Stronger U.S. Dollar Hurting Profitability at Suntech Power

• The Company: Suntech Power Holdings, a Chinese solar energy company.
• The Filing: FORM 6-K filed with the SEC on November 20, 2008.
• The Finding: Dr. Zhengrong Shi, Chairman and Chief Executive of Suntech Power, said the polysilicon pricing bubble has finally burst, with spot prices falling more than 50 percent in its third-quarter to under $200 per kilogram. Nonetheless, gross margin fell quarter-over-quarter 290 basis points to 21.8 percent in the third-quarter, primarily reflecting a decrease in average selling prices (ASP) due to the depreciation of the Euro versus the U.S. dollar.

The Upshot: During the third-quarter, the average value of the US dollar was 1.5 against to the Euro. Assuming an exchange rate of US $1.28 to the Euro in the fourth-quarter of 2008, the Euro will have depreciated another 15 percent against the U.S. dollar sequentially, resulting in an approximate $45 million impact on fourth-quarter 2008 gross profit (approximately 12 percentage point impact on gross margin).

To better manage its currency exposure, Suntech Power is enhancing its risk management in two ways: (i) management plans to increase hedging of Euro denominated revenues from approximately 30 percent to 50 percent; (ii) implementing initiatives to increase natural hedging through procuring more materials settled in U.S. dollars.

Foreign currency management is not without risk, too. Readers should note that currency exchange loss was $16.6 million in the third quarter of 2008 compared to a foreign exchange gain of $2.5 million in the second quarter of 2008. Management attributes the foreign currency exchange loss in the third quarter to the revaluation of some assets, which were impacted by the depreciation of the Euro against the U.S. dollar and the revaluation of some liabilities, which were impacted by the appreciation of the renminbi against the U.S. dollar.

Turning to 2009, Suntech expects full-year 2009 shipments of more than 800-megawatts. However, margins will continue to be pressured by a stronger U.S. dollar, as more than 90 percent of 600-megawatt in shipping commitments are in Euro-denominated contracts.

The Question: In addition to a stronger U.S. dollar, will competitive pricing issues (from other Chinese vendors) force SunTech Power to aggressively discount photovoltaic module products — forcing the company to abandon its targeted gross margin floor of at least 20 percent in 2009?