Nearly-Zero Energy Buildings Will Deliver Strong Growth for Materials Manufacturers, but Geographic Segmentation Must Drive Strategy

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As global awareness of the impact of building energy consumption on climate change has increased, a number of countries have announced supportive policy measures and mandates for transitioning all new construction to nearly-zero energy. However, for companies looking to find growth opportunities, it is critical to distinguish policy rhetoric from adoption reality. With most countries still lacking a clear definition of “nearly-zero” or policies with genuine incentives or punative ‘teeth’, forecasting the hotspots where growth opportunities exist is non-trivial. To be clear, no country will meet its 2017 targets for nNZEBs, but partial adoption will propel the nearly-Net-Zero Energy Buildings (nNZEB) floor space from 12 million m2 in 2012 to 80 million m2 by 2017, creating a $16.5 billion materials market.

While Europe dominates today, incentives in Korea, China, and India propel Asia-Pacific to an annual 31.4 million m2 by 2017. Numerous factors contribute to the region’s growing importance including energy security concerns in India, carbon tax in China, and cap-and-trade and an imminent national Passivehaus adoption target in South Korea, each of which directly or indirectly drive implementation and pursuit of announced targets for nNZEBs. In all, Asia- Pacific’s share of annual nNZEB installations will rise from 23% in 2012 to 39% in 2017.

In terms of technology, while the likes of cool roof coatings and air barrier materials will grow robustly from a modest base, high-R value glazing and daylighting skylights accounting for 86%, or $14.2 billion, of the total market for building envelope materials. High-R value glazing alone will be an $8.2 billion market, dominated by double-pane constructions as higher cost, thickness, and weight will keep the adoption of triple-pane glazings limited. Designers will try to get triple-pane performance with double-pane designs and advanced edge sealant materials, or will look to integrate emerging technologies into glazings. Designers in India and Australia will adopt light redirecting louvers to reduce artificial lighting, while designers in the Middle East will look towards incorporating phase change materials (PCMs) in double-pane glazings to reduce the air-conditioning energy usage during peak hours.

Companies looking to grow with the nNZEB market need to plan now for tomorrow’s market in terms of technology selection, manufacturing locations and partnerships in the value chain that can yield adoption of the right materials technologies in the right geographies. Six-fold market growth in five years should be compelling to any materials company, but appropriate strategy will determine who sees the spoils of the market opportunity.

Source: Lux Research report “Getting to Nearly-Zero Energy Buildings: Ambitious Targets, Modest Progress” — client registration required.

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Chinese Giant Shuanghui Plants its Flag in the “Ham Capital of the World”

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Making a play for access to high-quality American pork products, Shuanghui International entered into an agreement to purchase Smithfield Foods this week. Per the terms of the purchase, Smithfield is valued at $7.1 billion, with Shuanghui purchasing outstanding Smithfield shares for a total of $4.72 billion and assuming approximately $2.38 billion in Smithfield net debt. Pork consumption in China has nearly doubled in the last 20 years, to over 50 million tons of carcass weight equivalent annually. As per the Lux Research report “From the Horse’s Mouth: How Chinese Companies Value Foreign Partners and Opportunities” — client registration required, M&A and joint ventures are rapidly becoming attractive routes for increasing overseas market penetration and offshore production capacity for Chinese firms. In this case, the acquisition of Smithfield represents the immediate opportunity for access to offshore production, and the longer term opportunity for increased penetration into the international markets already familiar to Smithfield.

While the key players have agreed to the deal, regulatory hurdles remain to be cleared. The Committee on Foreign Investment in the U.S. (CFIUS) must permit the deal to proceed. The stated objective of this organization is to verify that foreign business investments do not interfere with U.S. national security. While pork products seem well separate from national security, some lawmakers see a significant security risk in allowing a Chinese corporation to gain a controlling interest in any food company, fearing a trend toward Chinese-style food safety practices. The town of Smithfield, VA, so-called “Ham Capital of the World,” is wary of the effect this acquisition may have on their town and their beloved “other white meat.” Shuanghui has made clear its intentions to keep Smithfield headquartered in the U.S., and has stated no intention of moving production overseas. Rather, this deal appears to be focused on access to American pork products for Chinese markets. There may be some perfunctory saber-rattling in the American political system, but this deal is likely to go through relatively unhindered.

