Description
This is a document about strategy analysis of suzlon energy.
SUZLON ENERGY-Strategy
Full Report And Analysis
INTRODUCTION
Suzlon Energy is India’s largest wind turbine manufacturer, in terms of market share and is amongst the top 5 turbine companies worldwide with revenues of INR 265.3 billion. It has about 15000 employees with an estimated capacity of 5600 MW 1. It is headquartered in Pune, and has manufacturing sites across India and abroad. Its manufacturing sites are spread across Pondicherry, Daman, Bhuj and Gandhidham as well as across 21 countries abroad including China, Germany, North America and Belgium. It is an end-to-end supplier of high quality turbines with exclusive research units located in Denmark and Germany. The company is listed on the National Stock exchange of India and on the Bombay Stock Exchange Suzlon’s Core Competencies are as listed below • Wind and site pre-studies and recommendations for optimal choice of wind turbine options and positions • WTG Supply & Erection or full scale Turnkey Projects • Extended service and warranty program available to optimize return on investment Suzlon’s vision2 states in no uncertain terms its desire to be ? ? ? ? Technology leader Among the top 3 wind companies in all Most respected brand Professional and efficient in project execution for quick and trouble-free installation.
GENERAL HISTORY
The story of Suzlon began in the early 1990’s; when Tulsi Tanti’s young textile business was in a bad shape due to escalating power costs and its infrequent availability. With survival at stake, Tanti chanced upon wind energy as an alternative. While commissioning two windmills to supply electricity for the family's textile factory in Gujarat, he realized that he had stumbled onto a promising business opportunity. In a powerstarved nation, renewable energy was to have a favored future.
The Suzlon Energy Limited was incorporated in 1995. The first subscribers to the Memorandum were family members and friends of Tulsi Tanti from Rajkot. Suzlon began with 20 people and a wind farm project in the Gujarat state with a capacity of just 3.34 MW. Tanti then started to gradually quit textiles to focus completely on Suzlon. He grew Suzlon into a company of over 15,000 people, expanded its operations across the America, Asia, Australia and Europe, fully integrated manufacturing units on three continents, and introduced sophisticated R&D capabilities.
History of Wind Power Industry
The idea of harnessing wind power is not something new to humans. Humans have been known to use it for the past 5,500 years. The earliest use of wind power known to man was in Asia, the Sinhalese were found to use wind power of the monsoon winds to power their furnaces from as early as 300 BC 2. Wind power has been widely used since then in sailing across seas, providing ventilation to buildings, statues, etc. The first practical windmill was built in Sistan, Afghanistan in the seventh century, with a vertical axle and rectangular shaped blades. Meanwhile, Europe had independently developed a horizontal axle windmill by the twelfth century. These early windmills were primarily used for grinding corn, flour or drawing water. In the 19th century, the usage of windmills had widely spread across Europe and the United States of America. By the end of the 19 th century, Denmark was known to have about 2500 windmills for mechanical loads like grinding mills, water pumps, etc. and was producing an estimated combined peak power of about 30MW, while the United States of America had around six million small windmills that were installed in farms to operate irrigation pumps. The first known windmill for electricity production was built in Scotland in July 1887 by Prof. James Blyth of Glasgow. Blyth’s cloth sailed wind turbine was installed in the garden of his holiday cottage in Maykirk in Scotland and was used to charge accumulators to power the lighting of the cottage. In 1888 a larger and much more heavily engineered machine was designed and constructed by Charles F. Brush at his home and operated till 1900. The Brush windmill was large even by today’s standards and it turned slower because it had more than 140 blades. It had a dynamo connected to it which charged a bank of batteries or the various electrical equipments in Brush’s laboratory. Also in the 1890s a Danish scientist, Poul la Cour, constructed wind turbines to produce electricity, which was later used in the extraction of hydrogen.
Wind turbines similar to that built by Poul la Cour were built throughout Europe and the USSR (currently Russia) through the next century. These wind turbines were built in varied sizes and for different applications like connection to the local electricity distribution system, to power isolated or remote establishments and to even recharge the submarine batteries of German UBoats during the Second World War. In the 1990s durability and aesthetics started taking precedence and hence turbines were placed atop tubular steel or reinforced concrete towers (this design is still prevalent today). Also, originally wind turbines were built only near the facility that was to consume the power generated, but later with the availability of long distance transmission lines wind turbines were built in wind farms that were located in areas that had very windy conditions which could even be offshore. The power generated was then transmitted back to the facility that would eventually consume it. The cost of wind power generation had been decreased by four percent every year, largely due to improved technology, accumulating experience of wind farm operators and the continuing trend towards larger wind turbines. On the other hand, the prices of fossil fuels had been increased, especially that of petroleum and natural gas. Although the price of fossil fuel had increased steadily, it was still relatively cheap at the beginning of the 21st century. But the century also saw rising concerns about energy security, global warming and eventual fossil fuel depletion. Thus, global energy demand, heightened environmental awareness and concerns over energy security had resulted in increased demand for renewable sources of power in developed as well as developing countries resulting in a 30% annual growth for the fledgling industry. This was mainly driven by easy availability of large wind resources, falling costs due to improved technology and better wind farm management. As shown in Figure 1 below, wind energy has become the fastest growing source of renewable energy.
(a) Generation in TWh Source: Suzlon Energy Limited Investor Presentation, August 2009 Figure 1
The year 2003 saw a steady increase in the crude oil prices leading to increased fears of high prices involved in global extraction of crude, which would negatively affect the rate of production of crude oil. This led to further interest in commercial wind power. Thus it would be safe to say that the world is changing and renewable sources of energy are one of the few sustainable solutions available to humanity. Wind energy is one of the very few economically viable solutions for implementing renewable sources of energy. Although wind power installation requires huge initial investments, it is a source of constant supply of captive power. This is very useful in countries like India where the power infrastructure is not very reliable. India is the fifth largest wind power market in the world with a total installed capacity of 9,587 MW as of 2008 (i.e. 3% of the total electricity produced in India). India lags behind the US (installed capacity of 25,170 MW), followed by Germany (23,903 MW), Spain (16,754 MW) and China (12,210 MW) 3; the capacity installed for each country is shown Figure 2 below. The short gestation periods of wind turbine installation and its increasing reliability coupled with the performance of wind energy machines has made wind energy a favoured choice for capacity addition in India. Until recently, wind power projects in India were relegated to states like Tamil Nadu (which accounted for almost half of India’s total capacity). But other states like Gujarat and Maharashtra are aggressively trying to increase their installed capacities by providing
speedy sanction to wind power projects. There is a huge opportunity in the Indian Wind power market because the Ministry of New and Renewable Energy (MNRE) (started in 1992) has fixed a target of 10,500 MW between 2007 and 2012, although an additional generation capacity of only about 6,000 MW might be available for commercial use by 2012.
Installed Wind Capacity
20,111 3,160 25,237 United States Germany Spain China India Italy 9,655 23,933 France United Kingdom Denmark 12,121 16,543
Figure 2 : Country-wise Installed Wind Capacity
3,288 3,404 3,736
Others
Suzlon, an Indian based company has emerged on the global scale in the past decade and by 2008 captured 9% share of the global market, it had become the fifth largest wind turbine manufacturer globally (shown in Figure 3). Suzlon is the leading manufacturer of wind turbines in India, enjoying a 52.4% of market share.
Figure 3 : Wind Turbine Manufacturers
INDUSTRY ANALYSIS USING PORTER FIVE FORCES MODEL Threat of entry: Low to Medium
Wind industry has the business potential of securing future energy supplies through alternative energy sources. With government supporting renewable energy plans such as favorable tax schemes, India has seen higher overall increase in new entrants. Capital requirements: Wind power projects require high upfront capital investment Supply Side economies of scale: As the industry is capital intensive in terms of land, plant, machinery and technology, supply side economies of scale will deter entry by forcing the aspiring entrant to enter the industry through massive investments or accept cost disadvantages. Incumbency advantages: Cost and quality advantage arise out of proprietary technology and unique components used in wind turbines. Suzlon preempted the competition as it would take rivals 2 to 3 years to clone Suzlon turbines because they were unique or proprietary parts. Availability of financing options: The industry is very attractive but requires high capital financing which may not be easily available due to the high element of risk inherent in the nature of the industry compounded by poor resale value of plants and machinery.
Bargaining power of supplier: Medium to High
Supplier Concentration: Limited numbers of suppliers of key components, none of whom can meet demand, thus further increasing the switching costs of their customers. Some of these suppliers are owned by direct competitors, such as Siemens and GE, so their bargaining power is high. For generic components the situation is easier; wherein there are many suppliers, making it easier and cheaper for wind turbine manufacturers to switch sources. With increasing complexities in the product design, the need for stronger supplier relationship and joint product development is gaining momentum resembling vertical integration.
Bargaining power of buyers: Medium to High
Buyer Concentration: Buyers are primarily professional investors such as large electric utilities and generating plant owners. With large volume buyers, their bargaining power increases. Buyers in this industry focus on reliability. Reliability, in terms of delivery dates, product lifetime, electricity output and operating and maintenance (O&M) costs, has become the key measure of competitiveness in the industry which further puts greater pressure on supplier competence.
