Wind Industry Consolidation v.3

8/3/2019 Wind Industry Consolidation v.3

1/23

By

WIND INDUSTRY

CONSOLIDATION

Sep 2011

Anand Jha


2/23

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


3/23

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


4/23

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


5/23

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


6/23


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


7/23


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


8/23


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


9/23

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


10/23

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


11/23

JointVentures

Joint Ventures: Highly prevalent in general, China in Particular

Source: NEF

60 JV dealssince 2006

21 JV dealssince 2006

China JointVenturesince 2006


12/23

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


13/23

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


14/23

Backup Slides


15/23

Pure-play Stock Price

Vestas

Gamesa

Nordex

Source: Yahoo FinanceCOMMERZBANK


16/23

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


17/23

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


18/23

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


19/23

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


20/23

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


21/23

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)


22/23

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


23/23

Emerging Trends Vertical Integration

Forward & Backward Integration

Wind Industry Consolidation v.3

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