In addition to providing access to a large supply of pork products, this deal should also allow Shuanghui to build up its reputation in terms of food safety. China is all too familiar with food safety-related scandals, and the recent discovery of thousands of pigs fouling a large waterway in Shanghai has made consumers wary of local products, making obvious the need for change. Smithfield invests millions of dollars annually on food safety assurance and innovation, employing the hazard analysis and critical control points (HACCP) method of compliance with the requirements for GFSI certification. In fiscal year 2012, Smithfield opened a brand new R&D facility in the U.S. dedicated to food safety innovations as well as advances in taste and overall healthiness of products. These resources will be useful to Shuanghui in its efforts to clean up its rather tainted global image. Going forward, Shuanghui’s example may pave the way for other beleaguered Chinese food companies to clean up their images through M&A with other American producers.

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The 3D Printed Part Market Will Grow to $8.4 Billion in 2025, but Materials Suppliers Need to See the Small Print

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3D printing has been touted as an enabling platform for applications ranging from personalized medicine to personal drones. However, the specific trajectory it takes – more disruptive than the Internet vs. a passing fad for hobbyists – will depend on conquering commercialization challenges. Aspiring developers will not only need to address technical and commercial challenges, but also create new business models, legal structures, design paradigms, and partnership networks for reality to match the hype.

The 3D printed part market had a $777 million base in 2012, with 3D printed prototype parts in aerospace and automotive applications totaling $315 million and $428 million, respectively, accounting for more than 95% of aggregate sales.  By 2025, the market is projected to grow to $8.4 billion, representing a compound annual growth rate (CAGR) of 18%, with transportation prototyping continuing to own a meaningful $4.0 billion although dropping to only 48% overall share as less mature sectors pick up the pace. Specifically, medical markets will soar to $1.9 billion in 2025 from a mere $11 million in 2012. Arcam first received FDA approval for its titanium orthopedic implants (initially knee and hip replacements) in 2011, while OPM only received such approval for PEKK facial and thoracic implants in Q1 2013.

Despite the quality growth in 3D parts revenue, materials developers should go in with eyes wide open as far as revenue and price. 3D printable materials have historically garnered high margins – for instance, stainless steel powder for SLS and EBM printers sells for $120/kg, compared to $10/kg for its bulk analog. The actual amount of material sold to 3D printing applications will grow at a 18% CAGR from 886 tons in 2012 to 9,654 tons in 2025. However, as more materials suppliers enter and prices drop, the total materials market will grow at just an 11% CAGR from $142 million in 2012 to $579 million in 2025. Each of the key materials in today’s 3D printing pipeline will all see price attrition, from a 60% drop in price for titanium powder for aerospace, to stainless steel powder and polycarbonate filament for automotive each experiencing 90% or more in terms of price attrition.

In the longer term, 3D printing has potential to reshape the manufacturing ecosystem, but it will have the most impact in the near term for products that are made in small volumes, require high customization, and are more cost-tolerant. To survive the hype and subsequent fall-out, winners will identify and serve new applications early and often through nimble materials, application development and business models.

To learn more about this topic, join us for the upcoming webinar, “Building the Future: Assessing 3D Printing’s Opportunities and Challenges” on Tuesday, July 16, 2013 at 11 am EDT

Source: Lux Research report “Building the Future: Assessing 3D Printing’s Opportunities and Challenges” — client registration required.

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Steven Minnihan

Bloom Energy: Too Big to Fail?

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What They Said

Bloom Energy raised an additional $130 million in a continuation of a series G funding round that closed in 2011. This brings Bloom’s total private funding to over $1 billion. Credit Suisse provided $30 million, while an unnamed investor added an additional $100 million. No additional existing investors participated in the round, aside from Credit Suisse.

What We Think

Bloom is a media machine, but every piece of news they generate offers greater insight into the flaws and risks of the company. In the past, the company has revealed that its entire business model and financial viability is dependent on high levels of government incentive and support, so much so that the company has been accused of receiving government protectionism (client registration required). Prior to that, the company revealed that its high level of funding makes it infeasible for the company to offer worthwhile returns to its investor, even if its inflated valuation (client registration required).

This recent news reveals the underlying flaw in its business model. Specifically, the company continues to face cash constraints due to a high burn rate and large capital expenditures to fund its power purchase agreement (PPA) business model (client registration required). Despite significant subsidies and high fixed tariffs, the company lacks the ability to self-finance the deployment of new systems.