Threat of substitutes: Low to Medium
As the renewable sources of energy- crude and natural gas are limited by nature’s supply, need for alternative sources energy to satisfy the demand is popularity. Wind is, however, expected to be a substitute for some of our traditional energy sources, and to compete with other nontraditional sources. Of the latter, solar and hydro are the most widely-used renewable today, and so pose the biggest threat of substitution. Wind power is becoming increasingly costcompetitive compared to traditional sources of energy. Technological improvements have improved the reliability and reduced the O&M costs of wind power plants, while manufacturing, assembly and transport costs have also fallen. Wind power is thus a competitive form of energy.
Threat of competitive rivalry: Medium
Growth Rate: Due to high growth in the industry and demand supply gap, there is intense fight for increasing market share. Power Distribution (Concentration): There are numerous players in this industry with none of the players having significant market share. Height of exit barriers: Since it is capital intensive industry, keeps the company in the industry even if it is making loss.
TEMPORAL EVOLUTION OF THE FIRM
The growth timeline is as follows: 1995: Company is incorporated 1996: 0.35MW Turbine launched, first project for IPCL 1998: Company installed its first wind turbine in Maharashtra Satara district. 2000: Commissioned the 50MW wind turbine generator from Vankhusavade in Maharashtra. 2001: Formation of subsidiaries Suzlon Wind Energy Corp, USA and Suzlon Energy R &D in Netherlands and manufacturing unit in Daman 2002: First export order, its First Wind Turbine in the USA, R&D in Germany, first 1.25MW turbine launched 2003: Representative office in Beijing, China. 2004 Private equity placement, 2MW class WTG introduced 2005: IPO launched, 46 times oversubscribed. Korean Order of 150 MW for the Jeju Wind Farm Project. 2006: Hansen acquisition, 200MW Wind Farm Project for Australia Gas & Light Company. 2007: 400 MW deal with PPM Energy of Portland, USA. Acquired German wind turbine company RE Power. 2009: Entry into Sri Lanka with an order to supply 10 MW of wind turbine capacity to a project developed by Senok Wind Power Pvt. Ltd. 2009: Considering entry into the Canadian market in 2010..
CHANGES IN PRODUCT & SERVICES
The company initially developed small size wind farms, but in 1996 it moved on to the production of its own WTGs (Wind turbine generators) through a technical collaboration agreement with a German company, Sudwind GmbH Windkrafttanlagen. The company has changed tremendously over the last decade. Currently, the company along with its subsidiaries engages in designing, developing and manufacturing of wind turbine generators and related components such as rotor blades, control panels, nacelle cover, tubular towers, generators and gearboxes. Suzlon produces two major lines of turbines: the Megawatt series and the Multi-Megawatt series, which can generate energy in capacities from 350 kilowatts to 2.1 megawatts. The most recent additions to Suzlon’s product line are the S52 - 600 kW and S82 - 1.50 MW wind turbines. The services provided by the company include consultancy, design, manufacturing, installation, operation and maintenance services. It is also involved in wind project planning and execution, including wind resource mapping, site selection, technical planning and execution of wind power projects. Associate companies acquire sites identified as suitable for wind energy projects, and then undertake the technical implementation of windfarms including infrastructure development, installation of WTGs and connection of power grids.
ENVIRONMENT
Suzlon, by nature of its operations is heavily affected by changing energy paradigms. The price of fossil fuels, increasing environmental awareness, and the possibility of significant global climate change are contributing to changes in the social, political and economic views of energy production. Global wind capacity has increased by 27,051 megawatts in 2008, ending the year at 120,798 megawatts. This represents a growth of 29% in 2008 with the U.S. overtaking Germany as the world's leading wind power generator. Consumer demand for renewable energy and clean energy has increased rapidly over the past decade due to environmental concerns such as acid rain, smog pollution, asthma and respiratory problems. The fear of global warming and pollution has forced governments around the world to implement legislation that indirectly supports renewable energy.
The 2008 Financial Crisis has slowed growth in the wind energy sector in 2009. Despite the rapid growth in the wind energy sector in 2008, the turbulent economic environment and global credit crunch have led some of the fast growing markets like the U.S. and Europe to slow in terms of new capacity additions. Falling oil and gas prices ($150 a barrel in July 2008 to around $50 a barrel in the first quarter of 2009) has led to more affordable commercial electricity. Consumers too have limited their demand for new and expensive sources of renewable power. The main objections to wind power stem from environmental costs. Many wind parks are shut down for most parts of the year due to bird migration patterns and turbine-related bird deaths. Furthermore, turbines occupy land; and although larger turbines produce more power, they also occupy more land.
DISTINCT STRATEGIES
Suzlon’s strategy is in complete alignment with its vision to be the technology leader and amongst the top 3 wind companies in all the key markets of the world. Suzlon’s strategy entails: 1) First mover strategy in wind turbine manufacturer in India. 2) Improving cost efficiency by R&D and innovation through a) Integration of the best technological practices and its subsequent adoption b) Establishment of Research & Development and innovation centres (It has established product development facilities in the Netherlands and Germany) c) Establishment of a product and process engineering framework in India and gearbox R&D in Belgium (Hansen) 3) Growth acceleration through vertical integration a) Suzlon has vertically integrated from components to turbine b) It has established its manufacturing facilities in Belgium, China, India & USA c) It has established experienced workforce in both low labor cost economies as well as advanced economies 4) Focus on high growth markets a) Suzlon has a strong presence in key growth markets of India, China & far east, North America, Australia, Denmark, Portugal, Spain, Italy, Turkey, Romania, Brazil, and Nicaragua b) Suzlon’s acquired Repower presence in Germany, France, UK, and Canada.
Good Times
Calendar Years 2004-08 were the period of Suzlon’s scorching growth.
Figure 4: Capacity installed by Suzlon
1) Suzlon continued growth through internationalization a) It launched products for international markets b) It continued with capacity expansion overseas 2) Other major initiatives were increased vertical integration through a) Acquisition of Hansen Transmissions in 2006 b) Acquisition of REpower Systems in 2007 c) Its capacity increased to 4,200 MW Suzlon grew at more than twice the industry’s growth rate
Difficult Times
Calendar Year 2008-09 was the period of financial crisis industry wide and also across all industries. It had the following impact on the wind industry in general and Suzlon in particular: 1) Subdued growth forecasts a) Slowdown in order intake b) Customers were unwilling to pay advances for deliveries beyond near term c) Industry-wide order book visibility contracted from 2-3 years to 1-2 years 2) Concentration of projects with large developers a) Large-scale cancellation worry plagued the company 3) Cost of capital increases coupled with reduced avenues of project finance a) This skepticism restricted wind power project development 4) Equity investors’ Expectations a) Capital expenditure spending was lowered for projects across the board b) Actual returns did not align with High-return expectations 5) Postponement of capacity expansion plans a) US and Europe expansions scaled down b) India and China capacity expansion to continue
Success & Failures
Suzlon had some deeply disappointing failures before it could taste success and achievement.In October 2008, Suzlon’s attempt to launch a $390 million rights issue to complete the REpower takeover had to be abandoned because of the market slide. Despite holding 66% stakes, Suzlon had to wait till June 2009 to complete the acquisition. In this process, Tanti had to part with 10% stakes in Hansen Transmission – the Belgian gear box making company and 6% stakes of Suzlon stocks held by his family. By end of 2008, there were several incidents of blade failures in the overseas market that had to be compensated by Suzlon. This severely affected the third quarter results of FY08 that ended on 31st December 2008. Tulsi Tanti who went on to make an entry in to the Forbes list of 40 Richest Indians was praised for his foresightedness and deemed a visionary who paved the path for Green energy in India. But when the series of failures came in to light, Suzlon was blamed for its ambitious pursuit of global expansion that veered it away from important details like product quality, testing and technology. Even Suzlon’s mission of developing alternate energy was questioned. Its responsible actions in this context and subsequent growth were attributed to the tax benefits that it may have derived out of the Government policy to depreciate the plant value by 80% in the first year of installation. As late as June 2009, Suzlon had to make an out – of – court settlement with KM Birla – owned Essel mining when they filed a petition against the company over technical problems experienced by the wind mills set up in the area. Complaints of sub – optimal wind mill performance have been raised by other clients like Madras Cements, K. S. Oils, MSPL amongst others. The company initially started with developing small size wind farms, but in 1996 it began to produce its own WTGs (Wind turbine generators) through a technical collaboration agreement with a German company, Sudwind GmbH Windkrafttanlagen. The company has undergone immense changes over the decade. Today, the company along with its subsidiaries engages in designing, developing and manufacturing of wind turbine generators and related components such as rotor blades, control panels, nacelle cover, tubular towers, generators and gearboxes. Suzlon produces two major lines of turbines: the Megawatt series and the Multi-Megawatt series, which can generate energy in capacities from 350 kilowatts to 2.1 megawatts. The most recent innovations in Suzlon’s product line are the S52 - 600 kW and S82 - 1.50 MW wind turbines.
The services provided by the company include consultancy, design, manufacturing, installation, operation and maintenance services. It is also involved in wind project planning and execution, including wind resource mapping, site selection, technical planning and execution of wind power projects. Associate companies acquire sites identified as suitable for wind energy projects, and then undertake the technical implementation of windfarms including infrastructure development, installation of WTGs and connection of power grids.
