ecch: 310-283-1

Dr Debasis Pradhan London Business School REF: CS-10-006

Date: 2008

Suzlon Energy Ltd: Making Foray Abroad

Tulsi Tanti, the high profile Chairman of Suzlon Energy is reading out rave views made by
some analysts and academicians about its global expansion. There are mixed opinion
about his effort to make his form a vertically integrated one. In spite of its success, it was
still not clear whether it should go ahead with more acquisitions and integrate the firm
further. Certain decisions about its future expansions were also pending and were being
fiercely debated in his boardroom. Tanti was to explain and do his best to make his team
believe the value accrued to the organization by the past acquisitions. The degree of
product customization and innovation was also something that was on his mind. As Suzlon
was not into all kinds of turbines and demand for turbines of higher power was increasing.
Suzlon needed to have a close look at it.

A Glance at Company’s Inception

Tulsi Tanti is from Gujarat, India where he started his first venture which was in textiles but
he found the prospects stunted due to infrastructural bottlenecks. The biggest of them all
was the cost and unavailability of power, which formed a high proportion of operating
expenses of textile industry. In 1990, he invested in two wind turbine and realized their
huge potential. In 1995, he formed Suzlon and gradually quit textiles.1 This is how he set
out on a new path.

1
www.wikipedia.org.

This case was prepared by Debasis Pradhan, XLRI School of Business and Human Resources, Jamshedpur, India as a
basis for classroom discussion rather than to illustrate either effective or ineffective handling of a management situation. The
case study was supported by the Aditya Birla India Centre at London Business School.

Copyright © 2008 London Business School. All rights reserved. No part of this case study may be reproduced, stored in a
retrieval system, or transmitted in any form or by any means electronic, photocopying, recording or otherwise without written
permission of London Business school.
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The $10 billion Suzlon Energy is his wind power based company that has expanded its
operations into various parts of the globe.2 With this successful venture, Tanti is amongst
the ten richest Indians and one of the most successful entrepreneurs in Asian region. With
a net worth of $5.9 billion, he is the chairman and managing director of Suzlon energy.
Tanti owns 70% of the company with his three siblings.

Wind Energy Market

Globally, wind power generation has increased more than fivefold between 2000 and 2007.
At the end of 2007, worldwide capacity of wind-powered generators was 94.1 giga watts.
Though wind currently produces just over 1% of world-wide electricity use, there is an
estimated 72 TW of wind energy on the Earth equivalent to 54,000 MToE (million tons of
oil equivalents) per year that potentially can be commercially viable. 3 Steve Sawyer,
Secretary General, GWEC (Global Wind Energy Council) says, “The wind energy market
continues to achieve tremendous growth rates, and has now hit 20 GW of new installations
per year. As a result, we have had to revise even our most ambitious estimates. The
fastest areas of growth for the next five years will be North America and Asia, and more
specifically, the U.S. and China”. This substantiates the aggressive business strategy of
Suzlon to target more on China and USA.

The forecast of Global Wind Energy Council (GWEC) showed that the global wind market
would grow by more than 155 percent, reaching 240 giga watts (GW) of total installed
capacity by 2012. 4 In terms of economic value, wind energy sector has become an
important player in the energy market, with the total value of new generating equipment
installed in 2007 reaching €25 billion, or US $36 billion5 (Please see Exhibits1 and 2).

2
Forbes Business, January 21, 2008.
3
Global Wind Council News.
4
www.renewableenergyworld.com.
5
GWEC News.

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Exhibit 1

Source: World Wind EnergyAssociation

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Exhibit 2
Global Wind Power Installed Capacity (MW)

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Suzlon’s Product Portfolio

Tanti was of the opinion that Suzlon’s product line was a reflection of its strategy to focus
on developing products customized not only to the local geography and wind regime, but
also the individual needs of customers (www.suzlon.com).

Suzlon’s current product range included wind turbine generators in capacities from 350 kW
to 2.1 MW, the largest example of a wind turbine manufactured and exported from Asia.
Suzlon offered its turbines in customized versions for installation in a variety of climate
ranging from hot, dry deserts to humid coasts, to near-freezing plains. This was a very
good example of product adaptation for any company. Tanti was thinking like a visionary
when any discussion came up on the needs of the customers prompting him to emphasize
on innovation.

