By Ritesh Gupta

Vertical integration has had a sea-saw effect on the supply chain over the last decade. Within the wind industry, when capacity was constrained, a lot of original equipment manufacturers (OEMs) and major suppliers (at the TIER 1 level) went with vertical integration and their efforts were made easy by the abundant capital in free flow. 

As the markets became turbulent, cash became “king”, constrained capacity turned into excess capacity due to order books drying up, so a lot of OEMs abandoned the idea of vertical integration and where possible divested. 

Going forward, the industry expects vertical integration to continue to take place, with due diligence at a slower pace.

Advantages

The primary advantages are cost control, quality control and capacity control. From a product perspective, vertical integration helps in overcoming risks associated with assorted components as well as challenges arising owing to inconsistent technical interfaces between component suppliers. 

“Vertical integration when implemented with synergy and growth in mind is beneficial,” says Farhan Mirza, VP and global head of sourcing and supply chain management at Winwind. 

Mirza further adds: “A lot of smaller suppliers operate in the niche market or may have technologically advantageous patents or methods of manufacturing, which are beneficial to a larger business. Getting vertically integrated with the larger business can bring benefit to the individual parties and also the end customers.

On the other hand, struggling partners can use the synergy to formulate a game plan of survival and growth. Vertical integration can serve to right size the market and optimise the product flow, by means of cradle to grave “should costing”, advantage in procurement synergy, sourcing strategy being streamlined and better control on Material Resource Planning (MRP) even with a low tech ERP system.”

Process 

It is important to assess how wind turbine manufacturers have managed to strengthen control of design, intellectual property, manufacturing and quality as well as securing supply capacity.

All OEMs have made tremendous strides in improving control on design, IP, manufacturing and quality. “We continue to see evidence of the same in terms of improved availability numbers where the standard now is 97 per cent and increasing, bigger towers and blades being deployed without incident and continuing in operation, which not only cater to the needs of the low wind sites, but also support low cost maintenance,” says Mirza. 

Arguably all of this has been made possible by a closer network of the different departments within each company, working in harmony in clusters called Cross Functional Teams (CFT) which consist of design, development, sales, supply chain, manufacturing and production. Involving all members right from inception of the concept helps to get the product to market earlier, cheaper and without flaws, ultimately catering to the needs of the customer. Lessons learned are being documented and reviewed, which helps make the manufacturing process leaner and the quality of the product robust.

On the IP front, shorter lead times from concept to launch are helping in quicker implementation of products, in addition, better security of the data, tightly managed non-compete clauses for key personnel where allowed by law, help further towards IPR protection. Legally too, it’s becoming difficult to forge a copy of a design or process and get away with the same. 

“Justice is being rendered in all parts of the world when it comes to IPR related crimes and this is what truly stands out in the arena. IPR insecurity is the biggest turn off for investment, in my mind in today’s world, as product integrity needs to be safeguarded as a first and foremost criteria,” says Mirza. “For the foreseeable future I don’t see capacity constraint as a concern within the wind industry. Overcapacity which has taken place, due to past actions needs to be managed.”

Right Approach 

Manufacturers can opt for in-house production of key turbine technology components or buy them.

“Currently the trend is for sure outsourcing to reduce over heads and Capex,” says Lars Rytter, chief procurement officer, Nordex. “Cash is King” and as the industry is under severe pressure due to over-capacity, governmental issues and lack of financing, the OEMs are pushing all demands respective capacities, fulfillment of local contents and pricing pressure down in the supply chain i.e. the component suppliers,” says Rytter.

Mirza says the electronic component and blades have seen a lot of vertical integration. Evaluating the right process for such components and parts is best evaluated in the business plan for the next five plus years. That way a number of aspects can be considered, such as the advantages of in-house production, which offers price reductions and production flexibility, but brings additional burden of talent recruitment, R&D, warranty and service issues. There will also be the additional burden on the supply chain team to consider, such as the management of an additional chain of supply base, for the components which will be produced in house. 

“The top 5-7 biggest turbine manufacturers have to a greater extent taken this approach but it has not been without significant challenges to deal with,” he says. Partnering with suppliers of key components to make this happen in a phased manner is a synergy-based approach, which Mirza supports and recommends, before taking a plunge.

Drive train components including gearboxes, large bearings and generators are considered to be the most significant elements of the value chain. 

Some companies have invested in internal vertical integration in gearboxes and generators, says Rytter. Bearings are to a very large extent not in-sourced, but bought in the open market by almost all OEMs. The trend has led to overcapacity, reduction of prices and in some cases also insolvent and or restructuring/taking over of companies delivering such components, says Rytter. 

On the other hand, Mirza does not see a lot of vertical integration in gearboxes, bearings and generators happening currently. 

“Simply put, these are core competencies of the suppliers and to break-even and eventually make a profit on the business line, there needs to be enough production being fed to generate the kind of returns needed, to self-sustain and grow the business line. With the kind of turbulence in the wind turbine industry, it is a risky proposition currently,” says Mirza. 

A wind turbine manufacturer could vertically integrate a key component like a gearbox and offer to produce for the competition, too, by keeping the business as a stand-alone unit within its organisation, but this model has not taken off with enthusiasm and zeal as the other turbine manufacturers are still not fully comfortable with a subsidiary of the competition having their products’ key data, adds Mirza. 

Mirza says bearings are a true niche market. There are a handful of manufacturers for bearings and the German bearing manufacturers rule the roost.

Vertical integration for all?

The bearing manufacturing technology needs a lot of R&D and manufacturing expertise. The bearings used to be the single most short supply component in the entire supply chain approximately five to six years ago. Currently they are in excess capacity, but the bearings from the European manufacturers will continue to be sourced from the suppliers and vertical integration of this component is unlikely, at least for the next five to ten year period.