Leadership
Suzlon is actively run by the Chairman and Managing Director, Tulsi Tanti since the initiation of the company in 1995. He is a commerce graduate and a diploma holder in mechanical engineering. He originally hails from Gujarat and is presently based in Pune, Maharashtra. Tulsi Tanti was earlier into textiles. He started his textile business in Gujarat. In 1990, Tulsi Tanti invested in two wind turbines and realized their huge potential. In 1995, he formed Suzlon and gradually quit textiles. He has driven Suzlon over the years by focusing on research and development strategy, backward integration strategy, high growth market and an acquisition strategy to absorb smaller competitors to integrate along its supply chain. Tanti realised that if he had to make Suzlon a global company he would need better technological expertise and an international presence. Suzlon acquired German based REpower Systems to increase its international presence. He is one of the richest Indians (ranked 36th by Forbes). He has won several awards for his leadership over the years. Mr. Tanti is the recipient of prestigious Canada India Foundation ("CIF") Chanchlani Global Indian Award (2009). He was also named by the United Nations Environment Program as a “Champion of the Earth” for 2009 for his Entrepreneurial Vision in combating climate change.
VRIO Analysis:
The VRIO framework asks four questions about the internal resources that a firm possesses to determine its competitive potential: the question of Value, the question of Rarity, the question of Imitability, and the question of Organization. This framework rests on the Resource Based View of the firm. It helps us in understanding the various resources that Suzlon possesses and in gauging if they have been exploited by the company.
Table 1 : VRIO Analysis
SUZLON'S RESOURCES
VALUABLE?
RARE?
DIFFICULT TO IMITATE?
EXPLOITED BY THE ORGANIZATION?
End-to-end solution provider - Wind resource mapping, Site identification, Land acquisition Y - WTG and component manufacturing - Site development, infra set-up and WTG installation - Operations and Maintenance services Highest level Vertical manufacturing capabilities Integration/In house
N
N
Y
- From Infrastructure provision to O&M services Y - Better control over time, cost, quality and supply chain - Long term service support - Faster product rollout Products - Broad portfolio of products - Partial demand met for gearbox, panels, generators and Y towers - Complete demand met for turbine blades
Y
Y
Y
N
N
Y
R&D capabilities - Best-of-all-worlds technology strategy: Aerodynamics from Netherland, Product Development in Germany, Product and process engineering in India, Gearbox R&D Y from Belgium, Generator technology from Austria - Renewable Energy Technology Centre (RETC), a JV between Suzlon and REPower Systems for mfg. processes optimization, aerodynamic efficiency improvement etc Acquisition/Share holding in other technology companies - 76% stake and 91% control influence through vote pooling in REpower Systems, Germany for Multi-MW class WTGs - Acquisition of 100% equity in Hansen Transmissions, Belgium (world leader in gearbox and drive train mfg.) for WTG gearbox - 83% stake in SE Forge India, consisting of forging, machining and casting units Diverse & International Client Base - Cement, Steel, Textile, Automobile, Engineering, Construction and Mining industries clients Y - Possesses a strong international client base in US, China, Australia/NZ, Europe and South America Suzlon's Human resources - Experienced management team - Director/Chairman awarded "World Wind Energy Award", "Champions of Composite Technologies" - Extensive experience in design, engineering, manufacture, marketing and maintenance of WTGs Y Y Y Y N N Y Y N N Y
Y
Y
Y
- Robust employee growth - Increasing international mix of employees
Low cost of operations - Due to integration, it has reduced capital cost per unit Y of power generation First mover advantage in India - Agreement with Sudwind GmbH Windkrafttanlagen, Germany for technological know-how - Obtained the official non-exclusive, nontransferable license for the manufacturing, marketing, dealing and servicing of APX-60 type blades from Aerpac B.V upon its liquidation. It is valid indefinitely Y - Entered into agreement with Enron Wind Rotor Production B.V for acquisition of moulds, production line, technical support and assistance of rotor blade type APX 60-P for an indefinite period. - Tie-up with TERI University, India for an M.Tech in Renewable energy engineering and management Strategic focus - Especially on India; fourth largest wind energy production (in terms of installed capacity), lucrative Y market with ever growing energy demand - Developing business from Amsterdam to leverage locational and operational advantages Leading name in wind energy World Wind Energy Award for Y2003 Y - Introduced concept of large wind parks in Asia - Market leader in India as manufacturer of WTG Y Y Y Y Y Y
Y
Y
Y
Y
Y
Y
Assessment of strategic decisions
First mover strategy
Tulsi Tanti was first to identify the necessity of wind power generation at a time when India was entirely dependent on traditional sources of energy and also faced a supply-demand mismatch in the sector. Mr. Tanti followed blue ocean strategy where Suzlon ventured into a nascent emerging industry which was unexploited and created customer value through continuous innovation. Suzlon was the first company to introduce multi-Megawatt sized wind turbines in India. It was quick to identify new wind energy harvesting opportunities and established a huge market in seven Indian states, including Tamil Nadu, Karnataka, Maharashtra, Rajasthan and Gujarat. These states have the highest installed capacity of wind energy in India. Moreover, Suzlon introduced the concept of large wind parks, built some of the largest wind parks in Asia including the world’s largest wind park. This home market dominance yielded efficiencies of scale, a large and growing knowledge base and a solid financial platform to support ongoing expansion. Suzlon has also taken the initiative of starting and sponsoring an M Tech course in renewable energy engineering and management in alliance with TERI University, India. This would provide Suzlon an added reliable source of talent for its research and development division. By being the first Indian wind energy company to strike such an agreement, Suzlon gave an added boost to its R&D wing
Licensing of technology from small wind turbine manufactures
In the initial years of its existence, in order to acquire advanced technological learning for manufacturing wind turbines it followed the strategy of licensing technology from smaller wind power companies rather than from leading wind turbine manufacturers. There is a disincentive for leading wind turbine manufacturers to license proprietary information to companies that could become its competitors. Suzlon licensed the technology from smaller wind power companies which have less to lose from international competition but more to gain from license fees. These technologies were in no terms inferior to the ones provided by large companies; however, they were utilized less and therefore had lesser experience. Consequently it formed licensing arrangements with Südwind, Aerpac, and Enron Wind that helped it with necessary technical knowledge to enter the wind turbine manufacturing business. Suzlon was the first company to identify the potential for this kind of knowledge sharing agreement in the
Indian wind power industry. Low technological input cost along with low labor cost, gave Suzlon its competitive advantage in the industry.
Innovation, R&D and cost efficiency
Wind Turbine R&D in Germany
Rotor Blase R&D in Netherlands
Gear Box R&D in Belgium
Product Process Engg. India
Tech. Campus in Germany
Engineering Center in India
Innovation center in Europe
Figure 5 : R&D Capabilities of Suzlon
Suzlon is continuously looking for upgrading current models, advancing technology to improve its overall cost efficiency. Skill amalgamation along with its global presence of R&D centers has given Suzlon an edge over its competitors. It has blended the best resources across the globe. Suzlon has established its R&D centers at strategic locations around the world to specifically take advantage of local resources. Its research center, based in The Netherlands, is located there specifically to take advantage of Dutch expertise in aerodynamic rotor blade design and material sciences, while the German site helps the company take advantage of German wind turbine engineering capabilities, focusing on gearbox prototypes. While looking overseas for technical expertise in wind turbine manufacturing, Suzlon did not neglect its Indian manufacturing base. Although it conducts R&D abroad, it relies primarily on domestically made components, most of which it makes in-house, based on experience gained through its overseas research efforts. As the country’s largest wind turbine manufacturer that is owned by an Indian, Suzlon has access to local networks that foreign companies lack. The manufacturing unit in India and China provides cost effectiveness. This business model of leveraging on its foreign R&D capabilities and harnessing its local networks has paid Suzlon rich dividends and helped to capture more 50% market share in the Indian wind power industry. Suzlon is able to beat the market prices offered by its foreign competitors as it locally sources turbines. The business model adopted by Suzlon is valuable as it has contributed to its growth, rare as it is not followed by its competitors and is difficult to imitate.
Vertical Integration: Suzlon’s key competitive advantage
Suzlon’s Integrated Business Model:
Figure 6 : Suzlon Business Model
The first part namely assessment and land acquisition is mostly operated through associated concerns that does not form a part of the company’s value chain. The WTG (Wind Turbine Generator) supply chain is further detailed below showing that Suzlon has a presence in each one of them.
