1

Department of Business Studies

Msc in Finance and International Business

Vestas Foreign Direct Investment Expansion

Business Analysis of the Wind Turbine Industry and Vestas Strategy

Author:

Munaf Ali Husein Al-Hashimi

Academic Advisor:

Kurt Pederson

March 2010

Aarhus School of Business, Aarhus University

2

Dedication:

First of all I want thank GOD who blessed by being in a country that I consider as

dream land, which is Denmark, and he gave the Honor to meet people even in my

dreams I will never have the chance to meet them, and with this paper I will have

the chance to show my love, respect and appreciation to all the great things they did

to me.

I would love to dedicate this paper to:

To Knud Prætorius and Nicola Ellegaard the ones that I love most in my life and I

consider them my family in Denmark and I would love to thank them for all their

kindness and care for me, I just want to tell you that I love you both.

To my great and wonderful teacher Kurt Pederson whom was a great help for all

his students and luckily I had the honor to be one of them.

To the ones whom gave the chance to be in this great school, which I consider a new

life for me, they are Steen Weisner and Anne Dorte from the International office.

To Asmaa abdol-Hamid, which I learned from her as a Muslim that I can have a

positive contribution in the Danish society, with the way she defended Denmark in

the Arabic media during the profit Mohamed drawing crisis, and how she was

traing to create a dialog between these two deferent cultures.

3

Abstract

For the last 30 years many governments in the western world, has been supporting

investment in wind energy, and that support has resulted in a big growth in the wind

turbine manufacturing industry. This support for wind energy comes from the

environmental benefit from using wind energy and the independence pf wind energy

from using fuel, also the economical benefit that comes from the manufacturing of wind

turbines, in terms of its relatedness to many industries and the high employment rate in

the wind turbine manufacturing industry.

Countries like Denmark were the leading countries in establishment and the development

of wind turbine manufacturing industry, and that was through the incentives that have

been given to wind energy investors. These incentives motivated many Danish companies

to inter the business of manufacturing wind turbines and participate in the development

process of wind turbine manufacturing.

Vestas is one of the oldest Danish wind turbine manufacturing companies and it is the

leading company in the industry in terms of market global market share, expertise and

technology of wind turbines. The rapid growth in wind turbine industry attracted many

investors to inter the market, which affected Vestas market share. That demands from

Vestas to adapt its strategy, and increase its foreign direct investments in the most

growing markets in the USA and China.

In this research I will analyze the wind turbine industry and the changes in that industry

that lead Vestas to make changes on its strategy by increasing its foreign direct

investments. These analyses will be made by using tools like PEST and Porter five forces

factor for the industry and SWOT and OLI models for Vestas and I will analyze Vestas

supply chain and risk management.

4

Introduction……………………………………………………………………………6

Problem statement ………………………………………………………………..6

Mythology………………………………………………………………………….6

Chapter One……………………………………………………………………………8

1-1: Vetsas………………………………………………………………………….8

1-1-1: History …………………………………………………………………10

1-2: Wind energy Industry………………………………………………….11

1-2-1: structure of market and wind power industry……………………..15

Chapter Two …………………………………………………………………………21

2: PEST Model …………………………………………………………………21

2-1: Political Environment …………………………………………………..21

2-2: Economical Factor ………………………………………………………24

2-3: Technological Factor ……………………………………………………28

2-4: Social-Cultural Factor …………………………………………………..30

Chapter Three …………………………………………………………………………32

3: Porter Five Forces Factor Analysis ……………………………………………32

3-1: Internal Rivalry Among Existing Competitors …………………………..33

3-1-1: Cost of Wind Turbine …………………………………………………38

3-1-2: Product Differentiation ………………………………………………..40

3-1-3: Switching Costs ………………………………………………………..41

3-1-4: Barriers to exit …………………………………………………………42

3-2: Barriers to Entry …………………………………………………………….42

3-3: Threat of Substitutes …………………………………………………………43

3-4: Supplier Power Factor ………………………………………………………..44

3-5: Buyer Barging Power …………………………………………………………46

Chapter Four ………………………………………………………………………….48

4: SWOT …………………………………………………………………………48

4-1: Strength …………………………………………………………………49

4-2: Weaknesses …………………………………………………………..50

4-3: Opportunities ………………………………………………………...51

4-4: Threats ………………………………………………………………..52

5

Chapter Five …………………………………………………………………………54

5:The Eclectic paradigm (OLI)…………………………………………………54

5-1: The Ownership Advantage (O)……………………………………….55

5-2: Location Advantage (L) ……………………………………………….59

5-3: The Internationalization Advantage ………………………………….62

Chapter Six ………………………………………………………………………….64

6-1: Vestas Supply Chain ……………………………………………………….64

6-1-1: Supply Chain Risk ……………………………………………………67

6-2: Risk Management ……………………………………………………………69

Conclusion ……………………………………………………………………………74

Bibliography …………………………………………………………………………..75

Appendix ………………………………………………………………………………80

6

INTRODUCTION

The motivation of this research is to is to present the current situation of the wind turbine

industry with the increase demand wind turbines and the big growth in the global markets

and especially in the USA and China, and the effect on Vestas position in the market and

its foreign direct investments in the USA and China.

1- Problem Statement.

My investigation for the conditions of the wind turbine industry, Vestas and Vestas

foreign direct investment expansion in the USA and China can be summarized in the

following questions:

• What are the economical drivers for the political support for the wind turbine

industry?

• What the reasons for Vestas foreign direct investment strategy expansions in the

USA and China, and supplying the USA from the USA, China from China and

Europe from Europe.

• What are the benefits of Vestas foreign direct investments expansion strategy on

the company’s position in the industry, and what affect it has on Vestas overall

risk.

• What should Vestas add to its strategy to overcome the challenges that comes

from the firm operational risk, which is related to its components suppliers, and

the risk that comes from the high dependency on political support?

2- METHODOLOGY. I started this paper by giving overview of Vestas from one side and the wind power

industry and the wind turbine market fro the other side.

7

After that I used some models to analyze the general environment, the wind turbine

industry and Vestas. As I mentioned in the abstract I used PEST model to analyze the

political, economical, social and the technological environment of the wind industry. I

used Porter five forces model to analyze the wind turbine industry, and I used SWOT in

order to analyze Vestas internal aspects of strength and weaknesses and the external

aspects of Vestas of opportunities and threats.

I used the OLI theory to analyze Vestas foreign direct investments expansions in the USA

and China, and that has been done by analyzing Vestas (O) ownership advantages or its

competitive advantage over its local and foreign competitors in these countries, also the

analyzing the (L) location advantage of foreign direct investment in the USA and China,

and analyzing the (I) internationalization advantage of choosing FDI in these countries.

My data source is from the industry is from GWEA (Global Wind Energy Association),

EWEA (European Wind energy Association), BTM consult, the American Wind Energy

Association and the Chinese Wind energy industry. I also used Vestas website and other

sources like journals. The only legal document I used is this paper is (The directive of the

European parliament and of the council of the promotion of the use of energy from

renewable sources).

8

CHAPTER ONE

1-1: VESTAS VESTAS is a Danish company and one of the biggest companies in Denmark. It is listed

on the OMX20 Copenhagen, an index consisting of the 20 most traded companies on the

Copenhagen Stock Exchange, it’s listed with a 203.7 million outstanding shares.

VESTAS is, a global manufacturer with headquarter in Ringkøbing, Denmark and

production facilities in Europe, United States, India, China and elsewhere. It announced

in the 30 September 2009 that it has 20,256 employees worldwide1

The company’s core business comprises the development, manufacture, sale and

maintenance of wind technology that uses the energy of the wind to generate electricity.

.

It is one of the world leaders in the design, engineering and manufacturing of Wind

turbines. The company develops and manufacture it’s own proprietary Wind Turbine

technologies, selling a range of products from the bar turbine components to complete

turnkey systems, and even entire wind farms. Vestas is distinguished by a high degree of

vertical integration, which gave the ability to, increased the flexibility of the product

development, reduce dependence on suppliers and maintain a high level of manufacturing

know how. The company had installed over 39, 000 wind turbines in over 63 countries

on five continents.

