COMM 401: Individual Case

Canadian Solar Inc.

COMM 401

Strategy and Competition

Liliya Lyubman

Section Q

Word Count: 1,498

 March 13, 2013
1. Problem Statement:

Canadian Solar Inc. is a NASDAQ-traded solar cell and module manufacturer, which was
established in Ontario by Dr. Shawn Qu in October 2001. The company stands as one of the
world’s largest and most competitive solar cell and module producers. Canadian Solar has
described itself as “an inverted flexible vertically integrated business model” allowing elasticity
within short-term demand shifts. The company manufactures its entire product in seven plants
based in China, whilst operations are conducted from offices within North America, Europe and
Asia. The company product is composed of ingots, wafers, solar cells and modules, as well as
other solar applications. The Company’s future within this unforeseeable, ever-changing market
is uncertain. Thus, Canadian Solar is in dire need to differentiate themselves, and the product
from the competition in order to survive in this highly competitive and innovative market.

2. External Analysis:

1. General Environment

Technological:
The Photovoltaic (PV) power cells industry is one of fast growth, technological
advancements and innovation, which continuously challenges companies operating
within the industry. Currently, PV, a source of renewable energy, is more expensive than
non-renewable sources of energy. Though, many experts in the field have argued that the
cost of solar energy is continuously decreasing with technological innovation and will
soon be competitive with non-renewable sources of energy. This theorem confirms that
market share in the near future is highly dependent on technological breakthroughs.

Economic:
The photovoltaic industry greatly depends on economic factors. Due to its elastic nature,
its profitability greatly depends on the economic wellbeing on society. As observed in the
past, during the economic downturn of 2008, credit crunching had a significant negative
effect on the industry.
 Political/Legal:

The continuous growth of the photovoltaic market has been stimulated by an increase in
awareness and the subsidization and incentivization by governments across the world for
renewable energy sources. For example, the Ontarian provincial government’s FIT
program, an incentive program for green energy.

2. Industry Environment

Porter’s Five Forces:

Barriers of Entry:
The threat of new entrants is relatively high. This is due to fairly low barriers to entry due
to the low capital requirements and medium-low technological know-how to manufacture
a photovoltaic module. Companies are struggling with product warranties due to the
demand for 25-year guarantees that the performance of the products would be upheld.

Buyer Power:
Buyer’s power is relatively low due to the diverse nature of the photovoltaic module.
Potential buyers include house-held consumer electronics, the automotive manufacturing
industry and industrial product companies whom integrate solar cells into their products.

Supplier Power:
Supplier’s power is relatively low as well. The manufacturing of photovoltaic power
requires raw materials, such as silicon, glass, and metal, as well as specialized equipment.
Though, these supplies are easily obtainable from various suppliers.

Intensity of Competition:
The photovoltaic industry can be segregated into three market groups based on
geography, market strength, size and quality perception. The first group includes
Manufacturers like Canadian Solar, who operates on a low-cost basis and uses China as
 its manufacturing base. The second group is made up of start-up companies competing on
a technological differentiation basis such as First Solar. The third consists of Japanese
electronic firms with established brand names. Thus, in this industry, competition comes
in all shapes and forms, and is therefore fierce.

Threat of Substitutes:
Non-renewable energy (fossil-fuel based) is currently the only major substitute to
renewable energy (photovoltaic).

Trends: With rapid evolution in consumer awareness, renewable energy sources have
become a lucrative market. Many customers are looking for both products to aid the
rehabilitation of the eco-system, and for products made by companies who are eco-friendly in
production, distribution and other aspects.

Industry Size: With the support of governments worldwide, and a constant need for
innovation in the renewable energy field, the industry is continuously growing.

Growth: The company experienced compound annual growth rates (CAGR) of 135.7% from
$9.7 million in revenues in 2004 to $705 million in 2008. Although in 2008 the company
faced net losses of $9.4 million, future projections seem favourable and are estimated to
generate Canadian Solar net profits of $49 million for the year 2009.

