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Suzlon Energy Ltd: Making a Foray Abroad
Akash Tekchandani B12007
Attractiveness of the Wind Energy Market In Industrialized countries, such as USA and Germany, the demand for energy is increasing - the days of overcapacity in electricity production are coming to an end. Many older power plants (fossil fuel based) will soon reach the end of their working lives. It is estimated that over 1,500 GigaWatts of power generation capacity will need to be built in the Organization for Economic Co-operation and Development (OECD) countries alone.
Oil Producing Countries in the World
By 2030, the world energy needs are estimated to be over 40% higher than in 2008. Current Estimates are that over 4,000 GigaWatts of new energy capacity needs to be installed before 2030, requiring investments of more than US$ 13 Tr. in the market. This sharp increase in world energy demand will require significant investment in the power sector to generate capacity and develop grid infrastructure, especially in emerging economies such as India, Brazil and China. In contrast to uncertainties of non renewable sources of fuel, wind energy is a mass indigenous power source perennially available in almost every country across the globe. Since there is no fuel costs and no supply dependence on imported fuels from politically unstable regions, it is Total Wind Energy - Total being taken up heavily in both developed and emerging nations. This Installed Capacity (MW) 180000 160000 makes this a very attractive market to foray into.
140000 120000 100000 80000 60000 40000 20000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E
Currently, wind energy produces just over 1% of the global energy, but it is estimated to touch 160 GW by 2010 and 240 GW by 2012. Further, Wind Energy is competitive and lucrative as long as an Oil Barrel Costs over $40 per barrel. In 2007, Oil cost over $55 a barrel and is expected to cross Installed Capacity (in %) $100 a barrel by the year Germany 2012. US
13.9 23.7 2.3 2.5 2.6 2.9 3.3 6.3 8.4 16.1 17.9
Wind power has the advantage that it can be deployed faster than other energy supply technologies. Even large offshore wind farms, which require a large detailed level of infrastructure and grid connection, can be installed from start to finish in less than two years. This is lesser than the much longer timescale for conventional power stations such as nuclear reactors. This has resulted in a number of developed countries adopting the same.
Spain India China Denmark Italy France UK
The Analysis of the holistic market performance of the firms results in a Matrix mapping Relative Market Share to Business Growth rate, which is as follows:
Business Growth Rate High
Enercon Gmbh Goldwind BCG Matrix
Vestas Gamesa Corp Technology
High Market Share
Since the Global Wind Power Industry has an Annual Turnover of more than $23 Bn. and has been growing at an Annual Rate of more than 28% for the last 10 years, Suzlon can expect some competition. Further, competition is high in Europe- as it accounts for over 65% of the total capacity. However, Suzlon’s foray into Europe was hedged by its diversification in 21 countries, all over the globe.
Threat of Substitutes - HIGH Fossil Fuels (75% of total Energy Market)
High Front-up Capital Investment Low Operational Capacity (40%) High Subsidies given by Governments
Power of Buyers - LOW Threat of Substitutes
Large number of Customers Highly Fragmented Market Large Switching Fixed Cost Green energy adoption increasing globally
Bargaining Power of Suppliers
Porter's Five Forces Analysis
Bargaining Power of Buyers
Power of Suppliers - HIGH
Steel constitutes 70% of total Manufacturing cost of a Turbine Current need for vertical integration to drive down costs Niche technology leads to increased reliance on a few suppliers
Threat of New Entrants - LOW Threat of New Entrants
Large number of Patents Globally Large amount of Initial Capital Investment is required
Hence, Suzlon can prepare itself by:1) Innovating by investing heavily in Research and Development 2) Vertical and Backward Integration – Acquisitions 3) Setting up Manufacturing units all across the globe, especially in growing markets such as North America and Taiwan. 4) Continuing to keep up its value proposition of a low cost and high quality wind turbine provider
