Ramped Up Solar Inverter Supply May Overshoot Demand in 4Q

Inverter capacity will be ramped past 30 gigawatts (GW) this year and inverter production may exceed actual demand by more than 2 GW in 4Q10 leading to large inventory build, according to a new report from IMS Research.

This effect reverses the earlier inverter shortage seen in the first half of 2010 and is set to impact the industry as it heads for a major slowdown in demand in 1Q11.

According to IMS Research, inverter production capacity has more than doubled in 2010 and by the end of the year will exceed 30 GW. Based on the expansion plans of more than 30 top suppliers, capacity is set to grow another 40% in 2011.

However, significant double-ordering occurred in 1H10 as customers panicked to secure inverters as the German market boomed. Now that German demand is slowing, these additional orders are starting to be cancelled as warehouses fill up with unwanted inverters.

“Although inverter shortages were evident in the first half of this year due to a bottleneck in component supply, an oversupply of inverters is now very possible and inventory is starting to build at customers," PV Research Director Ash Sharma said. "Suppliers continue to ramp capacity and production at an alarming rate given market demand is now starting to wane. Installation demand is predicted to be 13% higher in the second half of the year compared to this first half. However, planned inverter production is forecast to be 56% higher.”

Looking past 4Q, the picture for inverter companies looks bleak in the short term. Production capacity has been massively increased, with all leading suppliers expanding facilities and many new entrants to the market. This increasing supply, however, is likely to meet falling, or at best, stable demand in 2011 and a large fall in prices seems likely as a result.

As such, inverter suppliers will need to brace themselves for a sharp fall in profits in 1Q11, with IMS Research predicting the lowest level in seven quarters. A major fall in demand, coupled with intense pricing pressure and additional costs of expanding capacity will undoubtedly see a slide in supplier gross margins.

Two of the companies that have ramped up to meet demand include Satcon (NASDAQ CM: SATC), which signed a Chinese manufacturing agreement with GCL Solar, and Power-One, Inc. (Nasdaq:PWER), which is opening an new manufacturing facility in Phoenix, Arizona.