Samsung's solar cell business stands at a crossroads

 Solar cell business is one of the five areas that South Korea's No.1 conglomerate Samsung Group has planned to nurture as new growth engines.

Samsung announced in May last year it will inject 23.3 trillion won (21.69 billion U.S. dollars) by 2020 into new growth drivers such as electric vehicle batteries, light-emitting diode (LED), biomedicine and medical equipment as well as solar batteries.

Samsung Electronics' LCD business unit has been tasked with producing solar cells and modules since 2009, but the unit failed to pay off in the past two years, resulting in rumors that Samsung is reassessing its solar energy business.

On May 27, Samsung Electronics decided to transfer its solar battery business to its affiliate Samsung SDI for 160.8 billion won. The flagship unit of Samsung Group will hand over personnel and equipment as of July 1 to Samsung SDI, which produces electric car batteries and plasma flat screens.

Market watchers said the business shift was aimed at unifying Samsung Group's energy-related businesses and generating synergies between the solar cell business and Samsung SDI's existing businesses such as rechargeable batteries and energy storage systems.

Stock investors, however, seemed to see the business transfer from a negative perspective. Shares in Samsung SDI nosedived 11.47 percent to close at 177,500 won on Monday. It was the biggest daily drop since May 2009.

Experts were divided over the transfer. Optimistic experts said the acquisition of solar cell business will strengthen Samsung SDI ' s growth potential as the energy-focused arm of Samsung Group. But,pessimists focused on the solar cell industry entering the down cycle and enormous investment requirements.

COMING DOWN CYCLE

Solar power industry, including polysilicon, ingot & wafer, cell and module, is widely expected to fall into the down cycle in the near term due to excess supply and expected demand weakness.

Moody's said Wednesday in a special report that the solar photovoltaic industry will face challenges from weaker demand and global overcapacity despite the sector's favorable long-term outlook.

Following the devastating Japanese earthquake in March, many countries felt the need to embrace safer renewable energies, including solar power, as a means to generate electricity. Radiation leaks from Japan's nuclear power plant prompted Germany to shut down all nuclear power stations by 2022, and encouraged Italy to extend its own moratorium on nuclear projects indefinitely.

Rising costs of fossil fuels and growing needs for reducing carbon-dioxide emissions require countries to expand the usage of solar and wind power as electricity-generating sources. The International Energy Agency (IEA) has advised governments to halve their carbon-dioxide emissions by 2050, and the share of renewable energies in the European Union (EU) will rise from 9 percent to 20 percent by 2020.

Overcapacity and weaker demand, however, is projected to worsen the solar power industry in the short term.

The pullback of government incentives and subsidies in Europe will cut demand for solar power in the near term, according to Moody's. Europe, which accounts for 80 percent of the world's solar power demand, has lowered subsidies in response to ballooning fiscal deficits in the wake of the global financial crisis.

Europe's incentives, including tax credits and favorable feed- in tariffs, have recently contracted, adding pressure to demand for solar power. Germany, the world's largest market, cut feed-in tariffs by 15 percent in January, with further decreases expected. Feed-in tariffs, introduced by Germany for the first time, fix the rate at which utilities buy electricity generated by renewable energy sources such as solar power.

Excessive supply is forecast to drive down profits of solar power manufacturers and to crowd out marginal players by increasing mergers and acquisitions (M&A) among rivals. As a sign of excess capacity, solar module makers planned to raise exports by 55 percent this year, but full-year growth in demand will be much lower, according to the San Francisco-based industry publisher Solarbuzz.

A reduction in average selling prices (ASP), driven by overcapacity and competition, will hurt high-cost players with limited ability to control their input costs and producers with uncompetitive processing, Moody's warned.

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