For Vestas, it is not only selling the turbine as a deal, but also more like a package deal,

with the installment and maintenance. So the turbine can be seen as the core yield, and

the maintenance and the installment as a supplementary yield. Vestas have 6 active

product numbers in the portfolio ranging from the oldest the V52 to the latest addition,

V112. In every product number the buyer has the option to, choose between different

MW varieties. In general Vestas design and produces it’s turbines on the basis of

maximizing/minimizing 3 core measurable variables: Energy production, energy quality

and less mechanical strain and sound.

Vestas investing heavily in research and development of it’s product, since the early

stages of the wind turbine production which thy were thy were one of the first ones in the

1 Vestas annual report 2008.

9

industry. In 2008 Thy opened the world largest research and development center for wind

energy in Århus, Denmark. These heavy investment in R&D, to sustain their competitive

advantage of being the biggest producer of wind turbine in the industry and having the

biggest market share, that’s because the wind turbine as a product is new and in process

of development, to make it more competitive then the other renewable energy products.

The other reason for the heavy investment in R&D, is to support there ambitions of

making wind an energy source on par with fossil fuels, which can be seen from their

vision “ Wind, Oil and Gas”, to make wind energy competitive advantage of being

environmentally friendly and been independent then conventional energy sources, but

also with similar costs2

.

Table (1-1): Vestas market share for the years 2005-20083

.

2005 2006 2007 2008

Market share 27% 28.2% 22.8% 19.8%

Table 1-1 shows Vestas market share from 2005- till 2008, as a percentage of the total

market installed capacity of 28,190MW. The reason behind this decrease in market share

was due to the emerging competitors. USA and China are the biggest growing markets,

60% of the Chinese market is held by three home companies and the biggest part of the

US market, is held by, an American company, called GE Wind which is holding 44.4%

of the American market share. Also in the German market, which is one of, Vestas main

market, is showing some decline in Vestas share in this market, because of the new

players coming into the market.

Vestas expectations about the world electricity production will grow from the current

production which is 2 percent to 10 percent by 2020, equal to an installed capacity of at

least 1,000,000 MW, against 122,000 MW at the end of 2008. It is expecting a big

growth in the industry, that demands from Vestas to expand with its investment, so it will

continue to be No. 1 in the industry. To strengthen it’s competitive power, it is currently

investing heavily in new capacity in China and the USA, as the, long term goal is to

2 www.vestas.com and Vestas annual report 2008. 3 BTM consult. International Wind Energy Development. From 2005-2008.

10

supply “North America from the US”, “Europe from Europe” and “ Asia from Asia”.

This strategy demands, foreign direct investments in China and the US, which the wind

mile industry is mostly growing. From Vestas prospective, these foreign direct

investment, will strengthen their, competitive position among, their rivals in the industry.

Because governments in these countries are supporting the manufacturing companies

which has most of there production facilities in the these countries and the other reason,

is the costs of the logistics and specially the transportation of the wind mills to these

countries is high.

1-1-1: VESTAS HISTORY. Vestas was HS: Hansen in 1898, a black smith, in the small town of Lem in Denmark. He

and his son Peder Hansen manufactured steel windows for industrial buildings. In 1945

Hansen and his son Peder founded their first industrial company, Dansk Staalvindue

Industri, a manufacturer of steel window frames for industrial buildings. After World

War II, Peder Hansen forms a new company, Vestjysk Stålteknik A/S, which

subsequently changed its name to Vestas. With a start capital of DKK 75,000 the Vestas

team move into manufacturing households appliance and kitchen. Over the following 15

years (1945-1960), the companies, product range continuously evolves, from appliance to

agricultural trailers to intercoolers. The company’s firs international experience was in

1950, Vestas exported its first goods to Finland, Germany and Belgium. In 1968,

hydraulic cranes for light lorries as a new promising product area, which proves to be, a

major export success. A couple of years later, as the two oil crises of the 1970’s hit the

transportation industry and lorry sales decline, Vestas has to look for another growth

area.

Inspired by the second oil crises in 1978/79, Vestas begins to examine the potential of

wind turbine as an alternative source of energy. Thy choose the Darrieus Turbine design,

but after 18 months of experiments, the company decided to focus a three-blade model,

which soon becomes the dominant design in the wind industry. In 1970, the first wind

turbines are delivered to Danish customers. Subsequently, the industry experienced its

first boom, mainly driven by government incentives in Denmark and the USA. By 1985,

the number of employees increased to 800. It is also in 1985 Vestas introduced pitch-

11

regulation, a major technological innovation that optimizes the energy output of a wind

turbine. By the end 1985 Vestas has sold 2’500 wind turbine to the US.

At the end of 1985, Vestas was highly exposed to the US market that lead to crises for

Vestas, when the California tax legislation expired. As a consequence, Vestas US market

collapsed and, after a rescue plan failed, it files for bankruptcy in October 1986. As the

reason for the collapse is the change of the regulatory framework rather than in Vestas

products, a major restructuring finally leads to the establishment of a new company called

Vestas Wind Systems A/S in 1987. After a large parts, of Vestas Group have been sold

off, the new company emerges as a new wind energy pure play.

In 2004 Vestas merged with another Danish wind turbine manufacturer company NEG

Micon. The merger led Vestas to gain 32 percent market share4

.

1-2: Wind - Energy Industry: Since first wind farms where erected in California in 1908, wind has become an

established source of renewable energy. It is attractive due to its wide availability and

production of neither climate-changing greenhouse gases nor pollution. The technology

used in the wind industry getting cheaper. Generating electricity from wind has gone

down three times since 1980.

This industry is much supported by governments, incentives such as tax credit and tariffs.

Wind power industry can be associated with many benefits such as:

• Job creation: the wind industry is estimated to create around 370000 jobs in the

EU between 2000 and 2020.

• Economic growth: in 2020 the EU wind energy market is believed to reach 17

billions Euros annually.

• Environmental friendliness: the wind turbines, which were installed by the end of

2007 allowed to avoid 91 million tones of co2, an equivalent to the pollution

produced by 46 million cars.

4 http://www.vestas.com/en/about-vestas/history.aspx http://www.e-pages.dk/windpower/10/fullpdf/full4b8670ba33dbf.pdf profile of the Danish wind Industry.

12

• Energy independence: 30 million households could be provided with power

thanks to the capacity of 57GW generated by wind turbines in Europe5

.

The 2008 Renewable Energy Sector Directive, a part of the EU’s climate package sets a

goal of a 20% CO2 reduction by 2020. Such target will be achieved trough an increased

usage of renewable energy sources. According to the EU Directive, before the year 2020,

a third of the electricity produced in the EU will have to come from renewable energy

resources and wind power believed to have the biggest stake. The Department of energy

in the USA came op with a plan to reach 20% wind power share in energy production by

2030, a huge upcoming market in Asia, which is forecasted, to become the biggest

market for wind power installation within next five years6

Wind power market is a market, with lots of potential and broad prospective, which is

tempting to enter such market. There are 10 main players in the market with a market

share of 85%, of the total market share. The rapid growth rate in the wind industry, that is

global wind power grew from $17,400MW in 2000 to over 121,000MW in 2008, made

wind turbine manufactures companies more distinguished with their high degree of

vertical integration, that’s buying out suppliers of the critical components such as blades,

generators and gear box. By bringing suppliers at home, will give them more security to

get product that thy need on time, better price and increase the flexibility of the product

development

.

7

Investors in the wind power industry realize, that the existence of their business is

dependent on the subsides and the national and international governmental incentives to

that kind of business, for that they formed some organizations like the GLOBAL WIND

ENERGY COUNCILE, the EUROPEAN ENERGY COUNCILE and other organizations

in deferent parts of the world. These organizations give the help to organizing

conferences and the exchange of information on the latest developments in the products

of that industry.

5 www.ewea.org/index.php?id=1551 6 Directive of the European Parliament and of the Council on the Promotion of the Use of Energy from Renewable Sources http://ec.europa.eu/energy/climate_actions/doc/2008_res_directive_en.pdf 7 BTM consult. Wind energy report 2008.

