James Lawson, Contributor
April 02, 2013 | 5 Comments
Manchester, UK -- Overcapacity, tightening margins, intense demand fluctuations, uncertain subsidy support and severe price competition: wind turbine manufacturing isn't for the faint-hearted these days. Wind turbine original equipment manufacturers (OEMs) are now redesigning their businesses from the ground up to compete effectively in today's ultra-competitive global marketplace.
“The wind market is volatile and unpredictable, with high fluctuations in volume,” says Arto Lahtela, senior vice president, wind gears at Moventas. “The ability to adjust capacity is key to making profits and those with the greatest vertical integration will suffer the most.
Vestas, the world's largest turbine maker, is probably the highest-profile casualty of the ongoing market slowdown. With its stated goal to create “a more flexible and scalable business”, the company is now in the midst of a restructuring that will see it cut staff by almost a third, from 22,721 in 2011 to 16,000 by end 2013.
To maintain profitability, OEMs must constantly refine turbine performance while cutting costs and increasing manufacturing flexibility. In order to achieve these goals, manufacturers are revamping their supply chains with techniques like lean production, component commonality, just-in-time stocking and strategic supplier outsourcing.
In the early days of wind turbine manufacturing, specialist suppliers were thin on the ground and there was little alternative to in-house production for components of any complexity. Today there is a wide range of approaches, with the likes of Enercon still making most of its parts in-house while others outsource almost everything apart from final turbine assembly.
“There is a movement towards outsourcing and flexible manufacturing,” says Aris Karcanias, managing consultant with BTM Consult - A Part of Navigant. “Typically it is a hybrid model where OEMs retain control over vital components and outsource the rest. The challenge lies in finding the proper balance.”
Highly vertically integrated structures like Enercon's give manufacturers full control of component design, quality and delivery time. Siemens, another successful manufacturer with a high degree of vertical integration, bought independent suppliers and opened new facilities to make its own blades, hubs and nacelles.
When demand is strong and capacity is fully utilized, this arrangement works well as an OEM can maximize income (and hopefully profit) in every part of its internal supply chain. But when demand slackens, the downsides become apparent: high working capital requirements, costly R&D and other overheads, inflexibility and a drain on management resources.
Most wind OEMs have realized that long-term strategic partnerships with specialist suppliers can offer many advantages over in-house production, with many recruiting supply-chain experts from industries like automotive and aerospace.
“The wind business is changing from a niche to a larger industry of global size,” says Edward Rae, who spent 20 years at Nissan, Ford and Peugeot before becoming vice president, global wind supply chain at Alstom. “Good supplier management, better inventory control, long-term innovation and partnerships: in general, it's about making the industry a lot leaner.”
Instead of just making parts for one parent company, independent suppliers of major sub-assemblies like towers, gearboxes and generators can manufacture in higher volumes and diversify by selling into multiple markets, helping them better amortize the substantial investment needed in areas like R&D, testing and plant. An OEM might need to ramp up R&D to develop a new generator every three to five years; what does it do with those experts the rest of the time?
A specialist supplier continuously developing multiple products will be better able to support ongoing R&D and, like marketing agencies and management consultancies, working across multiple sectors allows cross-fertilization of ideas and so a better product. Dow, which supplies many blade manufacturers with resins, foams and adhesives, is a case in point, recently opening its Global Wind Application Centre R&D facility near Zurich.
Outsourcing also helps insulate OEMs from market fluctuations. Suppliers can keep their production lines rolling by selling to other manufacturers or into other sectors, as ZF does with gearboxes. A highly vertically-integrated manufacturer will have to support a collection of non-productive business units and probably make redundancies, as both Vestas and Siemens have recently had to do in the U.S.
“The suppliers take the brunt of the volume risk and the turbine OEM doesn't have to deal with the full impact of a slowdown,” explains Karcanias. “There's less capital outlay and financial exposure, and less exposure to policy risk.”
A Dominant Theme
Outsourcing has been a dominant industry theme in recent years. In June 2012 Vestas sold its tower factory in Varde, Denmark to long-term supplier Titan Wind Energy while Goldwind offloaded its blade manufacturer Tianhe Blade to Sinomatech in May of that year - a complete reversal of the insourcing strategy previously followed by Chinese OEMs.
“That's a very clear indication from two top-10 players that they are seeking to divest fixed assets and pursue more of an outsourcing strategy,” says Karcanias. “Vestas has already shown its intent to pursue a hybrid approach and they are rapidly implementing that.
Gamesa has also slowly been shifting to a more outsourced model over the last decade. In 2007 the company took a 32 percent stake in Spanish tower manufacturer Windar as its part of a joint venture with Daniel Alonso that saw Gamesa divest its own tower factories. As well as Gamesa, Windar now supplies Acciona and Alstom.
“We are trying to get closer to the dynamics of the automotive industry,” says Ricardo Chocarro, Gamesa's operations managing director. “With only one or two days' inventory in the warehouse, working capital can be drastically reduced.”
Cost and capital are the two key metrics, with Gamesa's hybrid Make and Buy supply chain strategy using ROCE (Return on Capital Employed) analysis to decide whether to insource or outsource. Chocarro estimates current overcapacity in the market as 30-40 percent. “We want to use existing capacity, whether ours or a supplier's,” he says. “Any future growth will be covered by outsourcing.”
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