Cost-cutting Key for Continued First Solar Success

Industry watchers continue to fawn over solar panel maker First Solar (s FSLR) because of its low-cost technology and ballooning sales contracts. But with mounting competition, analysts attending an important presentation by First Solar executives later this week want to hear the company’s plans for cutting production costs. The measures would allow First Solar to drop the price of its panels while still protecting its bottom line. Analysts also will be interested in any comments about production expansion, though some believe the company should wait in this current economic environment.

First, the cost cutting. Even though First Solar can produce its thin-film solar panels for less than $1 per watt, manufacturing costs for many of its competitors have been plunging in recent months because of the declining price of polysilicon. While First Solar uses a thin layer of cadmium telluride semiconductor material to convert sunlight into electricity, most solar panel makers today rely on polysilicon, which has dropped to about $55-$60 per kilogram from nearly $400 per kilogram in 2008. Satya Kumar, an analyst for Credit Suisse, wrote in a research note published today that in the face of this pressure, he believes First Solar will have to lower its prices. If not, competitors like China’s Suntech Power (s STP) will be in a strong position to steal key First Solar customers.

The question for analysts is, can First Solar reduce prices while protecting its profits? Many believe that the company can. First Solar has said that it aims to reach production costs of 65 cents per watt by 2012, from 98 cents per watt in the fourth quarter of last year.

Sanjay Shrestha, an analyst with Lazard Capital Markets, wrote in a research note published today that he expects First Solar to accelerate cost reduction through “volume, operating leverage, and manufacturing excellence.” If successful, the solar company could still command gross margins in the high 40s over the next 12 to 18 months, with the closest competitor around the high 20s, he wrote.

Analysts, however, disagree about First Solar’s expansion plans. Al Kaschalk, an analyst with Wedbush Morgan Securities, wrote in a research note published last week that he doesn’t expect any changes to First Solar’s capacity expansion plans. The panel maker has said that its annual production capacity will double in 2009 to more than 1 gigawatt. The company currently has plants in Ohio, Germany and Malaysia. “With the solar market highly dependent on financing and continued over supply of modules, we see little reason for management to alter its plan,” Kaschalk wrote.

But Credit Suisse’s Kumar has a different take. He expects First Solar to expand capacity in Germany by about 200 megawatts and in Ohio by about 50 to 100 MW (on top of the 54-MW expansion already announced there). Kumar also wrote that he believes First Solar is considering a “1-GW scale new factory” that could be located in North America. But before solar fans excite over such an ambitious plan, Kumar doesn’t expect any word on this potentially monstrous plant at the presentation later this week.