Moving On With Solar in Ohio

First Solar (FSLR:  Nasdaq) recently announced plans to build a new manufacturing plant in Ohio. The solar module manufacturer already has a large presence in Ohio near Perrysburg.  The new plant will be located nearby and will have capacity to produce 1.2 gigawatts of the company’s Series 6 thin film photovoltaic modules per year.  With the 600 megawatt capacity in the existing plant, First Solar’s presence in the U.S. will be 1.8 gigawatts, ensuring the company keeps its position as the largest manufacturer of solar modules in the U.S.

Capital investment in the new plant is projected to be $400 million.  First Solar management may be feeling quite prescient to have planned a U.S. expansion.  The new plant comes will be a plus for First Solar if Trump makes good on his tough talk about tariffs and abandonment of trade agreements.  In January 2018, the Trump administration imposed tariffs on solar panels as part of a plan to boost jobs. 

Not All Jobs Are Equal

For certain, First Solar’s new plant will create jobs in Ohio.  Payroll is expected to top $30 million per year for around 500 employees.  Jobs will require mostly skilled workers who are aplenty in the Ohio economy where manufacturing and industrial operations are commonplace.  No one in the state is quibbling with Trump despite the fact that Ohio government officials have been in talks with First Solar leadership for well over year to plan the details.  According to the Bureau of Labor Statistics, in 2017, the state lost 414 jobs related to the coal industry.  

Ohio needs jobs and they care not who or how they get them. Some have been surprised at how stridently coal industry workers defend their jobs.  Average coal industry salary is $51,000, but miners themselves can make as much as $70,000 per year or about $23.00 per hour on average.    

First Solar’s new jobs with pristine work stations in shiny clean rooms will seem like child’s play to toughened coal miners.  The pay may seem lower as well.  First Solar manufacturing associates, an entry level position, have reported to Glassdoor hourly wages averaging $15.00 per hour while production operators have reported wages averaging $13.00 per hour.  Payscale reports the average salary at First Solar, including laborers all the way to the chief technology officers, is $86,000 per year.  For the industry as a whole, National Solar Jobs Census of 2017 found that the median wage for a mid-level assembly or production worker in solar manufacturing is about $20.00 per hour.

First Solar has good salaries to offer, but it will take skills to tap those jobs.  Recruiters will have to remind former coal industry workers that they have left behind more than a large wage.  Typical work week for a coal miner last six days and requires twelve hour shifts. Coal dust is everywhere and that can cut life expectancy for coal miners to fifty years.  The folks who work at ground level can expect to enjoy an additional nine years with their families.

Sticker Shock

Ohio workers will need to safeguard incomes.  The imposition of tariffs will impact domestic prices long before those tariffs bring about desired effects on the location of manufacturing. Solar systems installations will likely rise in price to the extent that solar installation companies can pass higher costs along to consumers.

Unfortunately, experience with solar module tariffs suggests Trump’s tariff plans are not likely to have the effect he is claiming.  In 2012 and 2015, penalties were imposed on solar cells imported from China and Taiwan.  Chinese solar products were seen as flooding the U.S. at lower and lower prices.  Yet in the wake of the penalties, the U.S. experienced a dramatic reduction in solar module manufacturing.  Solyndra, BP Solar and Helios USA were among the many manufacturers who shuttered U.S. solar module plants.  The problem was not unfair trade, but simply economies of scale enjoyed by manufacturing located in low wage regions such as Vietnam.

Trump claims his tariff will accomplish his goal where the earlier action against China and Taiwan failed.  The Trump tariff covers imports all countries and discourages the regional shell game previously played by China producers.  That optimism is not warranted.  The Trump tariff lasts only four years.  Given that it requires at least two years to plan and construct a manufacturing facility, leaving only a window of about one to two years to enjoy the benefits of tariff protection.  It is not likely the imposition of tariffs will trigger capital spending on new solar panel manufacturing plants.  First Solar began planning its new plant in Ohio long ago and not because of any anticipated tariff benefit.

To be sure, there are those within the U.S. solar industry who have been whispering in Trump’s ear, arguing in favor of government action.  Two domestic solar module producers, Suniva,Inc. and SolarWorld America’s Inc., filed what is a called a Section 201 petition with the U.S. International Trade Commission asking for the tariffs.  Suniva is in bankruptcy and SolarWorld has laid off many of its workers. 

Installation versus Manufacturing

Solar system installation represents an even more important source of jobs than does solar module manufacturing.  According to the National Solar Jobs Census of 2017 sponsored by the Solar Foundation, solar industry employment increased from 93,000 jobs in 2010 to 250,271 jobs by the end of 2017.  Solar industry growth represented about 1% of the 12 million new jobs added by all U.S. businesses.  Installations and other demand-side activities such as sales and distribution represent 78% of solar industry jobs and while about 15% of jobs are devoted to manufacturing.  Clearly solar installation activity is an important source of business and job creation in the U.S. 

Higher prices will likely impact the pace of solar system installation as higher prices triggered by the tariff make some installations no longer economic.  Greentech Media estimates the Trump tariff could result in an 11% reduction in solar system installations in the U.S. during the four-year tariff period from 2018 through 2021.   HIS Markit estimates the reduction will be about 9% to 10% over the next four years.  That said, since these predictions were published in January 2018, it seems that U.S. installers have done a fairly good job of funding cost savings in other components to offset higher module prices. 

The Solar Energy Industry Association estimates the imposition of Trump’s tariffs on solar modules is expected to cause the loss of as many as 23,000 solar industry jobs in 2018.  Most of those lost jobs will be in the demand-size of the solar industry.  New manufacturing jobs, if any should transpire because of tariff projection, would not come along until at least two to three years as manufacturers execute on new capacity plans.

It was the specter of this ripple effect that motivated 27 demand-side solar equipment manufacturers to send their own petition to the ITC.  These companies argued they represent 5,700 employees compared to 500 at Suniva and SolarWorld together.  The group also alleges that the problems of Suniva and SolarWorld have been triggered more by mismanagement than by unfair trade.

Economics of Solar Modules

Capacity utilization is perhaps more important in triggering new manufacturing capacity and new job creation.  Renewable Energy World estimated that in the fourth quarter 2017, capacity utilization was near a record-setting 95% globally.  There are some supply chain constraints as well.  Those factors more than the imposition of tariffs, may push manufacturers to the drawing board for new plants.  The China photovoltaic manufacturers account for as much as 59% of global production capacity and reportedly captured 53% of the world market in 2017.  China’s own domestic market is the most profitable for these producers and therefore gets priority over the U.S. and European markets.  Under this backdrop, the U.S. solar installation segment was beginning to experience shortages.  It was likely anticipation of these circumstances that had inspired First Solar to put a shovel in the ground in Ohio.

Workers in Ohio can only hope regular economic forces continue to drive decision making and job creation in the solar industry and that the unintended but clear consequences of Trump’s grand tariff plan quickly fall away.  The argument that Suniva and SolarWorld’s problems are self-inflicted seem to gain credence as First Solar moves ahead with its new manufacturing plant and demand-side companies move forward despite tariffs.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.