The acquisition of US-based PV manufacturer, Silevo, by the largest US PV installer, SolarCity, has caused a storm and turned recent business trends within the industry on their head.

Since overcapacity raged through the industry, upstream PV module manufacturers in particular have moved downstream to carve out higher margins and ring-fence module sales by becoming EPCs, project developers and even PV energy providers. However, SolarCity, firmly rooted in the downstream sector, has elected to move upstream and become a PV manufacturer.

The obvious catalyst for the upstream move by SolarCity is the fact that the latest round of US anti-dumping duties on Chinese-made solar cells and potentially those from Taiwan seriously impacts the ability of the company to gain access to quality but cost-competitive modules, given its heavy dependence at times on Chinese producers such as Suntech, Yingli Green and Trina Solar.

One interpretation of the move could be that the current key Chinese suppliers would be unable to either supply adequate module quantities from sourcing wafer/cells outside China or wafer/cell pricing would be uncompetitive, or a combination of both when sourced from companies with production operations outside those areas with duties imposed.

However, any strategy by Chinese module suppliers to retain SolarCity’s business, even on a lower supply level, would more than likely include absorption or partial absorption of the new duty cost.

Only recently SolarCity announced a decent sized module supply agreement with REC Solar, technically a European company but with headquarters and cell/module manufacturing (1GW) in Singapore and therefore not under any import duties into the US. The deal with REC Solar could be interpreted as a direct move by SolarCity to de-risk the supply and increased cost hit of using Chinese modules and be seen to be a stop-gap until SolarCity ramps module production in the US over the next couple of years.

SolarCity could be planning to tap a number of other mid-sized cell/module manufacturers to fill the void left by the Chinese. An obvious supply candidate is Hanwha Q CELLS, which has 1GW of cell/module capacity in Malaysia.

However, it looks more likely that, with SolarCity’s planned business expansions over the near term and importantly post the proposed 1GW fab ramp through 2016, the company would continue to supplement in-house module production with outsourced supply, which would more than likely continue to include modules from Chinese suppliers wherever they may be made.

The move to start in-house module manufacturing could also suggest that Chinese suppliers have baulked at building plants in the US and that strategies touted to potentially build plants in Malaysia and Mexico to supply major players such as SolarCity, on cost or other grounds. However, this may be premature as the second phase of the anti-dumping ruling has yet to be concluded and Chinese manufacturers would be unlikely to have made any strategic decisions yet.

Yet the unique (family) relationship that exists between SolarCity and Tesla executives and initiatives by Tesla founder to build gigawatt-scale battery storage manufacturing plants also suggests that some manufacturing-mentality DNA also exists in SolarCity.

The company touted in a blog that the decision to start PV module manufacturing was based on the principle that PV adoption has only just started and will be a major energy producer for the world in the future, therefore getting into manufacturing now rather than later will be a key competitive part of the overall fully integrated business model and a key part of eliminating all types of secondary costs through the supply chain.

Simply stated, the move to in-house manufacturing reduces SolarCity’s purchasing costs and provides extra gross margin to the bottom line in the future.

The move to acquire and ramp Silevo’s module technology in the US could be interpreted as a major negative to SolarWorld’s business model in the US.

Having a major domestic manufacturer with higher performing modules that has a major captive customer should not be underestimated. Bragging rights for being the largest US module producer with leading-edge technology owned and operated by a US firm could see SolarCity/Silevo gain customers in the US that would have previously remained SolarWorld customers.

Though this remains a moot point at the moment, it will certainly be a key aspect to watch unfold.

Manufacturing

The acquisition also raises interesting points in relation to Silevo. The period of acute overcapacity obviously took its toll on the start-up and its ability to become cost competitive.

Although the company had plans to expand capacity and raise funds for the expansion back in 2012, that didn’t happen under its own steam.

Silevo was hoping that its focus on supplying installers focused on high-end markets such as residential and small-scale commercial rooftops would provide the environment to survive and prosper. Its inability to go it alone and expand capacity (32MW only) and become competitive independently was not achievable.

Although SolarCity touted Silevo’s technology differentiation and high conversion efficiencies the financial structure of the acquisition indicates that the Silevo management team and investors have a lot to prove in executing the plan outlined yesterday, specifically being able to ramp the technology and processes to large-scale production levels and achieve the competitive the production cost levels envisaged.

The financial terms indicate that Silevo owners could be in for a further US$150 million windfall in future earn-out payments based on stock-based compensation but these are clearly tied to production and cost milestones.

It looks like payouts are being planned in two 50MW ramp phases at US$50 million a phase, and a final US$50 million in earnings for a 100MW production ramp and production cost level (undisclosed) by 2016.

SolarCity will also benefit from production plant site selection incentives from the State of New York, which could easily offset much of the capital cost of the facility and initial 300MW ramp phases.

Although there is no way of knowing if Silevo can meet or exceed the key milestones expected of it by SolarCity, it will benefit from having a captive customer.

Like key rival, SunPower, ring-fencing its production operations from outside competitive forces by using its own modules in projects has proved that the business model works and the same should be expected for SolarCity and Silevo.

Technically, Silevo may not now become the next SunPower, but SolarCity is definitely attempting that goal.