Suzlon

n Energ
gy Ltd Makiing Forray Abrroad
ACa
aseStuddy

Q1.H
Howdoyou
uanalyzethe
eattractiven
nessoftheIIndustry?Sh
houldSuzlon
nexpectmo
orecompetittorsindays
toco
ome?Howsshoulditpre
epareitselffforit?
TheW
WindPowerIIndustryisveryattractive. Thoughwind
dcurrentlyprroducesjusto
over1%ofwo
orldwideeleectricityuse,
thereeisanestimaated72TWoffwindenergyyontheEarth
hequivalenttto54,000MTToE(millionto
onsofoilequ
uivalents)per
yearthatpotentiaallycanbecommerciallyviable.Thegro
owthintheinndustryisbeingdrivenbyanumberoffactors:
1
1.
2
2.
3
3.
4
4.

Theenerggysupplyand
ddemand.
Thegrowingfocusone
environmentaalissues,especiallyclimattechange.
Theadvan
ncementsintthetechnologgy
Governme
entSupport

Supply&
Demand

Technolo
ogy

Growth
inWind
Power

Environ
nment

Government

Gro
owthFactorso
oftheWindPo
owerIndustry

1
1. Energysu
upplyanddem
mand
By20
030,itisestim
matedthatth
heworldenerrgyneedswou
uldbebetweeen30and600%higherthaanthecurren
ntlevels.The
IEAeestimatesthattaround4,50
00GWofnew
wenergycapaacityneedstoobeinstalledbefore2030,requiringinvvestments
ofmo
orethanUS$13trillion.Th
hisincreaseindemandwo
ouldrequiressignificantinvvestmentinn
newpowergeenerating
capacity,especiallyinemergingeconomieslikeChina&India.InInduustrializednattions,ontheotherhand,w
whiledemand
d
isinccreasing,thed
daysofoverccapacityinele
ectricityproductionarecoomingtoanend.Andjustaasenergydem
mand
contiinuestoincre
ease,suppliessofthemainfossilfuelsussedinpower generationaarebecomingmoreexpenssiveand
moreedifficulttoe
extract.

Incontrasttotheuncertaintiessurroundingsuppliesofconventionalfuels,andvolatileprices,windenergyisamassive
indigenouspowersourcewhichispermanentlyavailableinvirtuallyeverycountryintheworld.Therearenofuelcosts,
nogeopoliticalriskandnosupplydependenceonimportedfuelsfrompoliticallyunstableregions.Windpoweralsohas
theadvantagethatitcanbedeployedfasterthanotherenergysupplytechnologies.
2. EnvironmentalIssues
Windpowerisaclean&emissionsfreepowergenerationtechnology.Likeallrenewablesources,itisbasedon
capturingtheenergyfromnaturalforcesandhasnoneofthepollutingeffectsassociatedwithconventionalfuels.
Fossilfuelssuchascoal,gasandoilaremajoremittersofcarbondioxide.Incontrast,windenergyproducesnocarbon
dioxidethemaingreenhousegascontributingtoclimatechangeduringitsoperation,andminimalquantitiesduring
themanufactureofitsequipmentandconstructionofwindfarms.Itisakeysolutioninthefightagainstclimatechange,
anditiswellontracktosaving10billiontonsofCO2by2020.Anotheraspectofwindenergydeploymentconcerns
water.Whilemostconventionaltechnologies,fromminingandextractiontofuelprocessingandplantcooling,measure
theirwateruseinthemillionsoflitersperday,windpowerusesvirtuallynoneofthismostpreciousofcommoditiesin
itsoperation.Windenergyisarguablythecleanestelectricitygenerationtechnology.Itdoesnotproducetoxicor
radioactivewaste.Whenlargearraysofwindturbinesareinstalledonfarmland,onlyabout2%ofthelandareais
requiredforthewindturbines.
3. AdvancementsintheTechnology
Thewindenergyindustryhascomealongwayintermsoftechnologythatgoesintothemakingofturbinesandwhat
not.In2004,windenergycostonefifthofwhatitdidinthe1980s.Costperunitofwindenergyproducedwas
estimatedin2006tobecomparabletothecostofnewgeneratingcapacityintheUnitedStatesforcoalandnaturalgas:
windcostwasestimatedat$55.80perMWh,coalat$53.10perMWhandnaturalgasat$52.50.So,withfurther
advancementsintechnology,windpowermightevenbecomecheaperthantheconventionalsourcesofenergy.
However,ifthecostofimpactonenvironment(duetoconventionalsources)isconsidered,windenergycomesoutasa
clearwinner.
4. GovernmentSupport
Pressurefromsomenationalgovernmentstoplaceanobligationonenergyproducerstosourceanincreasing
percentageoftheirelectricityfromrenewablesourceshasimpactedthemarketinasignificantway.Forinstance,inthe
UnitedKingdom,withitsRenewableObligation,andintheUnitedStates,withitsstatebystateRenewablePortfolio
Standardshaschangedtherulesofthegame.Ataninternationallevel,theEuropeanUnionhasledthewayby
introducingalegallybindingtargetfor20%oftheregionsenergytocomefromrenewablesourcesby2020.
Windenergyhasbenefitedfromsubsidiesofvariouskindsinmanyjurisdictions,eithertoincreaseitsattractiveness,or
tocompensateforsubsidiesreceivedbyotherformsofproductionorwhichhavesignificantnegativeexternalities.

