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Executive Summary
SunEdison is a renewable energy company. Its revenue comes from semiconductor wafer manufacturing, solar energy business and TerraForm Power (wind power and global business). The company has recently filed for bankruptcy due to poor operational performance and its inability to serve its $11 billion debt. Luckily for the company, first and second lien holders have provided the required capital to continue operation. Overall, the renewable energy market is growing at a very high rate. However, due to increased competition and cost pressure from other forms of energy, the profitability has plummeted. SunEdison was expecting large inorganic growth quickly, especially in the solar sector. For that, it used debt financing for expansion. However, a sudden reduction in cost and softening of demand have resulted in losses. With burgeoning debt, no accumulated cash in hand and no profit SunEdison was destined for bankruptcy. The company should relook at its financials and assets. SunEdison should sell assets that are not profit making and also concentrate more on its semiconductor wafer and ingot manufacturing business, which is its core competency.
Company History and Current Status
SunEdison Inc. is a renewable energy company. Headquartered in the US, SunEdison, then named Monsanto Electric Materials Company, started as a silicon wafer manufacturing company in 1959 (SUNE#2, 2016). In 1989, Monsanto sold this company to Huls AG, a German chemicals conglomerate. Huls merged Dynamite Nobel and Monsanto Electric Materials to form MEMC Electric materials (SUNE#2, 2016).
In 2006, MEMC started diversifying its portfolio and entered the solar energy market. In 2006, MEMC started manufacturing large solar wafers and sold those to large Asian solar-energy companies (Suntech Power and Gintech Energy) (SUNE#2, 2016). The success of those contracts allowed the company to expand its solar business to other countries. In 2009, MEMC acquired a company named SunEdison LLC. At that time SunEdison LLC. was the largest player in the solar market in the USA. In 2013, it changed its name into SunEdison Inc. The debt for the company mounted sharply between 2012 and 2014. Additionally, due to cyclical downturn MEMCs, silicon wafer business started making losses. Due to increased competition, the revenue per unit of solar energy also came down drastically in 2014-2015. Finally, in April 2016, when the company was unable to service its debt and pay its employees, it filed chapter 11 bankruptcy (SUNE#3, 2016). It received $300 million from the first lien lenders to continue operation and pay staff (SUNE#1, 2016). In 2015, the price of the stock was more than $33 (Lee, 2015). Currently, the stocks are trading for $0.12 per share (Morningstar, 2016).
Introduction of Products and Services
Figure: SunEdison Revenue by Segments (Malik, 2015)
SunEdison has many products and services in the renewable energy business. SunEdison Inc. has divided its business into three subsidiaries. Semiconductor material was its main revenue earner but recently the Solar division has taken the number one position (Malik, 2015). SunEdison solar material group produces silicon wafers, silicon crystal ingots, and granular polysilicon (SUNE#2, 2016). These products are produced in its Pasadena, USA plant and in Ulsan, South Korea with a joint venture with Samsung. SunEdison’s crystal ingots are one of the most energy efficient and low-cost ingots available for manufacturing solar cells. SunEdison in partnership with Q-Cells produces and markets solar cells (Malik, 2015).
In 2014, SunEdison purchased First Wind, one of the largest wind power plants in the world. This company is now merged with the SunEdison materials development group and designs, installs, finances, operates and maintains wind energy and solar energy systems for commercial customers.
SunEdison’s subsidiary TerraForm and TerraForm Global are renewable energy project development companies. They operate in both wind and solar energy generation assets. TerraForm projects serve commercial as well as residential customers. TerraForm currently operates 200 projects in the USA. TerraForm Global works in emerging markets, such as China, India, South Africa, Brazil, Taiwan, and Russia. TerraForm plans to extend its business into the areas of other clean power generation assets, such as hydro-electricity, hybrid power generation, and biogas plants (Malik, 2015). TerraForm also develops energy storage assets and transmission lines for residential and commercial customers.