3. Opportunities:
The company faces many opportunities within its marketplace. The economic crisis of 2008
resulted in lower prices of silicon, which enabled Canadian Solar to produce the product at
cheaper costs due to lower raw materials costs. Other opportunities involve technological
advancements within society, thus paving a new way for Canadian solar to expand its
product within the industry. Other opportunities include government incentivization
programs worldwide.

4. Threats:
Canadian Solar conducts business is in a highly competitive industry with new innovative
technologies that threaten their market share as well as non-renewable energy sources. The
 other potential threat is the possibility that some upstream silicon makers will adapt their
business models to start producing modules downstream.

5. Conclusion:
Canadian Solar is facing many growth opportunities. With low buyer and supplier power,
government incentive programs, and rapid industry growth, the company is in a unique
position to capitalize on the evolving marketplace. In order to do so, the company must
maintain its position as a cost leader, to compete in its fierce industry.

3. Internal Analysis:

Strengths:

Canadian Solar’s strengths revolve around their operation flexibility and adaptability to
constant change in the industry. Qu states that the company has “the ability to see
changes in the marketplace and adapt the business accordingly”. Their capability to
benefit from their business model has led them to succeed in attracting investments.
Another facet to their strength is their ability to manufacture products at a relatively low
cost.

Weaknesses:

Canadian Solar conducts business is in a highly competitive industry with new innovative
technologies that threaten their market share. The company is in a vulnerable position due
to a higher price-point than its main substitute, fossil fuel energy (non-renewable).
Although the buyer has low buying power, the company relies primarily on five buyers,
and is thus highly dependent on them.

Value chain analysis:

Canadian Solar possesses a lot of capital as a result of the huge Venture Capital
investment received from HSBC and Jafco Ventures and also from their huge success
during their IPO in November 2006. The company established facilities such as the
production plants in China and operation offices in North America, Europe, and Asia.
Their inverted flexible vertical integration business model provides flexibility in short-
 term demand shifts and frees the company from capital investments required having equal
capacity of each component. Canadian Solar’s ability to produce in low cost, give
warranties for 25 years, meet the requirements of governments to benefit from their
incentive programs in renewable energy, outsource and promote themselves in new
markets, all summon the company’s value.

Sources of Competitive advantage:

Canadian Solar’s main source of competitive advantage is its combination of Western

engineering and management with low-cost Chinese production base. The operation
flexibility and adaptability due to their flexible vertically integrated business model has
gained them a competitive advantage.

Conclusion:
Due to operation flexibility and adaptability to constant change in the industry, Canadian
Solar is in a position to utilize their capital acquired through venture capital investments
to maintain operations in their manufacturing facilities spread throughout China in order
to remain cost leaders, and satisfy fluctuating demands. Their 25-year product warranty,
has further differentiated the company from its competitors.

4. Current Strategy Evaluation:

Business-level: Canadian Solar has adopted a cost leadership business level product strategy,
through cheap labour and production in China, as well as cheap raw materials prices, which
result in lower production prices. Thus, the company is a leader in the renewable energy market.
Although, the company can also apply a business-level strategy based on differentiation in the
same markets they operate in, as well as focus on a niche in the market.

Corporate-level: Canadian Solar has capitalized on economies of scale through mass production
at lowered costs. Although, they have not capitalized on economies of scope by diversifying
production in their industry.

5. Recommendation:
Canadian Solars main goals are to maintain long-term growth. This could be achieved by
obtaining new clients, building a brand image to add value to the product and differentiating
themselves from competitors. The company should also find ways to cut expenses
throughout the supply chain to maintain cost leadership.

Canadian Solar should implement an integrated business level strategy between

differentiation and cost leadership while opening to new markets. This strategy corresponds
well to Canadian Solar’s competitive advantage including their flexible vertical integration as
well as their ability to obtain contracts with various government entities.

Canadian and Chinese markets alone simply are not big enough to sustain long-term growth.
Currently, Canadian Solar is limiting its scope to a limited number of markets, in order to
compete within a wider market range, the company need to add value to their product on a
cost leadership and differentiation base. This strategy would involve increasing investment in
advertising and expanding their marketing department. In addition, cutting production costs
could be achieved by lowering supply chains enabling a cost effective, informative
management system.