While all fuel cell technologies suffer from high total cost of ownership (TCO) on account of high capital cost, high membrane assembly replacement costs (see the report “The Great Compression: The Future of the Hydrogen Economy” — client registration required), other fuel cell applications and technologies are far more appealing than Bloom’s PPA approach. Specifically, remote generation for off-grid commercial customers or telecom customers are viable value propositions for proton exchange membrane (PEM) fuel cells. Ultimately, if a client or a technology developer wishes to garner adoption for a novel generation technology, they must look to compete outside of the utility market for the medium term.

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Pallavi Madakasira

GaN and SiC-Based Power Electronics Set to Deliver Big Value in Distributed Solar Installations

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Inverters’ importance in the solar market has only been emphasized by the oversupply and price pressure that has driven down the cost of components around it. Suppliers are doing their part to reduce costs as well, with incremental improvements in efficiency and component count reduction, but the holy grail for solar inverters is the implementation of wide bandgap semiconductors – specifically, silicon carbide (SiC) and gallium nitride (GaN). They offer the promise of higher efficiencies, as well as superior thermal management – critical for temperature-sensitive applications such as solar inverters. GaN and SiC offer indirect cost savings in addition to direct performance benefits – superior thermal conductivity of SiC over Si reduces the size of the heat sink in inverters. Higher switching frequencies of SiC and GaN reduce the failure probability and count of passive components, while high power density enables footprint reduction and installation cost savings. The question is, what is the opportunity for introducing diodes and transistors using these higher cost, but higher performance materials?

Microinverters offer the best absolute $/W premium for SiC or GaN  diodes with Si transistors (SiC + Si, and GaN + Si, respectively) and represent the ideal niche entry for these devices in the residential segment. However, string inverters are the most attractive segment for price premiums relative to silicon with the introduction of SiC and GaN transistors in addition to diodes. Acceptable string inverter price premiums of all-GaN and all-SiC systems versus all silicon top $0.10/Wp in the residential market segment enabling price premium of greater than 20% relative to silicon-based inverters. Importantly, string inverters enable ready access to the growing commercial and residential segments, delivering both volume and price in the two segments set to dominate new solar installations in the developing world for the coming years.

Notably, SiC diodes are already hitting the market through microinverters. As GaN diodes and SiC and GaN transistors become more commercially available, they should take the same path – and will have a similarly beneficial impact, while enabling discrete device developers to penetrate the large-scale inverter market at a healthy 10% price premium. As devices fully featuring GaN and SiC hit the market, they’ll hold the biggest competitive advantage in small systems – microinverters and small string inverters, for residential and commercial solar installations – with a powerful proposition: lowering the levelized cost of energy (LCOE) and increasing margins on electricity sold through PPAs.

The race is on to position for technology-driven differentiation in these growing markets. Little surprise to see inverter mainstay Advanced Energy acquire REFUsol on this basis given the latter’s valuable SiC-based inverter IP and products. Though the payback will take some time, the $77 million Advanced Energy paid for that IP will look like a bargain down the road. Others would be wise to take note of this and ABB’s similarly SiC-related acquisition of PowerOne and act accordingly.

Source: Lux Research report “Reaching for the High Fruit: Finding Room for SiC and GaN in the Solar Inverter Market” — client registration required.

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Matthew Feinstein

Local Content, Anti-Dumping Policies Miss the Point

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Over the past few weeks, solar trade news has been made in three regions:

  • In India, the government will close a loophole that prohibits developers from importing crystalline silicon (x-Si) modules under the Jawaharlal Nehru National Solar Mission (JNNSM) by extending the provision to thin-film modules, as well. Specifically, developers in India had imported significant volumes of thin-film cadmium telluride (CdTe) from First Solar and some amorphous silicon (a-Si) from Sharp under the program. As the country tightens the screws on imports, expect developers to simply work around the solar mission. They can capture state-specific incentives in places like Gujarat, Rajasthan, and Tamil Nadu, and more continue to come online as the industry’s prevalence increases in India. Developers can also finance systems on power purchase agreements (PPAs) with private customers, and still capture green certificates without meeting JNNSM qualifications. The more stringent the Indian government makes its policies favor domestic content, the more irrelevant it becomes as developers embrace workarounds.
  • As we alluded to in our insight about tariffs on solar glass (client registration required), the European Union is poised to put import duties on Chinese solar modules. The Wall Street Journal reported that duties are expected to average 46%; in comparison, the U.S. applied duties (client registration required) effectively range from 20% to 35% on top-tier manufacturers. Though the EU seeks to protect solar manufacturing in the region, most of it is already gone, and much of what remains will be filtered out, too, as financial problems plague SolarWorld. The policy is too little too late, and would only serve to increase module prices and hurt project economics for developers while demand is currently poised to be significant in historically strong markets like Germany and Italy, and eastern European markets like Romania and Poland.
  • Ontario has lost its appeal after the World Trade Organization (WTO) upheld its ruling that the Canadian province’s domestic content program violates international trade laws. The program has long been contested by Japan and the EU. An EU spokesman said that “the use of quality, cost-effective technologies should not be hampered by protectionist measures,” which could be perceived as hypocritical in light of the EU’s own trade case, discussed above. For Ontario, the program seemed destined to crash; but the bigger problem has been the region’s flooded interconnection queue.