External Analysis
Industry and Business Environment
Figure: World Energy Share by Category (IEA, 2015)
Overall, the renewable energy market was 0.1% of the total energy market in 1973. Currently, the market share is 1.2%. Norway leads the way for renewable energy usage. 97.9% of Norway’s energy requirement are fulfilled by renewable sources. Even large countries such as Canada (62.7%) and Brazil (73.5%) also uses renewable sources as their primary electricity generation mode (GESY, 2016). In European countries such as Portugal, Spain, Germany, Romania, Italy, United Kingdom, Netherlands, and Belgium solar and wind power are used heavily to meet domestic electricity demand (IEA, 2015).
Figure: Solar PV Installations for the year 2014 and 2015 (IHS, 2016)
Most of the new solar installations demand in the next 1-2 years will mostly come from China, USA, Japan and the UK. However, the growth of solar and wind power energy installations in emerging markets is huge. India, China, South Africa, Brazil, Russia and some other southeast Asian countries will see huge solar energy demand growth for next 5-10 years (AT Kearny, 2015).
Figure: Solar Cell Efficiency vs Solar Cell Price Movement (EIA, 2016)
The solar industry is continuously trying to increase the efficiency of the solar cells to compete with other fossil fuel energy sources. In last three years, the average industry efficiency has increased by 5%-8% (IHS, 2016). However, in 2013-2014, after a huge slump in oil prices the fossil fuel prices went down which forced the solar energy prices to come down as well (Deutsche Bank, 2015). This has resulted in a sharp decline in revenue for almost all the renewable energy companies. Solar energy is still one of the costliest forms of energy. One unit of solar energy cost production cost is around $0.34 per unit almost 85-100% more than fossil fuel generation cost (EIA, 2016).
Movement of Industry
Figure: Market Attractiveness Compared to Market Growth (IHS, 2016)
Solar and Wind power industry have some interesting movements in recent years. Most of the technologies and the technologies suppliers will see consolidation in the coming years (Stone and Associates, 2011). Although China will continue to remain the largest distributed PV market in terms of new installations, others will soon catch up. For example, new PV installations in California alone in next 5 years is expected to be more than all other countries except China, UK, and Japan (Platzer, 2015). Countries such as Chile, India, South Africa, Israel and Brazil is expected to witness more than 100% growth per year for next 5 years in new solar panel installations. This will mainly happen in the less than 100KW category.
Figure: Grid connected PV energy storage installations (IHS, 2016)
Apart from new PV installations, Grid connected PV energy storage installations will witness more than 300% rise in next 2-3 years (Hirth, 2015). Most of this growth again will come from residential installations.
California is offering tax credits to solar energy generation and distribution companies which make this market lucrative for renewable energy giants.
Advantage and Threat from External Environment
Major threat currently facing the renewable energy market is the price pressure. Because of low oil prices, solar and wind energy prices are no longer competitive with fossil fuel prices (Deutsche Bank, 2015). This is slowing down demand in both residential, commercial and utility-sector. Additionally, this price pressure has reduced profit drastically which is creating a concern for most of the pure-play solar companies as they have huge investments.
One of the main advantages for this industry is the continued growth opportunities. The overall renewable energy market will more than double in next 5 years. This growth will be supported by most of the governments across the world in the form of favorable regulations and tax credits offered to renewable energy producers.
Current and Future Challenges
For SunEdison, the major challenge is to balance between growth and new investments. The whole industry knows that solar and wind power energy market will grow huge in coming years. However, the growth has been slower than expected. Still, the market share of renewables is only 1.2% of the total energy market. Therefore, the heavy investment may not provide any return in the immediate future.
The growth of energy market is also dependent on other forms of energy generation and their efficiency. For example, sustained level of low price for oil can severely damage the growth prospects of renewables (Deutsche Bank, 2015). Other clean sources of energy such as biomass, tidal wave etc. also are getting some traction. Some of the companies have started installing wave power generation technologies commercially and those are becoming cost competitive with solar and wind power. This can create a huge threat for solar energy industry.
