The Fight To Harness The Sun
If Roger Little manages to turn tiny Spire Corp. of Bedford, Mass., into a major force in the emerging world market for Solar-photovoltaic cells, his iconoclastic business plan should become required reading for corporate and political leaders currently fretting over the inability of the United States to comete in international markets. Little's plan takes what politicians and other business executives see as problems -- rapid technology changes, tariff barriers, huge domestic competitors, government-subsidized foreign competitors -- and either neutralizes them or turns them to his advantage.
Little's is a pragmatism not often found in the hubbub of political debate over how best to make the United States competitive in a global economy. In fact, parts of his plan sound downright unpatriotic, and in another time they may have been. But Little, 42, is betting his 13-year-old company that the world has changed, and while it may not be the way he would like it to be, he plans to deal with the world, profitably, just as it is.
Photovoltaic cells convert sunlight directly to electricity (see sidebar), a phenomenon observed by a French physicist in 1839, made workable by U.S. researchers in the 1950s, and given practicality by the 1974 decision of the OPEC oil cartel to begin raising the price of crude. The U.S. space program has used solar cells to power its satellites since 1958, but as an industry with commercial potential, solar photovoltaics is barely nine years old, and it is still sorting itself out.
In some respects, the development of the photovoltaic industry resembles that of other industries based on new technologies. For example, as it was with semiconductors, the United States has always been the technology leader in photovoltaics. Because of work done in the space program, single-crystal silicon solar cells made in the United States today are cheaper and more efficient than any others. The U.S. government and industry together have spent more on photovoltaic research and development than any other country.
Similarly, Americans have led in industry sales. In 1980, U.S. companies made 86% of the solar cells sold in the growing world market, according to Strategies Unlimited, a Mountain View, Calif., market research and consulting firm. And, as in other high-tech markets, the demand for solar cells is expanding at a healthy clip. This year's estimated sales of $110 million will be nearly 60% more than last year's and almost eight times more than in 1978. Estimates of future market size vary with the exuberance of the estimator. The most conservative put the sales level at close to $10 billion by the turn of the century.
But a major difference exists between solar photovoltaics and other new-technology industries. Most high-tech products -- TV sets, computers, fiber optics, robots -- first find markets in the developed countries of Europe, the United States, or Japan. African, South American, and Asian markets follow. Paradoxically, photovoltaic cells are more affordable in poor countries than in the developed world.
Let's say you have decided to build a new house for your family in the Northeast, where electricity is expensive compared with rates in the rest of the country. For $75,000 to $100,00, you could equip this new house with solar-cell arrays, power inverters, batteries -- everything you would need to be independent of the local utility. Even though various state and federal energy tax credits would reduce the net cost by several thousand dollars, there is still no good economic reason to spend that money when you can tap into the distribution line that runs along the road and buy all the power you can reasonably use for $700 or $800 a year.
The story is different in a poor African, Asian, or Central American country with only one or two urban centers and many small, scattered villages. Establishing a health clinic in one of the villages would require, among other things, a refrigerator to keep the medicines and vaccines fresh. One way to get electricity to the village to run the refrigerator is to start building a power-distribution grid reaching from the new central power station (which would have to be constructed) to every remote corner of the country. That will take a few hundred million dollars and, maybe, 10 years. Or, you could buy each village a generator and start trucking diesel oil from the refinery, which would also have to be built, to the village. OPEC would love you, and installing diesel generators would be cheaper and faster than building the power grid. But a small photovoltaic power system in each village turns out to be cheaper still, even at today's prices for solar cells.
This isn't to say that solar-cell uses don't exist in industrial countries. In the United States, solar-powered water pumps make and range land more productive, and solar-powered electric fences keep cattle on the right range. Solar cells work well in such remote locations as mountain-top microwave repeaters and ocean buoys. If and when solar cell prices drop 10% or more from current levels and can produce power that is price-competitive with electricity generated by fossil fuels and nuclear fission, the United States will become a huge market for cell makers. But that is in the indefinite future. Today's market is overseas, and some say that the Third World market is three times as large as the domestic sales potential at current prices.
