ABB has to pay through the nose to exit the inverter business

It’s not often that someone pays good money for another company to take a business away, but that’s precisely what ABB has come up with as a way of getting itself out of the inverter market, costing it a total of $470 million.

We’d hate to have to redesign the web page which must now say that ABB provides “almost” everything in a solar plant, except inverters, which it is now out of simply, because it was losing fantastic amounts of money on the business.

ABB said it will take a charge of $430 million in Q2, with up to 75% or $322.5 million being as cash paid to Italian acquiror Fimer SpA, itself a diversified equipment business with an existing inverter business. ABB’s solar inverter business has 800 staff across 30 countries, with manufacturing and R&D in Italy, India and Finland. It includes the solar inverter business from Power-One which was acquired by ABB’s Discrete Automation and Motion division in 2013. It is currently operating within ABB’s Electrification business a $290 million arm of ABB. Fimer says it will honor all existing warranties which is partly what the money is for from ABB.

ABB said that the charge would amount to less than keeping the unit, and analyst have estimated that it has cost it $1.5 billion throughout the time it has owned the inverter business.

That doesn’t seem entirely credible since there are profitable inverter companies and the solar industry is going through the roof right now, so how come ABB said that sales had fallen through the floor? Chinese competition and lower prices have been blamed. But surely anyone in the inverter business has been under constant pressure from LCOE targets that Solar is chasing – it wants to be as cheap as wind for each kwH it produces. If you are not going to buy into that type of rapid price decline and continually potentially rethinking the market, then you are better off out of it, but you must question the reasons for getting into it.

The truly worrying thing for ABB is that many more of its markets will go  through similar price declines over the coming years and if it has stumbled within inverters it is likely that its entrenched approach may allow it to stumble on others.

ABB now expects that its EBITA margin at its electrification division to rise by more than 50 basis points after the divestment (5%) with the margin improvement outweighing the cash impact of the transaction.

Interestingly we had been speaking yesterday to one of the more successful inverter firms, SolarEdge for a general update, and it occupies a completely different part of the market – ABB was supplying mostly inverters for solar farms, while 60% of those sold by SolarEdge are behind the meter, and it sells far more “power optimizers” which are individual components which like an inverter manage the conversion from DC to AC, but which also allow each panel to operate separately at different efficiencies – avoiding module mismatches. These allow each panel to perform at its optimal performance where different panels have different tolerances, soiling or shading, or are different ages or placed at different orientations. But somehow SolarEdge has achieved this at a similar price per panel and it agrees that it is a little like virtualization, but in reverse (moving closer to the edge, not to the cloud).

If you run all of the panels as a string or from a single cloud application which controls the inverters, all of the panels risk being simplistically set at the same output, which is optimal for some of them, but sub-optimal for others. Effectively you lose some of your power.

SolarEdge waxed lyrical about this and claimed it is now invading grid scale in front of the meter solar, and was already the largest inverter manufacturer by revenue. Of course individual homes pay a higher price for inverters than large scale power projects, and in China where Huawei is the market leader, prices are very low and most solar is set in front of the meter. SolarEdge has no plans to enter China, but it will come up against Huawei in other parts of the world. Currently only around 10% of its business is outside the USA and Europe.

Meanwhile we wonder if the cloud based ABB Aurora Vision Plant Management Platform which handles panel monitoring and management will go across to Fimer? Being a cloud based system it provides central management with web browser control, and is more about the management of a fleet of assets and online analytics. ABB also made string inverters which may make the inverter element cheaper, but does it provide maximum power?  And could that be the problem here?

But we see this type of consolidation right the way across the industry – continual pressure to provide a product more cheaply in renewables, until industry wide parity with all forms of fossil fuels, at the expense of a tired company, running on thinner and thinner margins, needing a break from consistent price erosion. This is something we are approaching today, and which onshore wind waltzed past two years ago – and yet more and more costs continue to be squeezed out.

To go back to SolarEdge for a moment, we also see each technology bridgehead – inverters for instance – leading companies towards neighboring technologies such as batteries, and eMobility infrastructure – and SolarEdge has already acquired businesses in those markets and is now in the process of integrating them. So market consolidation tends to be natural too, but you must identify markets which are helped by what you have already.

ABB will also take an extra $40 million in separation costs with the deal due to be completed in the first quarter of 2020. Which means it will have spent a total of $470 million getting out of a business. What would it pay to get INTO a decent business?