The overseas expansion of inverters is accelerating again. How much room is there for growth across the two high-quality tracks of "photovoltaic" and "energy storage"?

The export data of components and inverters in April has been released. Among them, the export of components in April was 12.43GW, a year-on-year increase of 67.15% and a month-on-month decrease of 14.03%. The export of inverters in April was US$540 million, a year-on-year increase of 45.09% and a month-on-month increase of 14.9%. The cumulative export value of inverters from January to April was US$1.853 billion, a year-on-year increase of 35.35%.

The demand in the European market has exploded. In April, the export value of inverters reached 154 million US dollars, a year-on-year increase of 90.3%. The cumulative export value of inverters in the first four months was 440 million yuan, a year-on-year increase of 67.6%. Overall, both components and inverters have been exported well in the first quarter of this year, especially in Europe. Today, I will explain to you how the inverter track is.

Highlights of this article:

1. Overview of the inverter industry chain

2. What is the business model of the inverter industry?

3. Photovoltaic and energy storage combined, the inverter market space may exceed 100 billion

Overview of the inverter industry chain

Inverter, in short, is a device that converts DC power into AC power. Inverters include traditional photovoltaic inverters and energy storage inverters that have emerged in recent years. There are four main types of photovoltaic inverters: centralized inverters, string inverters, distributed inverters, and micro inverters.

Centralized inverters and distributed inverters are mainly used in large power stations and distributed large industrial and commercial rooftop power stations. They are not suitable for small, medium and household power stations, so the market share of centralized inverters has gradually declined since 2016.

Compared with centralized inverters, string inverters have a wider range of applications and can be used in large power stations as well as small and medium-sized and household rooftop power stations. String inverters have become the mainstream product in the market. After 2016, the market share of string products continued to increase, and by 2021, the market share has reached nearly 70%.

Micro inverters are the most expensive of these inverters. Micro inverters are mainly used for distributed applications, including small and medium-sized industrial and commercial rooftop power stations and household rooftop power stations.

Figure: Trends in market share of different types of inverters from 2021 to 2030

From the above technical routes, Sungrow has the most comprehensive coverage. Sungrow covers almost all other products except micro inverters, while most other companies only produce string inverters. The main domestic micro inverter manufacturers are AP Energy Technology and Homax.

The power storage converter (PCS) is an extension of the application of photovoltaic inverters. The power storage converter has been developed along with energy storage. It is used in electrochemical energy storage systems to convert DC power into AC power and transmit it to the power grid, and to rectify AC power into DC power to charge batteries.

The upstream of the inverter is mainly raw materials, including mechanical parts, electronic components and auxiliary materials. Mechanical parts include plastic parts, die castings, sheet metal parts, heat sinks, etc. Electronic components include power semiconductors, integrated circuits, inductors, PCB circuit boards, capacitors, connectors, etc. Among the raw materials upstream of the inverter, semiconductor devices are the core parts, because IGBT and MOSFET determine the realization of the inverter's AC/DC conversion function.

The midstream refers to inverter manufacturers, including Huawei, Sungrow Power Supply, GoodWe, Jinlong Technology, etc. in China; SMA, solarEdge and other companies abroad.

The downstream is the EPC installer, that is, after the inverter is produced, it is matched with the components and handed over to the terminal installer.

(GoodWe IPO prospectus, 2019)

Overall, the author believes that the industrial chain structure of the inverter is not complicated, but its important link lies in the upstream semiconductor components. Because the threshold for IGBT is relatively high, it is mainly supplied by foreign companies such as Infineon, which is still a bottleneck link in my country. The leading domestic IGBT companies are mainly Star Semiconductor.

Last year, due to the global chip shortage, IGBT continued to be in short supply and price increased, and the localization process began to accelerate. Currently, the failure rate of domestic IGBTs is higher than that of overseas manufacturers, but it is still controllable overall. Domestic companies such as BYD Semiconductor, Star Semiconductor, and CRRC Times are catching up rapidly in power semiconductors. Reducing costs through localization of IGBTs will help improve the overall gross profit of the inverter industry.