Despite their lead in technology and sales, however, U.S. companies are losing market share to competitors in Japan and Europe. Strategies Unlimited reports that the U.S. market share fell from about 86% in 1980 to 75% in 1981 and an estimated 55% in 1982. Another industry analyst Paul Maycock, president of Photovoltaic Energy Systems Inc. in Alexandria, Va., predicts that by 1990 the United States and Japan will each have 35% of the world market but that the U.S. share will still be falling while the Japanese will be rising.
Why? Partly, U.S. business executives say, it is because their foreign competitors don't fight fairly. At a recent export seminar in Boston, sponsored by the U.S. Department of Commerce, a man reported that foreign governments pick up the travel tabs when their businesspeople visit foreign markets. "When," he asked, "will the U.S. government start paying my way?"
"The U.S. government is short-sighted," says Ron Matlin, a founder and the chief executive officer of TriSolarCorp, in Bedford, Mass., which makes water pumps and other solar-powered systems. "Other governments," he says, "support their industries, but not ours. In Islamabad [Pakistan], I mentioned to a French woman that I was there on my money. She said that the French government had just asked her to do a market survey for a French company that we compete against." The key to capturing a local market often entails getting just one machine set up in a village or province. European governments, Matlin says, will often "seed" a market by giving the local government a solar-powered device. "The company sitting there with one machine working will be in a good position when the order cornes in for 500 more. But I've been in places where they said, 'I like that. I'd like to have one of those to check out.' I've said, 'The price is. . . .' And . they've said, 'Can't you get your government to give us one? The French will.' "
Former Vice-President Walter Mondale complained at a New York dinner party recently that "American business is not competing with foreign business but with foreign governments." Mondale is probably right, and Matlin and the man in Boston have a point, too. But what would Mondale do about the situation if he were president? The French, Germans, or Italians, with only two or three solar companies each, some of them nationalized, can easily promote individual manufacturers' products. Which of the 12 U.S. makers of solar cells and solar-powered systems would Mondale pick to push overseas, and how would the rest of the industry react?
Similarly, other governments can direct the path of technology in their photovoltaic industries, businesspeople say. Zoltan Kiss, president of Chronar Corp. in Princeton, N.J., notes that dozens of U.S. companies, including his own, research one or another of about 10 solar-cell technologies, while the Japanese just focus resources on amorphous silicon, which isn't yet as advanced as some technologies but is likely to produce cheaper cells than the single-crystal technology some U.S. companies are trying to perfect. By focusing, Kiss says, the Japanese get more research for their money. "But in this country," he says, "who would make that decision?"
The answer, of course, is that U.S. businesspeople don't want the government or anyone telling them what they can and can't research. The U.S. talent for innovation is a consequence of the undirected diversity of its innovators, and yet, as a practical matter, the government must play a role in supporting this research. The kind of role depends on who is in office that year. The Carter Administration's approach to promoting solar photovoltaics was to start throwing $1.5 billion into the industry's R&D and commercialization efforts over a 10-year period, beginning in 1979. Spread over scores of contracts with private companies, universities, and government laboratories, $1.5 billion would have been enough money to buy a little bit of this and a little bit of that, some part of which would probably have paid off.
The Reagan Administration, citing its free market commitment, stopped funding for anything but basic research and cut government support of the industry from $150 million in 1980to less than $30 million this year. The immediate effect was to pull the rug out from under most non-oil-backed small companies and to delay or jeopardize the potential commercialization of several promising advances. Presumably, if a Democrat is elected in 1984, the level will rise again. But you can't run a company, or build an industry, on a research base that yo-yos each year.
Another reason the U.S. industry is losing market share is that some parts of the industry are embarrassingly wealthy while others exist in virtual penury. The ones with the money aren't terribly interested in the Third World market for solar systems; the others can't afford the air fare.
