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Labor Cost Arbitrage – Applied Materials moves to Asia

1 May, 2010

One of my pet theories is that they we see a lot of distortions and oppurtunities for arbitrage is because labor is not globalized while capital and trade are . When capital and goods/services with some restrictions can move freely around the globe , there are innumerable restrictions on movement of labor leading to outsourcing. The MNCs with sprawling global structures are able to best exploit this situation by moving most of their labor requirements to low cost locations in Asia. It is not only manufacturing and low valued added work that they are moving but their entire R&D capabilities. Applied Materials , one of the world’s largest semiconductor has moved and is in the process of moving the rest of its manufacturing and R&D capabilities to Asia. This is leading to mass layoffs in its US operations.

Rumor mill: Layoffs seen at Applied - EETimes

More rumors at Applied Materials Inc.: The fab tool giant is expected to have a layoff between May 10 to May 12, according to sources.

The layoff will involve an undisclosed number of employees in the solar and other groups around the company, sources said. There will be layoffs almost once a month over the summer, sources said. All cutbacks will be in the United States.

For some time, Applied has been reducing its headcount. The last layoff was small and happened at the end of March, sources said.

USA doing precious little on climate change

30 Apr, 2010

Climate Change,Renewable Energy,USA

With Obama’s election there were lots of hope on the climate change issue with regards to the USA. Under the previous Republican administrations US was actively trying to kill each and every initiative on climate change , so it was assumed that Obama would change that . But except for token measures under ARRA , there has been no significant long term commitments being made towards climate change. The administration has been so busy with other issues that it has stopped paying attention to one of the biggest threats to our world right now. With the US not paying enough attention to mitigate climate change , you can’t expect other developing countries in the world to make major contributions either . Think that only a major environmental disaster will get US to move forward on this issue.Until then expect the politicians to play the their useless political games as you can see in interview with Republican Lindsey Graham who is one of the co sponsors of the climate change bill .

Sen. Lindsey Graham: ‘I care equally about immigration and climate change’ – Washington Post

EK: So what allows climate to move forward now? What do you need to hear from Reid?

LG: Here’s the problem with climate. Do you have any chance of bringing it up and getting 60 votes in this environment? There’s a controversial provision in the transportation section. We have done as good a job as we can to get oil and gas companies to pay for their pollution. Some of that cost will be passed onto consumers. But it’s not a gas tax. I need Harry Reid to say I agree with you. I support that. I won’t introduce a bill and have the majority leader, who I have less than a strong bond with, say, “I can’t support that gas tax.” There was also a Fox News article where the White House said they couldn’t support Graham’s gas-tax gambit. I will not let this get blamed on me. It would be the worst thing in the world to take the one Republican working with you and make him own the one thing you don’t like.

EK: So what you need isn’t just an assurance on immigration. It’s an assurance that if you’re going to do the dangerous things on climate reform, you won’t be hung out to dry on it.

LG: Right. Ask yourself: Why did they leak the story to Fox News? That told me they weren’t committed to this issue. Why let a story start on a venue that would hurt your partner the most?

EK: Have you asked the White House?

LG: Yeah. They say, “Oh, we didn’t do it.” And it’s true: Rahm and David didn’t. But somebody involved in energy and climate there did. They’ve always worried about being in a bad spot on this. So someone pretty clever said, “Okay, we’re going to get on the record against this.”

EK: Do these assurances go in the other direction, though? You want to make sure the Democrats don’t leave you hanging on this. But they’re worried that this bill comes out, and you’re with them, but 40 other Republicans are hammering them for supporting what they’ll call a gas tax, cap-and-tax.

LG: This is exactly what they’re going to say. I have never suggested they won’t. And they’ll say it about me, too. So we have to hold hands so I can make a credible argument, alongside business, saying it’s not a gas tax. But you can’t make this into my idea alone. It wasn’t my idea.

Why First Solar might be loser in the long term

30 Apr, 2010

China,First Solar,Solar Energy,Suntech,Trina Solar,World Economy and Markets

First Solar beat the estimates and the gudiance soundly as it prone to do leading to a major stock rally . The stock went up due to the bearish sentiment plus the large short interest on the stock.However there might be some reasons that the stock might be a relative loser in the long term

1) Its inability to add capacity quickly – While c-Si companies can add capacity in as short a time as one quarter, it takes at least 1 year for First Solar to add its thin film lines.In the volatile sector this is a crucial part of

2) Slowing down in efficiency improvements – First Solar has cost cutting over the last year has been very slow compared to Chinese competitors like Trina Solar

3) High Operating Expenses and Stock compensation – Chinese companies have very low operating expenses in the range of 10% while First Solar with its US management employees has typically in the range of 20%. In the cut throat business , you have to cut that cost to remain competitive.Also paying $90-100 mm a year in stock compensation is a privilege for companies like Apple and Google in quasi monopolistic markets.