Though the legal processes continue today, the solar industry has largely moved past worrying about these policies. The supply industry continues to consolidate and shake out low-quality suppliers, while the landscape of survivors becomes increasingly clear – including companies in China, and elsewhere. Supply consolidation – as well as the declining costs that catalyzed the shakeout – should be interpreted as good signs by clients as the industry recovers and progresses towards equilibrium in 2015 (see the report “Market Size Update 2013: Return to Equilibrium” — client registration required).

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The Photovoltaic Market’s Return to Equilibrium in 2015 Drives Tomorrow’s Growth for Today’s Innovators

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The PV market has been a minefield in recent years, with shrinking margins, fluctuating subsidies and trade conflicts keeping executives across the globe awake at night. Beneath it all, the market has continued to grow, and will continue to do so in the next 5 years but with markedly different and healthier dynamics.

Due to the extreme price pressure experienced by manufacturers today, many will not survive the next two years. Uncompetitive tier-2 and tier-3 manufacturers, and some tier-1 manufacturers like Suntech, either will dissolve or be acquired. As a result, global module capacity will decrease from 65 GW in 2013 and 2014 to 58 GW in 2015. With demand increasing to 52 GW in 2015, overcapacity is reduced to 12%. As overcapacity shrinks, manufacturers will save up to $0.09/W by increasing utilization from 55% to 90%. Since prices remain mostly stable, manufacturers will be able to return to profitable gross margins. Projecting even further forward, with the U.S., China, Japan, and India taking over where Germany and Italy left off, companies looking for growth need to look no further than the PV global demand doubling from 31 GW in 2012 to 62 GW in 2018.

These projections depend on multiple large movements within the market, such as financing innovation for distributed projects, governments fast tracking utility-scale project development in emerging markets and discontinued government support for failing tier-3 manufacturers. Importantly, manufacturers will also need to reduce costs to maintain low prices while improving margins. These near-term incremental cost reductions will come from innovation such as double printing cell metallization to create thinner, deeper line widths and reduce silver paste use, or upgrading wafer saws to structured or diamond wire to reduce kerf loss and/or reduce wafer thickness. Business models need adjustment to not only survive the next two years, but also to adapt to the future market and come out on top in 2015.

Companies need to invest in their future now to develop products for the next generation of solar – the generation in which differentiated products such as back contact modules, passivated emitters, kerfless wafers, copper zinc tin sulfide modules, and numerous other technologies can earn large margins in a $155 billion market. Successful companies in the long-term will absorb cheap IP now and accelerate development.

Source: Lux Research report “Market Size Update 2013: Return to Equilibrium” — client registration required.

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Hardwood Trade Restrictions by U.N. Group Likely to Spur Demand for Modifed Wood

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On March 14, the United Nations Convention for International Trade on Endangered Species (CITES) announced new restrictions on trade of various plant and animal species, including 100 species of tropical hardwood. International trade in a range of rosewoods and ebonies from Asia, Central America, and Madagascar will now be regulated by CITES. The joint program between CITES and the International Tropical Timber Organization (ITTO) will support the efforts of the countries concerned, to strengthen their capacities to implement the Convention. The CITES agreement was signed by 170 countries, including most major timber exporters, e.g. Brazil, Thailand, Costa Rica, and Madagascar.