The latest examples in Suzlon’s product line-up were the S52 - 600 kW and S82 - 1.50
MW wind turbines. The S52-600 kW turbine was specially designed to deliver high-
performance in the low-to-medium wind regime prevalent across India (www.suzlon.com).
Suzlon’s latest Megawatt-series was S82 - 1.5 MW wind turbine too has been designed on
similar principles. The design incorporated advanced features like Micro Pitch technology
where blades could achieve 0.1 degree of pitching resolution in a response time of just 30
ms, a flexible, adjustable Flexislip system that offered maximum slip as high as 16%, high
performance gearbox, advanced yaw system and many other innovations all coming
together to make a wind turbine that delivers high performance with high reliability.

Innovation Riding on Research and Development

Tanti was one of those rare breed of entrepreneurs who had realized the importance of
research and development for growth, superior value proposition, and delivery. He
believed constant innovation can be one his competitive advantage.

The design incorporated Suzlon innovations starting from blades manufactured using
state-of-the-art Vacuum Assisted Resin Infusion Molding technology, to a unique Micro
Pitch system, advanced controls, and the highest hub-height in its class, all leading to a
robust, reliable and efficient product which generated high-quality grid-friendly power with
negligible harmonics.

The S52 stood apart not just from the engineering point of view; the size and capacity of
the turbine have been carefully selected to open up the wind energy market to smaller
investors, businesses and industries at an affordable price.

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Suzlon’s emphasis on higher efficiency, reduced stresses, power quality, high performance
and reliability, low operation costs, and increased safety delivers with high performance
turbines ensuring increased returns on investment and peace of mind for the customer.
Why Wind Energy?

Suzlon before entering into Energy market has understood the benefits of Wind energy. It
is plentiful, renewable, widely distributed. It is clean and reduces greenhouse gas
emissions when it displaces fossil-fuel-derived electricity. With tremendous increase in
human demand and limited stocks of fossil fuel, wind energy has become one of the
sustainable ways to meet the energy demands. There are several benefits of wind
energy.6 Wind energy is an ideal renewable energy because it does not produce toxic or
radioactive waste. When large arrays of wind turbines are installed on farmland, only
about 2 % of the land area is required for the wind turbines. The rest is available for
farming, livestock, and other uses. Landowners often are compensated suitably for use of
their land which enhances their income.

Ownership of wind turbine generators by individuals and the community allows people to
participate directly in the preservation of our environment. Each megawatt-hour of
electricity that is generated by wind energy helps to reduce the 0.8 to 0.9 tonnes of
greenhouse gas emissions that are produced by coal or diesel fuel generation each year.

Wind energy is quickly emerging as a serious alternative to other traditional sources of

energy not just in affluent areas of the world but in fast-growing countries like India and
China. Driving sustainable economic growth and mitigating the effects of climate change
through clean, renewable energy sources are the need of the hour. So it is wise to lead the
pack.

Economic Perspective and Growth Trends in Wind Energy

Global Wind Energy Council (GWEC) figures showed that 2007 recorded an increase of
installed capacity of 20 gigawatts (GW), taking the total installed wind energy capacity to
94 GW, up from 74 GW in 2006 (See Exhibit 1). Despite constraints facing supply chains
for wind turbines, the annual market for wind continued to increase at an estimated rate of
31% following 32% growth in 2006.

In terms of economic value, total value of new generating equipment installed in 2007
reaching €25 billion, or US $36 billion.7 In 2004, wind energy cost one-fifth of what it did in
the 1980s, and some expected that downward trend to continue as larger multi-megawatt
turbines were mass-produced. However, installed cost averaged €1,300 per kilowatt in
2007, compared to €1,100 per kilowatt in 2005. Not as many facilities could produce large

6
www.canren.gc.ca.
7
www.wikipedia.org.

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modern turbines and their towers and foundations, so constraints developed in the supply
of turbines resulting in higher costs.8

Wind and hydro power had negligible fuel costs and relatively low maintenance costs. In
economic terms, wind power had a low marginal cost and a high proportion of capital cost.
The estimated average cost per unit incorporated cost of construction of the turbine and
transmission facilities, borrowed funds, return to investors (including cost of risk),
estimated annual production, and other components, averaged over the projected useful
life of the equipment, which might be in excess of twenty years.

