NEW YORK ( TheStreet) -- I wrote only a month ago on TheStreet.com that massive inventory buildup and huge overcapacity were having a serious impact on the solar panel industry and its manufacturers.

To reiterate, inventory is averaging 122 days in 2009 vs. 71 days in 2008. Capacity utilization, or the amount of production capacity actually produced, dropped to 27.9% in 2009 from 48% in 2008.

For 2010, I "cautiously" anticipated that no new additional capacity will be brought on board, maintaining 2009 levels of 17,551 megawatts. This would bring capacity utilization to 35.4% and reduce inventory to 96 days, on average, for all of 2010. That ideal scenario is represented in the table below.

If solar manufacturers, such as Energy Conversion Devices ( ENER), JA Solar ( JASO), LDK Solar ( LDK), ReneSola ( SOL - Get Report), Solar Power ( SOPW.OB) and Yingli Green Energy ( YGE), went ahead and installed all the capacity planned for 2010, it would even worsen the outcome of the solar industry ; Utilization would decrease further to 26.8% and days of inventory would increase to 127 days, as shown in the table.

Now I am hearing that small solar panel manufacturers in China are planning to bring an additional 1 gigawatt of panels to the market by the end of 2009, which we have learned based on manufacturing equipment purchases. While it represents an increase of less than 5% of the planned capacity, there are several implications.
  • 1. China's solar panel manufacturers, exasperating the situation by adding more capacity, are already dropping prices to $1.80 a watt for polysilicon-based products, which is lower than the $1.85 level we projected back in March for the end of 2009. By way of comparison, the average selling price in the third quarter of 2008 was $4.05 a watt.
  • 2. Because of economies of scale, whereby the more solar panels manufactured the lower the cost to make them, other manufacturers will increase capacity to their planned 2010 levels in order to compete against the Chinese. We will now reach the last column in the table below -- 25.7% capacity utilization and 133 days inventory.
  • 3. Average selling prices could drop below $1 a watt in 2010 and 50 cents in 2011.
  • 4. As many as 50% of the more than 200 solar manufacturers, mired in red ink with current selling prices above $2 a watt, may not survive.

A Look at the Solar Panel Market
Ideal - No capacity increases
Planned capacity increases
Planned capacity increases + China
2008
2009
2010
2010
2010
Solar Consumption (MW)
5,625
4,894
6,215
6,215
6,215
Solar Capacity (MW)
11,722
17,551
17,551
23,212
24,212
Utilization
48.0%
27.9%
35.4%
26.8%
25.7%
Days Inventory
71
122
96
127
133
Source: The Information Network

Robert N. Castellano, Ph.D, is President of The Information Network, a leading consulting and market-research firm for the semiconductor, LCD, HDD and solar industries. Castellano is internationally recognized as one of the leading experts in these areas. He has nearly 25 years of expertise as an industry analyst. Castellano has provided insight on emerging technologies to many business and technical publications, including Business 2.0, BusinessWeek, The Economist, Forbes, Investor's Business Daily, Los Angeles Times Magazine, The New York Times, USA Today and The Wall Street Journal. He is a frequent speaker at conferences and corporate events. He has over 10 years' experience in the field of wafer fabrication at AT&T Bell Laboratories and Stanford University before founding The Information Network in 1985. He has been editor of the peer-reviewed Journal of Active and Passive Electronic Devices since 1985. He is author of the book "Technology Trends in VLSI Manufacturing," published by Gordon and Breach. His book "Solar Cell Processing" was published in 2009 by Old City Publishing. He received his Ph.D. in solid state chemistry from Oxford University.