Despite the recession, Dow Corning Corp. and Hemlock Semiconductor LLC plan to invest up to $3 billion in new polysilicon manufacturing in Michigan and Tennessee to serve customers in the solar industry.

Separately, Dow Corning will begin producing monosilane gas that is used to make thin-film solar panels and liquid crystal displays in a facility adjacent to the polysilicon factory in Hemlock, Mich.

(This story also appeared in Clean Technology Insight, a daily newsletter and information service published by Dow Jones & Co.)

The companies will invest $1.2 billion to add 10,000 metric tons of annual production to their polysilicon factory in Hemlock, which currently has 19,000 tons of capacity. They will also start building a new polysilicon factory in Clarksville, Tenn., which will have up to 13,000 tons in capacity for an investment of as much as $1 billion. That factory could be expanded to up to 21,000 tons of annual production.

Construction on all projects will start immediately, the companies said.

"When the global markets are down, we view that as actually the time for the strongest companies to step forward," said Rick Doornbos, president and chief executive officer of Hemlock, in an interview.

The move is also significant as the solar industry is entering what many observers expect to be an oversupply of polysilicon, with many new Chinese manufacturers adding capacity even as demand for solar panels is suffering because of the economic downturn. Polysilicon, which has been scarce and registered very high prices, has lost about 40% of its price over the past month or so. Hemlock and Dow, however, are pursuing a wide expansion in polysilicon production.

"We believe that long term trends in the solar industry continue to be very attractive," said Doornbos.

The companies committed to make the $2.2 billion "initial investment" in the additional polysilicon production, Doornbos said. Further investment will depend on market conditions and could reach a total of $3 billion.

Hemlock is a privately held company, in which Dow Corning holds a 63% stake, with the remaining 24.5% in the hands of Shin-Etsu Handotai Co. and 12.25% belonging to Mitsubishi Materials Corp. (5711.TO). The companies declined to specify how much of the financing will come from Dow Corning, which itself is jointly owned by Dow Chemical Co. (DOW) and Corning Inc. (GLW). The companies are already in the middle of a $1 billion expansion in polysilicon production that was announced in May.

"Hemlock and its customers will be sharing the financing costs," said Gary Homan, vice president of sales and marketing for Hemlock, in an interview. He declined to go into detail, but it is common in the solar business for buyers of polysilicon to make prepayments, which the manufacturer uses toward production expansion. "Outside capital will be involved, but much of the costs will be shared. The majority will be handled this way," Homan said.

The additional capacity in Michigan will come online by the end of 2010 or in early 2011, Doornbos said. It will require 800 workers for construction and about 300 to run the plant permanently. The Tennessee plant, although it will be started concurrently, will take longer to develop, as it is on a green site. Production there will be ready in early 2012, according to Doornbos. The companies expect that 1,000 construction workers will build the plant, which will later employ up to 800.

The company is projecting that by helping its customers to procure polysilicon in bulk and at cheaper prices, the industry will be able to move to a point where solar energy costs as much as fossil-fueled power, what the industry refers to as "grid parity." At that point the market demand could explode once again and manufacturing take off. Hemlock executives said that the expansion plans are driven by customer demand and interest in placing additional orders.

"We are confident that over the next several years major solar manufacturers will in fact have reached parity relative to fossil-based power. We are preparing for what we believe is a very rapidly expanding solar industry once grid parity is achieved," said Homan. He added that his assessment comes from having seen the cost projections of Hemlock's main customers.

The Tennessee location for the new plant reflects the companies' view that solar manufacturing in the U.S. will take off.

"With the current environment in the U.S., with the green movement that's underway, there will be a significant increase in sales [for Hemlock] into the U.S. market," Homan said. "And not only Hemlock. Our major customers that are based overseas are evaluating moving to manufacture in the U.S." Today Hemlock's primary markets are in Europe and Asia. The company declined to break out how much it ships where.

The companies evaluated more than a dozen sites globally for two years, according to the executives. "We ended up choosing the location in Tennessee for a variety of reasons," said Doornbos, "including access to very attractive energy costs, the overall business climate, access to a quality labor pool and financial incentives that were offered" by the local government. Electricity costs are especially important for the companies as polysilicon production consumes a lot of power.

Equipment for Hemlock is made by outside manufacturers to its own specifications. Doornbos declined to say who will provide the additional reactors and other machines necessary for the expansion.

Dow Corning's move into silane production comes as the thin-film industry is growing rapidly. Currently Oslo-based Renewable Energy Corp. is the main producer of silane gas. That company noted recently that demand has driven prices of silane up. "This is new for Dow Corning, as we don't currently provide those materials on the merchant market," said Jarrod Erpelding, Dow Corning spokesman, in an e-mail.

Dow Corning provides many other materials to the solar market, including metallurgical-grade silicon, coatings and encapsulants for solar cells, and sealants for solar module frames.

-By Yuliya Chernova, Dow Jones Newsletters; Yuliya.chernova@dowjones.com

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