WIND INDUSTRY CONSOLIDATION

Sep 2011
By Anand Jha

Executive Summary
Macro Environment
Sluggish US Economy & Europe Debt crisis Policy Uncertainties (Europe, US) China Policy Adjustments Declining Shale Gas Prices/ New Discoveries Modest Growth Disincentives for New Entrants

Industrial Environment
Transition to Buyers Market High Entry Barriers Capital erosion of Pureplays Long terms Value Chain Partnerships Higher Commodity Prices

Economies of Scale Attractive M&A preys Supplier Rationalization

Consolidation

Internal Environment
Supply Overcapacity Declining Margins Industrialized, Lean operations

Macro Environment and Market Dynamics favor Consolidation

Macro Environment
EU Debt Crisis
Portugal, Italy, Ireland, Greece & Spain (PIIGS) reviewing Renewable Support Programs, Together 33GW of Installations (2010) Italy proposed increase in corporate tax for Renewable Spain revising 2020 targets, FIT expected to go down further Portugal increases VAT across all electricity production Sovereign Debt Crisis makes lenders more cautious
Source: NEF

China New Policies & Regulations

Tighter Monetary policy, increased interest rates and dwindling stimulus funds for Infrastructure projects Grid Connection Code, which is expected to burden OEM with LVRT cost Provincial Quota System, limiting new project announcements in grid congested areas
Source: NEF

EU Austerity & Tightening Chinese Finance would flatten growth

Macro Environment
US Sluggish Economy & Policy Uncertainty
PTC set to expire in 2012, no visibility on ITC and Federal grant Natural Gas Prices continually falling No Federal Energy Bill in sight , EPA fails to put Green House Gas Regulations Low Electricity Demand
Drivers of utilities wind procurement strategies, US

Source: Make

Dependence of US Market on Stable Policy Environment

Source: Make

Maturing Europe, Declining Americas & Stabilizing Asia Pacific Market Growth

Industrial Environment
Price & Margin Pressures

Source: Make Product Development Integrated Development Standardization Modularization Design to Manufacture & Assembly Requirement Based Development Factories Flow & Layout Lead time Reduction Pull Flow Minimal Rework Inventory Management Equipment Supply Chain & Logistics Procurement Planning & Scheduling Supplier Management Stocks Management Lean logistics and coordination on a regional and global level

Efficiency of test benches Equipment reliability & maintenance Tools Spares Management Breakdown Management

Needed: Lean, Efficient & Industrialized Operations

Supply Overcapacity

Asset Buying, Liquidation and Market Exits

Capacity Utilization ~50% Not expected to go beyond this level

BI Intelligence

Winning Strategies: Productivity & Asset Management

Source: BI Intelligence

Industrial Environment
Seller To Buyer Market
Consistently increasing wind farm size - key factor for industrialization OEM in major deals with Utilities Siemens & Dong (1800 MW), Repower & EEG (1900 MW) Larger orders and framework agreement with selected suppliers Number of suppliers to Utilities decreased Drives Economies of Scale & Industrialization

Value Chain Rationalization

 Build-to-print principle  Own design & proprietary technology  Reliance on in-house R&D Capabilities

OEM R&D

   

Build-to-specification principle Off-the-shelf or customized sourcing Partnership with selected suppliers Reliance on supplier quality

Both OEM approaches impede Fragmentation

Technology Acquisitions

Supplier Rationalization

Winning Strategies: Scale Economy, Industrialization & Consolidation

Industrial Environment
OEM Competitive Landscape

Top 15 = 90% Market share

Technology acquisitions by Western Conglomerates Loss of market capitalization makes Pureplay easy prey Global Market Access by Strong Asian players Joint Ventures, Alliances & Licensing by Asian players Vertical Integration for Supply Chain bottlenecks Asian pureplays attractive targets for Asian Conglomerates

Bottom Fragmented = 10% Market share

Thin organic growth potential for pureplay Merger with Top Players Horizontal integration for better share Market exits Conglomerates may acquire several players for market entry or access

