'Plenty of growth options as wind OEMs spread their wings'

Lars Holm highlights the key imperatives behind the wind industry's blizzard of mergers and acquisition

In the recent past, we have seen several strategic moves of wind OEMs in the M&A space.

Vestas carved out its offshore turbine business and joined forces with Mitsubishi Heavy Industries; Envision partnered with ViveEnergia, a large project developer in Mexico; Goldwind launched a Danish unit; Nordex bought Acciona Wind; Gamesa and Areva founded Adwen for their joint offshore turbine development; Suzlon sold Senvion to Centerbridge, a private equity house.

We can add more. Siemens acquired an engineering company in India and is now carving out its wind business and merging it with Gamesa; Vestas acquired two independent service providers; GE has divested its financial services, which had been instrumental in more than 2GW of generation capacity, and acquired Alstom, Blade Dynamics, and just recently LM Wind Power.

What is the logic behind these efforts? Is there a pattern? And what does it mean for the future of the OEM landscape?

This can be examined through six lenses: backward integration, forward integration, geographical scope, customer scope, wind technology portfolio and adjacent technology portfolio.

In the past, backward integration — the purchase of (or merger with) suppliers — was driven by a shortage of supply and by suppliers that needed to be "saved" by the OEM when they encountered financial difficulties. This legacy has been taken care of in the restructuring waves that the OEMs have gone through.

Today, as we can see with GE, backward integration is a sign of an industry that is beginning to mature; where reducing interfaces and the ownership of technologies is valued higher than the flexibility to scale up and down in response to volatile markets.

"Turnkey and project development have proven to be powerful tools"

We can expect more backward integration in the medium to long term, partially as M&A but also in very close-knit system supplier relationships.

Forward integration — effectively, the move into after-sales services — will be a strong component in most OEM strategies. Especially in new markets, turnkey and project development have proven to be very powerful tools in building a market position.

To date, we have no indication that the evaluation of OEMs has suffered because they are connected to or have become a developer — in fact, the opposite is often the case.

With the mergers of Nordex with Acciona, and Siemens with Gamesa, we can expect to see more forward integration in the near future. This will likely be in non-OECD markets and will come as a package solution with long-running O&M contracts.

Increasing geographical scope was certainly a key element in the recent mergers of Nordex and Acciona, and Siemens and Gamesa. The value of pushing to expand the geographical scope may seem to be a no-brainer; however, the contrary is the case.

Expanding geographical scope comes with the risk of fragmentation on the sales side and complexity on the product side. GE and Vestas have demonstrated how to create product portfolios that cover a wide spectrum of applications and markets with limited complexity.

It remains to be seen whether the two aforementioned mergers can make a fusion of their current technologies and combine broad spec coverage with cost-efficient design.

Until recently, increasing customer scope was limited to serving different customer types (farmers, financial investors, IPPs, utilities, or build-operate-transfer models).

Since the acquisition of UpWind and Availon by Vestas, a new dimension has emerged. The traditional approach of offering all O&M services for a particular wind farm has been upgraded by Vestas, which now offers all O&M services to a particular customer, regardless of the type of turbines it owns and operates.

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This customer-centric approach is only natural as the O&M space is becoming a highly competitive one. The fact that Vestas has acquired two companies within a short period of time — and signed new deals after the acquisitions — is proof that Vestas is expanding its customer scope based on a clear strategy and out of a position of strength.

We can safely assume that other OEMs are now reconsidering their customer strategy.  The Siemens cooperation with Duke is a first step.

GE acquired Blade Dynamics and LM Wind Power in order to expand its wind technology portfolio. This is very normal for an industry with such a high degree of innovation and technological improvement.

The levelised cost of energy continues to fall far faster than by cost cutting and quality improvements alone, due to technology improvements, and this is expected to continue for years to come. It may well be that such acquisitions will move from individual technologies to complete systems.

We can see a similar trend in the adjacent technology portfolio as Envision expands into the Internet of Things and GE promotes storage technologies. 

"Since the acquisition of UpWind and Availon by Vestas, a new dimension has emerged"

The underlying rationale for moving beyond wind is twofold: first, the desire to build a broader foundation for the future business —which obviously applies far less to OEMs that are already part of industrial conglomerates.

Second, the assumption that the energy markets are going to evolve away from support schemes with fixed feed-in systems and that we will increasingly see systems where the remuneration for MWh will become a function of the time when the power is injected.

Additionally, willingness to pay for generation even if it cannot be absorbed by the grid is going to decline. With this in mind, OEMs are expanding their technical scope outside of the pure wind sector into adjacent technologies.

In summary, there are ample opportunities for wind OEMs to push their growth agendas. Individual strategies can differ strongly as the starting points for OEMs are very different. The OEM space will also consolidate further, and the future role of the OEM will be decided by focusing resources on the right growth opportunities.

Lars Holm is an associate director of The Boston Consulting Group, based in Hamburg, Germany

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