Internal Analysis of GT Solar International INC

Formulating strategies focuses on matching the resources and capabilities of a firm to the opportunities arising from the external environment. The ultimate aim of evolving and implementing strategies for a firm is to attain sustainable competitive advantages. Therefore a resource-based view postulates that a firm has to use its available resources and capabilities for garnering distinctive competitive advantages which enables the firm to add value for the firm. Value can be defined as what customers assign to a product based on its attributes. A competitive advantage can become a distinctive one when it allows the firm to differentiate its products. Although all the resources and capabilities are important to the industry, the firm has to identify the important ones based on the factors that make them useful for the firm to become successful. The firm has to organize its resources and capabilities based on their relative importance and compare them with those of the competitors. This process will enable the firm to identify its strengths and weaknesses which can be manipulated intelligently to achieve sustainable competitive advantages. Competitive advantage enables a firm to outperform rivals on profitability. Innovation and responsiveness to change are the bases on which competitive advantages can be developed. Competitive advantages to remaining sustainable should meet the criteria of being unique, difficult to replicate, superior to the competition, sustainable, and applicable to multiple situations. With this background, this paper makes an internal analysis of GT Solar International Inc.

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Resources and Capabilities GT Solar International Inc (GTS) is “a leading provider of specialized manufacturing equipment and services essential for the production of photovoltaic (PV) wafers, cells and modules, and polysilicon”. (Edgar Online) The company occupies a unique position in the industry because the company provides turnkey and equipment solutions for the total components of the solar value chain namely wafer cell and module fabrication lines. The integrated solutions offered by the company are designed for low-cost PV manufacturing. By acquiring core expertise in the areas of (i) integration of fabrication lines for automated manufacturing, (ii) development of process technology, and (iii) design of advanced manufacturing equipment the company is able to target mass production in photovoltaics (GT Solar Incorporated).

Another distinct resource the company possesses is the expert in-house staff which enables the company to provide total turnkey solutions from the design stage to the start-up and qualifying stage in the manufacture of the wafer, cells, and modules in PV. This offers greater chances for the clients to maximize their revenues with minimum risk.

Turnkey manufacturing solutions represent total production solutions for meeting a required level of output. Turnkey solutions for the construction of new production facilities are normally offered to new factories entering the industry. Wafer fabrication line, cell fabrication line, and module fabrication line are the three turnkey solutions that are currently being offered by GT Solar. Large solar companies and companies in the chemical industry constitute the major customers of the company. Considerable technical knowledge is required to use the products of GTS and therefore a majority of the customers have to depend on GTS for designing and optimizing their production processes. The company also trains the employees of the customers in using the equipment manufactured by GTS.

Demand for the products of GTS has increased over the recent past because of the increasing investments in manufacturing capacities by solar silicon, wafer, and module manufacturing companies to meet the increased demand from the customers.

Strengths Acting as an enabler to the new entrants to the PV industry add to the competitive strength of GTS. In addition, GTS has a large installed base of PV equipment which provides the company with the required strength to meet the challenges of competition.

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The business relationship established by GTS with large solar companies of the world as one of the reliable suppliers increases the strength of the company and this strength is further enhanced by the turnkey solutions being offered by the company. The company has established its strong presence in China which is a growing market for the kind of products it manufactures which makes the position of the company stronger.

The outsourced manufacturing model adopted by the company provides significant cost advantages to the company to make it more efficient and competitive. The company has an experienced management team which is one of the major strengths of the company. In the words of Tom Zarrella President and CEO of GT Solar International Inc

“Because we supply the global solar power industry with its core equipment and technology, GT Solar has a unique perspective on macro trends and developments. Given that perspective, we believe that the solar power industry is continuing to make additional progress in lowering costs and bringing solar power closer to parity with more conventional energy sources. We, therefore, remain optimistic about GT Solar’s future and that of the industry as a whole.” (Burger)

This statement explains the basic strengths of the company.

Weaknesses Despite the strengths which act to increase the market share and revenues of the company there are certain inherent risks, uncertainties, and challenges which may affect the performance of the company at a significant level.

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There is a potential weakness that when the company wants to expand its business, it may have to improve operational, information technology, and financial systems drastically to meet with the changed circumstances. However, with the available outsourcing resources, the company may not be in a position to effectively manage any additional business which is a serious weakness the company has to consider.

Excessive dependence on a smaller number of customers is one of the shortcomings which are a potential disadvantage for the company to grow further. For instance, in the financial year 2005-2006, sixty-four percent of the total turnover for the company was contributed by three customers. For the financial year ended 31st March 2007, the three customers contributed seventy percent of the revenues of the company. The same trend continued in the year 2008 with three customers accounting for 62 percent of the total revenue. This situation leads to a risk that a default in payment by any one of these customers or a change in the schedule of product acceptance by any of the customers would seriously hit the financial status of the company. Lack of new orders in a financial period may also impede the performance of the company for that specific period.

