STP Streamlines Arizona Solar Plant

Suntech Power Holdings Co. Ltd. ( STP - Analyst Report ) will halt two of the three production shifts at its Goodyear, Arizona, solar panel manufacturing facility. Moreover, the company will also lower its workforce at the facility. The need comes in the light of global oversupply and higher production costs related to the recent import tariffs imposed by the U.S. government.

The Goodyear, Arizona, manufacturing facility has a highly-automated manufacturing and product testing equipment and currently produces 300-watt solar panels for commercial and utility-scale electricity generation.

With the halt in production, the annual production throughput of the facility will decline from 45 megawatt (“MW”) to 15MW, which will also result in elimination of approximately 50 positions.

A few days back, the U.S. International Trade Commission made unilateral tariffs of 35.97% mandatory on Suntech solar cells produced in China. Solar cells are a key component used at Suntech's Goodyear production facility. Rise in costs of solar cells increase the manufacturing costs of solar panels in the U.S. Apart from this, the U.S Government had also imposed tariff on aluminum frames in 2011, which is also a key input for the production of solar panels.

To overcome the imbalance between demand and supply and improve trade protectionism, the company is following a restructuring plan. As per the plan, Suntech Power had closed a portion of its solar cell production capacity in Wuxi, China for the time being, in September. As a result of the initiative, the company’s operational solar cell capacity will be temporarily reduced to 1.8GW.

Later in October, the company announced its intention to improve operations and solidify its global industry leadership. It indicated that to achieve its goal it will have to invest in profitable and sustainable customer relationships, right-size production capacity, cut production cost, streamline operating structure and improve its financial position.

As per its plan, the company aims at reducing its module non-silicon cost structure 30% year over year. Moreover, the company is on track to achieve a 20.0% year-over-year reduction in annualized operating expenses (excluding non-recurring items). Also, the company is committed to extend maturity of credit facilities and continue to reduce total debt and related interest expenses. Above all, the current decision of lowering down the production shifts is in line with the company’s targets.

Overall, the solar industry is facing oversupply and tariff headwind. In order to survive, one of the company’s peers, SunPower Corporation ( SPWR - Analyst Report ) has planned to restructure its Philippines manufacturing operations, which also includes reduction of its employees.

Suntech Power is one of the largest producers of crystalline solar cells and modules, serving geographically-diversified customers. The company is prudently expanding its revenue base to divergent markets around the globe, while increasing megawatts shipped. However, the positives are currently overshadowed by tepid module demand in Europe, rising competition, tariff imposition, the volatile euro and the financial stability of its customers.

The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

The company mainly competes with First Solar Inc. ( FSLR - Analyst Report ) and Yingli Green Energy Holding Co. Ltd. ( YGE - Snapshot Report ) .