Figure 7 : Wind Turbine Generator Supply Chain
The wind energy industry was facing supply chain bottlenecks in terms of long lead times in production of key components like bearings, gearbox and forging materials. Suzlon already has a research, development and manufacturing facility for rotor blades. Gearbox has the longest lead time in the WTG value chain. To plug this gap, Suzlon acquired a 61.3% stake for about Rs.2500 crores in Hansen Transmissions which is the second leading global player in wind
gearboxes. The acquisition of Hansen, described as a ‘masterstroke’ by the company, made Suzlon a leading integrated wind turbine manufacturer. It allowed Suzlon to integrate Hansen’s gearbox technology with its total turbine solution enabling it to provide a more reliable and competitive product in the marketplace. This deal also enabled Suzlon to sell gearboxes to third parties making other manufacturers more vulnerable. Suzlon also acquired a 91% stake for about Rs.7300 crores in the German wind turbine company REpower systems, which is a recognized technology leader with a strong presence in Europe. Repower was acquired to supply rotor blades, gear box, generator, control panel, forging and casting parts etc to Suzlon. This investment also provided Suzlon an entry opportunity into the large European markets like Germany, UK and France. Suzlon was also able to capitalize on the REpower’s design and development know-how and brand-equity. Their product portfolio was also complementary to each other. This combination established a sustainable global market leadership for Suzlon in the wind energy industry, with good research capabilities and an integrated supply chain. It has also helped them accelerate their offshore capabilities. REpower systems and Suzlon also formed a 50-50 JV entity named Renewable Energy Technology Centre (RETC) to focus on manufacturing process optimization, aerodynamic efficiency improvement, training and technology services. This clearly shows that Suzlon is integrating backward to have a greater control over its critical components. Its alliances helped Suzlon to get the products on time and at acceptable prices. The company’s ability to leverage on the abilities of its partners through equity alliances is an aspect which its competitors cannot imitate easily due to the huge amount of upfront investment required and the strategic preemption ability of partners and facilities in major European markets. These add economic value to its customers through terms mentioned below and thus are valuable. Moreover, most of the products in a wind turbine are specifically made for use in the same center. The huge amounts of transaction specific investments justify the moves by Suzlon in backward integration. Also these alliances have helped Suzlon expand its integrated capacity from 1500 MW in FY2006 to 2700 in FY2007 and 4200 in FY2008. Suzlon’s greater level of vertical integration compared to its peers such as Vestas and Gamesa is reflected in its superior operating profit margin of 25 per cent against an average of 13 per cent of its competitors. It is also expected that the cost-efficiencies attained through vertical integration will offset any margin dent caused by a hike in the prices of steel, that constitutes 70 per cent of the cost of towers. Suzlon has a group management centre in Amsterdam which
serves as the hub for integrated management of the Suzlon group maximizing synergies and efficiencies across geographies, companies and functions. The above mentioned alliances will help in creating a competitive advantage while still maintaining the much needed flexibility for Suzlon in terms of the following: ? Better control over time, cost and quality ? Long-term service support to customers ? Faster product rollout ? Turbine technology integration and leadership. ? High reliability and credibility among customers by providing efficient and robust wind energy solution.
Expansion in 2005
With growing market demand of wind turbines from international markets, Suzlon decided go for expansion in 2005 with an investment of Rs 320 crores. Suzlon launched its IPO in 2005 to fund these investments. The proceeds of the IPO were used to set manufacturing units in high growth areas of United States & China and set up subsidiary unit in Europe for providing support for global customers and for research and development. The rationale behind setting up a manufacturing unit in US involved logistic problems arising out of export of blades and turbines from India and the additional costs associated with it. Suzlon exploited the buoyant market conditions and favorable external environment to raise money through the IPO. In a bid to expand globally, Suzlon skipped the due diligence process. In India, customers were focused on installations rather than on actual generation, as tax incentives were based on capital expenditure allowing Suzlon to get away with lower levels of due diligence. Due to low level of due diligence in terms of testing, some of the Suzlon supplied blades developed cracks across various installations and dented Suzlon’s reputation severely. Considering the opportunity to expand in the rapidly growing wind power industry, Suzlon’s decision to go for market expansion was correct but it could not capitalize on it due to haste.
Focus on high growth markets
Table 2: Estimated Installations in the next 5 years
Year
Total Installations(MW) US China Australia/NZ Europe/South America 2008 8358 6246 619 4910 2009-2013 52000 42800 3950 40765
Source: Suzlon Energy Limited, Investor Presentation, August 2009
Suzlon’s strategy has been to look for high growth areas. It has its presence in India, China, North America, Australia, Denmark, Portugal, Spain, Italy, Turkey, Romania, Brazil, Nicaragua, Germany, France and UK. Suzlon has always exploited opportunities. With its cost efficiency and robust business model it could establish itself in these countries. Suzlon also exploited supportive national policy environment for wind energy development in many of these countries.
End to End Solution
Wind resource Mapping
Site Indentification
Land aquisition
WTG and component manufacturing
Site-development, infrastructure set-up & WTG installation Operations & Maintenance services
Figure 8 : Suzlon, an end-to-end solution provider
End to end solution allows customers to benefit from cost-efficiencies and economies of scale in wind farms leading to higher perceived value for the customer thereby generating competitive advantage for Suzlon. Site identification and land acquisition helps customer avoid
the need to undertake cumbersome wind farm development process. Planning of Wind Farm Systems, Land Acquisition, Development and Technical Design., Infrastructure and Equipment, O&M services, Suzlon offers customers end to-end wind energy solutions, including wind resource mapping, site development and installation, and finally operations & maintenance services in India. This allows Suzlon to offer Indian customers economies of scale, and eliminates the need for customer involvement in the complex process of wind farm development. In short, Suzlon’s strategy can be summarized as a combination of licensing intellectual property, creating strategic technology partnerships, accessing regional and global learning networks, R&D, Innovation and taking advantage of regional opportunities like lower labor costs. All these aspects contributed to the company’s strong business model.
Strategy Assessment Table
No
Element of Strategy
Pros and Cons ? Exploited a great strength –technological and business genius of Tulsi Tanti Exploited an opportunity – shortage of traditional form of power Exploited an opportunity – the need for green power
? 1
In 1995, Tulsi Tanti, founder of ? Suzlon in wind power industry – first mover strategy ?
? 2
Followed a strategy of licensing of ? Increased its strength of low cost of technology from small players turbines by reducing its input cost. rather than obtaining from large turbine manufacturers. Followed a strategy of vertical integration Acquired Hansen Transmission, ? Reduced the threat of suppliers enabling quicker and more efficient assembly to hasten customer delivery times. ? Cut logistics and transaction cost since
? 3 ?
gearbox manufacturer ? Acquired Repower Systems AG
fewer parties are involved in the value chain. ? Entry in European markets ? Exploited opportunity - supportive government policies in many of these countries. ? Exploited its strength – cost efficiency and robust business model. ? Increased customer focus offering Indian customers economies of scale, and eliminating the need for customer involvement in the complex process of wind farm development.
4
?
Focus on high growth areas
5
?
End to End solution
6
?
? Exploited Opportunity – high growth potential in US and China. Floated Rs 320 crore IPO to fund market expansion ? Exploited opportunity – favorable market conditions. ? Exploited opportunity – location specific R&D and innovation capabilities technical expertise. For example, Dutch around the world. expertise in aerodynamics rotor blade design Right product for the right market ? Exploited strength product mix comprehensive
7
?
8
?
Current Affairs of the Suzlon
Current State of Affairs In 2005, Suzlon had an overwhelming 50 percent share in the Indian wind turbine market. This had also catapulted Mr. Tulsi Tanti, the founder as well as the chairman and managing director of the company, to the Forbes list of 40 richest Indians in the same year. With increased market presence and recognition, Suzlon decided to go global. In order to vertically integrate its business, Suzlon decided to acquire Hansen Transmissions International NV, a leading wind turbine gearbox manufacturer for Euro 465 billion (Rs. 2,511 crore at that time) in an all cash deal 4. Suzlon got indirect ownership in Hansen Transmissions International NV, Belgium, along with its subsidiaries in the UK, Australia, Brazil, US and South Africa that were engaged in the business of design, development, manufacturing and supply of industrial and wind turbine generator gear boxes. The motive for Suzlon behind the deal was to develop supply chain synergies with Hansen, integrate gear box technology into a complete solution offered by the company and also to expand capacity of Hansen in Belgium and new emerging markets like Asia. As mentioned above, the company had dominated the Indian market by 2005. The company’s smaller turbines were selling like hot cakes in India (especially those with 600 KW, 1000 KW and 1.25 MW capacities)5. Suzlon had thought the time was opportune for going global and had planned on selling the larger 2.1 MW turbines in the world’s largest markets, the US and Europe. Suzlon’s engineers had already developed a prototype of the high powered turbine. Until 2007, despite an inflow of orders Suzlon lacked the product portfolio that would let it exploit the international market. Hence by April of 2007, Suzlon bought a controlling stake in the Germany-based REpower. The portfolio of REpower perfectly complemented that of Suzlon. REpower was the world leader in large off-shore wind turbines and earned significant revenues from its turbines larger than 2 MW. Suzlon would and did benefit from this transfer of technology. This strategy of Suzlon to expand into the global markets inorganically and also integrate vertically was commendable. However, Suzlon timed the market wrong. Suzlon failed to build the requisite technical expertise and the high quality products needed to compete in the global markets. Suzlon could not utilise the superior technology of REpower till it increased its stake in the company to 91%, Hence, the REpower acquisition proved to be costlier than its initial offer price. This was also due to the high cost debt that Suzlon incurred in acquiring the controlling stake of REpower.
Orders were lost due to low quality. For example, Cracks developing in the rotor blades installed by Suzlon in the US of wind turbines with 2.1 MW capacity. In addition to the financial loss, it led to a loss of reputation. Suzlon however is tenaciously crawling back from the troubles that it faced in the past couple of years. It has replaced all the faulty rotor blades in the US and has also provisioned for further such replacements. As a short-term focus, Suzlon is looking back at the market that made it big –India and has increased its focus in the domestic market. As a long term strategy, the company is trying to develop clients in the non-US and non-European markets, increase its client base in emerging markets like China, Sri Lanka, Australia, etc. and is also trying to diversify its client base so as to avoid dependence on any single market or market player. It is also considering a decreased pace of expansion into the global markets.
References
1
http://www.suzlon.com/
http://www.suzlon.com/about_suzlon/l3.aspx?l1=1&l2=1&l3=9
2
2
“History of Wind Power”, http://en.wikipedia.org/wiki/History_of_wind_power “Wind Power in India”, http://en.wikipedia.org/wiki/Wind_power_in_India “Suzlon to buy Belgian co Hansen for Rs 2,511 cr”, The Business Line, 17 March, 2006 “Saving Suzlon”, Forbes India, 18 May 2009
3
4
5
doc_285239547.docx
This is a document about strategy analysis of suzlon energy.
