Can Longi Green Energy Navigate Silicon Price Volatility?
The evolution of China's photovoltaic (PV) industry over the past two decades has been nothing short of remarkable. Amidst shifting international conditions and fluctuating government policies, this sector experienced a dynamic transformation, transitioning from multicrystalline silicon to monocrystalline silicon technology. While some enterprises were unable to adapt and subsequently failed, many new players emerged to continue expanding the industry. The journey reflects shifting priorities in technology and market demands along with the rise of competitive dynamics.
One prominent entity within this competitive landscape is LONGi Green Energy Technology Co., Ltd., abbreviated as LONGi Green Energy. Once lauded as the epitome of success with a market capitalization that surpassed 500 billion RMB, LONGi has earned the nickname "the darling of photovoltaics." Yet, like many others in the sector, LONGi faces its own set of challenges.
The recent years have been marked by an oversupply of silicon materials as factories ramped up production output. This surge has led to declining prices and raised concerns about a potential downturn for the photovoltaic sector. Furthermore, as local governments withdrew subsidies for electricity tariffs, the production costs for solar companies, including LONGi, increased.
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The implications of these market changes are starkly reflected in LONGi's stock performance. Since June of the previous year, the company has seen a significant plunge in its stock price. As of late March, LONGi's market capitalization dropped to around 303.5 billion RMB, losing nearly 200 billion RMB in value.
The question on everyone's mind is whether LONGi, under the leadership of its founder Li Zhenguo, can restore investors' confidence and guide the company through these turbulent waters.
01
LONGi's Founding Trio Takes Off
Born in a rural family in Henan province in 1986, Li Zhenguo's educational journey formally initiated at Lanzhou University, where he pursued studies in materials science. This academic foundation naturally led him to the semiconductor field.
Upon graduating in 1990, Li was assigned to work at the Huashan Semiconductor Material Factory in Shaanxi Province. Engaging directly in the production of single-crystal silicon rods, he honed his technical skills over two years. However, the entrepreneurial spirit within him soon sparked a desire to chart his own course, prompting him to leave his stable job.
Prior to the establishment of LONGi, Li Zhenguo ventured into various projects, including opening an electronic components factory in Wenxi, Shanxi Province, and managing a single-crystal silicon base in Xi'an. Eventually, in 1997, he entered a joint venture with Aerospace 771 and Xi'an University of Technology, launching Xi'an Lijing Electronics Company as the general manager.
By the year 2000, Li found himself at a crossroads due to disagreements with his partnerships, prompting him to set forth independently. Around this same time, news of China’s impending accession to the World Trade Organization (WTO) spurred a new wave of entrepreneurship throughout the country. Seizing the opportunity, Li invited his friends Li Chun'an, Zhao Tao, and Qian Jundong to establish Xi'an Xinpeng Electronic Technology Co., focusing on the R&D and sale of single-crystal silicon materials.
The company's early days bore fruit as revenues quickly exceeded 10 million RMB, achieving an annual production capacity of 20 tons of device-grade single-crystal silicon. A significant milestone occurred in early 2003 when they secured a $2 million export deal to Ukraine, marking a major transaction for the fledgling company. However, the order turned disastrous due to technical issues, leading to a protracted return journey for the goods. Ultimately, upon their return to China, the materials were bought at triple prices by another solar company, hinting at an elusive silver lining amidst the challenges.
Despite their success in this instance, not all ventures bore positive outcomes. In 2003, a series of projects resulted in setbacks, prompting Li Zhenguo to seek partners with complementary strengths. Three years later, he successfully recruited his fellow Lanzhou University alumnus Zhong Baoshan as chairman to oversee strategic planning, while he became the CEO, focusing on clients and market outreach.
The trio, consisting of Li Zhenguo, Zhong Baoshan, and Li Chun'an, formally rebranded their company as LONGi Co., setting a focused strategy around single-crystal silicon development. This decisive moment catalyzed their future endeavors.
02
The Winds of Monocrystalline Silicon
The trajectory of LONGi's growth aligns closely with the broader narrative of China's photovoltaic advancement. In 2004, the energy transition became a prominent global theme, driven by legislation like Germany's Renewable Energy Sources Act, which marked the inception of widespread interest in photovoltaic technology.
Chinese corporations, taking advantage of foreign capital and technology, quickly gained momentum. Notable figures like Gao Jifan from Trina Solar, Peng Xiaofeng from Suntech, and others saw their respective companies rise to prominence, with many achieving billionaire status along the way. Through this period, driven by tales of wealth generated by PV innovations, the number of Chinese PV companies soared, reaching nearly 1,000 by 2007, dominating approximately half of the global market share.
