Suzlon, which made a spectacular debut on the Bombay Stock Exchange in 2005 a decade after it started out, is now one of India's largest quoted companies.
The organisation was set up by Tulsi Tanti, a textile entrepreneur, and in its first year it turned over about US$150,000 (at today's exchange rate). Suzlon currently employs 13,000 people worldwide, has revenues of over US$2bn and an order book for 3,358MW, worth US$4.3bn. And Suzlon has now burst out of its domestic market. In 2005, all Suzlon's orders were domestic, and a year ago, so were almost all its employees. Now just 11% of its forward order book, and a dwindling 70% of its employees are based in India.
The company has emerged as a formidable force in Mergers & Acquisitions. In March 2006, it acquired Hansen Transmissions, the world's second largest turbine gearbox maker, for US$585m. And in June 2007, Suzlon finally saw off French nuclear group Areva in a hard-fought battle for Repower, paying US$1.9bn for its German rival.
The Hansen deal was driven by what Andre Horbach, Suzlon's Group CEO, describes as a focus on the Group's “backward integrated supply chain”. Such a strategy aims to establish a presence along the supply chain. This not only positively affects Suzlon's component supply (something that is currently critical for most turbine manufacturers) but will ultimately enable Suzlon to sell components, such as gearboxes, to third parties.
Suzlon has taken the “non-integration” route a stage further with gearbox supplier Hansen, which it floated on the London Stock Exchange in December 2007. The IPO valued Hansen at US$2.4bn, a handsome return on the US$565m that Suzlon had paid less than two years earlier (and which, at the time, represented a windfall profit for Hansen's private equity owners, Allianz Capital Partners and Apax Partners). Even though Suzlon still holds 72% of Hansen's shares, the company has an independent management / supervisory board.
“Hansen doesn’t just supply Suzlon, but the whole wind market. Having a broad customer base for Hansen is an important part of our strategy,” explains Horbach. Vestas, Siemens and Gamesa all use Hansen gearboxes in their turbines.
And Suzlon has ambitious plans to expand Hansen's capacity from 3,600MW to 14,600MW, a fourfold increase. It also plans to increase its own turbine manufacturing capacity from 2,700MW to 3,700MW, and Repower's from 1,250MW to 1,700MW.
The Repower business on the other hand, allows Suzlon to gain market share in what were until then, non-core markets for Suzlon – such as Germany, for example – and helps the organisation in its quest to become more of an integrated global player. Repower (which Suzlon now effectively owns 86.5% of) also produces larger offshore turbines, and gives Suzlon access to a strong brand in Europe. Suzlon's turbines range from 350kW to 2.1MW, reflecting the organisation's roots in India where smaller turbines (650kW) are best suited to the country's low to medium wind resource. Repower, however, has grown up supplying the European wind market, where higher wind speeds and the prospect of offshore turbines have led to far larger turbines (1.5MW to 5MW). Suzlon's strength lies in supplying India, the US, China, Australia, Brazil and Europe, while Repower is a market leader in Europe, particularly in Germany where it has a 10% market share, or 3.3% worldwide.
But Repower, like many other turbine manufacturers has been beset by difficulties and delays over component supply, and Suzlon will aim to improve the performance of Repower by strengthening the company's supply chain.
The two companies are also collaborating on future technology development. Together they plan to build a Renewable Energy Technology Centre (RETC), a new R&D hub in Hamburg which will house 200 engineers, and which is described by Horbach as a “state-of-the-art wind technology development centre”. The RETC will include an academy offering technical training, initially in collaboration with universities.
Suzlon also plans to build a new engineering centre in India. “Being an Indian company, we are significantly expanding our technology team in India, tapping into the country's engineering potential that some Western markets lack,” says Horbach. “We are also setting up smaller technology hubs where we think we can gain specific technologies – our philosophy is to create a network of technology centres, in Germany, India, perhaps the US and Japan, where we pick up different bits of technology”.
Innovation is fundamental to Suzlon's vision – and while many see wind as a mature technology, Horbach believes there are still significant technological advances to be made. “Over the past 30 years, the industry has focused on two things: making small machines bigger, and increasing efficiency. Huge developments have taken place. But now we need to think about how we can use new materials, how we can transform this industry from pilot scale into mass production, and how we can reduce the physical dimensions of turbines while still generating the same MW. These are key challenges for the wind industry if it is to prove its long-term existence,” he says.
These challenges lay behind the dollars thrown at the recent acquisitions, but according to Horbach, though these deals have created a formidable force in terms of leveraging the organisations’ production capacity, keeping Hansen and Repower at arms length remains important to Suzlon. “We have no plans at this moment to completely integrate Repower into Suzlon. Instead, we’re thinking about how we can support Repower to grow faster. The market is offering so much growth, we are thinking about how we can work together closely to grow faster than we’re growing today,” says Horbach.
The supply and demand issue
Suzlon's access to Hansen's gearboxes could well prove to be a masterstroke. The supply problems for various components such as gearboxes and bearings have been well documented, causing major delays and bottlenecks for turbine manufacturers, and certain companies, such as Suzlon and Siemens, have boldly addressed this with acquisitions; Hansen, for Suzlon and Winergy in the case of Siemens. Having control of a professionally-resourced supply chain is a broad aim of turbine manufacturers, and Suzlon's move for Hansen has made other manufacturers more vulnerable in this regard. When Hansen's new capacity comes on stream, Suzlon should have significant time to market advantage.