In the photovoltaic industry's early days, around 1974 when oil-price boosts first shocked the world, entrepreneurial engineers working at big companies on solar cells for the National Aeronautics and Space Administration jumped ship. They started their own photovoltaic companies to supply the expected demand for this apparently attractive alternative energy technology. But as fast as these engineers founded them, oil companies bought them out. ARCO Solar Inc., today the world's largest producer of solar cells, began in 1975 as Solar Technology International Inc. In 1977, when Solar Technology had only eight employees, Atlantic Richfield Co. bought the business and renamed it. Exxon Enterprises Inc. bought the current third-place photovoltaic manufacturer, Solar Power Corp., from its founder, Elliot Berman, in 1975. Secondplace Solarex Corp., in Rockville, Md., is still run by founder Joseph Lindmayer, but Standard Oil Co. (Indiana) is reportedly the principal stockholder. These top three companies account for more than 80% of the U.S. industry's sales. Shell, Mobil, and Standard Oil of Ohio have also invested heavily in photovoltaic companies. Of about 15 U.S. companies producing commercial solar cells, 7 are either owned or controlled by oil companies or depend heavily on them for R&D funding.
A cynic would suggest that oil companies moved into the photovoltaic business with one thing in mind. In 1978, Robert Willis founded Solenergy Corp., a still-small company making single-crystal silicon cells in Woburn, Mass., but before that he was president of Solar Power Corp., the Exxon Enterprises affiliate. "After I left Exxon," Willis says, "people would come to me and say, 'Now, tell the truth. Isn't Exxon trying to suppress the technology?' Well, the whole time I was president there, nobody at Exxon ever pulled me aside and said, 'Bob, take it easy here. We're trying to push up the price of oil."
But a pragmatic person would suggest that however honorable the oil companies' intentions, their presence in this still-emerging alternative energy industry has been a mixed blessing at best.
On the positive side, oil companies have been the largest single source of private R&D capital in the industry. Companies like Solarex, which has developed a cell that is less costly than single-crystal silicon and, reportedly, more efficient than amorphous silicon, and Energy Conversion Devices Inc. in Troy, Mich., which claims to have developed an even less costly amorphous silicon cell technology, probably wouldn't exist today without R&D support from petroleum profits.
On the negative side, companies without oil-based backing find it nearly impossible to raise capital. When an independent photovoltaic company tries to raise venture capital, says Edward Blum, a vice-president of Merrill Lynch White Weld Capital Markets Group in Washington, D.C., and director of the alternative energy financing group, "the first question they are asked is, 'Flow are you going to compete against the oil companies?' " Hambrecht & Quist, a San Francisco investment banking firm with a reputation for spotting good venture capital opportunities in high-tech industries, is looking into new energy technologies. "But," says Jeana Hurst, an associate in Hambrecht & Quist's corporate finance department, "[photovoltaics] is a little longer term than we're looking for. We don't have the funds to compete with the big oil companies. They tend to be in for the long haul, while a venture capitalist wants a company to grow and go public in a few years."
Even companies not considered small by most measures, RCA Corp. and Westinghouse Electric Corp., for example, are sitting on the solar technologies they have developed rather than putting up the capital to bring them to market. Westinghouse, says a spokesman, is "looking for a way to spread the investment risk."
So who needs the smaller solar companies? Why can't the oil-backed and oil-owned solar manufacturers hold up the U.S. world market share all by themselves? They probably could, if they wanted to, but building solar-powered water pumps for Egyptian farmers is not ARCO Solar's idea of a big market. "We just want to build and sell modules, not systems," says the company's chief scientist, Elliot Berman. When U.S. electrical utilities are ready to start switching from oil, coal, and nuclear fuels to solar cells, ARCO Solar and its sister companies want to be there.
Meanwhile, the U.S. solar industry could lose the Third World market. The new, small, independent companies designing solar systems for the market can't get financing, have had their federal R&D funds slashed, and must compete unaided with those on trade ministry vouchers.
