THE BIG. Big Question

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1 Big Question Mersen THE BIG Question Ingo Wagner/Corbis Does consolidation loom for wind? For many in the wind industry the question of the moment is not whether consolidation lies ahead, but as Gamesa s chairman put it in February when will it start and who will do it? According to some, consolidation is already happening; according to others, it isn t something the industry needs to worry about, at least not this year. We asked our readers for their views on consolidation in the wind industry: is it inevitable or avoidable; is it already happening; what will happen if and when it happens and, if it does, will it ultimately be good or bad for the industry? Here is what you told us. Steve Sawyer, secretary general, Global wind energy council There have been predictions of a massive consolidation within the wind industry for nearly a decade now. While there has been a continuous process of smaller players being bought up by larger players and some consolidation, this has been offset by a steady stream of new players entering the market, particularly in Asia. There is no doubt that the current manufacturing overcapacity has, in combination with a global economic slowdown, led to powerful downward price pressure; margins are thin and getting thinner, and the survival of some of the smaller players is increasingly in doubt. However, as long as the market continues to spread to new continents and new markets, I think that we will continue to see new players enter the industry, while the weaker players are weeded out and/or bought up in the more mature markets, particularly in the traditional strongholds of Europe and North America. China is a special case, but it is very apparent that with the market stabilising Bob Sacha/Corbis now the massive overcapacity in manufacturing cannot be sustained. But the market is changing, requiring new skills (offshore, lower wind speed machines) and, one hopes, a completion of the shift in emphasis of government policy from MW installed to MWh delivered at the lowest possible price. This will be the most powerful force for rationalising the supply side in China. If there is a right number of manufacturers per market or per MW of market size, I don t know it, but the nature of the technology is such that there will always be room for a number of local champions and global players in each substantial market. RENEWABLE ENERGY WORLD MARCH APRIL

2 THE Big Question Stefan Gsänger, Secretary General, World wind energy association During the past two years, the wind industry saw on a global average significantly lowered growth rates: while the average growth rate in the last decade was around 30%, it reached only 20% in At the same time, the geographical distribution of this growth has changed fundamentally. In 2004, Europe accounted for more than 70% of all new wind turbines. This share dropped to only 22% in 2011, while Asia tripled its share from 18% to 54%. This shift is, after all, the result of very strong political support, mainly in China as well as in India, and of an ambiguous situation in Europe, where some governments have still not understood the benefits of renewable energy. During the same period, the North American market in particular the US remained unstable, also due to the unpredictability of political support and the weakness of the PTC scheme. Investment in manufacturing capacity follows demand for wind turbines. Thus the stronger role of Asian manufacturers, European stagnation, and the US manufacturing industry's precarious situation are not surprises, but logical consequences of market development. Earlier European manufacturers were able to compensate for lower growth and stagnation in Europe by selling in other world regions, mainly in North America and Asia. And Europe saw a first consolidation of its wind industry a decade ago, while in China dozens of new companies were established. However, even the current largest market by far, China, has now reached a stable size. Pressure from within the Chinese market is forcing the nation's wind industry to expand abroad, and will lead to a reduction in the number of turbine manufacturers in the Suzlon country. It is also noteworthy that almost all Western wind turbine companies have entered the Chinese market, while Chinese manufacturers have only begun to export to other parts of the world, and sales are still low. Against this background, the current changes in the wind industry should be seen as a re-balancing of the global wind market which reflects the strengths of different regional markets. Increasing competition forces efficiency improvements. Some world regions are just beginning to utilise wind energy. It will be very interesting to see especially how the African and Latin American markets will perform. New companies from these two continents have just entered the market, and their success will eventually depend on their governments support. The future will bring more changes, new balances and probably also more geographical diversification. More diversification will eventually be in the interest of the wind sector worldwide, in particular in its competition with the highly centralised fossil fuel and nuclear industries, as jobs and other economic benefits will be more equally distributed around the globe. Ben Warren, head of environmental finance, Ernst & Young A triumvirate of pressures is building on the wind sector and driving some inevitable consolidation. First, we have waning government support in Western markets. Then there is capital scarcity within utilities and independent power producers and a tough and illiquid project finance market, bringing balance sheets under more pressure than ever. The third aspect is today s truly global market. Substantial Chinese turbine manufacturers that have tended to be capitalised via state support, having enjoyed five years of extreme domestic growth, are now looking increasingly to overseas markets to deploy their technology. This puts established Western manufacturers and all of their supply chain under considerable pressure. No one within the industry should be surprised at this turn of events. For the past 10 years there has been quite a degree of consolidation in the sector s component supply chain. Peripheral businesses, such as some support services markets, are also seeing consolidation. And we re starting to see outbound activity, particularly in the Eastern markets; for example, there are signs of vertical integration in the Chinese market. The only cause for surprise might be where some OEMs, for example in the EU and the US, have been champions for domestic economies. Due to subsidy regimes, these OEMs have traditionally been insulated from certain pressures. These markets have thus been somewhat ill-prepared for operation in a global marketplace, and it would be fair to say that they have been somewhat lax in terms of formulating strategic direction and, indeed, of realising its importance. It might be a surprise to some domestic markets to see their national champions coming under significant stress, fighting for market share in an increasingly competitive environment. In the end, however, consolidation will be good for the wind industry. The industry is not about short-term job creation, it s about delivering a real alternative to conventional sources of energy, and thus it must compete with conventional sources across the globe. If that means we need consolidation to deliver economies of scale and manufacturing efficiencies that make wind cost-competitive, that must be a good thing for the long-term sustainability of the sector. If wind remains a cottage industry demanding high prices for its products, then it will ultimately fail. For the sector to be able to stand on its own feet, consolidation is necessary. 24 RENEWABLE ENERGY WORLD MAY JUNE 2012