As well as the areas of gearboxes and bearings, Horbach also believes that the company needs to be ready for any other pinch points that may come along in the next few years: “I don’t see any drop in demand for at least the next five years. Even with the enormous capacity investments under way in the industry, it's going to be a tightrope walk as we go forward and there will always be weak links in the supply chain, and today gearboxes and bearings are tight. Once this shortage is resolved over the next couple of years, we might run into another component that's hard to get hold of. So we are planning our investments on a three to five year time horizon, and we are trying to balance our capacity investment for each component along the supply chain. This is now largely under our control, but we are still dependent on suppliers for some components and we’re trying to avoid this by investing in our own foundry and forging,” he says.
This new foundry and machining facility (120,000mt) and forging and casting facility (70,000mt) will be up and running by mid-2009. This will complete Suzlon's vertically integrated supply chain, from foundry through to towers, although various links in the chain are being expanded or reinforced over the next 18 months. And there is evidence that vertical integration in the wind industry pays off. Suzlon, Siemens and Gamesa have been gaining market share at the expense of less integrated wind groups such as Vestas and GE Wind.
No pain, no gain
Of course Suzlon's ambitious (and expensive) strategy is not without its risks, notably the wind industry's continued dependence on market subsidies in some regions. In addition, should the offshore market fail to take off as expected, this could slow down the industry's vast growth.
But Horbach is not concerned that Suzlon's massive ramp-up in capacity might leave the company in the cold, if supply starts to outstrip demand, and indeed he acknowledges that competition for market share will increase, especially from Chinese manufacturers. But he believes that newcomers will not find it easy to break into the industry: “Any player that comes to a new market will face challenges. Growth in this industry is so high that it's very tough to attract enough engineers and experienced employees – which is why we make a huge effort in Suzlon to train people. Also, in more remote areas, you just won’t find people. But we’re not underestimating any competitor. There are a number of companies that only operate in China at the moment, but who will soon be major global players. And this is the competition that we’re planning for.”
EU legislation to drive the market
In Europe, where Suzlon is keen to expand its presence, Horbach sees new EU legislation revitalising the wind market. “Repowering will play a big role as equipment that's now 10 to 20 years old will be replaced by modern equipment with better efficiency and availability,” he says.
It will also drive the development of offshore wind. The EU's binding target of 20% by 2020 could mean that 34% of electricity comes from renewables, including 12% from wind. But this can only be achieved with offshore wind. Without it, Europe will run into land space issues, particularly in smaller countries (where open space is limited) and in countries which have led the way in installing wind generation and whose best onshore sites have already been exploited. Offshore development will also be boosted by the European Commission's offshore action plan for 2008, and a trilateral offshore research agreement signed by Germany, Sweden and Denmark last December. Nevertheless, Horbach is cautious about offshore wind.
“We are still focusing on onshore positions because we see significant opportunities here, not only in terms of overall potential, but also because we are relatively new in some of these markets so there's a lot of uncharted territory for us to grow into. Longer term, it's obvious that offshore will start to play a major role, but there are still huge opportunities for technology development in offshore. When these come into play, I think offshore development will accelerate quickly,” he says.
Like most in the industry, Horbach is bullish about prospects in Asia, particularly in India and China where exponential economic growth is driving far higher energy consumption. In response, Governments are introducing legislation to promote renewable energy and energy efficiency. China, which had been slow to install wind capacity, surged forward in 2007, adding almost 3.5GW and more than doubling its wind capacity, prompted by tough energy efficiency targets and the impending Beijing Olympics.
US problems ahead?
And in the US, Horbach believes the wind market has picked up a momentum that has overridden the drip feed of supportive Federal legislation. “Many States have set renewable energy targets that are just as high as the EU targets, so there is considerable momentum within these States,” he says. This momentum, combined with the prospect of a new US Administration later this year (which will, almost by default the industry hopes, be more renewable energy-friendly than the previous one), goes some way to mitigate the effect of the US Production Tax Credit, whose inconsistent renewal from year to year has been blamed for a yo-yo pattern in US wind farm development. “We are in several discussions about longer-term contracts that go beyond the end of 2008. The major US players are playing for long-term growth, and I can’t see any drop in dynamics on the volume side,” adds Horbach.
Underpinning all this is the fact that wind has become a mainstream technology and, at a cost of 3-6 cents / kWh, can already be competitive with conventional energy in its own right. If oil prices continue to rise, this equation will only become more compelling. And there is plenty of wind. Estimates suggest that 72TW of onshore / near shore wind is available – enough to meet the world's energy needs fivefold – of which just 94GW has been exploited. Wind's global electricity generation contribution is expected to increase from 0.8% in 2006 to 3.4% in 2030. And new storage technologies – together with larger wind farms – should increase the ability of utilities and other suppliers to mitigate the perceived “variability” of windpower.
Against this positive backdrop, Suzlon's vision is to rank among the top three wind energy companies in the world. It is carefully building its presence in new markets, including China where a new production facility in Tianjin is one of the biggest factories ever built by the wind industry. “We are trying to be as local as possible in these markets. Suzlon China is a Chinese company in China. Our complete supply chain is being organised with Chinese suppliers,” explains Horbach.
Yet Suzlon remains true to its roots – and its major focus remains India. “We want to remain the market leader in India,” says Horbach. Suzlon is developing what will be the world's largest wind farm, in the Dhule district of Maharashtra. The Dhule wind farm's current installed capacity is 650MW – the 450MW addition will take it to over 1GW, making it the largest in the world.