Building a supply chain from scratch can present a high-risk gamble. Is it worth the cost?

By Karl Harder

Breaking into new markets in countries with little experience of manufacturing the components required to build turbines is the ultimate challenge for a supply chain manager. Faced with prohibitive costs associated with transportation of large components, such as blades and towers, companies are often left with little option other than to build a local supply base from scratch.

While the challenges vary considerably between regions, the key issues include maintaining component quality, ensuring access to raw materials, protection of intellectual property rights and compliance with international trade regulations.

IP and quality an issue

Generally, in most emerging markets the first manufacturing units to be established are for blades and towers. However, in countries like China, where foreign companies run up against the hard rock of protectionism, the problem lies not with capacity, but with quality and protection of intellectual property rights.

A recent government mandate in China, designed to restrict imports, decreed that 70 percent of project’s total value be sourced from local suppliers. In other words, local companies may source from foreign firms, as long as the items are manufactured in China. 

In 2007 REpower began the process of establishing their manufacturing and supply capabilities in Inner Mongolia, China. The first of their Chinese-manufactured turbines was completed in 2008.   “In contrast to the US, China has a well developed supply chain for almost all turbine components,” explained Lars Kristiansen, Chief Supply Chain Officer at REpower Systems. 

In light of the import restriction, foreign manufacturers were forced to partner locally. “The first decision was whether to establish manufacturing capabilities in partnership with our home market suppliers,” explained Kristiansen. “The benefit of this strategy is that it ensures speed and quality but increased cost is the downside."

Rather than partner with home market suppliers REpower chose to form a joint venture with a local Chinese steel construction and engineering company, North Heavy Industry Corporation (NHIC), to build REpower’s nacelles. 

The key problem for REpower in China was securing gearboxes and other components for inside the nacelle.   “Good quality blades and towers are available but the locally produced nacelle components are not of the highest quality,” explained Kristiansen.  

 “This was not a simple process. It took two years of intense training to produce the first usable nacelle,” he added.  “But this provides the opportunity to achieve quality at a low price.”  

Underpinning this search for quality was a constant concern over intellectual property protection. “There is an inherent risk operating in China that your technology will be copied. The issue of IP protection meant that plans were only given to the Chinese partner for mature nacelle technology” explained Kristiansen. “We keep our latest technology for our home markets.”  

This concern over IP means that certain components are always going to be sourced at a global level. For instance the hardware and software used in the controller are the brain of the turbine and, in REpowers case, where much of their IP is housed.

In the Chinese market, steel and other building materials are often sourced globally due to concerns over quality .  

Import reliance hampering growth

Within the relatively smaller market of Latin America, Brazil is the major player.  With protectionist policies similar to those of China, Brazil mandates that 60 percent of a project's value be sourced locally. An added restriction is that only components for turbines greater than 1.5MW can be imported.  

Though the legislative environment has been favourable wind energy capacity has not grown substantially.  2008 saw only 94MW of capacity added. The Brazilian government is looking to speed things up by auctioning of sites. The first auction is due on November 25^th of this year.

Currently there are only two companies operating in Brazil: Wobben Enercon and Impsa. Both have the capacity to manufacture blades, towers and nacelle casing.

However, many of the internal nacelle components are imported, introducing currency and working capital risk for project developers. “Until demand picks up in Brazil it is unlikely there will be any further local options” concluded Eduardo Tobias from New Energy Finance.

Longer lead times a drag on productivity

Closer to home, supply chain issues still present challenges. “In the US LM Glasfibre, Vestas, Siemens and Suzlon are all active in blade and tower construction. But the construction of nacelles and nacelle components has not kept pace with demand,” explains Tobias. 

In the United States, gearbox and generator capacity is constrained primarily due to a lack of large casting and long forging capability.  Operating in this context, Nordex chose to invest in the development of their own nacelle manufacturing plant when they recently entered the US market. The motivation behind this was that they would be able to satisfy not just their own needs but also the needs of the wider market. 

Despite significant expansion of the manufacturing base in the US market, up to 50 percent of the value of a project is still imported from Europe.  This makes currency and working capital the key areas of risk for companies operating in the US. 

 “We buy many of our components in Euros, but we have to sell in US dollars. As the Euro has strengthened our margins have been squeezed,” explained Dan McDevitt, Vice President Supply Chain Manager at Nordex USA. “This risk increases because the time between agreeing a price and payment tends to be long.” 

The wind sector’s manufacturing foot print has been growing in emerging markets and this has made life easier for supply chain managers. But with the credit conditions still tight, the speed at which this footprint is increasing has been reduced.

The long lead times that come with sourcing from Europe, combined with requirements for large deposits means sourcing globally can put pressure on working capital.  Furthermore, investment is likely to stay restricted until at least 2011 and this will complicate supply issues as demand for wind recovers post credit crunch.

Respond to this article by writing to:

Karl Harder at karl.harder08@imperial.ac.uk

or write to the Editor at rstancich@gmail.com