A British Wind Energy Association report9 showed an average generation cost of onshore
wind power to be around 3.2 pence per kilowatt hour (2005). Cost per unit of energy
produced was estimated in 2006 to be comparable to the cost of new generating capacity
in the United States for coal and natural gas: wind cost was estimated at $55.80 per MWh,
coal at $53.10 per MWh and natural gas at $52.50. Other sources in various studies have
estimated wind to be more expensive than other sources of energy.

The last few years have witnessed a sea change in both the scale and extent of the
international wind industry’s operations. Individual wind farms have grown in size from a
few dozen megawatts capacity up to several hundred. And the continued growth in
demand for clean, emissions-free wind power has outstripped the available supply,
creating a demand for very large investments in manufacturing capacity, long term
equipment purchase arrangements and project development.

The structural changes which have accompanied this expansion have concentrated
around two key trends. One has been the involvement in the business of companies from
outside the traditional wind turbine manufacturing and project development community.
The other has been the spread of the wind power market well beyond its core geographical
centre of Europe and the United States. Significantly, the two trends have overlapped with
each other.

Increasing involvement of new players in the market is in part a reflection of wind power’s
success. This is now a business from which it is clearly possible to make a secure and
profitable return. In most countries where the technology has been successful there is a
structural framework in place which supports renewable energy because of the
environmental benefits it brings, especially in the battle against climate change . They also
help counter the effects of the massive subsidies over many decades to conventional
energy generation. These frameworks have in some cases stood the test of time over a
number of years.10

8
BWEA Report on onshore wind costs.
9
International Energy Outlook, 2006.
10
GWEC Annual Report, 2007.

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Legal Environment: Boon for Wind Energy Industry

Pressure from some national governments to place an obligation on energy producers to

source an increasing percentage of their electricity from renewable sources has impacted
the market in a significant way. For instance, in the United Kingdom, with its Renewable
Obligation, and in the United States, with its state by state Renewable Portfolio Standards
has changed the rules of the game. At an international level, the European Union has led
the way by introducing a legally binding target for 20% of the region’s energy to come from
renewable sources by 2020.

This has generated a surge of interest in renewable energy, and particularly wind power,
from companies whose previous investment portfolio had been mainly concentrated in
fossil fuels or nuclear or even outside the energy sector. Most importantly, these newer
entrants have both the advantage of the available balance sheet to consider large
investments and the incentive to diversify away from increasingly uncertain traditional
power sources.11

Wind energy has benefited from subsidies of various kinds in many jurisdictions, either to
increase its attractiveness, or to compensate for subsidies received by other forms of
production or which have significant negative externalities. With the price of oil well over
US $100 per barrel, and the price of coal and gas at historically high levels, Wind Energy
has lot in store for the globe. Resource depletion’ will never be a problem for wind power.
Expected growth in coming years can be found from Exhibits- 2 and 3.

11
GWEC Annual Report, 2007.

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Exhibit 3

Source: GWEC Report 2007

Size and Potential of Industry: Leading Players

One can gauge the growing importance of Wind Power Industry from the following report
of GWEC.

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Source: GWEC

Leading Players

Vestas12 installed its first wind turbine in 1979 and has since played an active role in the
fast-moving wind power industry. From being a pioneer in the industry with a staff of
approximately 60 in 1987, they are today a global, market leading group with over 15,000
people employed. They are the leading producer of high technological wind power
solutions.

Their core business includes development, manufacturing, sales, marketing and

maintenance of wind power systems that use wind energy to produce electricity. With a 23
per cent market share, Vestas is the No 1 supplier of modern energy solutions. It has
installed more than 35,000 wind turbines in 63 countries on five continents. It installs an
average of one wind turbine every four hours, twenty-four hours a day. In fact, their wind
turbines generate more than 60 million MWh of energy per year, or enough electricity to
supply millions of households.

12
www.vestas.com.

