To Integrate or Not to Integrate, That Is the Question

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Photo credit: Tanner Swenson

There has been much news lately on large solar companies that are becoming increasingly vertically integrated. SolarCity has gone so far as to purchase a PV manufacturing company, putting it well on its way to becoming the most vertically integrated solar company in the world.

It has yet to be shown, though, if this type of extreme vertical integration is actually good business or not. There are several strong arguments both for and against vertically integrating a solar company.

To discuss these various points, Solar Power International organized a debate in which four speakers, two per side, would attempt to win over an audience with regards to a vertically integrated business model versus a networked business model. The audience was able to vote on which they preferred both before the debate started and after it finished.

Before the debate started the votes came in showing that a majority of the audience preferred a network business model. For this reason, the vertical integration side was allowed to speak first. They made a strong case by pointing out that every large solar company is vertically integrated. Margin stacking — that is, stacking profits from each aspect of the sale — allows companies to decrease costs and bring the price down for customers. A network business model just cannot compete at the same price.

The response to this was quite interesting. It was argued that while integration makes sense for premature industries, solar is no longer in this category. At this point for solar, integration can actually lead to a lack of innovation in the industry. Because integrated companies do everything, they cannot master any individual aspect. This can even lead to the attempted integration failing. There are several large, well-run companies that have failed to integrate, one example being Google with Motorola.

A properly integrated company, however, can in fact become a master of all its individual pieces. With the purchasing power of a large company, the best talent from each field can be brought in. Essentially, a team can be created that consists of all the top players in their respective fields. By being under one company, a strong brand can be established that customers will learn to trust. It essentially becomes the go-to company that people will think of for a given industry.

On the flip side of this, branding can be seen as independent from either integration or network models. That’s because it really doesn’t depend on owning anything. The brand is really just what the customer sees. It doesn’t matter which companies are running in the background, as long as they are working together effectively — which admittedly can be a challenge. An example of this kind of company is Verizon, or any cell service company. Verizon doesn’t make handsets, or build cell towers, but they are what the customer sees.

This talk eventually boiled down to the idea of how deep a company should vertically integrate, because it is not a black-and-white scenario. Even companies like SolarCity network with others at the appropriate level to increase sales and installations. Networked companies also contain some level of vertical integration to give them control when it makes sense. Ultimately, vertical integration and networked business models should be thought of not as separate entities, but as a spectrum. All companies will not fall into the same place on the spectrum, but this does not mean one end of the spectrum is right and one is wrong.

After this talk concluded, a vote was again taken asking whether networking or integrating was the correct business model. Networking still came out ahead, but integration gained significant ground. Additionally, the total number of votes had greatly increased, as people had filtered in over the course of the discussion.

So, the jury is still out on which of these models is best. But wherever a company lands, if they are successful, it’s ultimately a win for solar.