Licensing can lower wind barriers
Some wind markets have been experiencing unprecedented fluctuations in capacity additions in recent years.
This has led to international corporations reducing their footprint and activity in some markets while seeking expansion in others.
It has also revealed the weaknesses of being a purely regional player, whether in project development, finance, the turbine supply chain or the services sector.
As the wind supply chain seeks global growth, it becomes important to internationally diversify revenue streams.This can be difficult in market conditions where year-on-year fluctuations result in inconsistent returns on substantial capital investments.
It is clear that some markets have presented commercial barriers to entry for the supply chain, including Tier 1 OEMs.
Partnerships may prove to be a key tool to support international growth and overcome barriers to market entry.
These partnerships can range from joint ventures to pure technology and intellectual property (IP) licence agreements.
Manufacturing and distribution partnerships inevitably involve a component of technology and IP out-licensing, in addition to the potential for engineering support.
Looking at the current market climate, we see that GE, Siemens and Vestas can access the capital necessary to establish an international footprint, given their balance sheet and/or recent profits.
However, even in the Chinese market, it may be necessary to establish a partnership in order to enter and compete successfully.
It has been reported that Vestas, for instance, is seeking a partnership in China after years of anemic sales trying to penetrate it alone.
But this strategy has been tried unsuccessfully by Suzlon, Siemens, and GE in the past, and it is unclear if market dynamics, such as the vast consolidation of turbine manufacturers in China, will enable other Western entrants there.
Markets with local-content regulations still present a hurdle to overcome, but one that is slightly less high than China.
One solution for markets with high entry barriers is to remain a turbine manufacturer in core markets, but to out-license their turbine designs and IP rights to regional partners that have independently raised funds for capital equipment, manufacturing and commercialisation.
This approach may present an opportunity for regional Tier 2 OEMs such as Nordex, Gamesa and Acciona, which will struggle to make the capital investment in those markets with high barriers to entry and limited order book, given the strength of entrenched Tier 1 competitors there.
In the past five to seven years, smaller European and US companies have had success with this approach.
The best example would be Vensys with Goldwind in China, Impsa in Argentina and ReGen Powertech in India.
Northern Power Systems has also taken a harder look at this strategy, establishing its first partnership with WEG in Brazil and a second with China First Heavy Industries, and is seeking partnerships in India, Asia and Europe while maintaining manufacturing rights in the US and parts of Western Europe.
Senvion has had success with this approach in the past with the out-licensing of its older 1.5MW designs to companies in China, but technology and IP licensing has not been part of its business strategy of late.
Suzlon/Senvion could significantly benefit from this approach in Brazil, where it has largely missed the competitive window, and the regional partnership would enable it to target markets in Chile, Peru and Uruguay.
Pure design and out-license players such as AMSC and Aerodyn are still finding success while collecting royalties.
Given that the Tier 2 OEMs have field-proven and certified designs, it could create stiff competition for the pure-play turbine design firms that had found success with the technology and IP licensing strategy in markets where the Tier 1 and 2 OEMs were unwilling to enter or were not nimble enough to react to the market dynamics.
That said, two challenges to this licensing approach need to be understood and addressed.
First, the regional market would need to have several key support mechanisms for a partnership or licence agreement to be a prosperous reality.
In addition to wind resource, electricity market demand, transmission infrastructure and a political climate including renewable- or wind-specific incentives, three factors will be critical to success: manufacturing infrastructure, capital markets and IP rights.
The second challenge to the licensing strategy involves finding the right commercial partner.
Successful long-term partnerships require trust, collaboration, compromise and commitment.
Enercon has unsuccessfully attempted this out-licensing approach in the past, although the Wind World India split was largely due to Enercon’s lack of willingness to compromise.
AMSC thought it had a productive commercial relationship with Sinovel until it was revealed that Sinovel was extracting trade secret information on how the technology worked, to subvert the commercial relationship.
Formation of the licensing partnership can often take time and careful observation of business behaviour.
An examination of markets that fit these criteria in which manufacturing infrastructure and capital markets exist, IP rights are respected and partnerships could be fruitful reveals that Brazil, Canada, Korea, Japan and other select markets could represent opportunities for Tier 2 OEMs in particular.
Taking into account the aggregate demand from neighbouring countries that could be serviced by a regional partner, a company with technology/IP assets to sell or out-license could have a way to achieve international growth without significant upfront capex investment.
Also, a joint venture might allow the original licensor to buy up the regional partner if future market expansion is warranted, based on demand growth.
Philip Totaro is CEO of Totaro & Associates