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Enercon GmbH, 13 based in Aurich, Northern Germany, is the third-largest wind turbine
manufacturer in the world and the market leader in Germany for several years. One of
Enercon's key innovations is the gearless (direct drive) wind turbine in combination with an
annular generator. This is unlike most other wind turbines, which use a potentially less
reliable gearbox in order to increase the rotation speed of the generator. Other differences
of Enercon's wind turbines are their distinctive drop-shaped generator housings, designed
by Lord Norman Foster, and their towers, which are painted light green at the base to
blend in with their surroundings (Enercon Natural Color Scheme). As of April 2007
Enercon had installed 11,006 wind turbines, with a total power generating capacity of
11.703 GW. Their most-often installed model is the E-40 which pioneered the gearbox-less
design in 1992. Enercon has production facilities in Germany (Aurich and Magdeburg),
Sweden, Brazil, India, Turkey and Portugal.

Gamesa Corporación Tecnológica14 is a manufacturing company mainly concerned with

the fabrication of wind turbines and the construction of wind farms. Its Headquarters are in
Vitoria-Gasteiz, Spain. It develops, manages and sells wind farms, for which it also
supplies the turbines. It is the market leader in Spain and is the second largest company in
this sector worldwide with a market share of 15.5 % in 2006 (refer Exhibit 4). The company
has installed more than 10,000 MW of production in four continents, saving the equivalent
of 51.9 millions of tons of carbon dioxide annually. It presently has over 20,000 MW of
production in development in Europe, America and Asia and it is also involved in the
construction and development of photovoltaic power stations.

Goldwind 15 (Jinfeng) has recently emerged as the leading Chinese wind turbine
manufacturer. A Chinese company, Goldwind currently holds 2.8 percent of market share
in global wind turbine sales, reaching the top 10 for the first time in 2006.

In China, it captured 31 percent of sales in 2006 (BTM, 2007).The company is rapidly

expanding production, and has been benefiting from Chinese government policies that
selectively promote the utilization of domestically-manufactured wind turbines in its wind-
farm projects (described in the previous section). In 2006, Goldwind installed 442 MW – by
far its largest annual installation to date. Goldwind has, thus far, only supplied the Chinese
market, and has not yet exported any turbines outside of China.

GE16 is one of the world's leading wind turbine suppliers. With over 8,400 worldwide wind
turbine installations comprising more than 11,300 MW of capacity, our knowledge and
expertise spans more than two decades. With wind manufacturing and assembly facilities
in Germany, Spain, China, Canada and the United States, our current product portfolio
includes wind turbines with rated capacities ranging from 1.5 to 3.6 megawatts and support
services ranging from development assistance to operation and maintenance.

13
www.enercon.de.
14
www.gamesa.es and www.wikipedia.org.
15
BTM Report, 2007.
16
www.gepower.com.

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Siemens17 entered the rapidly growing wind energy business with the acquisition of Bonus
Energy in 2004. The financial strength and the turnkey experience of Siemens Power
Generation combined with the technical know-how of Bonus Energy have created an even
stronger player in the global wind energy market: Siemens Wind Power. With the
installation of our SWT-2.3-93 turbines at Horse Hollow II, Siemens Wind Power’s re-
introduction to the US market is massive and based on one of the most recent
developments in our product range. Horse Hollow II is the largest wind farm installed by
Siemens Wind Power to date, measured by installed capacity.

Suzlon Energy 18 is the wind power company in India. In terms of market share, the
company is the largest wind turbine manufacturer in Asia. With headquarters in Pune,
Suzlon is a multinational company with offices, R&D and technology centers,
manufacturing facilities and service support centers spread across the globe (See Exhibit
4). Suzlon offers customers total wind power solutions including consultancy,
manufacturing, operations & maintenance services.

Exhibit 4
Global Market Share: Top 10 Wind Turbine Manufacturers (2006)

Source: BTM, 2007

Note: 15,016 MW total capacity. The total shares sum to more than 100% due
to discrepancies between supplier information and national installation figures.

17
www.siemens.com.
18
www.wikipedia.org.

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Exhibit 5
19
Largest Wind Markets and Domestic Wind Companies

More about Suzlon and its operations

Suzlon was ranked as the fifth leading wind turbine supplier in the world, with over 10.5%
of global market share in 2007, according the BTM Consult ApS World Market Update
2007.