What to do? Roger Little, chairman and chief executive officer of Spire, has neither the wisdom of Solomon nor the patience of Job, which is to say that he doesn't pretend to know how the U.S. industry ought to work out its problems. Neither can he wait for someone else to resolve the sticky issues -- of government's proper role in R&D, in trade subsidies, and in policing free-trade restrictions -- that such problems raise. Spire needs sales today.
Little founded Spire in 1969 to do consulting and research on energy beams and particle physics for the aerospace industry. By 1973, Spire had developed new manufacturing techniques for the solar cells being used on spacecraft, and when the oil embargo opened the terrestrial market to photovoltaic technology, Spire was already a leader in designing manufacturing technology and equipment.
As the solar-cell market slowly developed, Little watched oil companies take over the cell-manufacturing end of the business. He watched the small systems makers fight the government-supported marketing efforts of foreign competitors in developing countries. He watched federal R&D support for the fledgling industry flow and then, under Reagan, ebb. He watched such Japanese electronics giants as Sharp and Sanyo begin collecting resources to enter the fray. And he decided that, although his little company couldn't compete directly with any of them -- the ARCOs, the Europeans, or the Japanese -- he could outfox them all by selling what none of them was interested in selling, not product but know-how -- production equipment, technology, and supplies. "We are," Little says, "the only company in the world that exists to put other people in the photovoltaic business. We want to be the McDonald's of solar cells."
It is a simple idea. Spire will sell Third World countries what they really want to buy, which is not a box marked "Made in U.S.A.," but the equipment, training, and raw materials to create their own photovoltaic industries.
For a few hundred thousand dollars, Little says, he can sell to a local joint-venture partner a turn-key plant capable of producing 100 or 150 kilowatts of solar-cell modules annually. Spire might contribute its equity in the partnership in the form of training. When the plant goes into business, Spire will supply the solar cells from which the modules are made. When the local market has expanded enough to support several more of these small module plants, Spire will help its local partner integrate backwards into cell manufacturing. At that point, Spire will sell to the partnership the unprocessed silicon wafers from which the cells are made. The plan appears to deal with most of the conditions keeping small U.S. photovoltaic companies from growing and the conditions that have cut the U.S. share of the world market.
Spire and its local joint-venture partners in the developing world will be doing business behind a protective tariff barrier. "Of course they'll erect a tariff," Little says. "They'll want to protect their national photovoltaic industry." The tariff will give Spire a substantial cost advantage over its European competitors, offsetting the advantage European company-government combines have had since World War II in selling to their former colonies.
Another edge is what Spire's manager for photovoltaic operations, Sanjeev Chitre, calls local-market enhancement. "Because they've got their own company," he says, "each country will help it find applications and develop the local market. You wouldn't expect them to sell ARCO's modules with the same enthusiasm as they'd sell their own. We think this enhancement will mean an additional 20% growth in each of those markets."
This plan also keeps Spire out of head-to-head competition with the major oil companies whose volume tends to make them the low-cost producer of cells. In fact, instead of a competitors Spire becomes a buyer of cells. "We provide our joint-venture partner with his solar cells," says Little, "which we get from the big production houses on a cost-competitive basis." Eventually, when the annual volume of cells shipped by Spire to its Third World joint-venture partners exceeds two megawatts, it might make economic sense for Spire to produce its own solar cells. "But today it doesn't," Little says, "not when I can get them from ARCO."
Spire has sold module-making plants to Brazil and India. Deals are pending in Pakistan and Tunisia. But Little considers his biggest coup to date to be the agreement he signed early this year with a Saudi Arabian company. The Saudi company, he explains, "got the license to manufacture photovoltaics in Saudi Arabia, but it needed a partner. ARCO was crawling all over the place to find a way into a joint venture. Everybody wanted to work with that Saudi company. ARCO wanted to ship modules in. 'Later,' ARCO said, 'maybe we'll teach you how to assemble modules, but we'll never teach you how to manufacture cells." So these guys, after looking over the entire U.S. technology base, ended up with Spire because we said, 'Hey, we'll give you everything.' We got a piece of the license, and our part of the equity comes from cost-sharing, which means I don't take fees on things. We've got other deals going, one in Egypt, for example. And they all want the same thing: continuing photovoltaic technology. Nobody wants to be just a rep for ARCO."