Future Opportunity in the Industry
As cited several times that the solar energy market is growing at a phenomenal rate. However, the future growth opportunity will come from the different type of sources. Distributed PV production and installation for commercial and utility sector will continue to be the largest demand generator for next few years. However, eventually, residential hybrid installations will overtake commercial demand. It is expected that systems up to 100 KW will account for more than 50% of the total global PV installations by 2020.
Figure: Market share of Monocrystalline vs Multi-Crystalline PVs (Fu, James and Woodhouse, 2015)
Additionally, PVs that use monocrystalline technology will start replacing the multi-crystalline technology due to its higher efficiency and higher profitability. Companies such as SunEdison who already have the technology in-house will have a future advantage over its competitors.
Internal Analysis
Current Internal Challenge
SunEdison is going through huge internal issues. Most of the issues are centered on its poor financial state. Due to its $11 billion debt burden, the company was forced to file for bankruptcy. Although the federal government and first and second lien holders are providing the operational cash to run the company for the time being but it has significantly reduced SunEdison’s ability to grow.
The management of SunEdison cannot make any decision for new ventures and the company is in a limbo till the time the overall bankruptcy investigation procedure is completed. This means that the company may not be able to function properly for around 6 months to a year and also may incur cost upwards of $20 million for the process (SEC#3, 2016).
Relationship of Current Financial Activity and Active/Inactive Project
When SunEdison filed for bankruptcy, there were hundreds of projects in the pipeline for the company. These projects were in Chile, Honduras, India, Philippines, UK, Jordan, Israel, South Africa and the US. These new projects will require an investment of $250 million and expected to give a value of $900 million to the company. However, as SunEdison is currently in the middle of bankruptcy procedure it is not allowed to make any new investment or start any new project.
Government and first lien holders of the company are providing enough cash just for running the current operations and pay salary to the employees. All these projects will remain inactive until the time SunEdison is in a bankruptcy procedure. Competitors can very well bid for those project and lure away the customers from SunEdison.
Key Resources for the Firm
A unique core competency is what drives the growth of a company for a long time (Prahlad and Hamel, 2008). SunEdison has several of those. Firstly, SunEdison holds a superior technological advantage over its competitors. It has better solar wafer production technique and monocrystalline PV technology that competitors.
SunEdison also has strategic partnerships across the globe which give the company access to almost all major and potential markets across the world. SunEdison is one of the few companies in the renewable sector that can offer an end to end support. It has the capability to produce silicon ingot, produces solar cells, install and maintains which is a unique core competency and resource for the firm.
Internal Operation/Finance Performance
As per the last SEC filing of SunEdison, it has total assets worth $20 billion. However, most of this is in the form of property, plant, and equipment. On the other hand, it has almost $2 billion as short term loans and $9.7 billion as long term loans. As there is no current income (the company is making a loss) and the accumulated cash is negative $2 billion, SunEdison is unable to continue its operation without a further injection of working capital and debt restructuring.
Revenue increased in the last year from $469 million in 2014 to $476 in 2015. However, due to higher debt burden ($107 million in 2014 compared to $ 214 in 2015), SunEdison made a huge loss of $284 on revenue of $476. This clearly indicates that the company is a financial mess and immediately need to restructure its debt before it can continue operation.
Porter’s Five Forces Analysis
Threat of New Entrants
High: There is huge growth in this sector and also government giving perks to the companies that are operating in the clean energy business. This is attracting many new companies to enter the sector. Additionally, the traditional fossil fuel companies are diversifying their portfolio by entering in this market segment. All major players such as BP, Exxon and Chevron have started investing in this sector.
Threat of Substitutes
High: Fossil fuel continues to threaten the market growth of renewable energy. Especially, natural gas which is considered a reality clean mode of energy compared to oil or coal, is fast gaining momentum and this is hurting the solar industry. If solar cannot become cost competitive than other forms of clean energy sources such as tidal wave or ocean wave may also substitute solar demands.
Bargaining Power of Suppliers
Low: For SunEdison, bargaining power of suppliers is low. Primarily because of its in-house capability to do everything (from production to installation). Additionally, SunEdison also has a strategic partnership with main suppliers for mutual benefit.
