Will solar in 2011 look like automobiles in 1911? by Fortune Editors @FortuneMagazine October 7, 2010, 1:11 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons How many of the 217 solar start-ups today will be around in 10 years? Not many. A look back at the automobile industry in the early part of the last century explains why. By Alex Taussig, contributor T he automobile traces its roots back to Europe — first to France in 1860 with the invention of the internal combustion engine, and then to Germany in 1876 with the invention of the 4-stroke gasoline engine. In the United States, interest in a “horseless carriage” was first drummed up in 1895 by Herman H. Kohlstaat, a man who made his fortune in the bakery business and sponsored the first race of such vehicles, with a whopping $2,000 prize for the winner. Over 80 automobiles entered the competition, either imported from Europe or made in local machine shops by their owners. When race day came around, 6 cars showed up, 2 of which were electrically powered and didn’t make it far. The winner was Frank Duryea of Springfield, MA, who built his car himself and beat 3 German imports. (This story is paraphrased from here.) These were the humble beginnings of the U.S auto business. It didn’t take long before cheap gasoline, the invention of the electric self-starter, and many other incremental improvements together produced the biggest change in American transportation since the proliferation of railroads in the 1800′s. This Golden Age of the auto industry looked far different from the one we know today, however. According to Carnegie Mellon’s Steven Klepper, by 1911 (only 16 years after that fateful race occurred), the U.S. had 275 automobile manufacturers selling to the general public. The two biggest firms (Ford F and General Motors) held only 38% of the market. Yet, by the 1920′s, their share had increased to 60% and, by 1930, with the addition of Chrysler (which was the combination of two failing companies), the “Big 3″ had 80% of the market. Why the sharp dropoff by 1930? My (educated?) guess would be a combination of commoditization through mass production by the Big 3, as well as the lack of financing available for smaller firms during the Great Depression. Does this sound familiar? To cleantech enthusiasts, it should. I think 2011 in the solar industry may look like 1911 in the automobile industry — not in terms of market share, but number of firms. Conveniently, Eric Wesoff over at Greentech Media keeps an excellent list of solar firms, which he last updated in May 2009. He identified 217 solar startups along the value chain, most of which have been founded or funded post-2004. How many of these will be around in 5-10 years? Not many. In fact, the number of solar firms in existence will probably never be greater than it is today. Like the early auto industry, the solar business faces price deflation and commoditization, brought on by the increasingly sophisticated production techniques of some of the larger firms. The lack of cheap financing caused by our current recession and the lapsing of overly aggressive European subsidies have contributed to some demand destruction as well. Smaller manufacturers, not yet at scale, will suffer as a result. Many will be gobbled up by giants, and some will simply close up shop. To be clear, I’m bullish in the long-term on solar and, indeed, the auto industry saw its boom times with the Big 3 long after the Great Depression. The impending shakeout and consolidation will make the industry stronger, leaner, and better able to compete with incumbent sources of energy. For some, though, it’s gonna be a tough couple of years. Alex Taussig is a Principal with Highland Capital Partners and invests in startups at the intersection of energy and technology. You can find this blog post, as well as additional content on his blog called infinite to venture. You can also follow Alex on Twitter (@ataussig).