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CASE ANALYSIS by Rajaram P R (B13105) 1) How do you analyze the attractiveness of the industry?

Should Suzlon Energy expect more competitors in the days to come? How should it prepare itself for it? The data shows that the current status of the industry is doing very well and is expected to grow at a fast pace. The following points relating may be considered while analysing the attractiveness of Wind Energy Industry. The Wind Energy market has grown leaps and bounds between the years 2000 and 2007. There has been a 400% increase in wind power generation in these years. Current installation capacity has grown to 20 GW per year, which seems to be a very promising number. Also, this per year installation capacity is expected to grow even further keeping in view the ever increasing demand for clean energy. Global Wind Energy Council forecast promise around 155% increase in the global wind energy market by 2012. As clearly mentioned in the case, East Asian countries, especially China and North American countries are going to be the demand center of wind energy for the coming 5 years. Hence, investing in these provinces may be a lucrative idea. Economic valuation of the wind market stood at 25 Bn Euros, making it a significant part of the pie. Annual growth rate for market is expected to be more than 30%, which is very high as compared to the overall energy sector(including thermal power etc) Keeping in mind the falling per unit cost of wind energy production, which fell down to 1/5th of what it used to be in 1980s, the wind energy market is expected to draw the limelight. Also, the cost of production is expected to fall even further. With the demands of energy rising at a very high rate, the gap in demand and supply will only make the prices of energy rise to even higher levels, making it a more profitable business. With more demand of clean energy and the legal obligations by governments on energy producers to increase the percentage of renewable energy in their production, the dependence on wind energy producers is only going to increase. Subsidies being given by the government in order to promote the renewable energy resources are going to boost the wind energy market, making it more attractive. The wind energy market has been growing at a rate of more than 28% per year for last 10years continuously. This fact speaks for itself. Such an industry is assumed to be in its youth and is deemed as very attractive to invest in.

The points above may be summarized using the Porters 5 Force framework, which is commonly used to evaluate industry attractiveness

Porters Five Forces Power of Suppliers Entry Barriers Industry Rivalry Power of Buyers Threat of Substitute

Extent in Industry Low High Very High High Low

Global Rivalry in this field is high as big players like Vestas, GE Wind, Gamesa etc, companies with better brand value and better access to technology exist in the market. Suzlon produces wind energy at a low cost, therefore entry barriers to other firms is high. Also since wind energy itself is a substitute for other forms of energy, and thus there are limited threat of substitutes for this product unless we count other forms of renewable energy. Since Suzlon produces its own raw materials, bargaining power of suppliers is less. However Bargaining power of buyers is high as there are many companies with better technology. To evaluate the attractiveness of the wind energy industry to Suzlon, the SWOT framework may be used-

STRENGTHS: Abundant amount of wind available to harness East Asian countries, especially China and North American countries are going to be the demand focus of wind energy for the coming 5 years. Lower Maintenance cost Lesser Amount of Greenhouse Gases Stronger innovation and research initiatives in blade manufacturing. Wind Energy encouraging Sustainable Economic Growth Wider global spread of the wind energy based electricity market No radioactive Hazards The wind energy market has grown at about 28% per year for last 10 years. Such an industry is assumed to be in its growth years and is certainly as profitable to invest in. Costs of production diminishing continuously (to about 1/5th of 1980s).

WEAKNESS:

Continues to stay costlier than Coal and Natural Gas based electricity generation. Priced at 55.8 $/mwH Poor financial returns for the last quarter stemming from supply chain constraints. Dilution of First Movers advantage 2

OPPORTUNITIES:

20 GW increase in net wind energy installed capacity from 74 GW to 94 GW Global Wind Energy Council (GWEC) has ascertained the industry to grow to 240GW by 2012. Legislations asking minimum 20% of renewable sources Economic valuation of the wind market stood at 25 Bn Euros, making it a significant part of the pie. Decreasing sustainable economic growth and mitigating the effects of climate change through clean and renewable sources of energy are the need of the hour and its wise to lead the pack. Seen as a business from which a secure and profitable return can be made. Pressure from some national governments on energy producers to source an increasing percentage of their electricity from renewable sources. For e.g. Introduction of legally binding target of 20% of the regions energy to be derived from renewable sources by 2020 from European Union. The company penetrate its sales in India further so that it can reduces the overheads of making Farm equipment and has a richer value chain.

THREATS

Steady competitor space in the market with healthier Market shares of leaders. Demand for turbines of higher power was increasing but not many existing facilities could produce large modern turbines and their towers and foundations, so constraints in supply may lead to higher costs. According to Tulsi Tanti, head of Suzlon, wind energy generation remains competitive as long as crude oil price is above US$40 per barrel.

Suzlon offers wind turbine generators in the range of 350kW - 2.1MW, one of the largest ranges offered by an Asian firm. Also Suzlon offered its turbines in customized versions for variety of climate ranging from hot and dry to humid coasts. Suzlons two new products were specially designed to provide high performance. The design was incorporated using state-of-the-art techniques. One of the products was carefully designed to open up the wind energy market to small investors at an affordable price. Suzlon has been successful due to its positioning as a low cost producer with top class design and technology (which was achieved by strategic acquisitions to have control over supply chain securing and going for vertical integration of the company to secure growth and volume), and its competence to provide endto-end solutions rather than just being an equipment provider. Yes, Suzlon Energy should expect more competitors in the market in the days to come since the wind energy market is attractive, given few existing players and the speedy and increasing growth of wind energy market . Many players in the traditional energy market are planning to get into the wind energy 3

business keeping in mind the upcoming dependence on renewable sources of energy. Renewable sources of energy are the next big thing in the energy scenario and many new companies are expected to join the wagon soon. To prepare for the new companies that might get into the wind energy sector, Suzlon Energy may take the following proactive actions: Vertical integration in order to reduce the companys dependability on other companies and reduce the long term operating/manufacturing costs. Also, vertical integration will enhance companys flexibility. However, initially the burden of acquisitions might keep the profits low but the company should think with a long term perspective. Suzlon Energy should invest more into technology and Research & development in order to stay ahead of its competitors. The company should go more into customized production to make sure that it can fetch as many customers as possible. The company should provide end to end customer solutions in order to appease the customers. The company can further expand its base in India so that it can reduce the cost of manufacturing of the Wind Farm equipment and gain an edge over the competitors . The labor cost is low in India, which makes it a favorite place for expansion. Also, the conditions here are more favorable with government pitching in for renewable resources of energy.