13

1-2-1: History: In the beginnings of the last century, there where some research’s on the wind energy, in

the western world and specially, in the US and Denmark. The motivation for these

researches in wind-power was to strengthen the mechanization of agriculture through

local made electricity. But when electricity became important in the industrialized world,

the role of wind power decreased, because it could not compete with fossil-burning

power stations, which is more competitive, that it provide electricity with lower costs and

larger scale.

Lack of fossil fuels during World War I and after World War II made the western

countries to be aware of how thy are dependent on fossil fuels and made the to pay

attention again. In the 1970s there where two oil crisis, when the Arabic countries used

the oil as a weapon in the battle in 1973 and the oil crisis in 1979. During these, two

crisis there where supply problems and price fluctuations on the fossil fuels, which

brought the attention back to wind power. These issues created new era for wind power

and supported the development and the birth of new industry, that is today called wind

power industry, which is characterized by big wind turbines manufacturers, in the

beginning, from Denmark, Germany, Spain, USA and India and China followed them

recently. Denmark was and still leading country with the development and manufacturing

wind turbines, that’s because the Danish climate due to the long cost line is characterized

by consistent and strong winds, and there are no natural energy sources such as coal,

water falls for hydropower, etc. there for it was natural for Denmark to be one of the first

countries to develop it’s wind power technology through the efforts of it’s scientist and

engineers8

After the second oil crisis in 1979, resolve subsides 30% of the construction cost for wind

turbine and the California incentives for wind energy in the early 80s motivated many

investors to invest in the wind turbine manufacture industry. The Danish manufacturers

supplied thousands of turbines to the USA from 1982 until the market came to an end in

1986 when the California incentive expired, that led to a collapse in the industry, that

made all the small manufacturers disappeared or were taken over. In the early 90s, only a

few number, of big manufacturers which presents the Danish industry, Vestas, Bonus,

.

8 http://telosnet.com/wind/20th.html Illustrative History Of Wind Power Development.

14

Nordtank, Micon and Nordex. The industry in Denmark experienced further

consolidation during the past 15 years, ending with two large manufacturers in Denmark

Vestas Wind System and Siemens Wind Power. My focus on the Danish industry,

because the Danish wind turbine manufacture industry was the dominant, until other

European companies started to inter the market, in the late 80’s and 90’s, the suppliers of

the wind turbine components were supplying only Danish wind turbine manufacturers till

the late 80s, but after that thy started to supply other manufacturer companies9

In the history of, most manufacturing industries that are producing new or greatly

improved products. Investors if thy where entrepreneurs or companies, invest in plants

that are big enough to exploit the economic of scale and scope in production, in product-

specific facilities and skills in distribution and research and development, and in the

managerial organization for coordinating these activities. That will make them acquire a

first mover advantages and create entry barriers to the industry. Market forces will attract

other investors to inter the industry by investing in production facilities, skills and

managerial organization that has similar character as the first mover. By then the

producers and the competition in the industry will increase

.

10

What we see in the wind turbine production industry is the opposite. It started with many

investors most of them small investors and after that most of them went out of the

business or acquired by bigger companies in the industry ending with so few big

producers. That’s because market forces of wind energy industry, from the beginning

influenced by politics (governmental incentives), not by a product that has competitive

advantage over the existing sources of energy of fossil fuel that has lower cost and more

efficiency. The big producers survival in the industry, came from their mass production

that created job opportunities in the wind turbine manufacturing industry and the related

industry, and the contribution of economical growth of their nations, which made

governments in these countries, have a balance between their environmental concern

from one side and the economical forces in the other side, which made these government

to continue their support to this new industry.

.

9 http://www.e-pages.dk/windpower/10/fullpdf/full4b8670ba33dbf.pdf profile of the Danish wind Industry. 10 Alfred D. Chandler. (Scale and Scope) The Dynamics of Industrial Capitalism. Harvard University Press 1990.

15

1-2-2: STRUCTURE OF MARKET AND WIND POWER INDUSTRY

The main actors in the wind energy sector are Owners, Operators, Developers, Turbine

Manufactures and Suppliers (First Tire suppliers and second Tire suppliers). Turbine

manufactures supply the wind turbine and sometimes are also capable of engineering,

procurement and installation. In order to manufacture a wind turbine, manufacturing

companies are very dependent on suppliers. First Tier suppliers are responsible for

providing products and services connected with components required in the turbine (for

example gearbox, cabling, generators, etc.). Second tier suppliers are those who offer

necessary parts to the first tier suppliers, such as fixing, electrical components or raw

materials11

Wind turbine manufactures client are called owners and include mainly utility companies,

which have renewable resources in their portfolio. Wind turbines can be also ordered by

private firms or even communities, like it happened for example in the Danish Island

Samsoe.

.

The operators take responsibility for the daily operations of wind farms. It may happen

that developers provide operations service, or a utility company have a special

department for this. Operators are also important players in the wind power value chain.

There are over a 100 wind manufacturing companies around the world and the number is

increasing, which shows that the competition getting more intensive. The market is

dominated by 10 big wind turbine manufacturers some of them, 100% of their core

business is the manufacturing and development of wind turbines components like

VESTAS and GAMESA and there are others that are diversified with their business

portfolio like GE and SIEMENS.

The table below (1-2) shows the market share and the percentage change in market share

between the years (2007-2008) of each of these, top 10, wind turbine manufactures. The

market share of most of these 10 companies declined, because of the competition

pressure of the new entrants in the industry, and the ones which had some increase in

11 http://www.hi-energy.org.uk/documents/Doing%20Business%20with%20Wind%20Turbine%20Manufacturers.pdf DTI Scottish Enterprise 2006, Doing Business With Wind Turbine Manufacturers: Becoming Part Of Their Supply Chain, page 10.

16

there, market share is because of the big growth in there home market like GE (USA) 2%

growth compare to 2007, and Sinovel (China) 1.6 growth compare to 2007, the two

companies have the biggest market share in their home market, GE (USA) has 44.4% in

the US market, and Sinovel (China) has 21.9 in the Chinese market. These to markets are

the most growing markets in the energy installation, the USA market accumulated growth

rate in 2008, is 49.5% and in the Chinese market growth rate in the same year is 106.3%.

The role of major investors in the wind market has gained greater prominence in the past

five years, mainly as result shown in wind energy by large utilities, IPPs (independent

power producers) and oil companies. These in terms of cumulative capacity, the market

share operates of the top operators has increased has increased from 23% of total global

installation in 2003 to 36% in 2008.

As the wind industry has affected by the global financial crisis, and the assets of some

IPPs, have been acquired, by large utility companies. That gives a clear idea that there is

a shift in the customer ownership structure, Utilities becoming, a bigger players in the

market. Several of the largest European utilities they are playing a big role now in the

development of wind power, they also started to be more active by investing outside their

domestic bases, aiming to find better opportunities for their investments. This shift has

been mainly encouraged by two factors12

First: the wind energy industry, require a large capital, which made it a good market

place for cash-rich utilities. This shift in the market is favored by wind turbine

manufactures, because of the large scale of utilities projects. At the same time investors

in public markets thy favor putting their money in projects with utility sponsorship then

those made by small and medium size IPPs.

:

Second: there is an increasing pressure by politicians on utilities to incorporate renewable

energy source in their generation portfolio. The European Union Council of Ministers

and national governments, have recently reached an agreement on a new law that

commits Europe to get 20% of it’s energy from renewable sources by 2020. In the US,

the model of mandating a rising share of renewable generations in the generation

portfolio, known as PRS (Renewable Portfolio Standards). In China there are similar

legislation has been forced by on the Chinese leading utilities.

12 BTM consult. Wind energy report 2008.

17

Table 1-2: market share for top 10 manufacturers 2006, 2007 and 200813

Company

.