Bargaining Power of Buyers
High: Government is helping in the expansion of renewable source of energy. However, end customers are highly price sensitive and if solar or wind power cannot match or come close to the price per unit of fossil fuel energy, SunEdison will have a hard time penetrating in the residential market which is going to be the major market for solar energy in the coming days.
Potential Rivalry
SunEdison faces huge competition in the solar energy market. Apart from major Taiwanese and Chinese players in those markets, globally it faces stiff competition from Grupotec, British Solar Renewables, Solar century, Martifer Solaar, INRG Solar and Lark Energy. In the US market, especially in the very large California market, SunEdison is facing huge competition from Green Charge Networks, Stem, and Coda Energy.
In the Wind power sector, it has relatively better and dominant position is key markets such as Chile, the US, and South Africa. Companies such as Ocean Power with its new and efficient technology to extract power from Ocean waves is becoming and indirect competitor for SunEdison.
SWOT Analysis
Conclusion and Recommendations
SunEdison is one of the largest renewable energy companies in the world. It has mostly grown inorganically over the last few years and purchased companies using debt financing. This has made SunEdison a unique company in this sector with the capability to do everything. However, in the last few years, due to lower oil price, the profitability of the company has plummeted. Additionally, SunEdison expected the market growth to be high, which never happened. Currently, the company has assets unmatched by any of its competitors. However, the company needs to pay more than $200 million per year to carry those assets. To do that, SunEdison needs to increase its revenue and profitability drastically, which is not happening currently.
The overall market will definitely grow in the coming days and SunEdison has the required assets and resources to tap those demands. However, before that, SunEdison needs serious debt and asset restructuring. It needs to sell off those assets that are not paying any return (or making a loss) currently or are not expected to make any profit in the coming days. As the market size is small, SunEdison should try to follow a lean and asset light model for the time being. Selling off non-performing assets and reducing the debt burden with the money earned from the sales of non-performing assets will be a step in the right direction.
SunEdison has a great product superior to that of almost all of its competitors in terms of efficiency and output per unit cost. Therefore, with proper marketing effort around the globe, SunEdison can increase its sale quickly in the solar division.
More than 70% of SunEdison’s revenue comes from commercial segment. Since the government gives incentives to this sector, this sector is highly profitable. SunEdison may consider expanding business into commercial sector as it will increase the company’s profit margin, which is currently very low for the company. With most of the developing and developed countries offering special incentives for commercial and utility sites (more than 5 mw), SunEdison can work with the government to increase its revenue.
Semiconductor sale is the core business for SunEdison. It is probably the only solar company with the capability to produce semiconductor wafers and convert them into efficient cells. Therefore, it can leverage its core competency to not only differentiate itself from its competitors but can also sell semi-conductor wafers to the competitors as well, thereby diversifying the risk.
SunEdison has a lot of properties at its disposal and it should use its properties effectively to grow the solar business, because possession of a large number of properties is essential for the growth of solar business as solar installation requires a huge amount of space. Furthermore, SunEdison should buy and develop properties in strategic locations across the world to help in the development of its solar business.
SunEdison is also trying to do everything at once, which is the main reason for its poor operational performance. The core competency of the company lies in R&D and manufacturing of wafers and solar cells. The company should primarily focus on those activities and slowly spin off other divisions where it cannot differentiate itself from its competitors.
Solar business has a huge potential for growth. Therefore, SunEdison can attract new investors by showcasing the potential growth of more than 100% in the next three years, which will double the investors' money in no time. As SunEdison is going through severe cash crunch at the moment, it is important for the company to showcase the growth of its wind and solar business to attract investors. This will improve the working capital situation within the company.
SunEdison has aggressively expanded in the last three mainly through debt instrument. Therefore, it has a debt burden of $13 billion, which it is unable to repay. It is important that the company uses a balanced mix of debt and equity financing in the future and does not aggressively grow its business using debt financing only. Additionally, the company should plan to expand its business only when its previous investments start generating positive cash flow.
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