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By
WIND INDUSTRY
CONSOLIDATION
Sep 2011
Anand Jha
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Executive Summary
Macro Environment Sluggish US Economy & EuropeDebt crisis Policy Uncertainties (Europe, US) China Policy Adjustments Declining Shale Gas Prices/ NewDiscoveries
Macro Environment and Market Dynamics favor Consolidation
Industrial Environment Transition to Buyers Market High Entry Barriers Capital erosion of Pureplays Long terms Value Chain Partnerships Higher Commodity Prices
Internal Environment Supply Overcapacity Declining Margins
Modest Growth
Disincentives for
New Entrants
Economies of
Scale
Attractive M&A
preys
Supplier
Rationalization
Industrialized, Lean
operations
Consolidation
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Macro Environment
EU Austerity & Tightening Chinese Finance would flatten growth
EU Debt Crisis Portugal, Italy, Ireland, Greece & Spain (PIIGS)
reviewing Renewable Support Programs, Together33GW of Installations (2010)
Italy proposed increase in corporate tax for Renewable
Spain revising 2020 targets, FIT expected to go downfurther
Portugal increases VAT across all electricity production
Sovereign Debt Crisis makes lenders more cautious
China New Policies & Regulations
Tighter Monetary policy, increased interest ratesand dwindling stimulus funds for Infrastructure
projects
Grid Connection Code, which is expected toburden OEM with LVRT cost
Provincial Quota System, limiting new projectannouncements in grid congested areas
Source: NEF
Source: NEF
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Macro Environment
Maturing Europe, Declining Americas & Stabilizing Asia Pacific Market Growth
US Sluggish Economy & Policy Uncertainty
PTC set to expire in 2012, no visibility on ITC and Federal grant
Natural Gas Prices continually falling
No Federal Energy Bill in sight , EPA fails to put Green House Gas Regulations
Low Electricity Demand
Drivers ofutilities wind procurementstrategies, US
Dependence of US Market on Stable Policy Environment
Source: Make
Source: Make
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Winning Strategies: Productivity & Asset Management
Industrial Environment
Needed: Lean,Efficient &
Industrialized
Operations
Price & Margin Pressures
Supply Chain & LogisticsProduct Development FactoriesFlow & Layout Equipment
Integrated DevelopmentStandardizationModularizationDesign to Manufacture &
AssemblyRequirement BasedDevelopment
Lead time ReductionPull FlowMinimal ReworkInventoryManagement
Efficiency of test benches
Equipment reliability &maintenanceTools SparesManagementBreakdown Management
Procurement Planning &SchedulingSupplier ManagementStocks ManagementLean logistics andcoordination on a regional andglobal level
Supply Overcapacity Asset Buying, Liquidation and Market Exits
Capacity Utilization ~50%Not expected to go beyondthis level
Source: Make
Source: BI IntelligenceBI Intelligence
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Industrial Environment
Winning Strategies: Scale Economy, Industrialization & Consolidation
Seller To Buyer Market
Consistently increasing wind farm size - key factorfor industrialization
OEM in major deals with Utilities Siemens & Dong(1800 MW), Repower & EEG (1900 MW)
Larger orders and framework agreement withselected suppliers
Number of suppliers to Utilities decreased
Value Chain Rationalization
Build-to-print principle Own design & proprietary
technology Reliance on in-house R&D
Capabilities
OEMR&D
Build-to-specification principle Off-the-shelf orcustomized sourcing
Partnership with selected suppliers Reliance on supplierquality
Technology Acquisitions Supplier Rationalization
Both OEMapproaches
impede
Fragmentation
Drives Economies of Scale & Industrialization
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Industrial Environment
OEM Competitive Landscape
Top 15 = 90% MarketshareTechnology acquisitions by Western ConglomeratesLoss of market capitalization makes Pureplay easypreyGlobal Market Access by Strong Asian playersJoint Ventures, Alliances & Licensing by AsianplayersVertical Integration for Supply Chain bottlenecksAsian pureplays attractive targets for AsianConglomerates
BottomFragmented = 10% MarketshareThin organic growth potential for pureplay
Merger with Top PlayersHorizontal integration for better shareMarket exits
Conglomerates may acquire several players formarket entry or access
Consolidation possibilities in the entire OEM Competitive Landscape
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Industrial Environment
Suppliers
Strong Consolidation Drivers for Strategic Component Supplier
Mergers among PureplayTakeovers by Others unlikely
Technology access has beenmajor driver for Gearbox SupplierConsolidationAsian Players may targetWestern players for MWtechnology access Horizontal integration byIndustrial players to broaden theirmarket
OEM may acquire Generator& Converter players for PMGtechnologyOvercapacity in Blade market
may drive consolidation
Source: Make
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Wind Industry Consolidation
Equity Asset
Strategic Asset inPublic Co.