TheforecastofGlobalWindEnergyCouncil(GWEC)showedthattheglobalwindmarketwouldgrowbymorethan155
percent,reaching240gigawatts(GW)oftotalinstalledcapacityby2012.Intermsofeconomicvalue,windenergy
sectorhasbecomeanimportantplayerintheenergymarket,withthetotalvalueofnewgeneratingequipmentinstalled
in2007reaching25billion,orUS$36billion.

Competitors
OwingtothegrowthfactorsdiscussedaboveandthefactthatWindPowerindustryhasanannualturnoverofmore
thanUS$23Billionandithasbeengrowingatanannualrateofmorethan28%forthelast10years,SuzlonEnergy
shouldexpectmorecompetitioninthedaystocome.Therenewableenergymarkethasastrongfutureaheadas
dependenceonfossilfuelsdecreasesandisassuchaverylucrativeoneduetotherateatwhichitisgrowing.TheWind
Powerindustryistheobviouschoiceintheimmediatefuture.TheinteresttowardsWindPowerindustryhasbeen
mountingandwhileearlypioneershavebeenabletotakeadvantageofthehighgrowthratesalready,thereareother
manufacturersthatareevaluatingthesectorsandponderingonentrystrategiesthatwillallowthemtostartcateringto
thisburgeoningmarket.
ManyEuropeanandUSbasedmanufacturersaresettingupunitsinAsia,inordertotakeadvantageofcheaperlabor
andcomponentprices.Also,withthenumberofconsumersincreasinginthisregionoftheworld,manufacturers
recognizetheadvantagesofplacingproductionlocationsclosertoareasofhighdemand.Thewindturbine
manufacturingfacilitieshavestartedappearinginlowcostcountriessuchasChina,Malaysia,Taiwanandthe
Philippines.SuzlonshouldbewaryofcompetitionfromAsianplayersandparticularlyChinesefirms.

Preparedness
Suzlonalreadyhasthefullvaluechainowingtotheverticalintegrationthathashappenedduetothevarious
acquisitionsacrosstheglobe.Thefocusnowshouldbeonconsolidationofbusinessandorganicgrowth.Sincethe
competitioninthewindenergyindustryisboundtointensify,Suzlonhastoincreaseitsvalueproposition.Thewind
turbineproductioncapacityhastobeincreased.Qualitycontrolshouldbeimproved.Thereshouldbeafocusonwaste
reductionsandlowcostpower.Animportantareathatcanbeworkeduponispostsaleservicestherebymakingagood
rapportwiththecustomers.

