Jim Cramer recently said he's not a believer in solar plays because they require government subsidies, and governments around the world are out of "moola."

Back on Sept. 3 I wrote that the solar industry was headed for crisis in 2010 and that as many as half of the more than 200 solar manufacturers, who at the time were mired in red ink with selling prices above $2.00 per watt, might not survive. Prices have dropped since then, erasing already razor-thin margins.

Late last year, a few announcements supported my prediction:
  • General Electric (GE) said it planed to close its only U.S. solar panel factory because production costs had exceeded sale prices. The factory can produce 34 megawatts
  • Evergreen Solar (ESLR) said it would move panel production from its factory in Devens, Mass., to China in 2010 in order to cut costs.
  • BP (BP) solar unit announced it would close its solar panel factory in Maryland and outsource that work to a contract manufacturer. In October, BP said it had hired Jabil Circuit (JBL) to assemble panels at a Jabil factory in Poland.

Then this month, China-based Jinko Solar withdrew its IPO plans due to "poor market conditions." Just weeks before, another China-based polysilicon manufacturer, Daqo New Energy, pulled its $80 million IPO.

Meanwhile, a lot of companies are losing money:
  • Evergreen Solar reported a fourth-quarter net loss of $98.1 million after an $82.4 million loss in the third quarter.
  • Renewable Energy reported a fourth-quarter net loss of 1.05 billion Norwegian kroner ($177.5 million), compared with a net profit of 1.11 billion kroner a year earlier.
  • China's JA Solar (JASO) reported a fourth-quarter net loss per diluted American depositary share of 0.80 yuan (or 12 cents), compared with a net loss per diluted ADS of 2.31 yuan (or 34 cents) a year earlier.
  • Akeena Solar (AKNS) reported a fourth-quarter net loss of $3.7 million, or 11 cents a share, compared with a net loss of $9.2 million, or 31 cents a share, a year earlier.
  • Energy Conversion Devices (ENER) reported a fourth-quarter loss of $39 million, or 92 cents a share, compared with earnings of $13 million, or 31 cents a share, a year before.
  • MEMC Electronic Materials (WFR) (NYSE:WFR) swung to the red in the fourth quarter on a plunge in gross margin and weaker sales.

These are just a few examples. In some cases business was better last quarter, but that's before changes in German incentive programs (feed-in tariffs) expire in 2010. Also, these are large publicly traded companies, and many are Chinese with government stimulus packages assuring their survival. What about the plethora of small, privately held companies?

In fact, I suspect the Chinese will attempt to dominate the solar industry by increasing supply on the market at low prices to drive out competition. Already, JA Solar, despite a loss in the past quarter, announced it will increase capacity from 875 MW in 2009 to 1100 MW in 2010. In 2010 the solar industry will exhibit capacity utilization of 25.7%, and inventory will be stretched to 133 days.

Meanwhile, amorphous silicon solar cell manufacturers are in trouble. With polysilicon so cheap, why would someone want to purchase amorphous silicon panels with efficiencies half those of polycrystalline panels, which can now be purchased from China for $1.65 per watt?

Solar start-ups a few years ago that purchased turnkey equipment have no intellectual property, and every other customer of the equipment suppliers became an instant competitor selling the same product using the same process and equipment. Companies need to differentiate themselves.

Venture capital money has dried up in the solar market. Solar companies and suppliers are not investing in new technology that will enable them to compete against low-priced product coming out of China.

For example, a company I founded last year, SolarPA, announced that its room-temperature spin-on nanoparticle antireflection coating can increase efficiency by up to 10%, thereby reducing manufacturing costs by up to 10%.

Companies such as Applied Materials ( AMAT), Air Products ( APD) and Covidien ( COV) all expressed interest, but none followed through. Instead of investing outside the company, they prefer to do in-house research and development.

In fact, Covidien even sent out press releases last week announcing that its new process will increase efficiency by 0.7%, yet it never moved forward with an opportunity from SolarPA for a 10% increase. Does it come as a surprise that Chinese solar companies have expressed an interest?

Clearly there is a lot of anticipation in the solar industry, but programs related in the U.S. stimulus package are misguided. We need money to manufacture here and create jobs here. Last March, I wrote an article in Seeking Alpha titled, "Which Is Worse: Buying Solar Panels from Eurasia or Oil from OPEC?" A year later, I ask the same question, because nothing has changed.
At the time of publication, Castellano held no shares of stocks mentioned.

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.