No. of M&A Deals
No. of deals constantlyincreasing
Highest M&A Volume($M) in a single
quarter
M&A started as early as 2006, heating up in 2011
Source: NEF
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Wind Industry Consolidations
Wind Industry Players continuously leveraging Consolidation
GE AcquiresEnronsWind Assets
FKI acquiresDewind
MarketEntry &Access
CapacityAddition
Technology access
% ShareSynergy
SupplyChainStrength Vestas
merges withNEG Micon
GamesaacquiresMADE
SiemensacquiresBonus
SiemensacquiresFlender
EU EnergyacquiresDewind
from FKIJVAlliances
Suzlonacquires
Hansen
AlstomacquiresEcontecnia
IberdrolaacquiresCPV
IberdrolaacquiresMidwest
Suzlonmajoritystake in
REpower
Goldwind70% stakein Vensys
XEMCacquiresDarwind
GEAcquiresScanwind
DSMEacquires
Dewind
STX Corpacquires
Harakosan
UTCacquiresClipper
Arevaacquires
Multibrid
. Multiple Objectives
..Multiple Routes
..Across Value Chain
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JointVentures
Joint Ventures: Highly prevalent in general, China in Particular
Source: NEF
60 JV dealssince 2006
21 JV dealssince 2006
China JointVenturesince 2006
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Conclusion
Market Catalysts
Falling Turbine Prices, Lower Margins & Massive Oversupply Policy Uncertainty in majormarkets Tightening ofFinancesin EU, US and China Shale Gas, Clean Coal Technologies & High Commodity Prices US & Europe Stagnate, China plateaus at 10-15GW
Winning Strategies
Cost Reduction & ScaleEconomies Technology Strength Local Manufacturing Presence Effective Partnershipsthroughout Supply Chain
Enablers Industrialization JV, Alliances and Acquisitions Assetbuying, Licensing Supplier Base Rationalization
Winning Strategies through Consolidation
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Backup Slides
Basic ComponentSupplier
Main
ComponentSupplier
Wind TurbineManufacturer
Wind FarmOwner
Utilities
Economies of ScaleGrowth
Market Access
Economies of ScaleGrowth
Market AccessTechnology AccessSynergyDiversificationGlobalizationSupply Chain Strength
Cost ReductionSustained Orders
Asset Access
Horizontal Integration
Backward integration
Forward integration
JV, Alliances
Very Likely
Likely
Unlikely
JV, Strategic Alliances most likely tools for Consolidation
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Backup Slides
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Pure-play Stock Price
Vestas
Gamesa
Nordex
Source: Yahoo FinanceCOMMERZBANK
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Wind Industry: Historical Growth
Moderategrowth
Economies of Scale Market & Technology Access Quality & Price Pressure
Rapid Growth Entry of many new players Order fulfillment pressure
Filling Supply Chain gaps
Annual Installed Capacity (MW)
Fragmentation (2004-2009) to likely Consolidation (2010+)
2011-15: LM BI Forecast; June 2011
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Catalysts for Consolidation
Learning Curveeffect As industry majors produce more and more, they start doing
economically putting pressure on other players.
Costly capital goods/ Longservicetimes Bankable players with proven trackrecord are favored than others high equipment prices and very long service life
Economies of Scale/Scope As organization start offering more diverse,comprehensive & end-to-end solutions, cost per unit decreases (Vertical Integration)
Economies of Purchase/Sales Cost per unit tends to go down as volume of
purchase or sales per customer increases (Horizontal Integration).
Wind Industry It is difficult to evaluate the true cost of the Turbine its cost of energy a priori. This
can only be determined after several years of services, hence project finance tobankable players.
