Solar panel makers face dark times; the best that can be said is that a collapse in pricing at least brings solar technology costs down to where they become competitive without heavy subsidies.

Industry survivors will be those that vertically integrate, or in many Western firms' cases, accelerate outsourcing and concentrate on branding and client relationships - but even that will require a decent balance sheet.

The wild-card remains that large integrated tech firms with more robust finances step in to collect the wounded once the bloodbath ends.

 
   Malaise

A supply glut from low-cost Asian players that is destroying margins and balance sheets is the root of the malaise.

This dismal state of affairs jars with solar's impressive volume growth. Globally, from 2002-2008 compound annual growth for panel shipments ran around 50% and would probably have been higher were it not for polysilicon supply bottlenecks, the raw material used to make solar cells.

That supply constraint triggered an aggressive capacity ramp-up across the production chain resulting in the pendulum swinging from apparently chronic undersupply to now rampant oversupply.

In 2007, annual manufacturing capacity was 5.5 gigawatts. By the end of 2009 it will be between 11.5-13 GW with further escalation into 2012, a consensus estimate of analysts suggests, with plant utilization at about 60%.

Polysilicon prices have collapsed to about $65 a kilogram from the $400/kg heyday seen in 2007 and 2008. This should be good for solar cell makers' input prices, but long-term supply contracts were reasonably common so the full benefit hasn't been fully felt.

Adding to woes, demand has dropped off after Spain curtailed solar tariffs and subsidies last year.

 
   Storm

So this is as close as it gets to a perfect storm, one that should weed out the weak as overleveraged and inefficient makers wither.

To an extent this is happening: U.S.-headquartered Evergreen Solar Inc. (ESLR.NMS) started outsourcing panel production to Chinese firm Jiawei Solar Co. this year. Evergreen is one of the industry's highest-cost makers with a 1.9% gross margin for the April-June quarter and annualized asset turnover of 0.27.

Similarly, Germany's Q-Cells AG (QCE.XE) has been shifting production to Asia and trying to turn its focus to solar-installation projects.

On the mergers & acquisitions front, larger companies in various segments of the solar manufacturing process are moving toward vertical integration. In May, AIM-listed China-based Renesola Ltd. (SOLA.LN) acquired Wuxi Jiacheng Solar Energy Technology Co.

Nonetheless, opportunistic M&A has been patchy so far given how busted some balance sheets are.

Parlous finances aren't confined to western producers. China has a multitude of names which look hard-pressed to cover their debts - barring an incredible three-way recovery in demand, pricing and margins.

Take solar-wafer manufacturer LDK Solar Co. (LDK.NY). Net debt to earnings before interest, tax, depreciation and amortization was at 32 times for the first quarter of 2009 before the company turned an Ebitda loss in the April-June quarter.

In a market economy with banks concerned about loans souring this should raise flags, but with the monetary spigot gushing liquidity at Beijing's orders debt-encumbered, cashflow-negative companies can continue to hum along and aggravate the overcapacity plague.

Assuming marginal Chinese and Asian players eventually succumb to financial logic, or their banks do, then at some point true distressed fire sales should happen.

Those companies with stronger balance sheets should be able to muddle through the darkness and find their place in the sun.

Still, the big risk for whoever survives would be the likes of Taiwan Semiconductor Manufacturing Co. (2330.TW), moving in and scooping up distressed assets with their stronger balance sheets. The semiconductor powerhouse snapped up an 11.2% stake in Neo Solar Power Corp. (3576.TW) in August, according to local media.

(Jamie Miyazaki is a columnist for Dow Jones Newswires covering Asia. He can be reached at +852 2832 2320 or by email: jamie.miyazaki@dowjones.com. Dow Jones Newswires is enhancing its news, commentary and analysis for the investment banking community, and is providing it on this service temporarily. To ensure continued access to the best of Dow Jones news and opinion on companies, sectors and deals for bankers and research analysts, please contact investmentbanker@dowjones.com.)