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LDK Solar: Too Big, Too Fast?

The need to vertically integrate is a reason that an investor can't rush to quick judgment on LDK's decision to make another major capital commitment, even when the jury is still out on its last commitment. "There are aspects of this decision that get a thumbs up and others a thumbs down. It's not cut and dry," Soleil's Leming said.

The vertically integrated solar model makes sense, but strategy is only one half of the equation, and LDK will need to execute. In the least, manufacture of solar cells and modules is less capital intensive and less tricky than the raw polysilicon operations.

The LDK decision to plow ahead to 1 GW of solar cell capacity and 500 MW of modules at a time when there are fears of potential oversupply in 2011 does circle back to the biggest debate in solar: Are the Chinese solar companies overproducing and setting up solar for a major oversupply in 2011? And if LDK is even on schedule with its second quarter 2011 cell and module manufacturing, could it be selling into a glut?

Investors skeptical that demand will stay strong in 2011 as the German market slowdown plays out -- and other European nations reduce feed-in tariffs -- might think that it would be wiser of LDK to wait out any solar demand lull before putting its capital into the ground, so to speak. However, if demand does not slow in 2011, then it's the solar companies with the boldest plans that will benefit the most from economies of scale offered by vertical integration.

At present, the overcapacity issue is part of a larger debate impacting all solar companies, and for LDK the immediate and more interesting question is the financial capability to keep building at a fairly high rate.

-- Written by Eric Rosenbaum from New York.

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