A long-time international leader, the German solar industry's success could also lead to its failure if it doesn't change with the times.

"The fact is that Germany is losing more and more of its market leading position in renewable energy production to the United States and China," Swiss Bank Sarasin's Matthias Fawer told German weekly Die Zeit.

In the solar industry, "Asian cell and module producers are going to squeeze out the Germans," Anne Kreutzmann, editor-in-chief of the solar trade journal Photon, told the Financial Times Deutschland.

"They offer solar modules of the same quality at a much cheaper price," Kreutzmann added.

One in three solar modules sold worldwide was produced in China - double what it was two years ago, according to a report in the German daily Sueddeutsche Zeitung. The Chinese company Suntech, for example, exports 90 percent of its solar technology. The company enjoyed revenues of $2 billion (1.4 billion euros) last year, 23 times more than five years ago, the paper reported.

German companies losing ground

The effects of increased foreign competition can be seen on the German stock market where some solar companies have lost nearly 30 percent of their value since the beginning of 2008.

One indication of the crunch was an announcement last week by German company Q-cells, until now the world leader in solar cell manufacturing, that it would lay off 500 employees. The company posted an operating loss of 47.6 million euros for the first six months of 2009; revenues dropped nearly 37 percent.

The firm said it would close down some of its production lines to offset operating losses; other employees are already working reduced hours.

Q-cells' fate parallels that of many smaller solar companies in Germany as the global financial crisis has left many banks refusing to finance major solar projects. Additionally, prices for solar modules have dropped by around 25 percent since the beginning of this year.

The boom in solar technology in recent years led to increased competition as firms sprouted up all over Germany, the United States and Asia. In the past, "we couldn't produce fast enough," Q-Cells' head Anton Milner said.

Many companies are now "struggling with an over-supply [of solar components on the market]," Tobias Krier, of the Berlin-based consulting firm KrierHess, told the Sueddeutsche Zeitung.

"And the Chinese are the main ones pushing the prices down," he added.

Chinese produce at lower costs

Lower labor costs mean Chinese firms can produce solar cells for less than German companies. According to industry estimates, some Chinese firms produce cells at one half to one third of the cost of their German competition.

As the price for silicon decreases, long-term silicon delivery contracts have become an albatross for German companies. Silicon is the raw material needed for manufacturing solar cells, which in turn are the building blocks of photovoltaic solar modules.

Many German companies signed contracts during the solar boom in 2008 and earlier, tying them to fixed prices for years. Chinese companies, on the other hand, are buying the material on the spot market, where goods are sold for cash and delivered immediately. There, the price for silicon has dropped by some 70 percent in recent months.

Feed-in tariffs, which require utility companies to buy solar energy at a premium price, are also contributing to the pressure on German solar companies, analysts have said.

As prices for solar modules decrease, more consumers in Germany are installing solar power units on their homes and collecting the around 43 euro cents per kilowatt hour they can receive from utilities for supplying solar energy.

The incentives, some analysts have claimed, could be benefitting Chinese solar energy equipment makers, who sell their units for less.

The number of solar units registered from January to April doubled each month with a total of 15,000 going on the grid by the end of April, according to the Bundesnetzagentur, which regulates Germany's electricity and gas networks.

"Germans are taking advantage of the opportunity to buy high-quality solar units for a price of just 3,200 euros per kilowatt," Bernd Schuessler of trade magazine Photon, told Die Zeit. "Last year, they paid well over 4,000 euros."

Changing with the times

One consequence of falling prices is that some German solar companies are joining their competitors or moving their production sites. Q-Cells is shipping solar cells to China to have them turned into solar modules, according to the AFP news agency.

Bonn-based SolarWorld, another leader among solar energy businesses, told Deutsche Welle that it had completed building a factory in South Korea at the end of last year.

The company has weathered the solar crash better than other companies, seeing a decline in revenues of only 6 percent in the first half of this year compared to last, but enjoyed a sales volume increase of 26 percent in the same time period.

SolarWorld said its South Korean factory was built to "shorten delivery to Asian countries."

But the company added that it did not concentrate on just one product, but relied on a range to "react better to the market."

A multi-faceted approach is what many analysts say is the best strategy in the fast-changing solar energy market.

Author: Louisa Schaefer

Editor: Sean Sinico