Supplied

MW

2006

Share

2006

%

Supplied

MW

2007

Share

2007 %

Supplied

MW

2008

Share

2008 %

Share

%change

2007-2008

Vestas 4,239 28.2% 4,503 22.8% 5,581 19.85% - 3%

GE Wind 2,326 15.5% 3,283 16.6% 5,239 18.6% 2%

Gamesa 2,364 15.6% 3,047 15.4% 3,373 12.0% - 3.4%

Enercon 2,316 15.4% 2,769 14.0% 2,806 10.0% - 4%

Suzlon 1,157 7.7% 2,082 10.5% 2,526 9.0% - 1.5%

Siemens 1,103 7.3% 1,397 7.1% 1,947 6.9% - 0.2%

Sinovel 75 0.5% 671 3.4% 1,403 5.0% 1.6

Acciona 426 2.8% 873 4.4% 1,290 4.6% 0.2%

Goldwind 416 2.8% 830 4.2% 1,132 4.0% - 0.5%

Nordex 505 3.4% 676 3.4% 1,075 3.8% 0.4

Others 1,094 7.3% 2,076 10.5% 4,955 17.6% 7.1%

Total 16,003 107% 22,207 112% 31,326 111%

There are 15 major owners of wind power- generating facilities, in the world. Also thy,

are a major costumers for wind manufacturers. Thy supplied around 43,996 cumulative

MW capacity by the end of 2008, and 56% percent of this capacity has been supplied by

the major 4 big wind energy producers which are Iberdrola Renovables, FPL Energy,

EDP Renoveis and Acciona Energy.

USA WIND POWER INDUSTRY AND MARKET:

In 2008 the United States of America became the world leader in total wind power

installed capacity of 8,358MW that presents 29.6% of the global installed capacity. With

13 BTM consult. Wind energy report from (2006-2008).

18

an average cumulative market growth rate of 40.1% from 2005-2008, it became the

second largest wind power energy in the world after China.

The US wind power market has grown rapidly in recent years as technology

improvements have helped to reduce costs. The growth in the wind power industry in the

United States is attribute to improvements in wind technology, increasingly supportive

policies and the growing interest in renewable energy resources14

This growth has been a great motivation to many big, wind turbine-manufacturing

companies to establish, or plan to open manufacturing facilities in the US, and US based

companies are also expanding their facilities to meet increasing demand. The increase in

wind power investment, offered a big benefits for the domestic manufacturing sector. In

only four years the share of parts manufactured domestically of wind turbine has gown

from 30% to 50%. Table (1-3), show the manufacturers market share in the US. GE is

leading the US market, 44.4% market share of the newly installed capacity. Other leading

wind turbine manufacturers with some US manufacturing involvement include Vestas,

Siemens, Suzlon, Gamesa and others. Although the leading companies account for about

97% of the market share in the US, new companies are entering the US market like

Repower, Fuhrlander and DeWind (American Wind Energy Association, 2009).

. This growth has led to

surge in the wind turbine component manufacturing around the country and the creation

of thousands of jobs in many related sectors. The industry is positioned to help receive

manufacturing jobs that have been lost in other sectors like motor vehicle industry.

Table 1-3: Wind turbine manufacturers market share in the USA in 2008. Company GE Vestas Gamesa Siemens Mitsubishi Suzlon Acconia Clipper Others

Market

share

44.4% 12.9% 11.3% 8.6% 6.9% 6.8% 4.1% 2.3% 2.7%

US manufacturers are world leaders in market and technology development of small wind

turbine systems rated 100kWor less.

14 Department of Energy, energy efficiency and renewable energy) Annual report on U.S. wind power installation, cost, and performance. 2008(US)

19

Even if the market share of domestically manufactured wind turbine components was

50% in 2008, the country is still heavy importer of wind turbines. According to the US

Customs data, in 2008, about 2.5 billion dollar worth of wind turbine import came from

Europe and Asia. During the same period, US exports of wind turbine components also

increased from 0.7 million dollar in 2003, to 22.1 million dollar in 2008.

CHINA WIND POWER INDUSTRY AND MARKET:

China is one of the biggest growing economies in the world. With strong growth, China’s

demand for energy is surging rapidly. Recently China passed Japan to become the second

largest consumer of energy and will overtake the US to become the world’s largest

energy consumer after 201015. The primary energy demand in China is projected to more

than double from 2005 to 2030, according to the International energy Agency (IEA)16

The increasing energy demand and insufficient energy resources in China, from coal, oil

and natural gas, will become major constraints on the economic development in China.

All that increased the Chinese government concern for securing the future energy supply

for the country, which made them interested in renewable energy development, and the

biggest attention has been paid to the wind energy, which was relevant for China with it’s

wide recourse of wind and the independence from the need to fuel. The Chinese

government motivated investors with tax incentives, and loan subsidies, that made the

wind power market one the most growing markets in China.

.

The Chinese market has experienced a big growth in the recent years 2005-2008.the

installation of 6,300MW in 2008, which was 92% more than 2007 and maintained

china’s position as the second largest market in the world with a market share of (22.2%).

Between 2007-2008, the cumulative growth rate of wind power installed capacity was

112.4%.

15 U.S-China economic engagement: key mechanisms, opportunities and challenges: March 19, 2008, Available online at <http://www.state.gov> [accessed September 2008]. 16 International Energy Agency. World energy outlook 2007: Fact sheet—China; 2007.

20

In 2008, wind turbine manufacturers in China could be mainly divided into two groups of

domestic manufacturers and foreign manufacturers. The domestic manufacturers had

around 75% of the Chinese market share of wind turbine supply. Sinovel the Chinese

wind mile manufacture company took the largest market share, and Vestas had the

biggest market share compared to the foreign companies and it is ranked the forth in the

hall market share after the three Chinese manufacturers Sinovel, GoldWind and

Dongfang. Table (1-4) shows the market share of wind turbine manufacturers in 2008.

Table (1-4): 2008 Market Share in China. Company Sinovel Gold

wind

Dongfang Other

china

Vestas Gamesa Suzlon GE

wind

Nordex Acciona

Market

share

21.9% 17.7% 16.4% 17.5% 9.3% 7.8% 2.8% 2.7% 2.4% 1.6%

21

CHAPTER TWO

2-PEST Model In analyzing which factors influences the competitive environment a PEST (Political,

Economical, social and Technological) analysis.

2-1:POLTICAL ENVIORNMENT.

The wind industry is currently mostly driven by initiatives of governments around the

world to help promote and develop the efficiency of wind energy globally. The Koyoto

protocol in 1992 is one of the most extensive among these initiatives. The Koyoto

protocol is an agreement between 183 nations to reduce their greenhouse gas emission by

5.2% before the year 2012. In December 2009, the United Nations Climate Change

Conference (COP15) held in Copenhagen, which it has been a disappointment for many

countries, specially the African countries, whom affected mostly by the climate change.

The draft of this conference is the developed countries are pledged to cut 80% of their

emission by 2050 for 2020 thy presented a proposal to reduce 20% of emission. The rich

countries have pledged to donate 30 billion U.S Dollar over the next three years to a

found to combat global worming. The agreement provides 100 billion U.S Dollar per

year in 2020 many countries saw that it was insufficient 17

The EU countries had a the first initiatives for the reduction of CO2, and that can be seen

from their history, which started in Denmark with the tax incentives in late seventies.

.

EU member states and the European parliament reached an agreement, that all the EU

member countries will be obliged by law to increase the share of green energy. By the

2010 each of the EU states will have to submit a detailed implementation plan on this

matter18

The 2008 Renewable Energy Sector Directive, a part of the EU’s climate package, sets a

goal of a 20% of CO2 reduction by 2020. Such target will be achieved through an

increased usage of renewable energy sources, by natural resources such as sunlight, wind,

.

17 http://www.denmark.dk/en/menu/Climate-Energy/COP15-Copenhagen-2009/AboutCop15dk/ the COP15 website 18 Directive of the European parliament and of the Council on the Promotion of the use of Energy from Renewable Sources.

22

rain and geothermal heat. According to the EU Directive, before the year 2020, a third of

the electricity produced in the EU will have to come from these renewable resources and

wind is believed to take the biggest stake.