Consolidation possibilities in the entire OEM Competitive Landscape

Industrial Environment
Suppliers
Mergers among Pureplay Takeovers by Others unlikely Technology access has been major driver for Gearbox Supplier Consolidation Asian Players may target Western players for MW technology access Horizontal integration by Industrial players to broaden their market

OEM may acquire Generator & Converter players for PMG technology Overcapacity in Blade market may drive consolidation

Source: Make

Strong Consolidation Drivers for Strategic Component Supplier

Wind Industry Consolidation

No. of M&A Deals No. of deals constantly increasing Equity Asset Highest M&A Volume ($M) in a single quarter Strategic Asset in Public Co.

Source: NEF

M&A started as early as 2006, heating up in 2011

Wind Industry Consolidations

Market Entry & Access Capacity Addition Technolo gy access % Share Synergy Supply Chain Strength JV Alliances

. Multiple Objectives ..Multiple Routes ..Across Value Chain

Alstom acquires Econtecnia Iberdrola acquires Midwest

Goldwind 70% stake in Vensys

Gamesa acquires MADE Vestas merges with NEG Micon

Siemens acquires Flender EU Energy acquires Dewind from FKI

XEMC acquires Darwind GE Acquires Scanwind

FKI acquires Dewind

Suzlon acquires Hansen

Iberdrola acquires CPV Suzlon majority stake in REpower

DSME acquires Dewind STX Corp acquires Harakosan

Areva acquires Multibrid UTC acquires Clipper

GE Acquires Enrons Wind Assets

Siemens acquires Bonus

Wind Industry Players continuously leveraging Consolidation

Joint Ventures
China Joint Venture since 2006

60 JV deals since 2006

21 JV deals since 2006

Source: NEF

Joint Ventures: Highly prevalent in general, China in Particular

Conclusion
Market Catalysts Falling Turbine Prices, Lower Margins & Massive Oversupply Policy Uncertainty in major markets Tightening of Finances in EU, US and China Shale Gas, Clean Coal Technologies & High Commodity Prices US & Europe Stagnate, China plateaus at 10-15GW Winning Strategies Cost Reduction & Scale Economies Technology Strength Local Manufacturing Presence Effective Partnerships throughout Supply Chain Enablers Industrialization JV, Alliances and Acquisitions Asset buying, Licensing Supplier Base Rationalization Winning Strategies through Consolidation

Backup Slides
Basic Component Supplier Main Component Supplier Wind Turbine Manufacturer Wind Farm Owner Utilities

Horizontal Integration Backward integration Forward integration JV, Alliances Very Likely Likely Unlikely

Cost Reduction Sustained Orders Asset Access

Economies of Scale Economies of Scale Growth Growth Market Access Market Access Technology Access Synergy Diversification Globalization Supply Chain Strength

JV, Strategic Alliances most likely tools for Consolidation

Backup Slides

Pure-play Stock Price

Vestas

Gamesa

Nordex

Source: Yahoo Finance COMMERZBANK

Wind Industry: Historical Growth

Annual Installed Capacity (MW)
Moderate growth Economies of Scale Market & Technology Access Quality & Price Pressure Rapid Growth
Entry of many new players Order fulfillment pressure Filling Supply Chain gaps

2011-15: LM BI Forecast; June 2011

Fragmentation (2004-2009) to likely Consolidation (2010+)

Catalysts for Consolidation

Learning Curve effect As industry majors produce more and more, they start doing economically putting pressure on other players. Costly capital goods/ Long service times Bankable players with proven track record are favored than others high equipment prices and very long service life Economies of Scale/Scope As organization start offering more diverse, comprehensive & end-to-end solutions, cost per unit decreases (Vertical Integration) Economies of Purchase/Sales Cost per unit tends to go down as volume of purchase or sales per customer increases (Horizontal Integration).