Many of the components of Wind Turbine Blades, Gear Box, Generators, Controls
are specific to this industry. Players with large, sustainable volumes command betterpricing
It benefits from Learning Curve understanding diverse regions, weather conditions,segments etc. (Offshore, Low Wind sites, Cold and Dry conditions etc)
Wind Industry inherently incentivizes Consolidation
Source: Woodlawn Associates, 2011
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Consolidation Strategic Options
Consolidation: Strategy to overcome weakness/maximizestrength
External
Maximize Strength
Overcome Weakness
Internal HorizontalIntegration
Joint VentureConcentric
Diversification
Vertical IntegrationConglomerate
Diversification
ProductDevelopment
MarketDevelopment
InnovationHigh ROI, yet Longgestation time
Drivers
Supply Chain GapsEconomies of Scale
Bankable PlayersMarket AccessTechnology Access
Consolidation provides external means to overcome weakness or maximizestrength
It is sometimes easier, less time taking and perhaps economical than internalmeans New Product Development, Innovation, New Market development etc.
SWOT
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StrategicEnvironment Matrix
Gas Turbine: Future referencemodel for Wind Energy
A. Volume: Have only few differentiators, but the benefits fromthose are very high due to scale economies, gestation timeof the technology. Profitability is correlated with Marketshare/ Company size
B. Stalemate: Only few differentiators and gain from them issmall. In the Steel or Paper Industry, one can lowermanufacturing cost, improve safety, logistics etc. but cantexpect huge returns from them. Profitability not related tomarket share
C. Fragmented: A restaurant or Garment co. can differentiatein multiple ways, but the gains are not huge. There isspace for both large & small companies.
D. Specialized: Luxury car maker can differentiate in severalways, reaping huge benefits. Niche players can be asprofitable as big players.
Boston Consulting Group
Sourceso
f
Advantage
Size of Advantage
FragmentedApparel, House
building, Jewelry
SpecializationLuxury Cars,
Pharmaceuticals
VolumeGas Turbine,
Construction Equipment
Motorcycle, StandardMicroprocessors
StalemateVolumegrade
paper, Steel,
Wholesalebanking, Basic
Chemicals
Wind Industry (Future)
Few sources of advantage: Life Cycle Cost, Efficiency etc. Only incremental improvements in these sources possible Differentiators come with Scale, Learning Curve, Strong past records etc Benefits are huge for each differentiator Very Similar to Jet Engines: Fuel Efficiency and Emissions
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Emerging Trends Pioneersto Industrialized
Industrialized & Regional (China) will consolidation position
Pioneers Vestas, Enercon, Gamesa,
Nordex, Suzlon
Industrialized GE, Siemens,
Mitsubishi & Alstom
Regional Sinovel, Goldwind,
Dongfang Pioneersmarketshare dropped from
80% to 35% in 2005-10
Notenough to be firstto market,
Sustenancethrough
Lean operations (Industrialized)
Global presence
Local market access (Regional)
LM BI Forecast; June 2011
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Indicators of Consolidation
AcrossValue Chain Top5 Players will capture >75% Market Share
Consolidation
Source: Global DataSource: Woodlawn Associates, 2011
Concentrated MarketsIndicator : >75% marketshareby top 5 players
As Wind Industry replicates Aircrafts, Gas Turbines and Jet Engines, TotalMarket Share of Top5 Players expected to increase (50% -> 80%)
This will have cascading effect across Value Chain Wind Farms, OEM,Suppliers
Marketshareby Top5 Players (OEM)
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Aerospace Consolidation
Seven Aerospace Organizationsconsolidateto form Lockheed Corporation
Glen Martin &
Marietta
merged
Martin-Marietta
merged with
Aerospace
business of GE
Martin-Marietta
merged with
Space Division of
General Dynamics
Lockheed
Corporation
combines Martin-
Marietta
Lockheed
Corporation
acquires Loral
Northrop Grumman
merged with
Lockheed
Six Aerospace Organizationsconsolidateto form Boeing Corporation
Douglas &
McDonnel
merged
Boeingbuys
VertolMcDonnel-
Douglas &
Hughes
merge
Boeingmerges
with
Rockwell
International
Boeing &
McConnel
Douglas
merge
Fairchild Dornier, Raytheon are other primeexamples of Consolidation
Aerospace Industry marked by massiveconsolidation since 1960
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Emerging Trends Vertical Integration
Forward & Backward Integration