SUZLON ENERGY-Strategy
Full Report And Analysis
INTRODUCTION
Suzlon Energy is India’s largest wind turbine manufacturer, in terms of market share and is amongst the top 5 turbine companies worldwide with revenues of INR 265.3 billion. It has about 15000 employees with an estimated capacity of 5600 MW 1. It is headquartered in Pune, and has manufacturing sites across India and abroad. Its manufacturing sites are spread across Pondicherry, Daman, Bhuj and Gandhidham as well as across 21 countries abroad including China, Germany, North America and Belgium. It is an end-to-end supplier of high quality turbines with exclusive research units located in Denmark and Germany. The company is listed on the National Stock exchange of India and on the Bombay Stock Exchange Suzlon’s Core Competencies are as listed below • Wind and site pre-studies and recommendations for optimal choice of wind turbine options and positions • WTG Supply & Erection or full scale Turnkey Projects • Extended service and warranty program available to optimize return on investment Suzlon’s vision2 states in no uncertain terms its desire to be ? ? ? ? Technology leader Among the top 3 wind companies in all Most respected brand Professional and efficient in project execution for quick and trouble-free installation.
GENERAL HISTORY
The story of Suzlon began in the early 1990’s; when Tulsi Tanti’s young textile business was in a bad shape due to escalating power costs and its infrequent availability. With survival at stake, Tanti chanced upon wind energy as an alternative. While commissioning two windmills to supply electricity for the family's textile factory in Gujarat, he realized that he had stumbled onto a promising business opportunity. In a powerstarved nation, renewable energy was to have a favored future.
The Suzlon Energy Limited was incorporated in 1995. The first subscribers to the Memorandum were family members and friends of Tulsi Tanti from Rajkot. Suzlon began with 20 people and a wind farm project in the Gujarat state with a capacity of just 3.34 MW. Tanti then started to gradually quit textiles to focus completely on Suzlon. He grew Suzlon into a company of over 15,000 people, expanded its operations across the America, Asia, Australia and Europe, fully integrated manufacturing units on three continents, and introduced sophisticated R&D capabilities.
History of Wind Power Industry
The idea of harnessing wind power is not something new to humans. Humans have been known to use it for the past 5,500 years. The earliest use of wind power known to man was in Asia, the Sinhalese were found to use wind power of the monsoon winds to power their furnaces from as early as 300 BC 2. Wind power has been widely used since then in sailing across seas, providing ventilation to buildings, statues, etc. The first practical windmill was built in Sistan, Afghanistan in the seventh century, with a vertical axle and rectangular shaped blades. Meanwhile, Europe had independently developed a horizontal axle windmill by the twelfth century. These early windmills were primarily used for grinding corn, flour or drawing water. In the 19th century, the usage of windmills had widely spread across Europe and the United States of America. By the end of the 19 th century, Denmark was known to have about 2500 windmills for mechanical loads like grinding mills, water pumps, etc. and was producing an estimated combined peak power of about 30MW, while the United States of America had around six million small windmills that were installed in farms to operate irrigation pumps. The first known windmill for electricity production was built in Scotland in July 1887 by Prof. James Blyth of Glasgow. Blyth’s cloth sailed wind turbine was installed in the garden of his holiday cottage in Maykirk in Scotland and was used to charge accumulators to power the lighting of the cottage. In 1888 a larger and much more heavily engineered machine was designed and constructed by Charles F. Brush at his home and operated till 1900. The Brush windmill was large even by today’s standards and it turned slower because it had more than 140 blades. It had a dynamo connected to it which charged a bank of batteries or the various electrical equipments in Brush’s laboratory. Also in the 1890s a Danish scientist, Poul la Cour, constructed wind turbines to produce electricity, which was later used in the extraction of hydrogen.
Wind turbines similar to that built by Poul la Cour were built throughout Europe and the USSR (currently Russia) through the next century. These wind turbines were built in varied sizes and for different applications like connection to the local electricity distribution system, to power isolated or remote establishments and to even recharge the submarine batteries of German UBoats during the Second World War. In the 1990s durability and aesthetics started taking precedence and hence turbines were placed atop tubular steel or reinforced concrete towers (this design is still prevalent today). Also, originally wind turbines were built only near the facility that was to consume the power generated, but later with the availability of long distance transmission lines wind turbines were built in wind farms that were located in areas that had very windy conditions which could even be offshore. The power generated was then transmitted back to the facility that would eventually consume it. The cost of wind power generation had been decreased by four percent every year, largely due to improved technology, accumulating experience of wind farm operators and the continuing trend towards larger wind turbines. On the other hand, the prices of fossil fuels had been increased, especially that of petroleum and natural gas. Although the price of fossil fuel had increased steadily, it was still relatively cheap at the beginning of the 21st century. But the century also saw rising concerns about energy security, global warming and eventual fossil fuel depletion. Thus, global energy demand, heightened environmental awareness and concerns over energy security had resulted in increased demand for renewable sources of power in developed as well as developing countries resulting in a 30% annual growth for the fledgling industry. This was mainly driven by easy availability of large wind resources, falling costs due to improved technology and better wind farm management. As shown in Figure 1 below, wind energy has become the fastest growing source of renewable energy.
(a) Generation in TWh Source: Suzlon Energy Limited Investor Presentation, August 2009 Figure 1
The year 2003 saw a steady increase in the crude oil prices leading to increased fears of high prices involved in global extraction of crude, which would negatively affect the rate of production of crude oil. This led to further interest in commercial wind power. Thus it would be safe to say that the world is changing and renewable sources of energy are one of the few sustainable solutions available to humanity. Wind energy is one of the very few economically viable solutions for implementing renewable sources of energy. Although wind power installation requires huge initial investments, it is a source of constant supply of captive power. This is very useful in countries like India where the power infrastructure is not very reliable. India is the fifth largest wind power market in the world with a total installed capacity of 9,587 MW as of 2008 (i.e. 3% of the total electricity produced in India). India lags behind the US (installed capacity of 25,170 MW), followed by Germany (23,903 MW), Spain (16,754 MW) and China (12,210 MW) 3; the capacity installed for each country is shown Figure 2 below. The short gestation periods of wind turbine installation and its increasing reliability coupled with the performance of wind energy machines has made wind energy a favoured choice for capacity addition in India. Until recently, wind power projects in India were relegated to states like Tamil Nadu (which accounted for almost half of India’s total capacity). But other states like Gujarat and Maharashtra are aggressively trying to increase their installed capacities by providing
speedy sanction to wind power projects. There is a huge opportunity in the Indian Wind power market because the Ministry of New and Renewable Energy (MNRE) (started in 1992) has fixed a target of 10,500 MW between 2007 and 2012, although an additional generation capacity of only about 6,000 MW might be available for commercial use by 2012.
Installed Wind Capacity
20,111 3,160 25,237 United States Germany Spain China India Italy 9,655 23,933 France United Kingdom Denmark 12,121 16,543
Figure 2 : Country-wise Installed Wind Capacity
3,288 3,404 3,736
Others
Suzlon, an Indian based company has emerged on the global scale in the past decade and by 2008 captured 9% share of the global market, it had become the fifth largest wind turbine manufacturer globally (shown in Figure 3). Suzlon is the leading manufacturer of wind turbines in India, enjoying a 52.4% of market share.
Figure 3 : Wind Turbine Manufacturers
INDUSTRY ANALYSIS USING PORTER FIVE FORCES MODEL Threat of entry: Low to Medium
Wind industry has the business potential of securing future energy supplies through alternative energy sources. With government supporting renewable energy plans such as favorable tax schemes, India has seen higher overall increase in new entrants. Capital requirements: Wind power projects require high upfront capital investment Supply Side economies of scale: As the industry is capital intensive in terms of land, plant, machinery and technology, supply side economies of scale will deter entry by forcing the aspiring entrant to enter the industry through massive investments or accept cost disadvantages. Incumbency advantages: Cost and quality advantage arise out of proprietary technology and unique components used in wind turbines. Suzlon preempted the competition as it would take rivals 2 to 3 years to clone Suzlon turbines because they were unique or proprietary parts. Availability of financing options: The industry is very attractive but requires high capital financing which may not be easily available due to the high element of risk inherent in the nature of the industry compounded by poor resale value of plants and machinery.
Bargaining power of supplier: Medium to High
Supplier Concentration: Limited numbers of suppliers of key components, none of whom can meet demand, thus further increasing the switching costs of their customers. Some of these suppliers are owned by direct competitors, such as Siemens and GE, so their bargaining power is high. For generic components the situation is easier; wherein there are many suppliers, making it easier and cheaper for wind turbine manufacturers to switch sources. With increasing complexities in the product design, the need for stronger supplier relationship and joint product development is gaining momentum resembling vertical integration.
Bargaining power of buyers: Medium to High
Buyer Concentration: Buyers are primarily professional investors such as large electric utilities and generating plant owners. With large volume buyers, their bargaining power increases. Buyers in this industry focus on reliability. Reliability, in terms of delivery dates, product lifetime, electricity output and operating and maintenance (O&M) costs, has become the key measure of competitiveness in the industry which further puts greater pressure on supplier competence.