Similarly, the company is in the manufacture of DSS and CVD without an extensive product line or range. This makes the company vulnerable to any move by the competitors to capture the market share as the company cannot fall back on its other products. This is a serious weakness that may affect the profitability and growth of the company. For example, for the fiscal year ended 31st March 2006, the DSS unit sales accounted for 72 percent of the total revenue and in the fiscal ended 31st March 2007, the DSS sales constituted 85 percent of the total revenues of the company. However, there is no guarantee that the sales of DSS units would rise beyond a certain point or can be maintained at the past levels since there are several factors that affect the sale of DSS units that are beyond the control of the company.

Even though outsourcing provides GTS a competitive advantage in terms of cost, there is the potential danger of working with a smaller number of specialized suppliers. The supplier may decide to cater to the demands of the competitor for any increased service charges. The company is also subject to any product liability claims from the customers as the company solely depends on the works of the subcontractors where chances for quality compromise are more which ultimately will tell upon the reputation of GTS as the principal. There may be claims arising out of the use of third-party equipment against which the company is not guarded properly. Moreover, there is no protection to the intellectual property possessed by the company in the form of technical know-how which is available openly to any other individual or company. This situation may also lead to third-party claims on account of infringement of the intellectual property of others.

The company expects to realize substantial revenues from the CVD reactor and silicon tetrachloride business for which the company has acquired the license recently. However, the technology underlying the CVD reactor production and Silicon Tetrachloride Converter products manufacturing is not owned by the company. The company has only obtained a ninety-nine-year lease for the technology which could be terminated by any material breach by the company of any of the clauses of the licensing agreement. Such an event would adversely affect the production of polysilicon products thereby affecting the financial status of the company seriously.

Although the company has a heavy order booking close to $ 1 billion, there is a likelihood that these orders would eventually result in adding up the revenues to the company. Even though there are signed contracts or purchase orders from the clients, the delays in executing the projects or any other external market reasons may force the customers to cancel the bulk of the orders. The company is not in a position to precisely estimate the proportion of realization of the pending orders into revenues for the company. This weakness has to be taken into account while making an internal analysis of the company.

Another significant weakness that may affect the performance of the company is its ability or inability to attract, train and retain talents which could contribute to the technological advancement of the company’s operations. Such technical professionals are always in demand which may significantly affect the performance of the company.

Opportunities The anticipated higher growth in the PV industry is expected to induce the existing as well as new entrants in the polysilicon and solar industry to enhance their investments in manufacturing capacity. Being a market leader in the specialized furnaces essential for the production of multi-crystalline solar wafers, GTS gains its competitive strength. Photovoltaic systems are found useful in the conversion of sunlight directly into electricity and are being used by industrial, commercial, and residential consumers. With escalating energy prices and increased awareness about environmental protection at a global level, there is increased adoption of renewable energy sources including solar power which enhances the opportunities for companies like GTS. The increased support from the governments in the form of tariff cuts, tax credits, and various other forms of incentives designed with a view to supporting the renewable energy sources add to the existing opportunities. Solarbuzz has reported an overall annual growth rate of 47 percent between 2003 and 2007. The global PV market is expected to reach a production level of 9917 MW and $ 39 billion in monetary terms until the year 2012 which forecasts an excellent opportunity for companies like GTS (FormS-1/A). According to Solarbuzz, there will be an estimated addition of 193,000 MT of polysilicon production capacity within 2012 which indicates the introduction of more new players in the industry adding to the growth potential of GTS. Despite the potential threat to the industry posed by a glut of manufacturing capacity and unsold equipment, the firms may continue to perform better in the wake of government stimulus programs and the bounce-back of demand due to sharply falling prices.

Threats Major economic slowdown of the recent past is one of the factors which may post a significant barrier for the capital investment decisions of existing and new entrants to the PV industry. This would pose a substantial threat to the sustenance and growth of GTS. Since the technical know-how in the PV industry is easy to acquire the competitors would try to garner more of the market share using updated technological expertise and knowledge. GTS should be able to withstand such technological competition which still remains doubtful as there is no protection to this intellectual property of the company. Subdued oil prices act as a block against further large capital investments in solar energy equipment which acts as a threat to the PV industry. Excess capacity growth is a marked threat to the industry in recent years added with the reduction in the demand to the extent of 17 to 30 percent during 2009 (Gronewold).

It is to be recognized that the solar energy industry, as well as the renewable energy industry, are highly competitive in nature. This makes the existing players and the new entrants strive continuously to present product or cost differentiation to sustain their market position and to compete with the larger electronic power industry which is more sophisticated in terms of technology. The greater financial, technical, manufacturing and other resources of large electronic power industry players and other competitors within the solar energy industry act as a serious threat to the firms in the industry in general and to GTS specifically.

