Case Analysis on

Arco Solar Inc.

By:

Anish Raj

Company Overview
ARCO Solar Inc. was a world leader in photovoltaic (PV) cells production. Established in 1870 as Atlantic Refining Company and was exclusively in oil and gas business. In 1966, merged with Richfield oil Corp. and renamed as Atlantic Richfield (ARCO). Co. expanded into chemicals, plastics and coal business. By 1988, ARCO was one of the largest Integrated Petroleum enterprises. ARCO subsidiaries also conducted oil and gas exploration, production, refining, transportation and marketing.

Birth Of ARCO Solar

ARCO expansion in nonpetroleum business had limited success. In 1967, bought Nuclear Material & Equipments Co. which produces Uranium and Plutonium bearing fuels, but sold it in 1971. Also owned Newspaper, AC Co.; Plant Cells Research Inst. , but eventually sold them. In 1973-74, when energy crisis happened unexpectedly, they started to look for energy alternatives to petroleum. Realized that Solar energy is the best alternatives. As, it was :
In abundance, Clean source, Natural & Renewable source of energy

As Photovoltaic (PV) cells which produce electricity from sunlight were already invented in 1954. As its price were declined to $17 till 1977, attracted ARCO to study solar energy potential. So, ARCO ultimately decided to enter into Solar field, and purchased Solar Technology International and renamed it as ARCO SOLAR Inc.

ARCO Solar Inc.

Solar Tech. International was founded in 1975 by an engineer J.W. Yerkes with $80K. Co. produced PV panels that powered -wave repeater stations, irrigation pumps, navigation aids, trickle chargers for batteries etc. Yerkes sold the Co. to ARCO in1977, for $300,000 and stayed as ARCO Soar's first President. In 1979, Co. bought building at Camarillo and built worlds 1st automated production line for PV cells and panels. By 1980, Co. was 1st to produce panels generating more than 1MW power in a year. And sale got doubled. In 1981, Co. installed a prototype power generation facility on Navajo reservation in Arizona and New Mexico, enough to power 200 homes.

 Project judged as success, so Co. started to move from research mode into marketing stage. In 1982, built a $15million, 1MW plant in Hesperia- large enough to power 400 homes. Power at Hesperia generated by 108 trackers, which rotates to follow the sun. Thus, output was boosted to 40 % than stationary panel. Plant made a record as it was constructed in 6 months and under budget. It encouraged Co. to construct 16MW plant in Carissa Plain, near Bakersfield, California. Several technical improvements leads to increase in output by 50% with even less no of trackers. 37% federal and state tax credit for solar installation brought the cost down.

 In 1984, ARCO began to sell thin-film amorphous Silicon products. Genesis, 1sq-foot Si Cell, produced by the use of thin- film technology, to be used in calculators and watches. It was a 5W module with conversion efficiency of 6% ; life-span of 20 years and sold for $45. Genesis made ARCO Solar, a leader in race to commercialize thin-film technology. Sales, again get doubled. Co. expanded its International network and was able to sell 400 modules per month. Improvements in PV CellsEfficiency increased upto 13.1% in 1986 which was estimated to increase efficiency upto 20% by 1990.

In 1986, Co. entered into JV with Japanese Co.(Shell Sekiyu K.K.) and German firm (Siemens AG) to manufacture and market products in Pacific and Europe. Though sales were increasing, but Co. still remain unprofitable due to commitment of revenues to R&D and market of PV not growing as hoped.

The PV Industry
As PV Industry seemed lucrative, many oil companies like Exxon, Shell, Mobil, Amoco entered into this Industry. This Industry looked promising as oil prices were increasing and price of PV electricity falling. Worldwide sale of PV products rises from $11 million (1978) to $150 million (1983). Industry analysts forecasted $1 billion PV Industry by 1990 and PV electricity at half price of oil.

Threats to PV Industry
By 1982, oil prices began to fallAs Nation learned to conserve energy. Oil glut made the fossil fuel plentiful again.

Thus PV appeared unnecessary. The utilities wanted to expand established tech and were unwilling to invest in unproven technology.

A severe reduction in Federal Govt. commitment to solar energy R&D. President Ronald Reagan, started to cut non-military expenditures. Federal tax credit get expired in 1985. But commercial tax credit were extended to 1986 after lobbying effort of solar energy industry. Gramm-Rudman-Hollings federal deficit reduction budget cuts to lowest level ever.

Impacts on PV Industry
Burden of financing solar energy research fell on the shoulders of industry alone. Decrease in oil price, forced oil industry to curb down capital spending and lay off employees. Exxons Solar Power Co. ceased its operation in 1983. Standard oil written off $85 million and quitted in 1986. By 1988, ARCO and AMOCO remained only US industry to continue its operation in PV industry. PV market share of US fell from 80%(1981) to 35% (1987). Solar power accounted for only 0.1% of electricity generated every year.

Competition in PV Market
Japanese Govt. started to invest 19% more in PV R&D than US Govt. Japanese used new type of Amorphous Si cells which was less efficient but cheaper than singlecrystal cells. By 1985, Japanese sold $100 million Si powered products. Lower production cost and economies of scale provided them competitive edge. In 1985, they shipped 7MW silicon powered products.

A Ray of hope for US PV Industry

Still profitable mkt. for PV was Power grid generation was untapped. So, US was trying to tap the opportunity by producing cells to generate energy at a price competitive with fossil fuels. They used thin-film technology, which used fraction of material and less labor to produce single-crystal cells at lower cost. Threat of global warming made PV industry to regain the momentum as consumption of fossil fuel had to be reduced significantly. Also 3 Mile Island and Chernobyl nuclear Accidents damaged the credibility of Nuclear Power Industry. Thus Solar energy potential was once again seeming true.

ARCO Solar Inc. in 1988

It was world leader in PV Industry with 20% of $150 million mkt. Co. was leaner with 350 employees. Sale forecasts were optimistic due to growing backlog of orders. Research advancement in new type of thin film material- CIS, which was no degradable and had better efficiency than Silicon. Competitive advantage due to CIS technology. But still Co. was not making any profit. Its revenue of $30 million was matched every 15 hours by its parent company.