Monday, March 5, 2012

SMA Shocks the Market

Peter Gabriel used to have a lot of hair. SMA still does but it looks like they're going to get a wicked hair cut in 2012. You have to give credit to SMA for being brutally honest regarding their guidance. Part of me thinks this shockingly poor guidance is timed to be used as ammunition against the FiT reorganization currently underway in Germany. Another part of me thinks SMA has had an incredible run at high margin and it's about time they joined their polysilicon, wafer and module brethren in the galleys slaving away like everybody else. It's not that I want to see SMA go down but I do want to see more competition in the inverter market.

SMA has promised to invest in R&D and focus on new areas - they've targeted energy management and energy storage. I believe SMA should concentrate on energy management first and storage fifth. I'd like to see them integrate their EMS solution (Sunny Home - Sunny Business - Sunny Whatever) directly into their inverters.

Why the new strategy?

The new strategy is due to a shift in the market. The larger ground mounted photoelectric projects which feed all their production into the grid are losing ground to smaller projects that feed a portion of their production into the grid and use the remainder on site. This is a sharp reversal of the trend we've seen over several years where we had larger projects gaining market share. I say sharp reversal because over the last few years large projects have only slowly gained market share from 10 to 15 to 20 to 25 percent year by year. In 2012, Germany is likely to see the share of large projects drop from 20 - 25% down to 5 - 10%. This means all those large project focused inverters SMA has gotten good at building over the last several years are going to see significantly less sales. This has been a long time coming so they can't claim they've been blindsided by current events.

The proposal currently on the table in Germany has many interesting aspects. 1. No more self-consumption bonus. Germany has discontinued the SC bonus because you don't need a bonus when the retail price of electricity is 6 to 8 cents higher than the FIT. 2. You only get the FiT for 85 to 90% of your production. This new requirement is structured to ensure production is coordinated with on-site consumption. These two aspects encourage self-consumption with a stick approach as opposed to the carrot method used over the last few years.

The new FiT doesn't go far enough to encourage self-consumption but you can only package so much into a single proposal. Soon enough we'll see additional regulatory movement in the direction of encouraging self-consumption.

Here's me talking to SMA

Me:Hey SMA, check out that wall.
SMA:Yeah, neat wall.
Me:Take a couple steps back.
SMA:OK... Is that a letter on the wall.
Me:Take a couple more steps back.
SMA:Ahh... yes... it's writing.
Me:Yeah... What kinda writing.
Me:You get a star.

The writing on the wall says the future (at least the next several years) is going to see a heavy investment of research into self-consumption. If SMA focuses on this trend they can position themselves to take maximum advantage. How do you take advantage of this trend? The passive participant rides the wave and builds products according to market demand. The active participant tries to steer the market in coordination with building products to meet demand.

If SMA is smart they'll lobby for smart. One thing they could do would be to lobby for smarter appliances that have communication abilities that mesh with their smart inverters. A corollary second best strategy would be to lobby for updated appliance testing and reporting standards so that more information is provided to the market concerning how appliances work. In either approach the basic idea is to force appliance makers to provide more info about their appliances work so that SMA's energy management systems have better info to work with. If SMA can get more info they can deliver more savings to the consumer. The more savings they can deliver to the consumer the more profit that can shave off the top for themselves - capitalism works.

There's a common saying that moms teach their children: Necessity is the mother of invention. As it turns out I learned the less common version from my dad: Struggle is the father of all things. I am neither a momma or a papa's boy. I have my own take on this. The best thing worth fighting for is love... So if we must struggle for invention let it be for what we love. Saddle up.

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