Q2.EvaluatethedecisionofTantitogoforacquisitions?HavetheseacquisitionshelpedTantiinmakinga
verticallyintegratedentity?Hasitgivenanycompetitiveadvantage?
TherewerevariousfactorsthatledtothedecisionofTantitogoforacquisitions:
1.
2.
3.
4.
5.

TechnologicalLeadership
SupplyBottlenecks
Verticalintegration
BroadenProductportfolio
MarketPositioninEurope

In2001,therehadbeen$2billionincapitalexpendituresonwindturbines.By2004,expenditureshadincreasedto$25
billion.By2007,theglobalinstalledcapacityforwindwas76GW.Thisfigurewasexpectedtomorethandoubleover
thenextthreeyears,representingacapitalinvestmentof$180to$200billion.Oneofthemajorconstraintsonthe
developmentofthewindindustrywascomingfromtheinabilityoftheturbinemanufacturerstokeepupwithdemand.
Thevariouscomponentsusedinmakingawindturbinelikebearings,gearboxes,castings&forgings,etc.wereinshort
supplyasaresultofwhichorderswereoftendelayed.

TTechnological
Leadership

Vertical
Integraion

Suppply
Bottleenecks

Aq
quisitions

Broaden
Product
Portfolio

Market
Positionin
Europe

Factorsth
hataffectedth
hedecisionto goforacquisittions

Thessupplychainw
wasnotkeep
pingpacewith
htheenormo
ousmarketoppportunitiestthatexisted.SSuzlonmadeastrategic
decissionearlyonttoverticallyintegratealle
elementsofw
windpowerprroductionand
dhencethed
decisiontoaccquire.The
comp
panymadeevveryelementoftheturbin
nebarringthe
egearbox.BuuyingHansenallowedittomakeamoreeintegrated
desiggn.Suzlonhad
dalreadyestaablishedanR
R&DsubsidiarryinGermanyybecauseoftthetechnologgicalsuperiorrityinthe
Europeanindustryy.Forthesam
mereason,ithadmanufaccturingunitsi nIndia(lowccostsuperiority).
Overrtheyears,th
hecompanyh
hasbuiltastro
onginternatio
onalpresenceegivenitsp
preeminentp
positionintheewind
turbineknowhow
w:Denmarkaastheheadqu
uartersforitsglobalexpannsion;R&Dan
nddesignbasseinGermanyy;
herlandsfordesigninganddevelopingrotorblades,ggivenitslead ershipinaero
odynamics;andmanufacturing
Neth
facilittiesinBelgium,NorthAmerica,Chinab
besidesIndia..
ItsaccquisitionofR
Repowerwassprimarilyabo
outenteringandgainingaastrongfooth
holdinEurope,theworldsbiggest
wind
dmarket.Afte
ergoinginforrRepower,Su
uzlonhasaccelerateditsaaccesstothismarket.Repo
oweralsooffeersa
plementaryp
productportfo
olioincludingadvancedofffshoreturbinnes(5MW)an
ndhighlyskilleed&motivattedhuman
comp
capittal.Acquisitio
onofRepowerbolsteredth
hecompany'sslimitedoffshhorewindtecchnologythattiscrucialinEurope.
Havin
ngpluggedth
histechnologyygapandentteredtheEurropeanmarkeet,Suzloncan
nnowsettoffocusonorganicgrowth.

on&CompettitiveAdvantage
VertiicalIntegratio
Suzlo
onanticipated
dthatthesyn
nergiescouldbringdowntthecoststhrooughtheseaccquisitionsap
partfromthebenefitsof
wideermarketreacchandproductionfacilitie
esnearmarke
ets.Company
ysaysthatsom
meofexpecteedadvantageeswerelowerr
logistticscost,dedicateddeliverycapability,andflexiblerresponsetoloocalmarkets.
Notjustanequip
pmentsupplie
er,Suzlonisalsoafullwind
dfarmprojecctdeveloperaandoperatorr.Itsvariedseervicesare
offerredbyitsasso
ociatedcomp
panysubsidiarries,whichhaavealsobeennestablishedtocoverspeccificregionalmarkets.In
recen
nttimesithasbeenactive
elyexploringggrowthopporrtunitiesoverrseas.