Currently, Suzlon Energy20 is operating in 21 countries - USA, Australia, Belgium, Brazil,

China, Denmark, Germany, Greece, India, Italy, Nicaragua, Portugal, Spain, South Korea,
Romania, Ukraine, United Kingdom, New Zealand, South Africa, The Netherlands and
Turkey. The company considers its human capital as primary asset. With over 13,000
employees of more than 14 nationalities it has built one of the most successful teams on
the wind energy stage by attracting and nurturing some of the best talent in the industry.

Suzlon reported a strong consolidated order book position21 of USD 4,335 million (3,358
MW); with USD 600 million (441 MW) in domestic orders, and USD 3,726 million; (2,916
MW) in international orders, as on January 25, 2008. The company reported a 67% growth
in its consolidated turnover at rupees 3,169.76 crores, a 61% growth in MW sales at 545
MW over Q3 financial year 2007.

Suzlon's success has much to do with its positioning as a low-cost producer with top-class
design and technology, and its competence in providing end-to-end solutions. The Indian
government's policy of tax breaks for alternative energy was a key element in powering
Suzlon. In Domestic markets it is the leader with 52% share (refer Exhibit 6).
19
The home country listed is based on the country in which the current ownership is primarily based,
Bonus, a Danish company, was purchased by Siemens, a German company, at the end of 2004.
20
www.suzlon.com.
21
Ibid.

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Exhibit 6
Indian Market Shares, 2006

In recent years the company has been on an international expansion ride. It made
acquisitions which we will study in details later and has been globally acknowledged.

The Headquarters for its international operations is located in Denmark. Its out-of-India
sales22 rose from about 8 per cent in 2004 to over 70 per cent in 2006. Orders have been
coming from Australia, China, the US, South Korea, Brazil, Italy and Portugal. With the
current boom in wind market it was wise to be an opportunist. According to Mr Tanti, the
man with a vision to make Suzlon into the top three list – “The opportunity is global mainly
because driving sustainable economic growth and mitigating the effects of climate change
through clean, renewable energy sources are the need of the hour”.

Acquisitions Leading to Integration

Tanti is weighing his present options and is evaluating the past decisions taken by him.
Have the acquisitions helped Tanti in ensuring backward integration of Suzlon Energy?
Though he was sure of the value-addition to his firm, still he was spending more time to
understand the implications of a complete vertical integration

According to Mr Tanti, the head of Suzlon, wind energy generation remains competitive as
long as the crude oil price is above US $40 per barrel.23 Over the years, the company has
built a strong international presence – given its preeminent position in the wind turbine
know-how Denmark as the headquarters for its global expansion; R&D and design base in

22
Business Line.
23
New York Times, 2006.

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Germany; Netherlands for designing and developing rotor blades, given its leadership in
aerodynamics; and manufacturing facilities in Belgium, North America, China besides
India.

Suzlon's success has much to do with its positioning as a low-cost producer with top-class
design and technology, and its competence in providing end-to-end solutions. The Indian
government's policy of tax breaks for alternative energy was a key element in powering
Suzlon.24

When Suzlon's initial turbine supplier Suedwind25 folded due to financial difficulties in 1997,
the company took over its manpower to start R&D centres and manufacturing of turbines.
Subsequently, Suzlon acquired a rotor blades manufacturer in the Netherlands. In the
course of time it faced various supply bottlenecks caused by demand-supply mismatch.
Perhaps this was the incipience of strategic acquisitions it went for. Tanti was exploring
opportunities to grow further and was not sure if acquisition would be the route again. He
was proud of his acquisitions overseas making his firm a vertically integrated one and
giving him the right kind of advantage.

Acquisition of Hansen Transmissions, a firm from Belgium

Hansen Transmissions was a major wind turbine gearbox manufacturer with state of the
art manufacturing facilities in Edegem and Lommel in Belgium. Hansen Transmissions
International NV ("Hansen"), headquartered in Belgium was a leading gearbox and drive
train manufacturer with strong R&D capabilities and modern manufacturing facilities. In
2006 Suzlon Energy taking a step ahead acquired Hansen for US $565 million.