One of the reasons for this goodwill towards renewable energy is the desire to be

independent of fossil fuel, which not having to worry about price changes and supply of

fuel. Also not to be exposed to the risk unstable political environment of many of the oil

producing countries in the Middle East for example. The other reason is the massive

attention that has been put on decreasing emission of greenhouse gasses to prevent global

worming. On the October 2008, representatives of the power companies in Europe,

Canada, US, Australia and Japan, thy all agreed on the reduction of CO2 emitted from the

production of electricity by 60-80% within 2050 this would total 15-20%of the amount

omitted in these regions19

In the USA there has been a great emphasize, in recent years by the media on the

importance of governmental support to the renewable energy use, and has been used in

the latest presidential election by the Democrats (President Barack Obama). One of

president Barack Obama visits on the Earth Day, in central Iowa, he stated in his speech

that, the investment in wind energy is a “win-win,” saying it is “good for the environment

and great for the American economy” and he said that there are incentives that his

administration supports to encourage energy independence and reduce impact of climate

change

.

20. In these recent years, there has been an agreement been launched in the USA

which is the (PTC) Production Tax Credit21

The political support to renewable energy in the US hasn’t been stable, that can be seen

from the California tax credit in the 1980, which lasted for six years and after it stopped,

it turned into a disaster to many wind turbine manufacturing companies, specially in

Denmark, that was the biggest producer and the concentration of the wind turbine

manufacturing industry was so high at that time. Since the 1970s there has been attempts

. The PTC for renewable energy provides a

(1.9 cent/kWh) benefit for first ten years of facilities producing renewable energy in the

US. In February 2009 the agreement was prolonged to December 31st 2012 whereas in

the following years the grant would be only promised for 1-2 years.

19 http://www.vattenfall.dk/www/vf_dk/vf_dk/918477press/953281press/index.jsp?pmid=74144 20 http://iowaindependent.com/14302/obama-hails-wind-energy-incentives-as-win-win 21 http://www.awea.org/legislative/#PTC

23

by politicians in the US and specially the Democrats to increase the use of renewable

energy, but there will be big challenges for them, that comes from the companies that are

producing oil and thy powerful with their big anticipation in the wealth growth of the

nations and the connection with most of the powerful politicians in the US, that’s also the

weakness of the renewable energy to compete with the conventional energy in terms of

cost. We can see during president Carter time in the late 1970s, he committed the US to

drive 20% of its energy from renewable sources by the end of the year 2000 and now in

2009 the percentage of renewable energy, which is used in the USA, is the same as Carter

days22

I believe now the USA, with Obama’s will to increase the use of renewable energy for

generating electricity, and specially the wind energy, because they see big benefit of

investing in renewable energy and specially wind energy on the economy, with it’s

realness to deferent industries beside the manufacturing of wind turbines and the

production of energy through utilities, that can create many job opportunities in deferent

industries. Also the security of energy supply, which became a big concern for many

industrialized growing countries, that made them more interested in having independence

from the reliance on other unstable countries like the Medal east as I mentioned before.

.

In China the political environment is deferent then Europe and the USA. The government

has big control over the decision-making and it has bigger economical and social control

over the state. The Chinese government has the ownership of the biggest utilities in

China, like China Longyuan Power utility. This utility the biggest buyer of wind turbines,

it erects them and sells electricity that it generates to China’s power distributors at a fixed

price by the state23

In August 2008, the same ministry issued another incentive policy on funding support for

the commercialization of wind power generation equipment. Which states that all

domestic brands (with over 70% Chinese investment) the first wind turbine over 1MW

. In April 2008 the Chinese ministry of finance a new regulation on tax

refunds for improving large wind turbines (2.5MW and above) and key components, the

tax revenue will be used for technology innovation and capacity building.

22 http://www.energytribune.com/articles.cfm?aid=1390 23 Puffed up. Economist, 00130613, 12/5/2009, Vol. 393, Issue 8660

24

will be rewarded with RMB600/kW (60 Euro) from government. The rule specified that

wind turbine must be tested and certified by China General Certification (CGC), and

must have entered the market, been put into operation and connected to the grid. The

rewarded turbine must use domestic manufactured components and share the awards

proportionate with component manufactures24

. With this policy, the Chinese government

is not supporting the domestic wind turbine manufacturing, but it also has a big impact on

the wind turbine manufacturing technology improvement and innovation which will

improve the competitiveness of the Chinese domestic wind turbine manufacturing

components in the future. This support from the Chinese government to the wind turbine

manufacturing industry, is not only driven by environmental concern, but also the

realization of this government of the growth potential that this industry has, and also

china also concern with independence of its energy supply in the future.

2-2:Economical factor. One of the most important economical benefits of wind power is that it reduces the

exposure of the economy to the volatility of Fuel prices. This benefit justifies the large

share of wind energy in most European countries and the growing share of wind energy

in the USA and China. The benefit of risk reduction of using wind energy is presently not

accounted for by standard methods for calculating the cost of energy, which have been

used by public authorities for more then a century. The industrialized world is becoming

more dependent on importing fuel from politically unstable areas at unpredictable prices.

This instability of fuel prices and supply led authorities of these countries to in clued

high-risk options for power generation in their calculations for the cost of energy25

24

. As

the global financial crisis hitting the oil sector, oil companies are responding by

downsizing production and future investments. Stagnation in activity can lead to a surge

in oil prices. Based on figures from International Monetary Fund, analytics in oil sector

have depicted a scenario of oil prices exceeding 150 US Dollar per barrel within year

2012, if oil companies not immediately increase the activity in drilling, extracting and

http://www.gwec.net/index.php?id=125 25 http://www.ewea.org/index.php?id=201

25

refining oil26. These consequences of delaying activity is supported by analytics from

ODS-Petrodata, who pointed that the demand for oil in 2030 will be approx 44% higher

than the current situation27. Investment in wind energy capacity in a given year will

continue to avoid fuel cost and carbon cost through the lifetime of the wind turbines that

estimated for 20 years. It is assumed that wind energy avoids an average of 690 g

CO2/kWh produced, that average price of CO2 allowance is €25/t CO2, and €42 million

worth of fuel is avoided for each Twh (1000,000 Mwh) of wind power produced,

equivalent to an oil price throughout the period of $90 per barrel28

The wind energy industry created great jobs opportunities world wide, which over

400,000 workers have been employed in the wind industry worldwide. By the end of

2020 the expected level of employment in the wind energy sector will reach 2.2 million

jobs

.

29

. In the EU where it is the biggest with the use of wind energy and the

manufacturing of wind turbine, the rate went to 125% from 2002 to 2007. The number of

people whom have been employed is 154,000 in 2007. From figure (2-1) below we can

see that, the wind turbine and component manufacturing are responsible for the biggest

part of manufacturing that counts 59% of the employment in the wind power sector.

Table (2-1): Percentage share of employment rate in the wind industry30

Components Manufacturers

.

22%

Manufactures 37%

Developers 16%

IPP/Utility 9%

Installation/maintenance 11%

Consultancy/Engineering 3%

R&D 1%

26 http://e24.no/olje/article3115783.ece 27 http://www.dn.no/energi/article1686548.ece 28http://www.ewea.org/fileadmin/ewea_documents/documents/publications/reports/Economics_of_Wind_Main_Report_FINAL-lr.pdf. The economics of wind energy (A report by the European Wind Energy Association) March 2009. 29 http://www.gwec.net/index.php?id=137 30 http://www.ewea.org/index.php?id=1638

26

In addition to direct employment, the wind energy sector also affects employment in

sectors not directly related to wind energy. For every MW installed, there is 15.1 jobs are

created in addition, 0.4 jobs are created per MW of cumulative capacity in operations and

maintenance and other activities assessment from the EWEA.

In 2008 there has been over €36.5 billion (market revenue) invested world wide in wind

energy, which this amount covered the installation costs of 28,190 MW all over the

world. If we compare that with 2003 that was 8, 344 MW installed of wind energy. This

big growth comes from the political economical support that comes in the form of

subsidies and tax incentives for the manufacturing of wind miles and the production of

wind energy. According to the GEWC scenario, the annual value of global investments in

the wind energy sector will reach €149.4 billion by 2020 31

The financial crisis started in 2008, and since then most nations and in particular the big

industrialized nations like EU countries members, USA and China, all of them seeking

economical growth opportunities that can revive their economies. And through history,

the concentration of economical growth in the developed countries and more specifically

the biggest industries in the world in the last century like USA, Germany and the UK,

comes from the growth in manufacturing industries, with its relate ness to the growth

different of other industries in the economy

.

