What went wrong with Applied Materials Solar Innovation

Just this week Applied Materials (AMAT) announced that they were exiting their “Sunfab” business and cutting about 500 positions in that division. The analysts cheered.

But it was those same analysts who boosted AMAT’s stock price when the Sunfab idea was introduced a couple of years ago.

What changed?

An explanation of what a Sunfab is would be useful here. The basic concept was that AMAT could sell a turn-key thin-film solar plant with a guaranteed output to customers around the world. Applied hoped to take their expertise in thin-film manufacturing equipment, combine it with their production software and use their services organization to build a high output production line with capacity that factory owners could turn on at will.

Sounds good doesn’t it. As an example of innovation it fits the bill, existing expertise combined in a novel fashion and something that no one else was doing.

Along the way there were a number of challenges that needed to be solved. Applied was never in the business of building factories before. Yes, they had seen it done and had been intimately involved, but things are different from the seat on the right side of the car. They also needed to resolve issues of scaling – making the factory flexible so that additional capacity could be added economically. There were logistical problems. The equipment is large and complex and most sites were greenfield. But AMAT charged on finding solutions to all of these problems.

Turns out that those problems; the technology, the logistics, the integration of multiple systems from multiple vendors, were not the real problem. The real problem was how to make money.

The technologists of the company forgot a few things. First, they forgot to think about how this business could fail. Two things are pointed at for why it did not work out. First, building a fab is tremendously expensive and requires capital. With the economic meltdown in 2008, capital for this sort of thing began to dry up. Second, the product that is being produced is dependent on subsidies to be cost competitive with other energy sources. When economies begin to suffer, tax revenues and government subsidies fall as well. Their plan to build as many of these things as possible to get economies of scale started off well, but had no graceful way to return to earth. Technology is no protection against macro-economic forces.

But there is one more thing that the company forgot for which there is no external excuse. The business model was doomed from the start. AMAT’s concept of the solar factory was based on their long experience with semiconductor and thin-film fabrication. They supply the equipment that is used to build everything from computer chips to television screens. They sell the same equipment to every manufacturer – with some special modifications for different customers of course – but generally the same equipment is available for any customer. AMAT’s innovation was something that they could sell to the customer. AND most importantly, the customer would use those tools to realize THEIR innovative ideas – things like smaller, faster, cheaper computer chips.

With that background it appears that they simply forgot that their customers competed on the basis of products, not the use of innovative tools or processes – though those things are integral to building a successful product. When Applied Materials shifted from supplying tools to supplying output of a generic product they limited the opportunity for their customers to differentiate. Any customer with cash could buy a factory with the same product as anyone else.

In a business like that, being the first customer is great. But then it becomes a race to the bottom. The next customer has to consider why they should enter a market where they have no competitive advantage in the product. The next customer has an even harder decision. With global shipping and no spoilage to consider, there is small advantage based on locality (locality is key in some commodity businesses like Starbucks) At the end, it boils down to who has the cheapest land to build on and the least expensive work force.

The point of this I suppose is that technological innovation often blinds us to the much simpler dimensions of the problem we are trying to solve. Focusing on how to squeeze out another percent performance may be the logical next step from a technology performance, but it is the effect on the product that is important.

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