In a statement made on that occasion, Tanti, Chairman & Managing Director, Suzlon
Energy,26 said that the acquisition of Hansen gave them technological leadership and will
make Suzlon a leading integrated wind turbine manufacturer in the world. Although the
company will be run as an independent business unit, the acquisition of Hansen will allow
them to integrate gearbox technology into the total turbine solution enabling a more
reliable and competitive product in the marketplace. The company has an excellent
management team and over a period of time they will work with them in developing supply
chain synergies, expanding capacity in Belgium and development of additional capacity in
new emerging markets in Asia. Hansen's strong presence in the industrial gearbox market
is also an important dimension of the business and he sees a good opportunity to
strengthen it further (See Exhibit 7).

24
IIES Report, 2007.
25
Ibid. and www.earthtimes.org.
26
www.renewableenergyworld.com.

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Exhibit 7

RE Power Acquisition
RE Power 27, a German company, was a leader in manufacturing high capacity (5MW)
turbines. In May 2007 Suzlon acquired it for 1.35 billion euro. The Acquisition itself was
quite dramatic. Suzlon’s bid was in competition with Areva who is one of the shareholders
of RE Power. Martifer, a Portuguese company is also another shareholder. Suzlon’s
acquisition of RE Power made it possible for an accelerated expansion into Europe, which
constitutes half of the world’s wind energy market.

It was an achievement for the company which needed the deal more than the others. On
this occasion Tanti said, “Suzlon now owns and has managing control in RE Power. It also
has voting rights from both Martifer and Areva on the board”. While some analysts28 felt
that the RE Power deal would be a drain on Suzlon’s margins and cash flows, Suzlon was
27
www.wikipedia.org.
28
IIES Report, 2007.

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banking on rising volumes from RE Power’s portfolio that would generate positive marginal
returns (since the fixed costs would be taken care of after crossing a critical mass) and the
product portfolio of RE Power (which is different from that of Suzlon’s). In addition the
deferred acquisition arrangement from the other leading shareholders, viz. Areva (around
30%, which it can sell to Suzlon after one year) and Martifer (around 23%, which it can sell
after 2 years) could make the deal comfortable for Suzlon.

Suzlon also anticipated that the synergies could bring down the costs through these
acquisitions apart from the benefits of wider market reach and production facilities near
markets. Company says that some of expected advantages were lower logistics cost,
dedicated delivery capability, and flexible response to local markets.

Exhibit 8
Acquisition of RE Power Analysis

Source: Suzlon Documents

Future strategy of Suzlon

According to Mr Tanti,29 Suzlon was unlikely to make further acquisitions after RE Power,
given the fact that the company now has the full value chain and the focus henceforth will
be on consolidating the business and grow organically.

29
Ibid.

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The company is planning to increase the wind turbine production capacity from the current
level of 2,700 MW to 5,700 MW by March 2009 – in other words the company is looking at
a growth that will be double that of the industry growth of 20-30%, in the next few years.
(Please see Exhibit 9 to see the existing and expansion plans of Suzlon across the globe.)

Exhibit 9
Vertically Integrated Manufacturer

Source: Suzlon Documents

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How Backward Integration helped Suzlon in Going Global?

Not just an equipment supplier, Suzlon is also a full wind farm project developer and
operator. Its varied services are offered by its associated company subsidiaries, which
have also been established to cover specific regional markets. In recent times it has been
actively exploring growth opportunities overseas.

It has designed its strategy with keeping an extensive international expansion in mind.
Outside its target markets has been Australia, North America, Europe and China. It owns
some wholly-owned subsidiaries30 like technological development centres in Germany and
the Netherlands, a rotor blade manufacturing company (Suzlon Energy BV) in the
Netherlands, a US market subsidiary (SWECO), and an Australian market subsidiary
(Suzlon Energy Australia, Pty Limited).

