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A major trend over the last eight months has been the announcement of new PV manufacturing facilities in the U.S. A few of these, such as Solarworld's giant cell and wafer production facility in Oregon and Schott Solar's module plant in New Mexico, have already been constructed and have commenced operation. Besides these, there are at least 10 major manufacturing facilities in the pipeline that are scheduled to begin production by the end of 2010, as displayed in Figure 1.

Figure 1: Newly Announced/Constructed PV Manufacturing Facilities in the U.S.

Primary amongst the driving factors are a number of positive policy developments, to a great extent a response to the prevailing macroeconomic environment in the U.S. and the Obama administration's emphasis on the development of a strong domestic renewable energy industry. On the manufacturing side, a 30 percent tax credit for capital costs is now available to producers, the federal loan guarantee program is finally being mobilized, and state governments have only been too happy to provide generous incentives to manufacturers in exchange for job creation. On the installations side, the Emergency Economic Stabilization Act of 2008 extended the 30 percent investment tax credit on systems to 2016 and allowed investor-owned utilities to take advantage of it, boosting utility interest in deploying large-scale solar. Adding to this, the American Reinvestment and Recovery Act (ARRA) passed in February 2009 has led to the creation of state energy programs (SEP) that would eventually provide hundreds of millions of dollars in grants and loans towards deploying renewable, solar in particular.

At the same time that the U.S. is attracting new PV manufacturing, a strong trend towards moving production facilities eastwards is also in motion. The last year has witnessed decisions by a number of established American and European firms to shift production to Asia, either through tolling arrangements (BP Solar with JA Solar), contract manufacturing (Evergreen with Jiawei), or in-house manufacturing facilities (Q-Cells in Malaysia). The natural question that arises therefore is: to what extent will the move towards Asian outsourcing eat into future investments in U.S. PV manufacturing?

Answering this question requires an understanding of drivers for both of these opposing trends. The reasons for a move towards U.S. manufacturing, as discussed earlier, are proximity to end-demand, the ability to take advantage of state and federal manufacturing incentives, and access to the U.S. market in case of protectionist policies. On the other hand, the only real factor prompting a shift to Asian production is lowering production costs. As Figure 2 indicates, there is a material gap between conversion costs for producers based in the U.S. vs. "low-cost" Asian locations such as China, Taiwan, and Malaysia. This is mainly on account of lower labor rates, tax holidays, and highly subsidized electricity prices that facilities in these Asian locations enjoy.

Figure 2: Comparison of Conversion Costs, U.S. vs. Asian Manufacturing Facility

Since there is wide variation across firms with respect to both these metrics (visibility/access to the U.S. market vs. cost structure), they have differing priorities to different firms. A given producer's expansion strategy will therefore depend on which problem occupies of higher importance, leading companies to be grouped into the following brackets:

• Most Asia-based producers (e.g. Suntech/Yingli/Trina) have highly competitive cost structures but little or no access to the U.S. market. For such a firm, cost-benefit analysis can dictate basing new production in the U.S. to achieve this goal. At the same time, a large existing capacity in Asia means that the firm's costs will still be competitive on a blended basis. While this logic applies equally to all aspects of the value chain, module production makes the most sense given that they are the most expensive to ship and are the closest step to end-demand. Wafer and cell production for Asian players is likely to stay local, unless a more protectionist policy is enforced by the U.S.
• For European and U.S. players with sub-optimal cost structures (e.g. BP Solar/Evergreen), becoming cost-competitive occupies highest priority with respect to long-term viability. The specific model adopted by firms (in-house production vs. tolling vs. contracting) here will depend on available capital and their opportunity cost of capital. Given the current retraction in capital markets, it is likely that more firms will resort to the latter two strategies; however, this does not preclude European firms from setting up smaller (50-150 MW) module production plants in the U.S.
• For firms caught between these two extremes, incentive packages will play a critical role in the equation, especially for wafer and cell facilities -- and only those states offering deals that can meaningfully close the cost gap between U.S. and Asian production will come into contention. Obvious choices here are Oregon, with its 50 percent Business Energy Tax Credit (BETC) and Michigan, with its 100 percent business tax abatement. In fact, states will likely have to offer substantial benefits over and above the bare minimum to lure foreign producers to American shores, folding in low-cost land leases, infrastructure and job training into deals to drive competitive economics.

In summary, although the U.S. vs. Asia issue is a zero-sum game (what one location wins, another loses), the flow is not likely to be unidirectional -- and a given firm's decision will depend critically on where they currently stand with respect to manufacturing economics.