Vestas in red as competitive pressures increase in the Wind Industry

29 Apr, 2010

Goldwind,Green IPO,Renewable Energy,Sinovel,Vestas,Wind Energy

The Global Wind Industry increased by 31% in 2009 despite a bad year for the world economy boosted by the movement towards cleaner energy and the relatively good economics of wind compared to other renewables like solar energy. Despite this Vestas which is the world’s largest turbine maker reported a loss making quarter . I think Vestas will continue to lose ground due to competitive pressures from Chinese wind makers like Sinovel and Goldwind which have captured most of the orders in China the fastest growth market. Also Vestas is not strong in the USA which is the second largest market. With no compelling technology to beat the low cost Chinese players I think Vestas will continue to lose ground in the wind market.
Vestas Has Surprise Loss as Credit Crunch Cuts Orders – Businessweek

Vestas Wind Systems A/S, the world’s largest maker of wind turbines, reported an unexpected loss after tighter financing led customers to delay renewable- energy projects. The shares fell 4.6 percent. Vestas lost a net 82 million euros ($108 million) in the first quarter compared with profit of 56 million euros a year earlier

The order book was worth 2.9 billion euros at the end of the quarter compared with 4.9 billion euros at the same time a year earlier. Vestas installed 178 turbines with a combined capacity of 387 megawatts in the quarter compared with 490 turbines producing 885 megawatts in the same period of 2009.

Vestas will also increase 2010 investments by 400 million euros to 1 billion euros to help it speed up the introduction of its new V112-3.0 megawatt model, which works both on sea and land.

FPL Group Inc., the largest U.S. power company, said yesterday that it would build 600 megawatts to 850 megawatts of wind-energy plants this year, reducing its target from 1,000 megawatts previously. FPL cited low power prices and uncertainty regarding climate-change legislation.

Global installations of wind turbines this year will gain about 9 percent, adding 41 gigawatts to power capacity, Bloomberg New Energy Finance has estimated. That’s the equivalent of an investment of $65 billion and enough to power more than 12 million homes, according to data from the U.S. Department of Energy and the American Wind Energy Association.

What a climate bill could do to increase renewable energy

28 Apr, 2010

Climate Change,Siemens,Solar Energy,USA,Wind Energy

The Copenhagen Conference on Climate Change turned out to be a dud despite the huge media hype and hoopla . But despite indifferent support of climate by world governments , investments in climate change by private sector has increased by leaps and bounds despite the slowdown brought on by the financial crisis.Both wind and solar installations increased by almost 50% in 2009 despite no climate change bill enacted by the US. Makes you wonder where we would with a climate bill.Siemens CEO here talks about investing in renewable energy with or without a climate change bill. With great technology and investments devoted to energy efficiency,wind energy and solar energy,some think of Siemens as one of the best green investments in the world right now.
Siemens CEO: Lack Of Climate Bill Won’t Stop Energy Plans – WSJ

The U.S. Congress’s lack of action climate-control legislation will not cause Siemens AG (SI) to retreat from investments in renewable energy, Siemens Chief Executive Peter Loescher said Tuesday.

“You have to look beyond daily politics,” Loescher said during an interview with Dow Jones Newswires. “We are very bullish about the market opportunity that exists in the U.S. for renewable energy and particularly for wind energy.”

Loescher has sharpened Siemens’ focus on energy since becoming CEO of the industrial and engineering company in 2007.

Energy legislation that included limits on greenhouse gasses passed the U.S. House last year, but encountered stiff opposition in the Senate. It’s uncertain whether or when a Senate version of an energy bill will come up for a vote this year.

Even without climate legislation, Loescher said that demand for alternative energy continues to increase.

“This is a major push by governments around the world,” he said. “We have a massive order book that goes into the billions” of dollars.

A Green Power Utility to IPO in India

25 Apr, 2010

Biomass Energy,Energy,Green IPO,Solar Energy,Wind Energy

Orient Green Power Ltd (OGPL), is planning to raise Rs 900 crore to fund its expansion plans of raising capacity to 1000 MW by 2013 from the less than 200 MW now.Shriram EPC, Bessemer andOlympus Capital are the promoters of this company started in 2007 . From its website

OGPL is a leading renewable energy producer in India. Established in 2007, OGPL is a diversified renewable energy company focused on the development, ownership, and operation of wind, biomass and small hydel projects.OGPL currently has an aggregate installed capacity of 175MW, which comprises of 134.5 MW of wind and 40.5 MW related to biomass projects. OGPL has more than 500 MW under construction/implementation pipeline.

While more details on valuation and the quality of their existing projects would come out later , seems a very good time for the promoters to get additional funding given the hot theme of “power” and “green” which their company combines.

China’s Longyuan Power Group Corp., the country’s biggest wind-power producer and with a similar green power utility profile managed a very successful IPO raising more than $2.6 billion in HongKong in December 2009 . Stock price is up 15% from its IPO price.2 other big Chinese electricity utilities (Huaneng Group and Datang group) are thinking of raising money from the market by spinning off their renewalbes unit .Italy’s huge utility Enel is thinking of doing it as well.

With the globe excited about green power utilities , why should India be behind . However the main difference between these IPOs and Orient Power is one of scale and parentage. All these foreign companies have strong expertise in the electricity industry with a large portfiolio of renewable projects diversified over a number of sites.Orient Green Power seems quite small less than 200 MW of capacity and no deep expertise/parentage in the electricity industry .

With regards to valuation , it might seem rich again at $700-800mm considering that you can build 1 MW of wind power at around $1.5 million. With 175 MW of wind and biomass their existing assets without consideration about how much debt they have would be no more than $300 million . However the data is very scant now and I would post a much detailed valuation post when the prospectus comes out.

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