The Company set up a representative office in Beijing and manufacturing facility in Tianjin,
China to make its presence felt there. In 2004 Suzlon completed its first US project, a 24
MW wind farm in Minnesota. In 2005 Suzlon began manufacturing generators through a
74.9 percent owned subsidiary, Suzlon Generators, which is a joint venture with Elin EBG
Motoren GmbH of Austria. Suzlon also has an arrangement with Winergy AG, the leading
gearbox supplier in India, which allows for the use of domestically manufactured
gearboxes while it continues to work to advance its own technology.31

While the company climbed the ladder of success it felt its demand outpacing its supplies.
Also bottlenecks in supplies increased the cost of production. So the company came up
with a solution that increasing its in-house manufacturing capabilities will help them to
lower wind turbine costs by giving them greater control over the supply chain, and enable
quicker and more efficient assembly and faster delivery times to customers and creating a
strong value chain. The Two acquisitions were the result of that strategy. Vertical
integration enables better management of supplies. In this respect, Suzlon has built itself
an integrated structure that incorporates a process of continuous capacity expansion
worldwide.

According to analysts, 32 Suzlon is now a fully vertically integrated energy equipment

provider, a position only a few global providers such as Spain’s Gamesa, a leading wind
turbine maker, has managed to achieve. Suzlon has achieved a greater level of vertical
integration than its peers such as Vestas and Gamesa. This is reflected in its superior
operating profit margin of 25 per cent against 13 per cent for Gamesa.33 The Company
also expects the cost-efficiencies attained through the vertical integration to offset any
margin dent caused by a hike in the prices of steel, which constitutes 70 per cent of the
cost of towers.

30
CRS Report, 2007.
31
Ibid.
32
Siliconeer.
33
Business Line.

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Research and development activities at Suzlon34 are currently focusing on the design and
development of new wind turbine models (focusing on a gearless 1.25 MW, and 1.5 MW,
and 2.1 MW capacity models), upgrading current models, and advancing rotor blade
technology to improve efficiency. Its research centre based in the Netherlands is located
there to specifically take advantage of Dutch expertise in aerodynamic rotor blade design.
So the company has been continuously improving its products through technical up-
gradation and innovation. This as a whole has made the backward integration more
comprehensive.

Suzlon Energy has been one of the most opportunist players in the market. In 2004,
Suzlon established its international headquarters in Aarhus, Denmark, strategically
selecting Denmark due to its base of wind energy expertise and extensive network of
components suppliers. Placement of the international headquarters in Denmark was
particularly strategic since in 2004, many former workers for the leading Danish wind
companies Vestas and NEG Micon, had recently been laid off after streamlining in
conjunction with the merger of the two companies. Beside its central location provided
edge in supplies.35

Suzlon has been expanding its manufacturing presence around the world; however the
majority of Suzlon’s manufacturing facilities are still located in India. Suzlon believes this
gives them increased access to capital, and to low manufacturing and labour costs, giving
them an edge over competitors manufacturing turbines in higher cost regions such as
Western Europe. The Chinese government has been promoting renewable energy over
last few years. Seeing the great growth opportunities there the company has well
established itself in the Chinese market. The Chinese companies have been lagging
behind in technology and innovation of products. There is a chance that they might copy
the design of Suzlon’s products but this fact is well taken care of. In the coming years
energy is to be one of the criteria of factors making a nation a superpower. This is
envisioned well in advanced by China, the US, India as well as European countries. So
Suzlon has done the preparations in advance for making it big. The Backward Integration,
a high yielding value chain, productive manpower, technological improvement, providing
end-to-end solutions, all have put it in the elite league.

Performance of Suzlon and its Dilemma

Is it the overseas sales which have been behind its growth? Out-of-India sales36 rose from
about 8 per cent in 2004 to over 70 per cent in 2006. Orders have been coming from
Australia, China, South Korea, Brazil, Italy and Portugal. Its order book tells the story much
better.

34
www.suzlon.com.
35
CSR Report, 2007.
36
www.earthtimes.org.

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According to Suzlon Chairman and Managing Director Tulsi Tanti, while the wind energy
sector has grown at 20-25 percent during 2007, Suzlon has grown at a much higher rate. It
recently recorded a near doubling of its third quarter (September-December, 2007) net
profit that also sent its share price up more than 11 percent.

