Green Shoots and SunPower in California

California state finance officials wait about as patiently as an expectant father in the labor room for the big arrival. I’m talking not about a new tax deduction but for the revenue needed to pay for the kid’s education.  I did my part filing my tax returns on time and paying up for the year.

California hopes that when the accounting is done on the April 15th filing deadline that the revenue will exceed their expectations.  They have been getting cautious but still good news with year to date state tax revenues ahead of estimate by $2.3 billion or roughly 4.1% and are running 2% above the first quarter of 2009.

What’s happening?

The best news for California is a rising stock market and profits since the Golden State REALLY depends heavily on those wealthy taxpayers its politicians love to loathe to make more gold so they can tax it. At the current pace, the State Controller says California will end its fiscal year June 30th with about $3 billion more in revenue than earlier forecast.  That will not solve the state’s fiscal problems which the Legislative Analyst says will be about $20 billion per year deficits until the 2014-15 fiscal year but will let California life to fight another day and avoid some of the most draconian of budget cuts today. The worry is that the stock market uptick will flatten out while the costs of entitlements like ObamaCare, unfunded pension liabilities, and debt service will explode re-creating the nightmare scenario of ballooning deficits and declining revenue.

But growth is real and confidence is rising as jobs begin to materialize again.

Governor Schwarzenegger celebrated the opening of SunPower’s new plant in Milipitas as part of Earth Day.  The plant will produce more than 300 jobs building solar energy equipment and is run by Flextronics a contract manufacturer.  The press reports talk about jobs creation but the trade press accounts offer a better story. [1]

The good news for California is that manufacturing is being built here at all given the problems of regulation and other hassles of doing business in the Golden State.  But this is the center of the universe these days for solar energy and SunPower like many other solar players are changing their business models from being manufacturers of increasingly commodity priced products like solar panels outsourcing it to efficient contract manufacturers like Flextronics so SunPower can focus on the higher value added solar integration and services segment.  This shift is survival of the fittest at work as the Chinese drive down the costs of solar panels and wind turbines it becomes more difficult to make them profitably elsewhere.  But buy them cheap and integrate them with other products and services to fit the needs of local markets and California customers not only get high quality equipment at lower costs but job creation and tax revenue as well.

So what?

Across Silicon Valley and the entire cleantech supply chain the relentless pressure of commodity pricing is forcing a consolidation of players, falling prices and growing market penetration for products.  Not every market participant will survive the experience but the outcome is good products integrated into value added solutions, start-ups being bought by bigger firms with deeper pockets to scale the business, and money being made as market share grows and so do profits.

Arnold’s popularity has fallen along with the economy and the need for adult supervision of state spending.  But he is a tireless champion of doing business in this state.  To his credit are also a string of measures that cumulatively help make California a better place for the clean energy business including a sales tax exemption for cleantech manufacturing equipment in California (SB71); raising the net energy metering solar purchase requirement for utilities from 2.5% to 5% (AB510) and a new measure to exclude cleantech improved from property tax assessment reappraisals (SB 77) as well as the reauthorization of direct access for commercial and industrial energy customers.