Wind Industry
 It is difficult to evaluate the true cost of the Turbine its cost of energy a priori. This can only be determined after several years of services, hence project finance to bankable players.  Many of the components of Wind Turbine Blades, Gear Box, Generators, Controls are specific to this industry. Players with large, sustainable volumes command better pricing  It benefits from Learning Curve understanding diverse regions, weather conditions, segments etc. (Offshore, Low Wind sites, Cold and Dry conditions etc)
Source: Woodlawn Associates, 2011

Wind Industry inherently incentivizes Consolidation

Consolidation Strategic Options

SWOT
Overcome Weakness

Vertical Integration Conglomerate Diversification

Internal

High ROI, yet Long gestation time

Product Development Market Development Innovation

Horizontal Integration Joint Venture Concentric Diversification

External

Drivers Supply Chain Gaps Economies of Scale Bankable Players Market Access Technology Access

Maximize Strength
Consolidation provides external means to overcome weakness or maximize strength It is sometimes easier, less time taking and perhaps economical than internal means New Product Development, Innovation, New Market development etc.

Consolidation: Strategy to overcome weakness/maximize strength

Strategic Environment Matrix

Boston Consulting Group
Fragmented
Apparel, House building, Jewelry

A.

Specialization
Luxury Cars, Pharmaceuticals

Volume: Have only few differentiators, but the benefits from those are very high due to scale economies, gestation time of the technology. Profitability is correlated with Market share/ Company size Stalemate: Only few differentiators and gain from them is small. In the Steel or Paper Industry, one can lower manufacturing cost, improve safety, logistics etc. but cant expect huge returns from them. Profitability not related to market share Fragmented: A restaurant or Garment co. can differentiate in multiple ways, but the gains are not huge. There is space for both large & small companies. Specialized: Luxury car maker can differentiate in several ways, reaping huge benefits. Niche players can be as profitable as big players.

Sources of Advantage

B.
Stalemate
Volume grade paper, Steel, Wholesale banking, Basic Chemicals

Volume
Gas Turbine, Construction Equipment Motorcycle, Standard Microprocessors

C.

Size of Advantage

D.

Wind Industry (Future) Few sources of advantage: Life Cycle Cost, Efficiency etc. Only incremental improvements in these sources possible Differentiators come with Scale, Learning Curve, Strong past records etc Benefits are huge for each differentiator Very Similar to Jet Engines: Fuel Efficiency and Emissions

Gas Turbine: Future reference model for Wind Energy

Emerging Trends Pioneers to Industrialized

Pioneers Vestas, Enercon, Gamesa, Nordex, Suzlon Industrialized GE, Siemens, Mitsubishi & Alstom Regional Sinovel, Goldwind, Dongfang Pioneers market share dropped from 80% to 35% in 2005-10 Not enough to be first to market, Sustenance through  Lean operations (Industrialized)  Global presence  Local market access (Regional)

LM BI Forecast; June 2011

Industrialized & Regional (China) will consolidation position

Indicators of Consolidation
Market share by Top5 Players (OEM)

Concentrated Markets
Indicator : >75% market share by top 5 players

Consolidation

Source: Global Data Source: Woodlawn Associates, 2011

As Wind Industry replicates Aircrafts, Gas Turbines and Jet Engines, Total Market Share of Top5 Players expected to increase (50% -> 80%) This will have cascading effect across Value Chain Wind Farms, OEM, Suppliers

Across Value Chain Top5 Players will capture >75% Market Share

Aerospace Consolidation

Glen Martin & Marietta merged

Martin-Marietta Lockheed Northrop Grumman merged with Corporation merged with Aerospace combines Martin- Lockheed business of GE Marietta Martin-Marietta Lockheed merged with Corporation Space Division of acquires Loral General Dynamics

Seven Aerospace Organizations consolidate to form Lockheed Corporation

Boeing buys Vertol

Douglas & McDonnel merged

McDonnelDouglas & Hughes merge

Boeing merges Boeing & McConnel with Douglas Rockwell merge International

Six Aerospace Organizations consolidate to form Boeing Corporation

Fairchild Dornier, Raytheon are other prime examples of Consolidation

Aerospace Industry marked by massive consolidation since 1960

Emerging Trends Vertical Integration

Forward & Backward Integration