32. In the wind industry the biggest part of

employment comes from the manufacturing of wind turbines, as I mentioned before it

count for 59% in the wind industry, and 74% of employment of the industry in Europe is

concentrated in three countries Denmark, Germany and Spain, which thy are the pioneers

of the manufacturing of wind turbines in the world33

In the US, electricity that is generated by, wind energy accounts for 1% of the nations

total electricity production. Investments in the wind energy industry reached €10.5

. I believe that was on of the biggest

reasons for the incentives that have been given to the wind energy investment and

especially in the manufacturing of wind turbines in the USA, China and some of the EU

member countries. It needed the governmental intervention, because it doesn’t have the

competitive advantage over the conventional energy from Fuel and coal.

31 http://www.gwec.net/index.php?id=137 BIT International Wind Energy Development. World Market Update 2008. Forecast 2009-2013. March 2009 32 Simon Kuznets, Economic Growth of Nations: Total Output and Production Structure (Cambridge, Mass.1971), pp. 144-151, 160-161, 316-317. 33 http://www.wind-energy-the-facts.org/fr/part-3-economics-of-wind-power/chapter-7-employment/

27

billion, that count for 29.6% of the total wind energy investment in the world34. The US

wind industry currently employs more than 2,000 people. It also contributes directly to

the economies of 46 states with power plants and manufacturing facilities that produce

wind turbines and its related components and a wide range of other related equipment35.

According to several recent made by the Renewable Energy Policy Project (REPP)

estimates that job creation potential related to the wind energy installation in the future

could create job potential for 215,000 – 331,000 full time jobs in total: 150,000 –231,000

jobs in the manufacturing, 35,000 – 54,000 jobs in the installation, and 30,000 – 46,200

in the on-going operations and maintenance36

In China wind generates 1% of the nations electricity

. 37

The big economical growth in china has increased the demand for energy, and according

to the International Energy Agency (IEA) the primary demand for energy in china is

expected to be more than double from 2005 to 2030.

. There has been a big growth in

the wind industry investments in China. Around €8 billions have been invested in 2008,

which account 22% of the world investment in this year.

Reliance on outside energy suppliers is increasing in China. Though China, the leading

global consumer of coal, possesses the second-largest coal reserve in the world,

distribution difficulties make importing a more attractive alternative in many part of this

country. China has shrunk from its role as a coal exporter in recent years, becoming a net

coal importer in 2008, and its imports are expected to grow in the future38

34 BIT International Wind Energy Development. World Market Update 2008. Forecast 2009-2013. March 2009

. More general

China is one of the largest energy consumers and its dependents with energy on coal, oil

and natural gas expose the country to the volatility of the prices of these three products

and the risk of supply. The Chinese government supporting the investment in renewable

energy and specially wind energy with its advantage of been fuel-free and it’s sufficient

to cope with growing demand of electricity, also with wind energy economical benefit in

the manufacturing level with the big gob opportunity that it can make. Encouraging

35http://www.awea.org/faq/wwt_economy.html#How%20many%20people%20work%20in%20the%20U.S.%20wind%20industry the American Wind Energy Association. 36 http://www.repp.org/articles/static/1/binaries/WindLocator.pdf Wind Turbine Development: Location of Manufacturing Activity in the US 37 http://greeninc.blogs.nytimes.com/2009/09/30/measuring-chinas-wind-power-potential/ 38 http://www.chinamining.org/News/2010-01-14/1263448660d33386.html

28

investment in the wind power industry can’t be done through the market forces of supply

and demand, because as I mentioned before wind energy is not competitive enough with

conventional energy in terms of costs, for that the government needed to intervene with

the tax incentives and subsidies.

The world financial crisis didn’t have big impact on Chinese wind energy industry, by the

end of the first quarter of 2009, there is no obvious negative influence has been spotted.

From the bright side of financial crisis, lots of countries including the US pay more

attention renewable energy development and take it as one of the most important strategic

solutions to overcome the crisis, with its big growth potential. Chinese power industry

takes a certain proportion in the economic revitalization investment with RMB4 trillion

(RMB3 trillion for renewable energy, equivalent to $440 billion) founded by the Chinese

government. Some key equipment manufacturing companies have been listed as one of

the ten industries in the economical revitalization plan. As statistics show the average per

KW investment is RMB10,277($1,511) for wind farm in 2008, and investment per

million KW is about RMB10 billion 8$1.46 billion) for wind farm constriction, which

will be actively poling the Chinese GDP39

.

2-3:TECHNOLOGICAL FACTOR.

The evolution of wind power technology and market development has been influenced by

three physical relationships:

FIRST. A wind power output varies with the cube of wind speed. The high speed of wind

doubles the power of the wind turbine. There for wind power developers, faces the

challenge of finding where wind blow best. Wind at 250 feet is stronger and steadier

than those close to the ground, that’s why wind turbine towers are placed high in the air.

Second. Wind power output varies with area swept out by the turbine blades during their

rotation. Doubling a turbine blades length will yield a quadrupling of power output.

Today’s wind turbine blades are commonly 130 feet long or more in an attempt to have

more energy. Turbine manufactures have devoted attention over the two decades to find 39 http://www.globalbioenergy.org/uploads/media/0910_REN21_-_Background_Paper_Chinese_Renewables_Status_Report_2009.pdf Chinese Renewable Status Report October 2009

29

materials strong enough to handle the twisting forces that are transmitted from the longer

blades.

Third. Power output increase with the air density. Density is higher in winter months and

at a low altitude, and lower in summer months and at high altitude. Wind near the cold

Scandinavian seas for example, contain more exploitable energy then those of the hot,

high-altitude desserts of the American southwest40

Since the early days in 1980s and 1990s, the commercial wind turbines manufacturing

have started with the leading Danish technology and evolved significantly. They are

larger, more efficient and more durable. The utility scale of the wind turbines has grown

from units of 20-60 kWh in the late 1970s and early 1980s to a maximum 6 MW in 2008.

Larger wind turbines provide efficiency and economy of scale, but they are also more

complex to build, transport and deploy

.

41. Wind turbines usually spin 65% to 90% of the

time, but only at their full rate capacity 10% of the time. The capacity factor of wind

turbines (the ratio of the actual energy produced in a given period) is ranging from 20%

to 40%, if it will be compared to other energy sources like nuclear power plants about

90% and coal plants 70%, it is obvious that wind energy power has the lower capacity

factor. A high capacity factor lowers the plants cost level42

Technological innovation remains a crucial driver for reducing cost of wind energy. The

cost of onshore wind turbine is 75% of the total investment cost, which is lower

compared to the 19980s, although since 2004 cost reduction have not been fully realized

because of the increase in the prices from the supply constrains. Most of the efforts in the

R&D of wind turbine technology are concentrated on the issues of, offshore turbine

deployment, gearbox development, Blade design innovation, and low wind speed turbine

development, manufacturing economies of scale and system integration improvement

.

43

Technology R&D is critical to the wind turbine industry. The major wind turbine

manufacturing companies spending on R&D is different between one and other. The

.

40 http://www.fas.org/sgp/crs/misc/RL34546.pdf CSR Report for Congress. Wind power in United States. 41 http://www.ewea.org/fileadmin/ewea_documents/documents/publications/factsheets/factsheet_technology2.pdf. Wind Power Technology Report. 42 Renewable Energy Research Laboratory, “Wind Power: Capacity Factor, Intermittency, And What Happens When the Wind Doesn’t Blow?” University of Massachusetts at Amherst, p. 1, November 2004. 43 Technology Road Map. Wind energy. International energy Agency 2009.

30

reported spending on R&D in 2008 for Vestas $175 million (€119 million, 2% of

revenues), Suzlon R&D spending was $3.4 million (0.2 of revenues) and Clipper spent

$21.1 (3% of revenues) on R&D.

