Sunny Outlook, Cloudy Horizon

Canadian Solar's Shawn Qu wants to tap into China's hot solar market - but a worldwide materials shortage threatens his grand plan.

Shawn Qu is certain he could boost sales of solar energy-related products manufactured by the company he founded in Chengsu, a 90-minute drive north of Shanghai in China's Jiangsu province. But getting his hands on the silicon that is a major component of the solar panels and other sun-powered devices Canadian Solar Inc., produces can be a challenge. A worldwide silicon shortage this year, expected to spill into 2006, has had a major impact on an industry trying to meet growing demand.

“We could grow so much faster, but the supply chain can't keep up,” says Qu. He founded the company in 2001 as a spinoff from work he did in the solar division at Cambridge, Ont.-based ATS Automation Tooling Systems Inc. (ATS's main business is developing automated manufacturing systems for various markets, including the automotive, consumer products and healthcare industry.)

Canadian Solar, with about 100 employees in China and another 10 or so in Canada, produces solar modules with generating power ranging from 5W to 300W. The company has also become a major provider of integrated solar devices for specialty markets, such as the telecom signalling and automobile industries: examples include solar powered batteries for cars and Global Positioning System devices. As well, the company manufactures customized solar panels that are used on building rooftops to provide electricity to homes and businesses. (To give an idea of how the solar energy market is growing, in fiscal 2005, the solar division of ATS had revenue of almost $144 million, up from $88.5 million the previous year. It had operating earnings of $13 million, up from $4.2 million in 2004.)

Given such growth in the sector, it's not surprising the all-important silicon material is in such demand. Qu, when travelling to meet suppliers in search of silicon stock, often finds that executives from competing companies have already been there, just days earlier, with the same purpose. “We all travel the same route,” says Qu, whose company pulled in revenues of around US$10 million in 2004. He adds: “If we had the necessary silicon materials, we could easily double or triple our revenues.” In the past, Qu says suppliers were knocking on his door looking for business, while he was looking for more customers for his products. “Now it's the reverse – customers are calling us to place orders and the salesmen for our suppliers are getting swamped.”

The growing shortage of silicon for making solar cells is becoming an industry-wide concern. Prices have increased significantly and the shortage is having an impact on solar cell manufacturers' ability to use their available production capacity. At the same time, the market for solar-powered products has been growing, a result of increases in government subsidy programs‰??especially in Germany and Japan‰??and growing demand for clean, renewable energy. While still just a tiny portion of the world's energy output, industry experts figure that the global market for solar-energy related products reached 900 megawatts in 2004 and has grown at an average annual rate of about 30% since 2000. Japan and Germany alone are estimated to account for two-thirds of the worldwide market.

Regardless of the silicon issue, Qu‰??who came to Canada in September 1987 as a University of Manitoba physics student, but stayed after the 1989 clampdown on student protesters at Tienanmen Square‰??has made a profitable business out of Canadian Solar. While he has a home and family in Mississauga, Ont., Qu spends much of his time in China overseeing Canadian Solar's operations. Over the past two or three years, Qu figures he's “probably spent about 70%” of his time away from home.

Not that Qu regrets returning to his homeland to try his hand at entrepreneurship, after convincing his former employer, ATS (TSX:ATS) to let him spin off his business plan to capitalize on the potential of solar energy. Qu says that about 80% to 85% of Canadian Solar products made at the Chengsu plant are exported from China. But Qu has high hopes that will one day change, as Canadian Solar taps into a potentially huge Chinese market.

To that end, in April, the company unveiled a 10 kilowatt demonstration project at its Chengsu plant, which is about about 40 minutes from Suzhou, an ancient inland port city along the Yangtze River. (That's where the company has its administrative offices and a development division, Canadian Solar Technologies.) The 60 solar panels fixed to the roof of the Chengsu plant, each with capacity of generating more than 160 watts, are all connected to the power grid. This demonstration system at the plant will be used to help educate Chinese businesses and residents about the value of solar energy, Qu says, adding it was built following ratification of China's Renewable Energy Law, which emphasizes the use of environmentally friendly technology.

Qu admits that while solar energy may not be able to meet all the electricity needs of a energy-hungry China, it will contribute to the overall mixture in the country's power supply. He points out Canadian Solar participated in a 2003 project sponsored by the Canadian International Development Agency and the Canada Climate Actions Fund to provide small solar-powered generators to rural Chinese, many living in tents, in Western China. Says Qu: “Solar energy may one day help Chinese living in rural areas who right now have no access to electricity, and improve their quality of life.”