Threat of substitutes: Low to Medium
As the renewable sources of energy- crude and natural gas are limited by nature’s supply, need for alternative sources energy to satisfy the demand is popularity. Wind is, however, expected to be a substitute for some of our traditional energy sources, and to compete with other nontraditional sources. Of the latter, solar and hydro are the most widely-used renewable today, and so pose the biggest threat of substitution. Wind power is becoming increasingly costcompetitive compared to traditional sources of energy. Technological improvements have improved the reliability and reduced the O&M costs of wind power plants, while manufacturing, assembly and transport costs have also fallen. Wind power is thus a competitive form of energy.
Threat of competitive rivalry: Medium
Growth Rate: Due to high growth in the industry and demand supply gap, there is intense fight for increasing market share. Power Distribution (Concentration): There are numerous players in this industry with none of the players having significant market share. Height of exit barriers: Since it is capital intensive industry, keeps the company in the industry even if it is making loss.
TEMPORAL EVOLUTION OF THE FIRM
The growth timeline is as follows: 1995: Company is incorporated 1996: 0.35MW Turbine launched, first project for IPCL 1998: Company installed its first wind turbine in Maharashtra Satara district. 2000: Commissioned the 50MW wind turbine generator from Vankhusavade in Maharashtra. 2001: Formation of subsidiaries Suzlon Wind Energy Corp, USA and Suzlon Energy R &D in Netherlands and manufacturing unit in Daman 2002: First export order, its First Wind Turbine in the USA, R&D in Germany, first 1.25MW turbine launched 2003: Representative office in Beijing, China. 2004 Private equity placement, 2MW class WTG introduced 2005: IPO launched, 46 times oversubscribed. Korean Order of 150 MW for the Jeju Wind Farm Project. 2006: Hansen acquisition, 200MW Wind Farm Project for Australia Gas & Light Company. 2007: 400 MW deal with PPM Energy of Portland, USA. Acquired German wind turbine company RE Power. 2009: Entry into Sri Lanka with an order to supply 10 MW of wind turbine capacity to a project developed by Senok Wind Power Pvt. Ltd. 2009: Considering entry into the Canadian market in 2010..
CHANGES IN PRODUCT & SERVICES
The company initially developed small size wind farms, but in 1996 it moved on to the production of its own WTGs (Wind turbine generators) through a technical collaboration agreement with a German company, Sudwind GmbH Windkrafttanlagen. The company has changed tremendously over the last decade. Currently, the company along with its subsidiaries engages in designing, developing and manufacturing of wind turbine generators and related components such as rotor blades, control panels, nacelle cover, tubular towers, generators and gearboxes. Suzlon produces two major lines of turbines: the Megawatt series and the Multi-Megawatt series, which can generate energy in capacities from 350 kilowatts to 2.1 megawatts. The most recent additions to Suzlon’s product line are the S52 - 600 kW and S82 - 1.50 MW wind turbines. The services provided by the company include consultancy, design, manufacturing, installation, operation and maintenance services. It is also involved in wind project planning and execution, including wind resource mapping, site selection, technical planning and execution of wind power projects. Associate companies acquire sites identified as suitable for wind energy projects, and then undertake the technical implementation of windfarms including infrastructure development, installation of WTGs and connection of power grids.
ENVIRONMENT
Suzlon, by nature of its operations is heavily affected by changing energy paradigms. The price of fossil fuels, increasing environmental awareness, and the possibility of significant global climate change are contributing to changes in the social, political and economic views of energy production. Global wind capacity has increased by 27,051 megawatts in 2008, ending the year at 120,798 megawatts. This represents a growth of 29% in 2008 with the U.S. overtaking Germany as the world's leading wind power generator. Consumer demand for renewable energy and clean energy has increased rapidly over the past decade due to environmental concerns such as acid rain, smog pollution, asthma and respiratory problems. The fear of global warming and pollution has forced governments around the world to implement legislation that indirectly supports renewable energy.
The 2008 Financial Crisis has slowed growth in the wind energy sector in 2009. Despite the rapid growth in the wind energy sector in 2008, the turbulent economic environment and global credit crunch have led some of the fast growing markets like the U.S. and Europe to slow in terms of new capacity additions. Falling oil and gas prices ($150 a barrel in July 2008 to around $50 a barrel in the first quarter of 2009) has led to more affordable commercial electricity. Consumers too have limited their demand for new and expensive sources of renewable power. The main objections to wind power stem from environmental costs. Many wind parks are shut down for most parts of the year due to bird migration patterns and turbine-related bird deaths. Furthermore, turbines occupy land; and although larger turbines produce more power, they also occupy more land.
DISTINCT STRATEGIES
Suzlon’s strategy is in complete alignment with its vision to be the technology leader and amongst the top 3 wind companies in all the key markets of the world. Suzlon’s strategy entails: 1) First mover strategy in wind turbine manufacturer in India. 2) Improving cost efficiency by R&D and innovation through a) Integration of the best technological practices and its subsequent adoption b) Establishment of Research & Development and innovation centres (It has established product development facilities in the Netherlands and Germany) c) Establishment of a product and process engineering framework in India and gearbox R&D in Belgium (Hansen) 3) Growth acceleration through vertical integration a) Suzlon has vertically integrated from components to turbine b) It has established its manufacturing facilities in Belgium, China, India & USA c) It has established experienced workforce in both low labor cost economies as well as advanced economies 4) Focus on high growth markets a) Suzlon has a strong presence in key growth markets of India, China & far east, North America, Australia, Denmark, Portugal, Spain, Italy, Turkey, Romania, Brazil, and Nicaragua b) Suzlon’s acquired Repower presence in Germany, France, UK, and Canada.
Good Times
Calendar Years 2004-08 were the period of Suzlon’s scorching growth.
Figure 4: Capacity installed by Suzlon
1) Suzlon continued growth through internationalization a) It launched products for international markets b) It continued with capacity expansion overseas 2) Other major initiatives were increased vertical integration through a) Acquisition of Hansen Transmissions in 2006 b) Acquisition of REpower Systems in 2007 c) Its capacity increased to 4,200 MW Suzlon grew at more than twice the industry’s growth rate
Difficult Times
Calendar Year 2008-09 was the period of financial crisis industry wide and also across all industries. It had the following impact on the wind industry in general and Suzlon in particular: 1) Subdued growth forecasts a) Slowdown in order intake b) Customers were unwilling to pay advances for deliveries beyond near term c) Industry-wide order book visibility contracted from 2-3 years to 1-2 years 2) Concentration of projects with large developers a) Large-scale cancellation worry plagued the company 3) Cost of capital increases coupled with reduced avenues of project finance a) This skepticism restricted wind power project development 4) Equity investors’ Expectations a) Capital expenditure spending was lowered for projects across the board b) Actual returns did not align with High-return expectations 5) Postponement of capacity expansion plans a) US and Europe expansions scaled down b) India and China capacity expansion to continue
Success & Failures
Suzlon had some deeply disappointing failures before it could taste success and achievement.In October 2008, Suzlon’s attempt to launch a $390 million rights issue to complete the REpower takeover had to be abandoned because of the market slide. Despite holding 66% stakes, Suzlon had to wait till June 2009 to complete the acquisition. In this process, Tanti had to part with 10% stakes in Hansen Transmission – the Belgian gear box making company and 6% stakes of Suzlon stocks held by his family. By end of 2008, there were several incidents of blade failures in the overseas market that had to be compensated by Suzlon. This severely affected the third quarter results of FY08 that ended on 31st December 2008. Tulsi Tanti who went on to make an entry in to the Forbes list of 40 Richest Indians was praised for his foresightedness and deemed a visionary who paved the path for Green energy in India. But when the series of failures came in to light, Suzlon was blamed for its ambitious pursuit of global expansion that veered it away from important details like product quality, testing and technology. Even Suzlon’s mission of developing alternate energy was questioned. Its responsible actions in this context and subsequent growth were attributed to the tax benefits that it may have derived out of the Government policy to depreciate the plant value by 80% in the first year of installation. As late as June 2009, Suzlon had to make an out – of – court settlement with KM Birla – owned Essel mining when they filed a petition against the company over technical problems experienced by the wind mills set up in the area. Complaints of sub – optimal wind mill performance have been raised by other clients like Madras Cements, K. S. Oils, MSPL amongst others. The company initially started with developing small size wind farms, but in 1996 it began to produce its own WTGs (Wind turbine generators) through a technical collaboration agreement with a German company, Sudwind GmbH Windkrafttanlagen. The company has undergone immense changes over the decade. Today, the company along with its subsidiaries engages in designing, developing and manufacturing of wind turbine generators and related components such as rotor blades, control panels, nacelle cover, tubular towers, generators and gearboxes. Suzlon produces two major lines of turbines: the Megawatt series and the Multi-Megawatt series, which can generate energy in capacities from 350 kilowatts to 2.1 megawatts. The most recent innovations in Suzlon’s product line are the S52 - 600 kW and S82 - 1.50 MW wind turbines.
The services provided by the company include consultancy, design, manufacturing, installation, operation and maintenance services. It is also involved in wind project planning and execution, including wind resource mapping, site selection, technical planning and execution of wind power projects. Associate companies acquire sites identified as suitable for wind energy projects, and then undertake the technical implementation of windfarms including infrastructure development, installation of WTGs and connection of power grids.