Government programs and public-private collaboration through national laboratory

systems aid the development of wind technology and the testing of new wind turbines

models. The USA government budget more money for wind energy R&D then other

countries with competitive wind industries. From 2003 to 2007, the average annual USA

Wind energy R&D budget was $44 million, while Germany was $19 million, Denmark

was $16 million and Japan was $9 million44

.

2-4:Social-Cultural factor.

In recent years, climate changes have had an effect on the environment. As a

consequence, the climate change have created a focus on the need for alternative energy

sources to fossil fuels, like oil and gas that what are mainly causing the CO2 pollution.

The climate change have cause awareness among Western Europeans in the importance

of green energy such as the renewable energy that make of natures nature’s own

resources to create the energy45

According to Lord Nicholas Stem, a well-known economist in the UK, the global GDP is

currently facing the risk of decreasing by 50% if we continue using crude oil, natural gas

and coal at the level we are today. In the climate meeting held in Copenhagen in March

. Consumer green mindset has since has since the

beginning of the nineties dictates the trend seen in the renewable energy. The awareness

and the green mindset have also been seine in North America, and specially Asia with its

increasing population and fast growing energy consumption. This has increased the need

to invest in renewable energy, also increasing the need offshore wind turbine in Asia.

2009, Lord Nicholas stem also pointed out that the average temperature would rise by

5% globally if countries did not start investing in wind energy46

.

44 http://www.usitc.gov/publications/332/ITS-2.pdf Wind Turbines. Industry and trade summary, June 2009 45 http://www.thegreenmentality.com/alternative_energy.html 46 http://www.berlingske.dk/klima/klimaadvarsel-fra-topekonom

31

Conclusion: From the political and economical analysis, it shows that there is a big relation between

the political support and the economical benefit of wind energy, and most of the

economical benefit comes from the wind turbine sector. The wind turbine sector is related

to many industries and the growth in the sector will bring benefit to these related

industries, if these are components supply industries or raw materials industries like the

steel industry which is the most used in the wind turbine production. Also the economical

benefit that comes from the employment in the wind turbine sector, the wind turbine

sector is labor intensive sector, which means it will be a great opportunity for the USA

and China to use the workers which lost there jobs in other industries in the wind turbine

sector. These benefits are one of the major reasons that gave the industry big support by

governments of many countries and specially the biggest economies in the world USA

and China. The technology of the wind energy is still not competitive with conventional

energy in terms in efficiency and costs, but the economical benefit from the wind

industry that comes mostly from the wind turbine sector compensated this disadvantage.

32

CHAPTER THREE

3. Porter Five Forces Analysis The five forces is a strategic framework, developed by Michael E. Porter in 1979. It is a

strategic tool used to analyze an industry, by describing the current situation and the

future prospects of the industry47

. The analysis raise, critical questions about the industry

that need to be identified and answered, to have an idea about the business environment

of the industry. The analysis enable the organization to asses the competitive

environment and also enable the organization to determine the attractiveness of profit

potential of the industry by examining the interaction of the five competitive forces,

which are common to all the organizations in the industry and affect the performance and

profitability of the industry. The five forces constitute analysis of rivalry among existing

competitors, threat of entry, threat of substitute, power of input suppliers and power of

buyers. In figure 1 below, the competitive rivalry is placed in the center of the figure,

because it’s affected by all the other factors.

Figure 1: The five forces Framework.

The framework strives to identify the potential threats on the profits, and show the trends

in the industry. I will address each force and see how it will affect Vestas position in the

industry.

47 Porter, ME 1979, ―How Competitive Forces Shape Strategy‖. H arvard B usiness R eview , pp.137-145.

New Entrants

Suppliers

Substitutes

Buyers

Competitors

33

3-1: Internal Rivalry Among Existing Competitors.

Internal rivalry is the competition for gaining the market share within a market and the

competitive relation that will come from that competition between the competitors in the

market48

The rapid growth in the wind turbine sector, attracted many new investors to inter the

market, especially in the last 5 years, which increased competition in the market, wind

turbine suppliers in the bottom of the top 10 have increased their supply to the market

which lead to a decrease to the market concentration, if it will be compared to the period

between 2004-2006 the market concentration was 96% and in 2007 was 90%

. Vestas competitors are manufacturers of wind turbines whom having the

resources that enable them to compete with Vestas, to gain a market share and they have

the power to affect the strategic decision of Vestas. As I mentioned before the market is

global and highly concentrated with around 10 wind turbine manufacturing companies,

that has 85% of the market share, and Vestas has the biggest market share 19.8% on the

global level, and it is the second with it’s market share in the USA 12.9% and the forth

with its market share in china 9.3%.

49

The European Wind Energy Association (EWEA) estimation for the annual global

demand of energy will be €10 billion up to tear 2015 with a gradually increasing share of

investment in the offshore, and by 2020 it’s estimated the annual investment will go op

till €17 billion annually, these approximations are based on the cost of wind energy

installation

.

50

The market share of Vestas has been decreasing from the year 2004 of 35% to 2008 with

19.8% market share. That’s because the growth in the wind turbine market was mostly in

the USA and China, has been taken by Home companies of these countries.

. The result of these developments in the market Vestas found itself facing a

growing global competition by the big established companies from the top 10 like GE,

Gamesa, Siemens, Suzlon, Goldwind and others, also an increasing competition from the

new companies that entered the market because the big growth in China and USA.

48 Besanko, D, Dandrove, D, Shanley, M & Schaefer, S 2004. Economics of Strategy. 3rd ed. New Jersey: Wiley International. 49 BTM Consult ApS International Wind Energy Development. March 2009 50 Krohn, S, Morthorst, PE & Awebuch, S 2009, The Economics of Wind Energy. EWEA p 33

34

As I mentioned in the political and economical factors of the PESTAL model, that the

growth in the wind energy market is driven by political support of the growing markets

countries, through tax incentives and subsidies and that support has big effect on the

competition in the market, especially in the most growing markets USA and China, with

the constrains that these countries put on the support they give, which demands from the

wind turbine supplier companies to produce most of the components of the wind turbine

in these countries so they can benefit from the incentives. That’s why GE had the biggest

part of the American market, because its well established in its home country and it didn’t

face big competition from the outside big suppliers like Vestas and others. And also the

same thing with Sinovel, Goldwind, and Dongfang in China they were more ready to

benefit from the big growth in their home market. Most of the growth for these

companies comes from their markets. That’s an indication of the competition in the wind

turbine market is not free and not fully controlled by the market forces. That made many

European pioneer companies to expand or start FDI in the Chinese and The American

markets, which Vestas is one of these companies and its starting to expand its foreign

direct investments in these markets to use its resources and long experience in the market

for capturing part of the growth in these countries.

Europe is the biggest wind energy market and the oldest. Its market share from installed

MW capacity is 32.6% of the total installed in the world, within Europe Spain and

Germany are in the list of the 10 top markets, they both around 37% of Europe market

and 12% of the global market. Also the pioneer wind turbine manufacturing companies

are situated there like Enercon and Gamesa. The European wind turbine suppliers from

the top 10 have 52% of the global market51. Vestas generates 60% of its revenues from

Europe and its considered one of the biggest players in the European market, which was

the main source of Vestas growth and becoming a market leader52

. The European

companies from the top 10 suppliers are more distinguished as global suppliers then the

other suppliers in the same grope, Vestas, Gamesa and Siemens are the most

distinguished as global wind turbine suppliers, they can be seen having a market share in

51 BTM Consult ApS International Wind Energy Development. March 2009 52 Vestas Annual Reports (2008).

35

all the big markets USA, China and in Europe. Gamesa home market Spain that it has the

biggest share of 36.6% and Spanish market is on of the top 10 markets53

Siemens even if it is German company, it is more distinguished with its experience in the

wind turbine market as Danish, because it a result of the acquisition of the Danish wind

manufacturer company Bonus in 2004 and Bonus is the most specialized with the

offshore wind turbine manufacturing and development, which putted pressure on Vestas

offshore market.

.