In the last two decades, the use of tropical hardwood in the developed world, especially in European Union countries, has come under scrutiny. Most countries in the European Union require tropical hardwood imports to be Forestry Stewardship Council (FSC)-certified. The changes required to get FSC certification likely raise the production costs, and as a result the use of tropical hardwood has fallen significantly from 1998 to 2007 in Europe. The recent announcement from CITES is now applying screws from the supply side. To date, CITES has applied restrictions on trade of endangered animal species such as sharks and polar bears. To our knowledge, this is the first instance where it has included any wood species under its rules. If implemented effectively, the new restrictions will boost the demand for modified wood products that have shown promise of hardwood performance, such as the furfuryl-alcohol-impregnated softwoods from Kebony and flavonoidimpregnated softwood materials being developed at the Max Planck Institute (client registration required). Clients interested in modified wood materials should focus on the European market and applications that require durability, such as boardwalks and decking.

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Trojan Horse Partnering Strategy for Emerging Electronics Applications

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In the value chain for established electronics markets, material suppliers and manufacturing companies engage directly with the brand owners/end users, and technology developers must engage with the material suppliers and manufacturing companies to move downstream, relying on the credibility of these industry established companies. In the emerging printed, flexible, and organic electronics partnering landscape, companies throughout the value chain have struggled to innovate around undefined applications causing lofty industry expectations that failed to live up the hype. Without many success stories to point to, the best practices for forming relationships remain a mystery for most.

A survey of 73 executives active in different portions of the supply chain shows how different segments approach partnering and enables insight into how to approach their partnering strategy in the challenging arena. Based on the data from this survey, and detailed interviews with many stakeholders, a new strategy – the “Trojan Horse partnership” – is a more effective approach to this undefined space. Material suppliers and manufacturers use the technology developers to access brand owners and tap into downstream partnership networks. The appeal of the technology developer’s novel approach provides an avenue to penetrate the walls of the electronics brand owners and grow from within these relationships, while the materials and manufacturing companies offer resources and credibility to tech developers.

The shift to Trojan Horse partnering requires new approaches and tactics. Those looking to engage with early-stage technology developers should scout for technology, but as technology developers mature, technology scouting will give way to “partnership scouting” – scouting by assessing partnership networks. In addition, material suppliers can further the networks of its existing technology developer partners, through the use of its own technology scouting groups and existing relationships from other application spaces.

As this type of partnering becomes common practice, material suppliers and manufacturers will need to market themselves as attractive partner candidates to the technology developers. Companies that have the structure to move quickly and supply even small amounts of capital will have an advantage as it will lower the engagement risk for the technology developers. Material suppliers and manufacturers will also need the discipline to abandon the “sell something now” mentality that creates unrealistic expectations and timelines, and is notorious for euthanizing genuine long term growth opportunities.

Source: Lux Research report “Trojan Horse Partnering: Bringing Materials to Market for Emerging Electronics” — client registration required.

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3D Printed Silicon Carbide: Ceralink’s Novel Production Process for Jet Engine Material

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We recently caught up with Holly Shulman, founder of advanced ceramics developer Ceralink. The company recently developed a method for producing silicon carbide/silicon carbide composites using powder bed inkjet 3D printers from ExOne (see the report “Building the Future: Assessing 3D Printing’s Opportunities and Challenges” — client registration required) as part of a Phase II Small Business Innovation Research (SBIR) grant from the U.S. National Science Foundation (NSF). During the process, a 3D printer deposits a layer of carbon powder, then uses an inkjet printer to deposit an organic binder pre-mixed with additional powder. This method produces a carbon preform which Ceralink converts to silicon carbide by burning away the binder and adding liquid silicon under high pressure – a process known as reaction bonding. The resulting material consists of silicon carbide fibers embedded in a fully dense silicon carbide matrix. Holly said that the material offers lighter weight, higher temperature performance, and higher wear resistance than nickel alloys and titanium alloys for aerospace jet engine components.

Jet engines contain numerous high-value components with complex shapes designed to reduce weight, three factors that favor 3D printing production methods. Using 3D printing methods, additional shape complexity adds no additional cost (as the printer can add material equally well to produce any shape), and reduced weight results in faster production times (as 3D printers throughput outputs material at a fixed rate), not more machining. As aerospace continues to demand lighter weight and higher performance, process development must continue in tandem with materials development. The ability to 3D print an increasingly wide range of materials to achieve required properties will continually test the limits of both the available equipment and process innovation. By incorporating chemical modification post-processing steps into the production process, Ceralink is expanding the range of printable materials using existing printers and materials powders. While bringing Ceralink’s materials to market will involve extensive additional testing and qualification, its development strategy will likely prove a useful tool to 3D printer manufacturers, materials developers, and end users looking to raise the industrial utility of additive manufacturing technologies.

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