Exhibit 10

Its widespread presence is also one of its success stories. Indeed, the order book of
Suzlon continues to grow. In January 2008, 37 Suzlon’s Latin American and European
marketing arm bagged an order to supply 42.5 MW wind turbines. Renewable energy
company Pacific Hydro has signed a deal with Suzlon Energy Power, the company’s $140
million South Australian wind farm. Suzlon Energy will provide 27 turbines. In 2007 Suzlon
bagged a contract from California-based Edison Mission Group for the supply of 300
turbines. The Company also signed a contract for 400 MW of wind turbine capacity with
PPM Energy of Portland, Oregon. Recently its bagging of repeat orders38 from US and
increasing orders from China needs to be seen in the same perspective. With some of the
strong economies of the world in their market radar Suzlon has gone far in knocking at the
doors of its competitors.

At the same time the investors in the company have to make it big. Citigroup Venture
Capital International, 39 which invested Rs 1 billion in Suzlon in 2004, has registered
exponential returns that have grown to almost Rs 30 billion. ChrysCapital’s Rs 500 million
equity investment-has grown more than 50 times. These results have been made possible
by a perfect amalgam of backward integration, technological advancement and an apt
value chain.

37
Business Line, 2008.
38
www.suzlon.com.
39
www.siliconeer.com.

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Some risks and challenges still lie on the company’s high growth trajectory. Experts have
predicted that Suzlon may see a gradual diminishing of high profit margins due to setting
up of manufacturing units in other countries and dilution of the first mover advantages. A
key risk factor that could impact demand for wind turbines is the December 2008 deadline
for production tax credit in the US, 40 an incentive that was extended to wind energy
projects, which has not been reviewed. However, it is expected that the provisions may
continue through legislation in some or other form. With operations in so many countries
and the order book growing day-by-day, it would be another challenge to maintain the
pace of supplies and in-house manufacturing of components to rule out any delivery
delays.

To minimize land costs, wind farms are typically in rural areas, chosen for the strength of
the wind there as well as low prices for land. But that can mean culture shock. Doing
business in rural areas of the developing world carries special challenges. With more than
80% of the order book being occupied by foreign countries, also the US in major quantity
(See Exhibit 10), the recent recession there and the current Rupee appreciation against
the dollar is unfavourable for the company. But according to Tanti,41 a slowdown in the US
economy would have no impact on the company’s business due to the overall rising global
demand for clean energy sources and the offset from European Union countries that are
aggressively looking at promoting alternate energy.

The Suzlon product range 42 is limited in the 1.5-2.0 MW category compared to the
offerings by Vestas and Enercon in the 3-4.5 MW range. Suzlon may lose out in the
European and American markets unless it rapidly moves to large-size turbines that can
deliver power at lower unit cost. About 80 per cent of the order book of Rs 3,653.5 crore is
tilted towards exports, exposing the company to foreign currency risks. Tanti was
wondering if he should make more acquisitions. He was also exploring his expansion
plans. He was well aware of the competition and various threats posed by the
environmental variables. He was taking stock of his preparedness for the ensuing battle.

40
Ibid.
41
Business Line, 2008.
42
Ibid.

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Appendix

Quarterly Results of Suzlon

Source: Myriad Investment Research

Suzlon’s Shares

Suzlon Energy Limited

As of Jun 04, 2008 4:00PM IST
Exg Current Prev Close 52 Week High 52 Week Low Volume
BSE 247.20 258.40 460.00 220.10 1904079
NSE 246.80 258.55 459.80 221.00 11644444

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Exchange: NSE Start Date: 1-1-2006 End Date : 1-6-2008

INR

Source: www.suzlon.com

Suzlon NSE INDEX

Exchange: BSE Start Date: 1-1-2006 End Date : 1-6-2008

INR

Source: www.suzlon.com

Suzlon Sensex

Suzlon Energy Ltd posted a 10 per cent increase in net profit for the quarter ended March
2008 at Rs 482.55 crore from Rs 437.82 crore in the year ago period.

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The Ascent of Power, New York Times, 2006.

BTM Consult ApS Report, 2007.
Global Wind Energy Council Annual Report, 2007.
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http://www.earthtimes.org
http://www.renewableenergyworld.com
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Acknowledgement
The author gratefully acknowledges the research assistance rendered by Mr Priyesh
Ranjan of IT, BHU while working on the initial draft of the case study.

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