Wind turbine manufacturers are more willing to shop around for parts as supply chain bottlenecks ease up in the recession

Emma Clarke

During the wind energy gold rush before the economic slump, global wind power capacity grew from 17,400MW in 2000 to over 121,000MW in 2008. But the wind industry has been a victim of its own success.

Turbines have been doubling in size every four years, technology has been developing at breakneck speed, but the suppliers that had the right expertise, facilities and capacity to deliver on increasingly challenging orders have been thin on the ground.

With supply chain bottlenecks a constant threat, many of the large wind firms have responded by buying out suppliers of critical components such as blades, generators, and gearboxes. By bringing suppliers in house, they could ensure they would get the products they needed on time, and at an acceptable price.

Vertical integration of the supply chain has been a gradual process over the last decade. Today, most turbine manufacturers make their own blades, after a rush to bring them in-house four or five years ago.

Wind companies including Vestas, GE, Gamesa, and Suzlon also have in-house supply of generators and controllers, although they also still source some of these components from other suppliers.

Hansen Transmissions and Winergy, that supply most of the wind energy market with gearboxes, are owned by turbine makers Suzlon (acquired in 2006) and Siemens (2005) respectively . Suzlon is rumoured to be selling Hansen to Vestas in order to raise further capital during this year. 

Where suppliers of scarce and critical components could not be bought, turbine manufacturers have done the next best thing by setting up close relationships with them.

In some cases, they act as sole suppliers to the turbine manufacturer, or they operate an open book policy so the buyer can better understand the supplier’s prices and quantities.

REpower’s blade division has set up six strategic relationships with suppliers of sub-components for blades, one of which works within the same factory.

Going steady

Vertical integration of the supply chain was necessary to ensure security of supply and security of prices. Wind companies have also benefited by ensuring the quality of core elements of the turbine and by developing competitive advantage in some these component production processes, says Søren Gantov Frølunde, analyst at research firm, Emerging Energy Research.

There are additional benefits in terms of protecting IP security and technology secrecy, says Andrew Bellamy, head of rotor blade production at REpower Systems.

As Bellamy points out, REpower was uneasy about using external component suppliers that provide for multiple turbine manufacturers often from the same manufacturing site: “We need to make sure we have suppliers we can trust to keep our projects separate from others,” he says.

But vertical integration of the supply chain can also bring risks. Siemens Wind Power has been more circumspect, only bringing the production of blades and controllers in house. For all other components they prefer to develop long-term relationships with more than one external supplier. 

The main motivation for keeping a more diverse supply chain comes down to mitigating supply chain risk, says Mogens Nyborg Pedersen, director for global sourcing at Siemens Wind Power.

“Most of the products in a wind turbine are specifically made for that turbine. So from a risk management perspective, it is dangerous to only have a single source,” he says.

Competition

Frølunde points to the potential risks of turbine manufacturers taking control of suppliers that are also supplying other wind companies, as is already the case with gearboxes.

“As the ownership of manufacturing skills of critical components becomes concentrated on a few large players, this could lead to an oligopoly, where prices are not set at a competitive level,” he says.

Problems are compounded if the players who own the component suppliers try to supply themselves first by postponing deliveries to competitors, he adds.

But there are no signs of monopolies in the market yet, says William Young, lead analyst in the wind insight team at New Energy Finance.

“Suppliers of critical elements [such as gearboxes] have a diverse client base, so even if they are owned by another [wind] company, growth is going to be driven by their clients,” he says.

Innovation

With no incentive for new suppliers to compete on critical components such as gearboxes or blades, one fear could be that innovation will suffer.

But industry experts do not seem too concerned. “One of the things that the wind energy industry has had too much of from 1995 to 2005 was innovation,” says Young.

Over the last few years, however, the pace of innovation has changed. Instead of coming up with the most cutting edge products, manufacturers are now more focused on innovating to improve efficiency and performance in order to meet explosive demand.

A new era

Following a period of innovation, and then intense growth, the wind industry is now entering a new era that could signal yet another shift in the structure of the wind energy supply chain.

The recession has meant shortfalls in capacity are yesterday’s news, given demand for products is dropped and suppliers have had time to build capability, says REpower’s Bellamy.

A greater number of suppliers are interested in the wind energy industry, now that demand has ebbed from other industries that are struggling in the downturn. “We may not offer the same margins some suppliers are used to, but it is good money, it is reliable and it is in big quantities,” says Bellamy.

New suppliers are also coming over from Asian countries such as China and its booming wind energy industry. These suppliers also offer more attractive pricing than their European counterparts, says Bellamy. European firms are still cautious about buying from the Chinese, he says, “but these doubts are getting less and less”.

With a more resilient supply chain, and less money to spend on major acquisitions, Bellamy says there is less of a desire to hoard suppliers. “We are now happier to keep suppliers separate than we were a year ago,” he says.

The wind power industry isn’t quite at the stage where new suppliers are entering the markets for all critical components. Pedersen, for example, doubts we will see a new gearbox manufacturer anytime soon, given the time it takes to test and approve new products.

But, as the industry settles into a new period of sure but steady growth, supply chain directors may breathe a sigh of relief and start considering a new and more diverse supply chain.