Inverter Industry Business Model

What exactly happened?

Inverter is a high-quality photovoltaic subdivision track. I think it mainly has the following aspects:

1. Spanning the two high-quality tracks of "photovoltaic" and "energy storage"

Inverters span two high-quality tracks and reap all the benefits. First, in the photovoltaic track, as the dual carbon goals promote the explosion of the photovoltaic market, the demand for photovoltaic inverters has also increased. The demand for photovoltaic inverters mainly comes from two aspects: "new demand + stock replacement demand".

New demand mainly follows the growth of photovoltaic installations. It is expected that the global photovoltaic installations will exceed 300GW in 2025, which will greatly drive the demand for inverters. As for the stock demand, the life of components is generally 20-25 years, and the life of photovoltaic inverters is generally about 10 years. The current replacement needs are mainly for products around 2011, and the real rise of my country's photovoltaic market was after the photovoltaic "double anti-dumping" in 2012. Therefore, it is expected that by 2030, my country's photovoltaic stock replacement demand will be huge.

Energy storage is the second growth pole of inverters, because energy storage is a demand derived from the development of new energy, and is specifically used to solve the randomness and intermittency of new energy power generation. At present, the energy storage market is just in its initial development stage and is not as mature as photovoltaic inverters, but because of this, the market space is very broad. Moreover, energy storage inverters are equivalent to upgraded versions of photovoltaic inverters, and their value has also increased.

2. Overseas markets are accelerating production expansion

According to recent export data, inverter exports in April were US$540 million, a year-on-year increase of 45.17%; as of April, the cumulative export value was US$1.853 billion, a cumulative year-on-year increase of 35.35%.

Europe is the region with the most exports, mainly because the conflict between Russia and Ukraine has accelerated Europe's deployment of new energy. In April, the export value of inverters to Europe reached 154 million US dollars, a year-on-year increase of 90.3%. The cumulative export value in the first four months reached 440 million, a year-on-year increase of 67.6%.

3. Asset-light operation model: brand and channels are crucial

Compared with other links in the photovoltaic industry, inverters have lighter assets, with an investment of approximately RMB 30 million per GW, and current assets accounting for approximately 80%. The industry entry barriers are lower than those of asset-heavy industries such as silicon materials.

Although the entry threshold is low, the elimination rate of inverter companies is high, mainly because the inverter acts as a bridge between components, power grids and users, and its product design must meet and take into account the needs of three aspects. Whether it is the power grid side, the component side or the user side, the demand is constantly improving and upgrading.

Therefore, inverter products are updated quickly, and new products are needed continuously to meet market demand. Companies that cannot keep up with the pace will lose their competitive advantage. In addition, the overseas certification cycle of inverter companies is long, and it takes time to develop market channels. Latecomers do not have first-mover advantages in this regard.

Overall, the business model of inverters is similar to that of components, but better than that of components. The similarities are that both have strong TOC attributes, and pay more attention to brand and channel construction than other links, and both have the same downstream customer base, so the two have certain similarities. However, the difference is that first of all, the investment cost of inverters is lower than that of components, and the assets are relatively lighter. The difference is that components are more homogeneous than inverters, and their stickiness is weaker than that of inverters. Moreover, compared with domestic customers, overseas customers pay more attention to quality than price, and have a higher tolerance for inverter prices.

The author believes that judging from last year's performance alone, it can be said that whoever has silicon materials wins the world, and other links seem bleak. However, excluding the gaming factor in special years, the gross profit margin of inverters is higher overall, especially string inverters and micro inverters.

In general, with energy storage, explosive demand in overseas markets and a good business model, inverters are still a relatively good link.

Photovoltaic power generation combined with energy storage, the inverter market may exceed 100 billion

The inverter market space can be divided into two parts: existing demand and new demand. The new demand includes photovoltaic inverters and energy storage inverters.