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4 THE Big Question Luc Themelin, CEO, Mersen The decade between 2000 and 2010 saw a powerful upturn in the fortunes of the global wind energy industry, which posted a CAGR of close to 30% in its installed capacity. Western governments pledged to oversee a significant expansion in renewable energies out to 2020 and introduced corresponding support measures. With their appetites whetted by the attractive growth rates available, numerous industrial groups have expanded into wind energy. Industries built up around wind turbine manufacturers, expanding frequently through mergers and acquisitions (for example, the merger between Vestas and NEG-Micon in 2004). Certain manufacturers decided to pursue upstream integration, while others moved into turbine assembly by signing long-term partnership agreements with key suppliers. Since 2010, the sector has continued to achieve significant growth rates of around 15%, but the competitive landscape has been transformed. The ramp-up of Chinese manufacturers, which have brought significant downward pressure to bear on turbine prices, has caused problems for certain Western vendors. In addition, the focus of the market has shifted from Europe and the US to China, benefiting Chinese manufacturers to an even greater extent. Lastly, manufacturers and their suppliers have had to absorb higher raw material costs, without being able to pass them on to their customers. The economic crisis is now prompting certain governments to reconsider the wind energy subsidies they provide, especially since the price of gas, a rival source of energy, is highly competitive. As a result, many projects are unable to get off the ground because they do not have sufficient financing. The current overcapacity is taking a very heavy toll today because industrial plants are running at reduced capacity. The only alternative is to restructure to adapt to market conditions. Not all current manufacturers will be able to survive in the new landscape. The share prices of listed industry players have tumbled, making mergers or acquisitions more likely. These will strengthen these companies' positions, or see them becoming part of conglomerates with the requisite resources to finance their development. A round of consolidation is also set to sweep through the industry s supply chain. Manufacturers want to expand their operations downstream (maintenance, services) to retain customers with larger portfolios and regain the margins they lost when prices dropped. Manufacturers may also join forces with wind farm operators to secure downstream markets. Manufacturers are also expected to increase upstream integration to secure their supplies of key components (such as generators or blades), to offer unique products or to restore their lost margins by gaining the added value currently generated by their suppliers. NAVIGANT 26 RENEWABLE ENERGY WORLD MARCH APRIL 2012

5 Big Question Adam Barber, A Word About Wind When it comes to global consolidation within the wind energy markets, there s a simple truth. Yes, consolidation is inevitable and yes, it s unavoidable but to hand-wring over the mechanics of what will happen and how is to miss the point. Put bluntly, market consolidation is critical to the industry s future success. Consolidation levels the playing field. As major players merge and as larger firms acquire their smaller cousins, ideas are circulated, shared and refined as industry benchmarks and market parameters are reset. Businesses, both large and small, that have either become unprofitable or that struggle to articulate a clear and compelling corporate vision are often at the top of the acquisition list, particularly as rivals seek to develop greater economies of scale, diversify an existing client base or quickly build a foothold in new territory. Then there are the emerging upstarts those businesses that often feel as if they have come from nowhere and quickly grown up through the ranks. These businesses often reach a point at which they must either dig deep and re-invest, or alternatively become a viable acquisition target, with a view to generating future growth through the structure of a more established corporate cousin. Within North America and Western Europe the first phase of market consolidation is already underway and the pace of mergers and acquisitions in 2012 is only set to increase. Support services businesses and consultancies are sectors to watch, although don t rule out one or two surprises from some of the very biggest manufacturers. With the Chinese domestic industry now reaching maturity and with manufacturing costs continuing to fall, consolidation here is imperative. There MTS are just too many suppliers battling with the complex challenges of reliability and availability, and needing to find new ways of tapping into capital if they are to realise their international ambitions. Industry consolidation may well create consternation but in the fast-moving international wind sector, it s critical in safeguarding its future success. SENSOR Tildy Bayar RENEWABLE ENERGY WORLD MARCH APRIL