However, most companies opted for the multicrystalline path, while LONGi remained relatively low-profile in pursuing monocrystalline technology. Before 2004, single-crystal silicon was the favored route as it offered higher energy conversion efficiency, albeit accompanied by more complex and costly manufacturing processes.
Due to the capital-intensive nature of the PV industry, many new entrants prioritized the simpler and more cost-effective multicrystalline method to secure rapid profitability, allowing multicrystalline to become the dominant market approach. This popularity set the stage for an impending industry shift.
Initially, prices for multicrystalline materials skyrocketed due to the influx of capital, prompting companies to secure long-term contracts with suppliers to safeguard against price volatility. However, the onset of the 2008 financial crisis forced the cancellation of solar projects across the United States and Europe, leading to a dramatic reduction in demand and a subsequent collapse in multicrystalline prices. Many enterprises found themselves scrambling to mitigate losses, often incurring substantial penalties to break contracts amidst determined market conditions.
While leading figures in the Chinese PV sector, as exemplified by Peng Xiaofeng and Shi Zhengrong, anticipated a swift recovery from the crisis through further financing, this proved illusory when Western countries initiated anti-dumping investigations against Chinese solar products in 2011, pushing many firms toward bankruptcy.
Yet, amid this turmoil, Li Zhenguo's commitment to monocrystalline technology finally bore fruit. LONGi's persistence in refining its single-crystal silicon capabilities enabled the company to break international monopolies and drive significant cost reductions.
LONGi successfully went public in 2012, and by 2015, the Chinese government launched a "lead-advantage" program that set stricter standards for module efficiency, where monocrystalline products stood at 80% compliance versus only 20% for multicrystalline. This marked a significant turning point as the cost-performance ratio of monocrystalline technology greatly outperformed its multicrystalline counterpart.
By maintaining a focused approach on single-crystal silicon, LONGi captured global leadership in silicon wafer production shortly after the implementation of the new policy, positioning itself as a key player in the domestic market within five years.
03
Emerging Risks of Silicon Price Declines
Today, Li Zhenguo's LONGi has solidified its position as a frontrunner within the global PV industry, boasting personal wealth exceeding 70 billion RMB. The ascent to Fortune's list of China's 500 largest companies came in 2017, followed by his debut as the richest individual in Shaanxi Province a year later. By 2022, his name graced the Hurun Rich List at position 53, alongside other notable shareholders like Li Chun'an and Zhong Baoshan.
In light of a renewed wave of PV development, LONGi has earned its reputation as the "star of photovoltaics." However, the cyclical nature of the industry presents undeniable hurdles. The current drop in silicon prices is fostering fierce price competition across the value chain, compelling LONGi to strategize amidst fresh challenges.
The affluent Li Zhenguo has redirected LONGi's trajectory toward integrated operations. Currently, a considerable portion of the company's primary revenue stems from silicon wafers and solar components, contributing to nearly 90% of its income. The initiatives also encompass aspects such as solar power plant construction and contract manufacturing. Essentially, LONGi's strategy aims to cover nearly every segment of the PV industry value chain—excluding raw silicon materials.
This integrated approach has been in development since 2014, when LONGi established a subsidiary focusing on solar power plant construction and engineering. The company also acquired a significant stake in Zhejiang Leyue Photovoltaic Technology to expand its reach in solar cell manufacturing.
By leveraging single-crystal technology, LONGi is enhancing its footprint through vertical integration, shielding itself from risks associated with reliance on any single segment of the supply chain.
Annual reports indicate a consistent rise in the proportion of self-produced silicon wafers. In 2020, the self-use rate of monocrystalline silicon wafers reached 45.25%, increasing to 51.55% the following year, with a forecasted target of over 60% for 2023. This strategy, as planned by Li Zhenguo, ensures that the increased self-use percentage mitigates the risks associated with declining silicon prices while allowing the company to retain profits through downstream operations.
The company further diversified its pursuits in 2021 by investing in Sentech, marking a foray into building-integrated photovoltaics. This move heralded the beginnings of a vertically integrated industry chain model in the photovoltaic sector.
In May of the previous year, LONGi transitioned to the name "LONGi Green Energy," establishing a joint venture to launch "LONGi Hydrogen Energy," thereby embarking on an expansive journey through the complete new energy industry chain.
As we look ahead, the pivotal question remains: Can Li Zhenguo lead LONGi successfully through the next cycle of challenges?