Woodlawn Associates

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Energy » Wind

Blown Away: The Approaching Consolidation of the Wind Turbine Industry

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In the years leading up to 2008, the utility-scale wind power industry grew rapidly.  Globally, newly installed wind generating capacity expanded at an annual rate of 33% from 2004 to 2008.  The market’s growth enticed existing players (many of which were European) to expand globally, especially in large, rapidly expanding markets such as the U.S. and China, and many new firms entered the business or announced their intention to do so.  For example, the number of utility-scale wind turbine manufacturers with sales in the U.S. market increased from five in 2005 to ten in 2009, and 80 to 90 companies attempted to sell turbines in China.

The industry’s fortunes began to turn, however, with the global financial crisis of 2008.  In 2010, new wind installations decreased about 50% in the United States, which had previously been the world’s largest market.  U.S. market leader GE saw wind turbine revenue fall by more than 30%.  Global market share leader Vestas announced the layoffs of 3,000 people, mostly in northern Europe, to realign capacity with expected demand.  Although the Chinese market has continued to grow, large domestic suppliers now dominate there, dampening hopes of both foreign vendors and Chinese upstarts.

With a larger number of suppliers chasing a considerably less robust global market, it is reasonable to ask whether everyone now in the market can be successful.  Equally important is how participants can optimize their chances of success and shareholder value.  Through analysis of economic principles and comparisons with other industries, we attempt to answer these questions in this paper.  In brief, our findings are as follows:

  • The global wind turbine industry will grow at a much slower rate of 6% to 8% annually.  The U.S. is unlikely to exceed the level of demand seen in 2009 for some time.  The Chinese market will continue to see robust capacity growth, but the rate of increase will be much lower.
  • The wind turbine industry shares several characteristics with other industries that are much more concentrated, such as gas turbines.   Considering both this and the slower market growth, we believe there will fewer turbine suppliers a few years from now.
  • Opportunities abound for OEMs to combine in ways that strengthen their chance of success.   Leading firms can acquire manufacturing or technology assets; mid-size competitors can merge and eliminate duplicated resources; cross-border mergers could increase market access.
  • The scale provided by their home market will give leading Chinese turbine manufacturers a leg up in their quest for global competitiveness.
  • Suppliers to wind turbine OEMs should evaluate how likely their current customers are to be among the industry’s long term survivors and work to diversify their customer base.

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Chinese Solar Powers Up: Lessons for the Wind Energy Industry

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We recently looked at the overseas penetration of Chinese solar photovoltaic module makers to see if there might be lessons for the wind turbine industry.  Chinese solar PV module manufacturers have rapidly increased their overseas market share.  For example, they have increased from 0% to over 30% of the California solar market in three years, and have seen similar market share gains in Germany.  Moreover, Suntech, a Chinese PV manufacturer, rated #1 in consideration rate in our recent U.S./Europe survey of solar buyers.

In contrast, the overseas penetration of emerging wind turbine manufacturers has been much more muted.

Six main factors account for the growth of the PV module makers:

  1. Cost leadership
  2. They entered market when supply was tight
  3. Solar modules are (relatively) simple, modular, and scalable, which makes entry easier for new entrants
  4. PV modules viewed as commodity-like
  5. The executive teams of the leading Chinese solar manufacturers have extensive experience outside China
  6. As businesses, the leading Chinese PV makers are relatively transparent to those outside China

The implications for wind turbine manufacturers heading into new regions are:

  1. Expect new market penetration will take a long time due to need for an operating track record.  It may be a long time before local manufacturing capacity is required
  2. Purchasing projects or doing project development can get beyond bankability issues
  3. Developing local engineering and support capabilities should be high priority in overseas expansion
  4. Certain partnerships could accelerate progress and increase probability of success
  5. Prioritize markets appropriately

Download our detailed analysis here.

Again, Higher Returns for Less Integrated Wind Turbine Manufacturers

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In a follow up to our earlier on wind turbine manufacturers, we found that there has been a reversal of the previous trend toward vertical integration in turbine manufacturing.  We also found two of the least vertically integrated players—Goldwind and REPower—have the highest returns on capital.

During this work we also had the opportunity to identify best-in-class manufacturing practices among wind turbine manufacturers, and determined that fewer than half of them do best-in-class supply chain management activities comprehensively:

  • Lean and six sigma up the supply chain
  • Hands-on supplier quality management
  • Evaluate total cost (including cost of quality, working capital), not just landed cost or ex-works unit cost
  • Optimize collaboration with strategic suppliers
  • Use comprehensive IT tools for supplier evaluation and management

Download a detailed set of findings here.

Beyond the Blue Chip: Financing of Emerging Wind Turbines

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We recently talked to equity investors, debt investors, and wind farm developers the United States to determine the advantages and disadvantages of using non-blue chip wind turbines. We found mixed interest in financing projects with emerging turbines. This financing will be more costly and shift more risks to the project sponsor than financing for blue chip turbines. For emerging vendors, the first priority should be to establish the capability to deal with any issues that may arise over the long term. The second step should be to minimize risks to developers and financiers, perhaps by self-financing projects or subsidizing financing. Finally, we suggest there may be some wind farm developers more open to the idea of using emerging turbines.

Download a detailed summary here.

Lower Vertical Integration Means Higher Returns in Wind Turbine Manufacturing

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We recently examined the level of vertical integration of wind turbine firms and compared it with their return on invested capital. Generally, we found firms with lower vertical integration tended to have higher returns on capital. We also surveyed top 20 wind farm developers in the United States to get their impressions of wind turbine vendors. Their answers suggested four clear groups—the “blue chip” players like GE, Siemens, and Vestas, a respected second tier, a few firms that are respected but seen as potential competitors because of their integration into development, and some reputation-challenged players.

Download our analysis here.