Owingtoitsaggressiveexpansionstrategy,Suzlonisnowafullyverticallyintegratedenergyequipmentprovider,a
positiononlyafewglobalproviderssuchasSpainsGamesa,aleadingwindturbinemaker,hasmanagedtoachieve.
SuzlonhasachievedagreaterlevelofverticalintegrationthanitspeerssuchasVestasandGamesa.Thisisreflectedin
itssuperioroperatingprofitmarginof25percentagainst13percentforGamesa.TheCompanyalsoexpectsthecost
efficienciesattainedthroughtheverticalintegrationtooffsetanymargindentcausedbyahikeinthepricesofsteel,
whichconstitutes70percentofthecostoftowers.
Suzlonsnetworkofstrategicallypositionedglobalsubsidiariescontributestoitsbaseofindustryknowledgeand
technicalcapacity.Withitsverticalintegrationandarevisedproductportfolio,itcanoffercustomizedendtoend
solutionsinWindEnergy.Duetoagreatercontroloversupplychain,Suzlonisfurtherabletolowerwindturbinecosts.
VerticalintegrationhasenabledbettermanagementofsuppliesforSuzlon.

Q3.WhatcanbepossiblefutureexpansionstrategiesforSuzlon?
Suzlonnowhasthefullvaluechainandthefocushenceforthshouldbeonconsolidatingthebusinessandgrow
organically.AnyfurtheracquisitionwontbringanythingnewtoSuzlonintermsofvalue.
NewMarketExpansion
Thecompanyisplanningtoincreasethewindturbineproductioncapacityfromthecurrentlevelof2,700MWto5,700
MWbyMarch2009inotherwordsthecompanyislookingatagrowththatwillbedoublethatoftheindustrygrowth
of2030%,inthenextfewyears.Thisisaveryambitiousproposition.ThoughSuzlonhasachievedagreaterlevelof
verticalintegrationthanitspeerssuchasVestasandGamesawhichisreflectedinitssuperioroperatingprofitmarginof
25%against13%forGamesa,itwasrankedasthefifthleadingwindturbinesupplierintheworld,witharound10.5%of
globalmarketsharein2007.Suzlonwillneedtoexplorenewmarketsandgrowaggressivelyintheseinordertoincrease
itsglobalmarketsharetogaintheproductioncapacitythatithasenvisagedforitself.Currently,thewindpowermarket
isspreadingwellbeyonditscoregeographicalcentreofEuropeandtheUnitedStates.Mostofthecompaniesare
movingfromdevelopednationstodevelopingnationsasthegrowthopportunitiesinthesecountriesareveryhigh.
HugeopportunitiesexistintheAsian&SouthAmericanmarkets.PossibilitiesforgrowthexistincountrieslikeChile,
Venezuela&Mexico.TheAfricancontinent,withitslargecoastline,isanothermarketthatcanbeventuredintofor
expansion.Suzlon,withitsrichexperienceofworkingindevelopingcountrieslikeIndia,China&Brazil,canleverageits
expertisetogainfavorableentriesintosuchmarkets.
ProductPortfolioExpansion
Currently,theproductrangeofSuzlonislimitedinthe1.52.0MWcategorycomparedtotheofferingsbyVestasand
Enerconinthe34.5MWrange.AsaresultofwhichitmayloseoutintheEuropeanandAmericanmarkets.Suzlon
shouldexpanditsproductofferingstolargesizeturbinesthatcandeliverpoweratlowerunitcost.Also,ithasto
provideendtoendsolutionswhichincludeplanning,designingspecificproductsandpostsalesserviceandsupportfor
suchproducts.

References:

PreparedBy:

1. GWECwebsite:http://www.gwec.netALOKTHAPLIYAL
2. http://www.prnewswire.com

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