The utility-scale mounting system is in the middle of a transformation.
In the past, mounting companies had highly differentiated IP and benefited from high barriers to entry. After a decade in which design innovation, product optimization and operational streamlining allowed companies to maintain margin, mounting companies have entered a new era in which diversification and integration reign supreme.
Companies that survive this industry evolution will be nimble and creative enough to redefine their value proposition and deliver on a more sophisticated, service-oriented promise.
Because fixed-tilt systems are the longest-standing legacy ground-mount solution, fixed-tilt manufacturers’ path toward becoming commodity businesses provides important lessons.
We have seen fixed-tilt market pricing drop from ~$0.25/Wp to now under $0.07/Wp (adjusted for module efficiency) — in part thanks to volume and more sophisticated global supply chains, but mostly due to product innovation. The early industry spent a great deal of capital on sophisticated wind tunnel tests in order to lower input coefficients to enable the use of less steel. Companies also experimented with landscape orientation, prepanelization, pile designs, and the use of kickers and legs for various site conditions.
Though these product innovations yielded a wide variety of benefits including system quality, project bankability and more, the only outcome valued by the industry was cost reduction: cost of hardware, cost of installation and cost of O&M. Beyond cost, companies were expected only to be “good enough” on quality, support, and size of balance sheet.
Initially, barriers to the fixed-tilt mounting system industry entry were high. Gross margins were in the 30 percent range. Fixed-tilt companies were technology companies focused on IP differentiation while outsourcing everything else. They raised capital and had VC investors, just like technology companies (SunLink, Unirac, SPG/TTI). They also had growth and margin projections similar to technology companies.
But as pressure to drive down prices increased, things changed. Currently, in the fixed-tilt space, IP differentiation is now minimal, gross margins have shrunk to single digits, barriers to entry are low, and as a result, the number of suppliers has increased dramatically. The fixed-tilt market has become a commodity market in which EPCs and owner/developers consider one product just as good as another.
The single-axis tracker segment of the market is following the same path.
Still relatively early on the innovation curve, there are currently many exciting things happening in tracker product IP and innovation. Companies are still experimenting with various wind tunnel tests related to dynamics, stow strategy and snow/wind combinations. When it comes to design, companies are trying bold new approaches with the systems’ most expensive components, such as eliminating the torque tube or holding torque forces at every post (Axsus, RBI, SunLink, SunFolding). There are also two main architectures in the market — linked and independent row.
However, within an industry that continues to measure innovation almost exclusively by lowering cost, it’s getting harder and harder to innovate in the tracker segment as well. A few years ago, the first independent row tracker came on the market and it was 30 percent lower cost than competing products (NEXTracker). The industry caught up in a short time and today dozens of companies offer a similar independent row design, with similar costs (NClave, Soltec, GameChange, PV Hardware, SFR, Gestamp).
Barriers to entry continue to fall. Controllers (P4Q), bearings (DuPont, IGES), motors (3X, Dunker), slew drives (Cone, KMI) and actuators (Venture, Joyce-Dayton, Tomuu) can be purchased off the shelf and competitors score a bit by shaving as little as 5 to 10 percent off existing costs. The product differentiation on the single-axis tracker side is shrinking and designs will continue to standardize.
If trackers are headed down the same path toward commoditization as fixed-tilt systems before, what does the future hold?
When companies can’t charge for IP, what can they charge for in order to remain viable?
It’s next to impossible to derive margin with a product-design-only strategy. Instead, with products regarded as “good enough” commodities, mounting system companies have turned to services to sustain margin. Whether fixed-tilt or single-axis tracker, mounting system companies are generating value and margin for relationships, supply chain, sales acumen, project management, design services, warranty, bankability and only a bit for product and IP.
While a focus on services is advantageous to the solar industry overall, it makes scaling more difficult. Unlike modules and inverters, every mounting system requires a great deal of product design and layout customization in accordance with each project’s unique environmental conditions, geography, building codes, permitting jurisdiction and electrical design.
So how are mounting system companies looking to remain competitive and expand margins into the future?
Many are integrating. They are incorporating manufacturing to minimize margin stacking. They are offering services and electrical components to grow the top line and increase competitiveness. They are moving away from product and focusing on vertical integration or offering complementary products/services is a potential path forward.
These mounting system companies are no longer product companies, but rather service companies with products — requiring a dramatic shift in the way they think about their business. Operating a service company is a very different undertaking with new models for staffing and infrastructure and often different leadership skills.
There are now hundreds of fixed-tilt companies and more than 30 well-established tracker companies in the space. Though companies are seeking consolidation to get stronger, solidify their market position and open new geographies, we have still not seen any meaningful consolidation.
Why? First of all, consolidation will not raise barriers to entry. In addition, supply chain, services, brand, and relationships do not scale after a certain point and hold little competitive advantage. In addition, potential targets are barely profitable (or not profitable at all) with shrinking margins and little to no capital to pivot, add services, or acquire competitors.
As a result, investment capital is increasingly difficult to find, and instead of consolidation, the industry is seeing companies slowly lose market share, lower volume (which raises product costs) and become either marginalized in the industry or go out of business (Exosun, AET, Schletter).
On a global basis, fixed-tilt product companies have single-digit market share. On the less mature tracker side, though two players continue to control almost 50 percent of the market, their market share is shrinking (on a new geography basis) while newer entrants gain ground at a rapid pace centered on cost reduction.
There will still be acquisitions in the space. There are opportunities for large manufacturers that can realize value from going downstream or other companies that pursue expansion of their portfolio with additional services/products. However, even in the best scenarios, the valuations will be limited as today’s service-centered mounting system companies have limited IP and no easy path to scale.
So what are mounting system companies to do?
Embracing this reality means a broader business focus on lowering costs, integrating, expanding product portfolios, improving scalability and adding services to help differentiate themselves. Though the path ahead is not easy, those able to reinvent themselves will see profitable businesses in an industry segment that is critical to the success of solar projects and the future health of the industry.
Yury Reznikov is a consultant and adviser in the renewable energy space working with various companies on bringing new products to market. Previously, Yury was on the executive teams of both NEXTracker and SunLink as VP of Product and EVP of Product and Corporate Development, respectively. He also worked in the investment banking industry with Bear Sterns and MCF helping technology and renewable energy companies with M&A and capital raises.
Yury will be at Solar Summit 2018! Join him and other top industry all-stars in San Diego May 1-2. Learn more here.