Japanese Oil Company Looks to the Rising Sun

When Solar Frontier KK's new solar-panel factory in southern Japan is running at full tilt next July, the little-known company will vault into the upper ranks of the burgeoning solar-power industry, with a plant capable of producing more photovoltaic cells than any facility in the world.

The company's parent company is one of Japan's largest oil companies, Showa Shell Sekiyu KK. While major oil companies such as BP PLC and Royal Dutch Shell PLC are scaling back investments on solar energy, the Japanese oil refiner is months away from opening its 100 billion yen (roughly $1.25 billion) solar-panel factory in Miyazaki Prefecture.

"We know that the oil industry is not disappearing today or tomorrow. But if we don't take this chance on solar now, we feel like we won't get another chance," says Shigeaki Kameda, Solar Frontier's chief executive.

BP stopped manufacturing its own solar cells in the U.S. this year, saying it could lower costs better by using panels made by partners. Shell, which owns one-third of Showa Shell but hasn't been involved in the Japanese company's solar business, has decided to put its alternative-energy focus on biofuels.

Yet Showa Shell says it expects the business will turn profitable next year, thanks to the new Miyazaki factory and its annual output of 900 megawatts of photovoltaic cells. Showa Shell forecasts that its solar business will account for 50% of the company's earnings by 2014, with a pretax profit of 50 billion yen.

Showa Shell's push into solar comes as a way to adjust to declining oil demand in Japan, a trend expected to continue, given the nation's slumping economy, aging population, the adoption of hybrid cars and the move toward cleaner-burning natural gas for power generation.

Showa Shell, which accounts for roughly 12% of Japan's oil-refining capacity, plans to cut its capacity roughly 20% next year.

But funneling profit from still-cash-rich oil refining into Showa Shell's solar operations is a gamble. Nippon Oil Corp., which has become part of JX Holdings Inc., had forged a joint venture with Sanyo Electric Co. to build a solar-cell factory by the end of the fiscal year that ends in March. Those plans were put on hold, however, amid plunging prices for solar panels as a flood of entrants into the market have intensified competition.

Credit Suisse on Wednesday downgraded several solar-energy stocks, expressing concerns that demand can't keep up with new supply.

And many Japanese manufacturers, content to maintain technological leadership with highly efficient solar cells, have lost market share to less efficient—but less expensive—panels made by German and Chinese competitors.

Mr. Kameda, who became the head of Showa Shell's solar business in 2006 after a 35-year career in the oil industry, says "How come Japanese firms have lost out in semiconductors, LCD televisions and mobile phones? It's because they didn't act fast enough to take on risk and expand their business," he says at Solar Frontier's staid office overlooking Tokyo Bay. "The world wants a good, inexpensive product. But Japan seems to be focused on providing good but expensive products."  Read More




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