Suzlon n Energ gy Ltd Maki ing For ray Abr road

ACa aseStud dy
Q1.H Howdoyou uanalyzethe eattractiven nessoftheIndustry? I Sh houldSuzlon nexpectmo orecompetit torsindays toco ome?Howshould s itpre epareitselffor f it?
TheW WindPowerIndustry I isveryattractive. Thoughwind dcurrentlypr roducesjusto over1%ofwo orldwideele ectricityuse, there eisanestima ated72TWof fwindenergy yontheEarth hequivalentt to54,000MT ToE(millionto onsofoilequ uivalents)per yearthatpotentia allycanbecommerciallyviable.Thegro owthinthein ndustryisbeingdrivenbyanumberoffactors: 1 1. 2 2. 3 3. 4 4. Theenerg gysupplyand ddemand. Thegrowingfocusonenvironmenta e alissues,especiallyclimat techange. Theadvan ncementsinthe t technolog gy Governme entSupport

Supply& Demand

Technolo ogy

Growth inWind Power

Environ nment

Government

Gro owthFactorsof o theWindPo owerIndustry

1 1. Energysu upplyanddem mand By20 030,itisestim matedthatth heworldener rgyneedswou uldbebetwe een30and60 0%highertha anthecurren ntlevels.The IEAe estimatesthat taround4,50 00GWofnew wenergycapa acityneedsto obeinstalledbefore2030,requiringinv vestments ofmo orethanUS$13trillion.Th hisincreaseindemandwo ouldrequires significantinv vestmentinn newpowerge enerating capacity,especiallyinemergingeconomieslikeChina&India.InIndu ustrializednat tions,ontheotherhand,w whiledemand d isinc creasing,thedays d ofoverc capacityinele ectricityproductionareco omingtoanend.Andjusta asenergydem mand conti inuestoincre ease,supplies softhemainfossilfuelsus sedinpower generationa arebecomingmoreexpens siveand more edifficulttoextract. e

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.

Technological T Leadership

Vertical Integraion

Sup pply Bottle enecks

Aq quisitions

Broaden Product Portfolio

Market Positionin Europe

Factorsth hataffectedth hedecisionto goforacquisit tions

Thes supplychainwas w notkeep pingpacewith htheenormo ousmarketop pportunitiest thatexisted.S Suzlonmadeastrategic decis sionearlyonto t verticallyintegrateallelements e ofwind w powerpr roductionand dhencethed decisiontoac cquire.The comp panymadeev veryelementoftheturbin nebarringthe egearbox.Bu uyingHansenallowedittomakeamore eintegrated desig gn.Suzlonhad dalreadyesta ablishedanR&D R subsidiar ryinGermany ybecauseoft thetechnolog gicalsuperior rityinthe Europeanindustry y.Forthesam mereason,ithadmanufac cturingunitsi nIndia(lowc costsuperiority). Over rtheyears,th hecompanyhas h builtastro onginternatio onalpresence egivenitsp preeminentp positioninthe ewind turbineknowhow w:Denmarkas a theheadqu uartersforitsglobalexpan nsion;R&Dan nddesignbas seinGermany y; herlandsfordesigninganddevelopingrotorblades,given g itslead ershipinaero odynamics;andmanufacturing Neth facilit tiesinBelgium,NorthAmerica,Chinabesides b India. . Itsac cquisitionofRepower R was sprimarilyabo outenteringandgaininga strongfooth holdinEurope,theworldsbiggest wind dmarket.Afte ergoinginfor rRepower,Su uzlonhasaccelerateditsa accesstothismarket.Repo oweralsooffe ersa plementaryproduct p portfo olioincludingadvancedof ffshoreturbin nes(5MW)an ndhighlyskille ed&motivat tedhuman comp capit tal.Acquisitio onofRepowerbolsteredth hecompany's slimitedoffsh horewindtec chnologythat tiscrucialinEurope. Havin ngpluggedth histechnology ygapandent teredtheEur ropeanmarke et,Suzloncan nnowsettof focusonorganicgrowth. icalIntegratio on&Compet titiveAdvantage Verti Suzlo onanticipated dthatthesyn nergiescouldbringdownthe t coststhro oughtheseac cquisitionsap partfromthebenefitsof wide ermarketreac chandproductionfacilitie esnearmarke ets.Company y saysthatsom meofexpecte edadvantage eswerelower r ticscost,dedicateddeliverycapability,andflexibleresponse r tolo ocalmarkets. logist Notjustanequip pmentsupplie er,Suzlonisalsoafullwind dfarmprojec ctdevelopera andoperator r.Itsvariedse ervicesare offer redbyitsasso ociatedcomp panysubsidiar ries,whichha avealsobeen nestablishedtocoverspec cificregionalmarkets.In recen nttimesithasbeenactive elyexploringgrowth g oppor rtunitiesover rseas.

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: RollNoB12070

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

SectionB