2) Evaluate the decision of Tanti to go for acquisitions? Has it given any competitive advantage?

Suzlon was facing various supply bottlenecks because of demand-supply mismatch which led to delays in deliverables and increasing costs, and may be this was the reason why it started acquiring firms and decided to go for a vertical integration. Suzlon needed good support of R&D in order to experiment and bring to the fore new and innovative ideas to stay ahead of its competitors. Hansen Transmissions were in a good position to take care of the R&D demands of Suzlon, given its current R&D capability at Belgium. The decision to go for acquisitions came into the picture when Suzlon's initial turbine supplier Suedwind folded due to financial difficulties in 1997. As a result of which Suzlon took over its manpower and started R&D centres, along with manufacturing of turbines.

Acquisition of Hansen Transmissions, Belgium: Hansen Transmission was a manufacturer of wind turbine gearbox, one of the most important parts of a wind farm. It had fantastic manufacturing facilities with the latest machinery in Belgium. Suzlon needed good support of R&D in order to experiment and bring to the fore new and innovative ideas to stay ahead of its competitors. Hansen Transmissions were in a good 4

position to take care of the R&D demands of Suzlon, given its current R&D capability at Belgium. The manufacturing of wind turbine gearbox helped Suzlon Energy in combining these wind turbine gearboxes with the rest of the turbine, making it a complete package. The complete package was seen as a more reliable and trustworthy product in the market. Hence it became a competitive product in the market. Hansen Transmissions had an excellent team of managers who were supposed to better the supply chain strategies, support and plan companys expansion in Belgium.

Acquisition of REpower, Germany: This deal was a strategic one. In order to implement Suzlon Energys plans for spreading its reach in Europe, which was considered to be a terrific market for wind energy, the company had to acquire one of the leaders in Europe. It chose Repower. Although, Areva and Martifer also had a share in REpower, they were expected to sell it to Suzlon Energy in 2 years. The following points may be the basis of evaluation of Tantis decision: Enhancement in delivery capability by having a dedicated network for the same. Significant reduction in transportation and other logistic costs. Better and faster response to the demands of Europian markets Fast paced off shore competency.

The dreams of Suzlon Energy to expand its operations in Europe could only be realized through its acquisition of one of Europes major players. Although, the cost involved was huge, yet it was worth the risk, keeping in view the opportunities in Europe and the betterment of image of Suzlon Energy. Analysts suggest that after acquisitions Suzlon is a fully vertically integrated energy equipment provider, a position only a few global providers such as Spains Gamesa, has managed to achieve. Not even that, Suzlon has gone ahead by a step and achieved a greater level of vertical integration than its peers. This can be shown by facts; its operating profit margin is 25 per cent against 13 per cent for Gamesa. Suzlon also expects the cost efficiency to come in through vertical integration as it would offset any margin dent caused by increase in steel prices, which constitutes 70 per cent of the cost of towers. Some of the Competitive Advantages gained by Suzlon are: Supply chain stabilized Diverse Portfolio Enhancement in technology and hence reduction in manufacturing cost. Enhanced quality control over the manufacturing and supply process. Increased control over supply chains, helping in increase of sales. Improved product portfolio. Better and long term service for customers. 5

Deeper approach in the local markets of different parts of the globe Enhanced image as a Big and Reliable Wind Energy player, giving it a direct advantage over the competitors.

3) What can be the possible future expansion strategies of Suzlon Energy? Suzlon would follow an aggressive expansion strategy in the near future given that1. The current production of energy is not sufficient to meet the current demand and in the coming years the situation is only going to get worse, as the global economy is on a rise. The demand of electricity in the developing nations is going to rise as their economy is set to improve. The future thus looks bright for the renewable sources of energy. The economic status of people living in the South Asian and African countries is improving continuously and consequently they are increasing the demand for electricity. 2. Seeing the current status of the Order book of Suzlon Energy, it is easy to discern that the demand of wind based energy projects is increasing at a rapid pace. Latin American orders of wind turbines for production of 42.5 MW energy, Pacific Hydros order of $140 Mn for wind farms, supply of 300 turbines to Edission Mission group, PPM Energys order of wind turbines for production of 400 MW energy and further increasing orders from East Asia and US tell us that there is a steep rise in demand and it is going to increase even further. If there is no further expansion, these demands will not be met. Since Suzlon is currently involved in small size turbine sector, there is a potential risk of it ignore/underestimate other order sectors. Hence, Suzlon may see expansion as a choice. The investors faith in company has been encouraging keeping in view the fact that Suzlons share has proved to be profitable in multiple areas for them. Financial Deficits would ideally not be comprehended by Tanti as of now. Suzlon was generating high profits because of its early mover advantage; it can stick to the same policy and target nations where demand is expected to increase. Suzlon should be able to generate the funds required for the expansion fairly easily as investors are very satisfied with its performance.