ANALYSIS: Brazil key to Alstom deal

Alstom's turbine nacelle factory in Bahia

Alstom's turbine nacelle factory in Bahia

Brazil could have a significant impact on the Alstom takeover negotiations.

The market here is growing at such a fast pace (on course to double from 3.5GW in the year to December 2014 and quadruple by 2018), that what matters on the ground is how fast you can assemble and deliver turbines.

Whoever assumes control of Alstom's assets and pipeline contracts will gain important advantages. Brazil's turbine production capacity is estimated by the national development bank, BNDES, at 4GW a year when the nine manufacturers have finished expanding or building new factories.

Alstom, GE and Siemens have been present in the country for decades in the traditional power, oil and gas and transport sectors.

But in wind, GE and Alstom are neck and neck in the race for market share and have taken advantage of their local industrial facilities and supplier networks to introduce, since 2009, assembly lines of nacelles, blades and towers to comply with local-content rules, essential to ink contracts in this competitive, price-oriented marketplace.

In such conditions, where project developers sign draconian power-purchase agreements, any delay can cost millions, so the key to delivery speed is having production capacity.

Alstom and GE are on a level playing field in access to cheaper financing, since they have met local-content criteria and are listed on the Finame financing list at BNDES. Siemens is not on the list.

BNDES also reckons Alstom and GE have similar shares of production capacity: about 15% of the total. That is close to Vestas' 16% share, but ahead of pioneer Wobben (a unit of Germany's Enercon), which has about 9%. Siemens' capacity is about 5% of total output.

These figures include expansions announced in the past few years, as companies compete to guarantee financing and new contracts. But while GE decided to expand production in the industrial hub of São Paulo and risk time limits transporting turbines and blades more than 1,000km south and north to wind farm sites, Alstom expanded geographically to be close to its client base.

In the northeast state of Bahia, Alstom built a nacelle assembly plant in 2011. In the southern state of Rio Grande do Sul, it opened a steel tower factory last year.

GE bet on a different strategy focused on services and product development. It recently set up a services support center in Bahia, from where it plans to provide maintenance to clients. In the campus of the Federal University of Rio de Janeiro, it is set to inaugurate, in the second  half of 2014, a research centre, which, although focused on oil and gas, will include development of renewable-energy technologies. There, it will also have access to wind tunnels and other testing faccilities, as well as access to some of the country's leading energy and engineering minds.

All this makes the two companies complementary in a fast-growing market.

But GE stands to gain yet another commercial advantage: immediate access to Alstom's 2.7MW ECO 122 turbine. This would ramp up its local product portfolio, which includes the smaller 1.7MW GE 1.7-100 and 1.85MW 1.85-82.5.

With towers reaching stronger and more constant winds at more than 100 metres in new projects, and with the preponderance of price competition in the auctions, larger turbines could make the difference in winning contracts, by reducing developers' overall costs.

This year, for example, one of the country's largest renewables companies, CPFL Energia, concluded the 120MW Atlântica complex, which was built with Acciona's 3MW AW116/300 turbines. Wobben already builds locally the E-92, E-82 and E-70, all of which are over 2MW, while WEG is aiming at the launch in 2015 of a locally made 3.3MW turbine using Northern Power System technology.

Alstom's ECO 122 models are also part of a universal supply agreement that it signed last year with Renova. In the €1bn ($1.38bn) deal, the manufacturers will supply Renova's contracted wind projects, which add up to more than 1.2GW.

Notwithstanding decisions by the anti-trust watchdog body, which would have to review the transaction, Alstom's assets offer a strong foothold in this fast-maturing market.

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