Financial Outlook for GT Solar There is serious concerns about the challenges being faced by the solar energy industry in light of weakening demand due to the slump in the housing market and the restrictions on the offering of credits to housing and solar energy products because of the financial crisis. However, it is expected that demand for solar energy-related products will bounce back with the recovery of the economy. The tax breaks and low-interest loans being provided by the government to salvage the housing industry would benefit the solar sector. This enhances the chances of a favorable financial outlook for GTS. The stronger balance sheet of GTS, one of the largest providers of specialized manufacturing equipment and services required for the production of photovoltaic wafers, solar cells, modules, and polysilicon places the company as one of the potential investment destinations. Although it is argued that there is a global oversupply of polysilicon, GTS management is of the view there is not enough supply of high-quality polysilicon to meet the world demand. This enhances the revenue earning capacity of GTS in the near future. One of the analysts of the solar energy industry is of the view that future orders for GTS may emanate from the existing key customers of the company. With many of the major customers of GTS shoring up their balance sheets recently a distinct possibility of more orders coming from them in 2010 when they would plan to expand their capacity when then demand for solar wafers would grow healthier on a global basis.

The shares of GTS have been started trading in NASDAQ after the company issued an IPO in July 2008. Immediately after the listing of the IPO, the share value tumbled trading as low as $ 9.30 on July 25 as compared to the listed IPO price of $ 16.50. This was because of the fact that one of the major customers LDK Solar announced the cancellation of a major contract it entered with GTS. The company had to face several legal cases under class action brought on behalf of the stockholders of the company. Since the IPO, trading on the shares of the company has been very volatile with the price ranging from $ 9.30 to $ 17.00.

Ethical Issues and their Impact on Internal Environment One of the ethical issues the company had to face stemmed out of the allegations against the company was that the company, though had previous knowledge hid the fact at the time of announcing its $ 500 billion initial public offerings (IPO) that one of its major customers LDK Solar expressed dissatisfaction on the quality of equipment supplied by GT Solar and was about to enter into a three-year contract with the JYT Corp. a competitor of GT Solar. The class-action suits brought against the company alleges that the company has concealed this fact from the investors. The complaint alleges that GT Solar has violated the provisions of federal securities laws and provisions of various sections of the Securities Exchange Act. The complaint also alleged that the company has issued a series of material misrepresentations to the market which had the effect of artificially inflating the stock prices in the market. Although the company challenged these allegations based on the disclosures made in the prospectus, it has had an impact on the internal environment of the company (Sanders). On the first day of trading after the IPO, the share of GT Solar closed at $ 14.59 per share. On the second day before the market opened; LDK Solar announced through a statement to the press that it has signed the contract for procuring its requirements of equipment from one of the competing firms of GT Solar. This news made the price of GT Solar stocks hit the low of $ 9.30 with a day’s closing of $ 12.59, making the shares of the company losing 13% of their value on the second day. This proves the impact of ethical issues on shaping the internal environment of the company.

Growth Strategies adopted by GT Solar With a view to increase the market share and optimize the revenues and profitability, GTS mainly relies on expansion strategy. This has made the company penetrate into China which is a potential market for PV products. In order to supplement the expansion strategy, the company is also keen on acquiring complementary technologies and business in a global context. This might increase the competitive strength of the company. The company is striving to introduce new product lines through rigorous research and development.

Unprecedented demand for solar energy-based equipment and non-availability of polysilicon which is the main raw material for making PV panels have driven the firms operating in the industry to go in for immediate expansion of their facilities in the periods just prior to the economic meltdown. This has created the demand for new and clean energy installations. This also resulted in the downward revision of prices of polysilicon, PV, and thin-film solar panels. The industry experts are of the view that there is a major upheaval in the industry with weaker firms either closing down or selling off their major portions of their operations to other large players in the industry. This offers a wide opportunity for GTS for brining into reality its acquisition strategy.

Recommended Strategies Through the company’s expansion strategy would bring it the additional market exposure it requires, the technical know-how appears to be a critical factor that would enable the company to sustain its leadership position. This necessitates the company to work towards strengthening its technical knowledge base. GTS can work towards this through the process of acquisition of complementary products and technologies. This strategy would not only improve the inherent strength of the company but would also add to the existing product lines. This non-organic growth initiative will support the development and execution of other business strategies to drive the organic growth of the company. Strengthening research and development activities to supplement the introduction of new product lines is another important strategy that the company should adopt to improve its market position. The strategies to acquire products and technologies, strengthening the research and development area, and venturing the new markets are the best defensive strategies that GTS can adopt in the context of a perceived excess capacity created in the industry and an anticipated decline in global demand.

References

Burger, Andrew K. Silicon Wafer Producers Set To Capitalize On Growing PV Demand. Web.

EdgarOnline. Prospectus Summary. 2008. Web.

FormS-1/A. GT Solar International Inc. 2008. Web.

Gronewold, Nathanial. World Solar Industry Appears Headed for a Shakeout. 2009. Web

GTSolarIncorporated. Innovative Photovoltaic Manufacturing Solutions. 2007. Web.

Sanders, Bob. GT Solar answers lawsuits. 2009. Web.

Internal Analysis of GT Solar International INC
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