While he works to develop this network of joint-venture partners, Little has kept Spire in the contract research business, which not only brings in revenue but keeps the company on its technical toes. Technological obsolescence is a potential problem that Little thinks he can convert to another sales opportunity. "Nobody," he says, "is stupid in the world. They say, 'Okay, if I buy this [equipment] now, am I going to dead-end down the line somewhere?' We have to assure them that their technology will evolve." Spire, Little says, stays in touch with change in the technology by performing industryand government-sponsored research. "The other thing we do," Little says, "is look for commonality, so that when we build a piece of equipment it will handle as many different technologies as possible. We're always worried about obsolescence."
And Spire is attempting to increase its sales of fabrication equipment to the established solar cell manufacturers here, in Europe, and in Japan. Bill Murray of Strategies Unlimited, the market analysts, predicts that the U.S. photovoltaic industry will eventually sort itself out into companies that make cells and companies that make cell-fabrication equipment. So far, he says, "Spire is the fabrication industry." But he wonders whether the company may be premature with its product.
So long as Spire was primarily an R&D company that worked on contract, its capital needs could be met largely out of cash flow. "Now that we're going through that classic transition from R&D to manufacturing," Little says, "our needs have changed. We've got work in progress, we've got marketing costs, and we need a lot more working capital." Spire is looking for $2 million to $3 million, and so far it has been turned down by venture capitalists and by large corporations. Either they don't see an early payoff, Little says, or they think they are going to be competing with the oil companies, and they don't want that. Little is looking into taking Spire public, a move only two or three other independent photovoltaic companies have made. He says investment bankers have urged him to rewrite his business plan to de-emphasize Spire's involvement in energy, a field they say today's investors are wary of, and emphasize Spire's activity in the electronics industry.
If he can get through the next year or two, says consultant Maycock, Little's international marketing plan will work. "Every country wants to make its own product," Maycock says, "and they'll like Spire's equipment. In effect, Spire locks up a country.
Aside from whether it will work, Spire's business plan holds two elements some find troubling. The first involves Maycock's point that once Spire makes a deal in a developing country, any other solar-cell maker will have to contend with tariff barriers to free trade. Isn't that a bit, well, underhanded, when we are supposed to be promoting free trade? "I don't believe," says Berman at ARCO Solar, "that Roger Little's is the industry of the future. That says that there's no export business for anybody but Roger."
The second troublesome element is Spire's export of technology developed, at least partly, with federal R&D funds. "I am afraid," Rep. Berkley Bedell (D-Iowa) told a congressional subcommittee hearing in December, "that other nations are going to run us out of the international [photovoltaic] market using our own technology. I am afraid that U.S. jobs and U.S. exports will be transferred overseas to our competitors.
Berman may be right and so may Bedell. But consider, again, Little's alternatives at Spire. "We could have tried," he says, "to manufacture solar cells, but we recognized that the competition was just too awesome. We could have gone into systems and offered solar-powered water pumps internationally, but we didn't have a large marketing staff or the experience. We chose the equipment route because that's what we knew best, and we could do it with less capital."
It may not be fair that foreign photovoltaic companies get subsidies and marketing help from their governments; it may not be fair that the U.S. government has cut its solar spending; it may not be fair that oil companies scare off other potential solar investors. But that is the way it is, and, as Little says, "We still have to earn a living." You do what you have to do.
"I think Berkley Bedell has a point," Little says, "but if, indeed, distributed manufacturing is going to take place, and it is, somebody is going to make those machines and supply the technology. The Europeans and Japanese have already expressed an interest in buying the rights to manufacture our equipment. If they do, then we'll have just that many fewer jobs. What I'm responding to is what world economists recognize as world trends. I'm not creating anything new."
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