Leadership
Suzlon is actively run by the Chairman and Managing Director, Tulsi Tanti since the initiation of the company in 1995. He is a commerce graduate and a diploma holder in mechanical engineering. He originally hails from Gujarat and is presently based in Pune, Maharashtra. Tulsi Tanti was earlier into textiles. He started his textile business in Gujarat. In 1990, Tulsi Tanti invested in two wind turbines and realized their huge potential. In 1995, he formed Suzlon and gradually quit textiles. He has driven Suzlon over the years by focusing on research and development strategy, backward integration strategy, high growth market and an acquisition strategy to absorb smaller competitors to integrate along its supply chain. Tanti realised that if he had to make Suzlon a global company he would need better technological expertise and an international presence. Suzlon acquired German based REpower Systems to increase its international presence. He is one of the richest Indians (ranked 36th by Forbes). He has won several awards for his leadership over the years. Mr. Tanti is the recipient of prestigious Canada India Foundation ("CIF") Chanchlani Global Indian Award (2009). He was also named by the United Nations Environment Program as a “Champion of the Earth” for 2009 for his Entrepreneurial Vision in combating climate change.
VRIO Analysis:
The VRIO framework asks four questions about the internal resources that a firm possesses to determine its competitive potential: the question of Value, the question of Rarity, the question of Imitability, and the question of Organization. This framework rests on the Resource Based View of the firm. It helps us in understanding the various resources that Suzlon possesses and in gauging if they have been exploited by the company.
Table 1 : VRIO Analysis
SUZLON'S RESOURCES
VALUABLE?
RARE?
DIFFICULT TO IMITATE?
EXPLOITED BY THE ORGANIZATION?
End-to-end solution provider - Wind resource mapping, Site identification, Land acquisition Y - WTG and component manufacturing - Site development, infra set-up and WTG installation - Operations and Maintenance services Highest level Vertical manufacturing capabilities Integration/In house
N
N
Y
- From Infrastructure provision to O&M services Y - Better control over time, cost, quality and supply chain - Long term service support - Faster product rollout Products - Broad portfolio of products - Partial demand met for gearbox, panels, generators and Y towers - Complete demand met for turbine blades
Y
Y
Y
N
N
Y
R&D capabilities - Best-of-all-worlds technology strategy: Aerodynamics from Netherland, Product Development in Germany, Product and process engineering in India, Gearbox R&D Y from Belgium, Generator technology from Austria - Renewable Energy Technology Centre (RETC), a JV between Suzlon and REPower Systems for mfg. processes optimization, aerodynamic efficiency improvement etc Acquisition/Share holding in other technology companies - 76% stake and 91% control influence through vote pooling in REpower Systems, Germany for Multi-MW class WTGs - Acquisition of 100% equity in Hansen Transmissions, Belgium (world leader in gearbox and drive train mfg.) for WTG gearbox - 83% stake in SE Forge India, consisting of forging, machining and casting units Diverse & International Client Base - Cement, Steel, Textile, Automobile, Engineering, Construction and Mining industries clients Y - Possesses a strong international client base in US, China, Australia/NZ, Europe and South America Suzlon's Human resources - Experienced management team - Director/Chairman awarded "World Wind Energy Award", "Champions of Composite Technologies" - Extensive experience in design, engineering, manufacture, marketing and maintenance of WTGs Y Y Y Y N N Y Y N N Y
Y
Y
Y
- Robust employee growth - Increasing international mix of employees
Low cost of operations - Due to integration, it has reduced capital cost per unit Y of power generation First mover advantage in India - Agreement with Sudwind GmbH Windkrafttanlagen, Germany for technological know-how - Obtained the official non-exclusive, nontransferable license for the manufacturing, marketing, dealing and servicing of APX-60 type blades from Aerpac B.V upon its liquidation. It is valid indefinitely Y - Entered into agreement with Enron Wind Rotor Production B.V for acquisition of moulds, production line, technical support and assistance of rotor blade type APX 60-P for an indefinite period. - Tie-up with TERI University, India for an M.Tech in Renewable energy engineering and management Strategic focus - Especially on India; fourth largest wind energy production (in terms of installed capacity), lucrative Y market with ever growing energy demand - Developing business from Amsterdam to leverage locational and operational advantages Leading name in wind energy World Wind Energy Award for Y2003 Y - Introduced concept of large wind parks in Asia - Market leader in India as manufacturer of WTG Y Y Y Y Y Y
Y
Y
Y
Y
Y
Y
Assessment of strategic decisions
First mover strategy
Tulsi Tanti was first to identify the necessity of wind power generation at a time when India was entirely dependent on traditional sources of energy and also faced a supply-demand mismatch in the sector. Mr. Tanti followed blue ocean strategy where Suzlon ventured into a nascent emerging industry which was unexploited and created customer value through continuous innovation. Suzlon was the first company to introduce multi-Megawatt sized wind turbines in India. It was quick to identify new wind energy harvesting opportunities and established a huge market in seven Indian states, including Tamil Nadu, Karnataka, Maharashtra, Rajasthan and Gujarat. These states have the highest installed capacity of wind energy in India. Moreover, Suzlon introduced the concept of large wind parks, built some of the largest wind parks in Asia including the world’s largest wind park. This home market dominance yielded efficiencies of scale, a large and growing knowledge base and a solid financial platform to support ongoing expansion. Suzlon has also taken the initiative of starting and sponsoring an M Tech course in renewable energy engineering and management in alliance with TERI University, India. This would provide Suzlon an added reliable source of talent for its research and development division. By being the first Indian wind energy company to strike such an agreement, Suzlon gave an added boost to its R&D wing
Licensing of technology from small wind turbine manufactures
In the initial years of its existence, in order to acquire advanced technological learning for manufacturing wind turbines it followed the strategy of licensing technology from smaller wind power companies rather than from leading wind turbine manufacturers. There is a disincentive for leading wind turbine manufacturers to license proprietary information to companies that could become its competitors. Suzlon licensed the technology from smaller wind power companies which have less to lose from international competition but more to gain from license fees. These technologies were in no terms inferior to the ones provided by large companies; however, they were utilized less and therefore had lesser experience. Consequently it formed licensing arrangements with Südwind, Aerpac, and Enron Wind that helped it with necessary technical knowledge to enter the wind turbine manufacturing business. Suzlon was the first company to identify the potential for this kind of knowledge sharing agreement in the
Indian wind power industry. Low technological input cost along with low labor cost, gave Suzlon its competitive advantage in the industry.
Innovation, R&D and cost efficiency
Wind Turbine R&D in Germany
Rotor Blase R&D in Netherlands
Gear Box R&D in Belgium
Product Process Engg. India
Tech. Campus in Germany
Engineering Center in India
Innovation center in Europe
Figure 5 : R&D Capabilities of Suzlon
Suzlon is continuously looking for upgrading current models, advancing technology to improve its overall cost efficiency. Skill amalgamation along with its global presence of R&D centers has given Suzlon an edge over its competitors. It has blended the best resources across the globe. Suzlon has established its R&D centers at strategic locations around the world to specifically take advantage of local resources. Its research center, based in The Netherlands, is located there specifically to take advantage of Dutch expertise in aerodynamic rotor blade design and material sciences, while the German site helps the company take advantage of German wind turbine engineering capabilities, focusing on gearbox prototypes. While looking overseas for technical expertise in wind turbine manufacturing, Suzlon did not neglect its Indian manufacturing base. Although it conducts R&D abroad, it relies primarily on domestically made components, most of which it makes in-house, based on experience gained through its overseas research efforts. As the country’s largest wind turbine manufacturer that is owned by an Indian, Suzlon has access to local networks that foreign companies lack. The manufacturing unit in India and China provides cost effectiveness. This business model of leveraging on its foreign R&D capabilities and harnessing its local networks has paid Suzlon rich dividends and helped to capture more 50% market share in the Indian wind power industry. Suzlon is able to beat the market prices offered by its foreign competitors as it locally sources turbines. The business model adopted by Suzlon is valuable as it has contributed to its growth, rare as it is not followed by its competitors and is difficult to imitate.
Vertical Integration: Suzlon’s key competitive advantage
Suzlon’s Integrated Business Model:
Figure 6 : Suzlon Business Model
The first part namely assessment and land acquisition is mostly operated through associated concerns that does not form a part of the company’s value chain. The WTG (Wind Turbine Generator) supply chain is further detailed below showing that Suzlon has a presence in each one of them.