Suzlon’s Acquisitions Suzlon’s positioning as a low cost producer with state-of-the-art design and technology has resulted in its success. The Indian Government’s Tax breaks have also catalyzed the same. In order to keep Suzlon low cost, Vertical Integration was key. Hence Tanti commenced acquisitions starting with Suedwind in 1997. Heavy investments in Research and Development led to the rotor blade manufacturer acquisition in 1997. Suzlon then acquired Hansen for US $565 Mn- not only for its manufacturing capabilities but also to make its international foray and to leverage Hansen’s modern manufacturing facilities for gearbox production. This resulted in an increase in Suzlon’s integrated capacity by 80%. Suzlon then acquired Repower in 2007 to accelerate expansion into Europe. Suzlon took advantage of REpower portfolio’s rising volumes to generate positive returns as well as bring down costs for their current Wind Turbine Manufacturing. These cost efficiencies have helped offset variable Steel prices (which constitute around 70% of the total tubine cost). These acquisitions, along with many more, have resulted in a high yielding value chain, technological improvement, productive and cheap manpower resulting in Suzlon’s superiority in the market. Suzlon has thus been able to achieve the following: Product
Turbine Rotor Blades Gearbox Generator Control System Tower Foundry and Forging
India, China India, China. USA Belgium India India, China India
Expansion to New Markets
India India India, China, Belgium India, China India India India
Competitive Advantage - Suzlon
Technology Integration and leadership Reliable and cost- effective technology Control over supply chain - securing growth and volume Improved customer service The most profitable wind turbine manufacturer globally
Suzlon’s Vertical Integrations include the following two types:
Backward Vertical Integation
• Designing and Developing of Rotor Blades in Suzlon Energy BV, Netherlands • Acquision of Hansen Transmission, Belgium – Turbine Gear Boxes • Acquisition of REPower, Germany – High Capactiy Turbines • A manufacturing facility in Tianjin, China • SWECO, its US market subsidiary • Suzlon Energy Australia Pvt Ltd, its Australian market subsidiary • A representative office in China
Forward Vertical Integration
Suzlon’s detailed backward Integration is as follows: Rotor Blade
• Hansen • Winergy
• Suzlon • Mita-Teknik
• Suzlon • Siemens
• Suzlon • Local Firms
Future Expansion Strategies A detailed SWOT analysis of Suzlon revealed the following result: Strength Integrated business model In-house design capabilities Market Leader in India Global Presence in 21 countries Wise acquisitions and alliances Global production facilities Sophisticated and Modern R&D facilities Opportunity Environmental Awareness Government subsidies and initiatives Untapped global (offshore) markets Steady growth in Pacific region Weakness Operation Risk Poor strategy implementation Dimnishing growth of profits
Threats Intense competition Foreign Exchange Risk Technology Risk Objection of Environmentalists to Wind turbines
Hence the possible opportunities for Suzlon include: Adopt an Offensive Marketing warfare Strategy - Global front Existing large players have dominant positions in home market. However, Suzlon can leverage its global acquisitions and try to achieve the number 2 position in a number of countries. Currently, Vesatas is the number two player in each country and hence has captured a market share of over 28% - making it the market leader globally. Leveraging its low cost and yet highly innovative and reliable value proposition, Suzlon should foray into a number of growing markets such as Austalia and New Zealand – which grew by over 15% in 2006-07. Market Penetration (Existing Market and Existing Product) Since Wind energy is a relatively new energy market (only 1% of the total energy produced), there is a huge growth potential - forecasted by GWEC (Global Wind Energy Council). The major bottleneck in achieving this growth target is low manufacturing capability of turbine and gearbox suppliers. With recent acquisitions, Suzlon has been able to achieve technical competency to manufacture each of these products and now the focus should be on how to ramp up the manufacturing capability to support sales numbers and leverage economies of scale. In addition to this, Suzlon must focus on building operational efficiency and reduce wind power costs in the market. Reduce the rate of Global Acquisitions By focussing on organic growth and leveraging Repower’s growing portfolio, Suzlon should try to gain market share in Europe – where 65% of the total wind power is utilized. Invest heavily in Product Innovation In a techology heavy industry, the name of the game is “innovate-or-die”. Suzlon has made a number of prudent acquisitions for vertical integration and has leveraged the firm’s designing and manufacturing capabilities. Suzlon must not lose out on this advantage and must continue to harness its internal Sophisticated and Modern Research & Development facilities.
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