IN DEPTH: Behind the REC split

Long before “vertical integration” became a catchphrase among PV manufacturers, Norway’s REC Group was an extreme practitioner — with an in-house supply chain stretching from polysilicon to modules.

But as polysilicon prices crashed back to Earth and the group’s losses piled up in recent years, it became clear that the case for REC’s model was on the verge of collapse.

Last summer, the company announced the most radical decision in its two-decade history — to split itself into two independent entities. The move highlights the powerful and complex changes under way across the PV manufacturing sector.

But after years as a beacon of vertical integration, can it really be the case that two companies are better than one?

REC’s split in October saw its wafers-to-modules unit, known as REC Solar, spun off from the polysilicon unit, REC Silicon — with no exclusivity deals between the two.

Although both companies are listed on the Oslo stock exchange, that is one of their few remaining connections to Norway — with REC Solar now based in Singapore and REC Silicon in the US. Over the past few years REC closed all of its legacy factories in Norway and Sweden.

Ironically, despite the seismic nature of the shake-up, it felt entirely natural, says Luc Graré, senior vice-president at the new REC Solar.

“If you did a survey among our employees [in Singapore] and our customers, nobody would see any difference [since the split],” he tells Recharge. “That just confirms that there was really very little synergy left between the two companies.”

Amid the rise of low-cost Asian module producers in recent years, many industry experts had come to view REC’s polysilicon division as the true jewel in the company’s crown, with its ability to produce about 20,000 tonnes per year from its foundries in the US states of Montana and Washington. Even today, REC Silicon’s market capitalisation is about two thirds higher than REC Solar’s.

Yet thanks to the way the split was carried out — as well as changes to the global PV landscape — the gap between their long-term viability has narrowed significantly.

The REC Group — which was effectively morphed into today’s REC Silicon — raised NKr800m ($130.4m) through the flotation of REC Solar.

Of that, NKr300m was injected into REC Solar — which was also left with a pristine balance sheet and control of the REC Group’s distinctive and well-known logo.

The result is that REC Solar is one of the PV industry’s few debt-free manufacturers.

Since its initial public offering (IPO), REC Solar shares have risen nearly fourfold, leaving the company worth about NKr3bn.

With 800MW of module capacity in Singapore, REC Solar is “still a relatively small company compared to some of its rivals in China and the US”, notes Preben Rasch-Olsen, a Carnegie analyst who has covered the REC Group for nearly a decade.

“They’re not in a position where they can go out and buy other companies,” he says.

Still, REC Solar’s relatively strong balance sheet means that its modules are more bankable than many — and can therefore command a premium. Although the PV industry will see more casualties before stabilising fully, “I think they’ll probably survive”, Rasch-Olsen tells Recharge.

Graré, unsurprisingly, is a lot more bullish than that.

In the short term, REC Solar is benefiting from a number of tailwinds, he points out.

First is the recent trade settlement between Brussels and Beijing, which set a price floor on Chinese modules imported into the EU. That price floor means quality has become a far more important factor in winning customers in Europe — a huge relief for REC.

The company also benefits from the PV boom in Japan, where, again, quality and customer service are often more important than cost. One quarter of REC Solar’s modules are now being sold in Japan, a level Graré expects to hold steady through 2014.

Graré counts REC Solar’s Singapore location as one of its longer-term advantages — a claim that flies in the face of those who criticised the choice of Singapore, given its high labour costs compared to China.

But wages in China are rising quickly, and in Singapore the company has access to relatively inexpensive labour from Malaysia.

“It’s a huge asset to be so centrally located within Asia-Pacific,” he says of a region that is expected to account for half of global PV demand this year. “You’re six hours from New Delhi, six hours from Tokyo, six hours from Australia and an hour from Bangkok.”

The one downside to Singapore is its relatively high electricity prices, he concedes. But that is offset by other factors, including the rise of Singapore as an Asian hub for global investors.

That proximity to capital will come in handy, with REC Solar intending to add about 400MW of capacity over the next two years.

For REC Silicon, the post-partum period has been less sanguine. Its shares have fallen significantly since the spin-off.

With almost bizarrely inopportune timing, the REC Group revealed its plan to calve off its solar division just hours before China announced it would impose punitive anti-dumping duties on US polysilicon makers — a huge setback for the silicon company.

REC Silicon, which declined to comment for this article, was hit with the highest duty among all US producers, 57%. Many of its biggest customers are Chinese.

So far, the company has kept its head above water, and its fluidised bed reactor technology still makes it stand out among the world’s polysilicon producers.

For now, the outlook for REC Silicon appears less clear than for REC Solar — a significant reversal of fortunes.

“They’re probably a more obvious takeover candidate than REC Solar,” says Rasch-Olsen.

Just a few years ago splitting up REC would have seemed almost unthinkable, as rivals raced to copy its unique nose-to-tail manufacturing model.

But today, after the industry’s dramatic upheaval, there are few who would deny that REC Solar and Silicon probably stand a better chance on their own.