Figure 7 : Wind Turbine Generator Supply Chain
The wind energy industry was facing supply chain bottlenecks in terms of long lead times in production of key components like bearings, gearbox and forging materials. Suzlon already has a research, development and manufacturing facility for rotor blades. Gearbox has the longest lead time in the WTG value chain. To plug this gap, Suzlon acquired a 61.3% stake for about Rs.2500 crores in Hansen Transmissions which is the second leading global player in wind
gearboxes. The acquisition of Hansen, described as a ‘masterstroke’ by the company, made Suzlon a leading integrated wind turbine manufacturer. It allowed Suzlon to integrate Hansen’s gearbox technology with its total turbine solution enabling it to provide a more reliable and competitive product in the marketplace. This deal also enabled Suzlon to sell gearboxes to third parties making other manufacturers more vulnerable. Suzlon also acquired a 91% stake for about Rs.7300 crores in the German wind turbine company REpower systems, which is a recognized technology leader with a strong presence in Europe. Repower was acquired to supply rotor blades, gear box, generator, control panel, forging and casting parts etc to Suzlon. This investment also provided Suzlon an entry opportunity into the large European markets like Germany, UK and France. Suzlon was also able to capitalize on the REpower’s design and development know-how and brand-equity. Their product portfolio was also complementary to each other. This combination established a sustainable global market leadership for Suzlon in the wind energy industry, with good research capabilities and an integrated supply chain. It has also helped them accelerate their offshore capabilities. REpower systems and Suzlon also formed a 50-50 JV entity named Renewable Energy Technology Centre (RETC) to focus on manufacturing process optimization, aerodynamic efficiency improvement, training and technology services. This clearly shows that Suzlon is integrating backward to have a greater control over its critical components. Its alliances helped Suzlon to get the products on time and at acceptable prices. The company’s ability to leverage on the abilities of its partners through equity alliances is an aspect which its competitors cannot imitate easily due to the huge amount of upfront investment required and the strategic preemption ability of partners and facilities in major European markets. These add economic value to its customers through terms mentioned below and thus are valuable. Moreover, most of the products in a wind turbine are specifically made for use in the same center. The huge amounts of transaction specific investments justify the moves by Suzlon in backward integration. Also these alliances have helped Suzlon expand its integrated capacity from 1500 MW in FY2006 to 2700 in FY2007 and 4200 in FY2008. Suzlon’s greater level of vertical integration compared to its peers such as Vestas and Gamesa is reflected in its superior operating profit margin of 25 per cent against an average of 13 per cent of its competitors. It is also expected that the cost-efficiencies attained through vertical integration will offset any margin dent caused by a hike in the prices of steel, that constitutes 70 per cent of the cost of towers. Suzlon has a group management centre in Amsterdam which
serves as the hub for integrated management of the Suzlon group maximizing synergies and efficiencies across geographies, companies and functions. The above mentioned alliances will help in creating a competitive advantage while still maintaining the much needed flexibility for Suzlon in terms of the following: ? Better control over time, cost and quality ? Long-term service support to customers ? Faster product rollout ? Turbine technology integration and leadership. ? High reliability and credibility among customers by providing efficient and robust wind energy solution.
Expansion in 2005
With growing market demand of wind turbines from international markets, Suzlon decided go for expansion in 2005 with an investment of Rs 320 crores. Suzlon launched its IPO in 2005 to fund these investments. The proceeds of the IPO were used to set manufacturing units in high growth areas of United States & China and set up subsidiary unit in Europe for providing support for global customers and for research and development. The rationale behind setting up a manufacturing unit in US involved logistic problems arising out of export of blades and turbines from India and the additional costs associated with it. Suzlon exploited the buoyant market conditions and favorable external environment to raise money through the IPO. In a bid to expand globally, Suzlon skipped the due diligence process. In India, customers were focused on installations rather than on actual generation, as tax incentives were based on capital expenditure allowing Suzlon to get away with lower levels of due diligence. Due to low level of due diligence in terms of testing, some of the Suzlon supplied blades developed cracks across various installations and dented Suzlon’s reputation severely. Considering the opportunity to expand in the rapidly growing wind power industry, Suzlon’s decision to go for market expansion was correct but it could not capitalize on it due to haste.
Focus on high growth markets
Table 2: Estimated Installations in the next 5 years
Year
Total Installations(MW) US China Australia/NZ Europe/South America 2008 8358 6246 619 4910 2009-2013 52000 42800 3950 40765
Source: Suzlon Energy Limited, Investor Presentation, August 2009
Suzlon’s strategy has been to look for high growth areas. It has its presence in India, China, North America, Australia, Denmark, Portugal, Spain, Italy, Turkey, Romania, Brazil, Nicaragua, Germany, France and UK. Suzlon has always exploited opportunities. With its cost efficiency and robust business model it could establish itself in these countries. Suzlon also exploited supportive national policy environment for wind energy development in many of these countries.
End to End Solution
Wind resource Mapping
Site Indentification
Land aquisition
WTG and component manufacturing
Site-development, infrastructure set-up & WTG installation Operations & Maintenance services
Figure 8 : Suzlon, an end-to-end solution provider
End to end solution allows customers to benefit from cost-efficiencies and economies of scale in wind farms leading to higher perceived value for the customer thereby generating competitive advantage for Suzlon. Site identification and land acquisition helps customer avoid
the need to undertake cumbersome wind farm development process. Planning of Wind Farm Systems, Land Acquisition, Development and Technical Design., Infrastructure and Equipment, O&M services, Suzlon offers customers end to-end wind energy solutions, including wind resource mapping, site development and installation, and finally operations & maintenance services in India. This allows Suzlon to offer Indian customers economies of scale, and eliminates the need for customer involvement in the complex process of wind farm development. In short, Suzlon’s strategy can be summarized as a combination of licensing intellectual property, creating strategic technology partnerships, accessing regional and global learning networks, R&D, Innovation and taking advantage of regional opportunities like lower labor costs. All these aspects contributed to the company’s strong business model.
Strategy Assessment Table
No
Element of Strategy
Pros and Cons ? Exploited a great strength –technological and business genius of Tulsi Tanti Exploited an opportunity – shortage of traditional form of power Exploited an opportunity – the need for green power
? 1
In 1995, Tulsi Tanti, founder of ? Suzlon in wind power industry – first mover strategy ?
? 2
Followed a strategy of licensing of ? Increased its strength of low cost of technology from small players turbines by reducing its input cost. rather than obtaining from large turbine manufacturers. Followed a strategy of vertical integration Acquired Hansen Transmission, ? Reduced the threat of suppliers enabling quicker and more efficient assembly to hasten customer delivery times. ? Cut logistics and transaction cost since
? 3 ?
gearbox manufacturer ? Acquired Repower Systems AG
fewer parties are involved in the value chain. ? Entry in European markets ? Exploited opportunity - supportive government policies in many of these countries. ? Exploited its strength – cost efficiency and robust business model. ? Increased customer focus offering Indian customers economies of scale, and eliminating the need for customer involvement in the complex process of wind farm development.
4
?
Focus on high growth areas
5
?
End to End solution
6
?
? Exploited Opportunity – high growth potential in US and China. Floated Rs 320 crore IPO to fund market expansion ? Exploited opportunity – favorable market conditions. ? Exploited opportunity – location specific R&D and innovation capabilities technical expertise. For example, Dutch around the world. expertise in aerodynamics rotor blade design Right product for the right market ? Exploited strength product mix comprehensive
7
?
8
?
Current Affairs of the Suzlon
Current State of Affairs In 2005, Suzlon had an overwhelming 50 percent share in the Indian wind turbine market. This had also catapulted Mr. Tulsi Tanti, the founder as well as the chairman and managing director of the company, to the Forbes list of 40 richest Indians in the same year. With increased market presence and recognition, Suzlon decided to go global. In order to vertically integrate its business, Suzlon decided to acquire Hansen Transmissions International NV, a leading wind turbine gearbox manufacturer for Euro 465 billion (Rs. 2,511 crore at that time) in an all cash deal 4. Suzlon got indirect ownership in Hansen Transmissions International NV, Belgium, along with its subsidiaries in the UK, Australia, Brazil, US and South Africa that were engaged in the business of design, development, manufacturing and supply of industrial and wind turbine generator gear boxes. The motive for Suzlon behind the deal was to develop supply chain synergies with Hansen, integrate gear box technology into a complete solution offered by the company and also to expand capacity of Hansen in Belgium and new emerging markets like Asia. As mentioned above, the company had dominated the Indian market by 2005. The company’s smaller turbines were selling like hot cakes in India (especially those with 600 KW, 1000 KW and 1.25 MW capacities)5. Suzlon had thought the time was opportune for going global and had planned on selling the larger 2.1 MW turbines in the world’s largest markets, the US and Europe. Suzlon’s engineers had already developed a prototype of the high powered turbine. Until 2007, despite an inflow of orders Suzlon lacked the product portfolio that would let it exploit the international market. Hence by April of 2007, Suzlon bought a controlling stake in the Germany-based REpower. The portfolio of REpower perfectly complemented that of Suzlon. REpower was the world leader in large off-shore wind turbines and earned significant revenues from its turbines larger than 2 MW. Suzlon would and did benefit from this transfer of technology. This strategy of Suzlon to expand into the global markets inorganically and also integrate vertically was commendable. However, Suzlon timed the market wrong. Suzlon failed to build the requisite technical expertise and the high quality products needed to compete in the global markets. Suzlon could not utilise the superior technology of REpower till it increased its stake in the company to 91%, Hence, the REpower acquisition proved to be costlier than its initial offer price. This was also due to the high cost debt that Suzlon incurred in acquiring the controlling stake of REpower.
Orders were lost due to low quality. For example, Cracks developing in the rotor blades installed by Suzlon in the US of wind turbines with 2.1 MW capacity. In addition to the financial loss, it led to a loss of reputation. Suzlon however is tenaciously crawling back from the troubles that it faced in the past couple of years. It has replaced all the faulty rotor blades in the US and has also provisioned for further such replacements. As a short-term focus, Suzlon is looking back at the market that made it big –India and has increased its focus in the domestic market. As a long term strategy, the company is trying to develop clients in the non-US and non-European markets, increase its client base in emerging markets like China, Sri Lanka, Australia, etc. and is also trying to diversify its client base so as to avoid dependence on any single market or market player. It is also considering a decreased pace of expansion into the global markets.
References
1
http://www.suzlon.com/
http://www.suzlon.com/about_suzlon/l3.aspx?l1=1&l2=1&l3=9
2
2
“History of Wind Power”, http://en.wikipedia.org/wiki/History_of_wind_power “Wind Power in India”, http://en.wikipedia.org/wiki/Wind_power_in_India “Suzlon to buy Belgian co Hansen for Rs 2,511 cr”, The Business Line, 17 March, 2006 “Saving Suzlon”, Forbes India, 18 May 2009
3
4
5
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