China casts long shadow over solar off-grid startups

Investment has poured into the off-grid solar sector, which offers safe alternatives to kerosene lamps in emerging markets. However a rising flood of Chinese suppliers is crushing margins. Sharper analysis is needed to separate winners from losers.

The solar industry hit the headlines after US President Donald Trump slapped tariffs of up to 30% on imports of solar cells and panels on January 22, a move aimed at China which makes 60% of the world’s solar cells and 71% of solar modules, according to a release by the US Trade Representative Office.

Rising competition from Chinese suppliers in recent years has also coincided with a surge of investment in solar companies, driven in part by growing concern over the impact of fossil fuels on the environment. About $20 billion was invested in sustainable energy during 2014, according to the United Nations.

Take for example the off-grid solar sub-segment, which has raised about $580 million in financing since 2015 according the World Bank, mainly from Western venture capital firms who focus on the base-of-the-pyramid companies.

However profitability has eluded the vast majority of these off-grid players, who provide lighting to households that lack a connection to the national electricity grid, to a certain extent due to a flood of cheaper products from Chineses suppliers. 

The number of off-grid solar suppliers headquartered in China has risen from 35% of the market in 2010, to 66% in 2017, according to the World Bank data [see table below].


Moving forward, an injection of capital will no longer be a substitute for a long-term, sound business model say industry players and investors, who are turning more cautious. Debt investment with tighter terms is becoming easier to access than equity.

“To really scale financing for our sector it requires profitability and sustainability, because commercial banks are not going to want to put money into companies that essentially are funding operating losses,” said Ned Tozun, co-founder of off-grid solar energy product manufacturer D.Light, during a conference in Hong Kong on January 22.

As competition bites, investors need comparable data on figures such as customer defaults as a basis for sharper analysis of the sector in order to identify future winners, and losers in such a competitive environment. However novel business models in the fast-growing and innovative sector are obscuring trends and hampering the creation of data.

The sector is undoubtedly growing and innovating. Solar products are fast replacing kerosene lamps, which are a fire hazard and damage people’s lungs and eyes, with modern lighting. Solar-powered home systems are now capable of charging mobile phones and powering appliances ranging from televisions to refrigerators. Besides, these companies are starting to accrue and use data generated by remote communities as they plug in.

Most sales are in Africa but a few off-grid solar players, such as SolarHome in Myanmar and Kamworks in Cambodia, are penetrating the Asian market.

Annual off-grid solar sales will hit 70 million units and $8 billion in revenues in 2022, up from over 30 million devices and $1 billion in revenue in 2016, according to a report by the World Bank and offers published on January 22.

However as products increasingly compete on price rather than cutting-edge design and safety, players affiliated with industry associations that set product standaards have seen their market share slump to 29% of global sales, leading some companies to withdraw from the market.

It could be that the sector enjoys a smooth growth trajectory, but what if that is not the case and the funds pouring in are only delaying a bubble from bursting? To dig beyond the hype, equity investors and debt providers need to take a more granular approach to analysing companies’ performance.

Firstly, the industry needs common key performance indicators. 

The off-grid solar sector should learn from the microfinance industry, where data bases such as MIX collect data from microfinance institutions and makes it comparable and understandable to lenders, said Christian Schattenmann, a fund manager at Bamboo Capital Partners in charge of investment in off-grid energy.

“That is the only way we can attract massive debt financing and tap local currency markets,” said Schattenmann.

Next companies and investors need to find a way of separating businesses. 

“Today we bundle everything under solar devices but there are many different models,” said Schattenmann.

Pay-as-you-go providers of solar home systmes often comprise manufacturing, retail and increasingly financial operations.

“If you look at companies’ balance sheet projections over the next three to four years – they are becoming financial institutions, which pose a different set of risks for investors,” said Schattenmann who has invested over eight years across the sector in companies such as BBOX.
Some companies in the sector are experimenting with another way around this difficulty by placing assets into special purpose vehicles and securitising their portfolio, making it easier and cleaner for debt investors to analyse the portfolio’s quality. However asset securitisation works best when there are trillions of dollars in assets and loans that are typically backed by stronger collateral than solar home systems, according to a study by the IFC, a private-sector affiliate of the World Bank.

IFC, in a paper called “Strange Beasts” advocates creating captive, or in house financing units, with separate financial statements for the retail and credit sides of the business.

A few firms are leading the trend towards specialisation and vertical disintegration of the value chain, such as financing platform SunFunder.  

“We don’t want to be a bank, we have to be a bank today, but we realise that is not fully scalable and if we could find a partner that can handle the underwriting for us and the financing aspect we’re very happy to partner,” said D.Light’s Tozun.

Given better data investors will be able to better understand the impact of rising competition.

As the market has grown, so has the supplier base has grown from a little over 60 dedicated suppliers in 2010 to over 330, according to the World Bank report.

In 2010, the sector was dominated by non-governmental organisations that focused solely on off-grid solar products, typically headquartered in OECD (Organisation for Economic Cooperation and Development) countries. Now there are also companies producing solar portable lights as a small part of a broader consumer electronics portfolio, like Hubei Wisdomsolar Lighting Technology. At best estimate, they number over 600 and are mostly based in China, the report said.

“There are bad practices which can damage all the work by quality standards organisations,” said Philippe Cabus, director of access to energy at French oil major Total.

Source: World Bank
Market share in off-grid solar product sales by country


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