In the USA the market is the most growing globally, there has been 10,386 MW installed

in 2008. The American company GE takes the biggest share of the market with 44% of

the market share. GE supplied the global market in 2008, with 5293 MW around 88% of

this number is supplied to the American market, which count of 4611 MW. As we can

see that most the GE supply portfolio in the US market. Vestas has 12.9% of the

American market share and it’s considered the second largest wind turbine supplier for

the American market, also it generated 24.98% of its revenues from the US market.

Vestas main non-domestic competitors in the US market are Gamesa with 11.3% market

share, and Siemens with 8.6% market share.

In China the market is the second growing market after the USA and expected to be the

first. There has been 6,408 MW installed in 2008. The big growth for the wind turbine

mark that reached 112% annually in the years between (2005-2008) motivated many

Chinese manufacturers to inter the market, that resulted in 70 wind turbine Chinese

manufacturer, they have about 75% of the total Chinese market share54

53 BTM Consult ApS International Wind Energy Development. March 2009

. The biggest three

suppliers of the Chinese market are three Chinese companies Sinovel, Goldwind and

Dangfang thy have market share of 21.9%, 17.7% and 16.4% respectively of the total

Chinese market share. Sinovel and Goldwind are part of the 10 top global suppliers and

all there supply is to the Chinese market. Vestas is the forth-largest supplier in the

Chinese market, with a market share of 9.3% and it generated around 14.19% of its

54 http://www.globalbioenergy.org/uploads/media/0910_REN21_-_Background_Paper_Chinese_Renewables_Status_Report_2009.pdf Chinese Renewals Status Report October 2009 REN21 Renewable Energy Network for the 21st Century.

36

revenues from Asia pacific, which China is the biggest share. Vestas main non-domestic

competitor in the Chinese market is Gamesa with market share of 7.8%.

The home market for Vestas, the Danish market is limited and small compared to the

other global top ten markets, which are led by the US, China and in some parts of Europe.

That is one of the main reasons that made Vestas focus with its expansion outside

Denmark since the started as a specialized wind turbine producer. Vestas as one of the

first movers in the industry and its success of continuing and growing, gave Vestas a

good experience and a good reputation in the market, it established good bases in all the

big wind turbine markets in the world, that’s because the competition was less intensive

then now. It has been aggressive with its investment in R&D of wind technology and in

investment of production facilities around the world, that to sustain a competitive

advantage against its rivals. Vestas main competitors in the global level are Siemens and

GE, these two are one of the world’s biggest companies and they both have big financial

strength and strong political ties, and also their portfolio of wind turbine product is well

diversified, both of these companies are well capable of sustaining and expanding their

existence within the industry55

Vestas is a producer rapidly highly growing global market, and most of the growth is

concentrated in regions like parts of Europe, USA and China. Markets that are growing

rapidly offer better opportunities for sale then markets that have low growth, and it’s less

likely to involve stealing market share from competition. In these markets growth will

tempt new entrance that will take share in the growth. There is also a possibility that

growing markets are less profitable then low growth markets, that is because the high

growth in these markets demands investments from companies in these markets to hold

part from this growth, and these investments will be founded from the profits that comes

from the growth

.

56

The table (3-1) shows Vestas global market share, supplied MW by Vestas and the

growth rate of Mw supplied. It shows that Vestas market share is decreasing since 2005

and it is the lowest compared to in 2008 compared to the previous years, but also its MW

supplied to the market is growing on average of 24% during the years between (2003-

55 http://www.asb.dk/fileexplorer/fetchfile.aspx?file=10346 56 Richard Lynch, Strategic Management. 5th edition. Prentice Hall 2009. Page 359.

37

2008). This decrease in Vestas market didn’t come from loss in Vestas existing costumers

but from the loss of capturing the growth in the market that mostly came from the USA

and China, and it has been captured from new entrance and home companies of these

countries, which indicates that Vestas hasn’t been ready enough for supplying the

growing demand in these to markets.

Table (3-1): Vestas market share, supplied MW and the growth in MW supplied57

Vestas

2003 2004 2005 2006 2007 2008

Market share 21.7% 34.1% 27.6% 28.2% 22.8% 19.8%

Supplied MW

Growth in MW

supplied

1812

13%

2783

53.5%

3186

15%

4239

33%

4503

6%

5581

24%

The big growth in these two markets has changed the market structure, in terms of

supplied capacity to the regions, the European market has been the dominant for long

time and Vestas has been a major player in Europe, which is a region where Vestas

belong too, and most of its production facilities are there, but with new situation where

Vestas presence in the USA and China is low compared to its local competitors in these

to markets. This situation will demand heavy investments of Vestas in these two

countries to protect its leading position as number one in the wind turbine manufacturing

industry. From (appendix one) which shows the performance of Vestas compared to the

hall industry in terms of installed capacity, during the last five years. From the table in

the appendix Vestas performance is a little bit lower with average growth in installed

capacity for the period between 2004 and 2008 that was around 27.6% for the industry

and 26% for Vestas. This deference came from the low presence of Vestas in the most

growing markets during these years, which are the USA and China.

57 BTM consult. International Wind Energy Development. Years (2003-2008).

38

3-1-1: Costs Of Wind Turbine: Wind energy investments are intensive capital investments, compared to the conventional

electricity generation investments. 75% of the total costs of the investments in wind

energy projects are related to upfront cost, which is the installation of the wind turbine.

Table (3-2) is the costs structure of a typical 2 MW wind turbine in Europe. It is clear

that, the wind turbine is the most expensive component of the plant installation. Wind

turbines are type-certified for clearly defined conditions.

Table (3-2): Cost structure of the Installation of a wind turbine in Europe58

.

Investment

(€1,000/MW)

Share of

Total cost%

Turbine

Grid connection

Foundation

Land rent

Electric installation

Consultancy

Financial costs

Road construction

Control systems

928

209

80

48

18

15

15

11

4

75.60%

8.90%

6.50%

3.90%

1.50%

1.20%

1.20%

0.90%

0.30%

TOTAL 1,227 €/MW 100%

The certification is demanded by investors and insurance companies and states that wind

turbine will be secure and fit for their intended life time of around 20 years for onshore

and25 years for offshore. The main components of the wind turbine that have biggest cost

share of the wind turbine production are the, Tower, rotor blades and gearbox their share

of total wind turbine costs is 26.3%, 22.2% and 12.9% respectively59

.

58 Krohn, S, Morthorst, PE & Awebuch, S 2009, The Economics of Wind Energy. EWEA. Page 9. 59 Krohn, S, Morthorst, PE & Awebuch, S 2009, The Economics of Wind Energy. EWEA. Page 37

39

Wind energy price setting is an institutional setting in which wind energy is delivered.

Vestas and all the wind turbine suppliers have no power over the price setting of wind

energy. The struggle for wind turbine manufacturers for the reduction of their production

costs is how to manage the cost of their supply chain of wind turbine components, and

the most cost intensive of the components are the tower, rotor blades and the gearbox as I

mentioned before. That is done by integrating vertically with their suppliers or producing

the components at home60. It is not always cost beneficial to produce some components

at home, because the suppliers of some components benefit from the economic of scope

from their production, for example the gearbox Belgian manufacturer Hansen, only 20%

of the company production is for the wind turbine manufacturers and the rest is for

deferent industries, and the acquisition of supplier like Hansen will expose the buyer if it

was a wind turbine manufacturing company to a deferent kind of business risk that is

included in other industries as it was the case of Suzlon acquisition of a share of 60% of

Hansen that turned to a failure61. One of the most important material that is used in the

manufacturing of wind turbine is steel. Steel account of 90% of the weight of turbine, a

single 1MW utility scale wind turbine tower is produced with an estimated 100 tons of

steel. Vestas is estimated using 400,000 tons annually for turbine tower production only.

This expose the wind turbine manufacturers to the fluctuations in the commodity price of

steel, that is not easy to control62

.

60 http://social.windenergyupdate.com/industry-insight/supply-chain-vertical-integration-shows-signs-slowing 61 http://www.thehindubusinessline.com/2009/06/16/stories/2009061651140200.htm Business Line. http://economictimes.indiatimes.com/markets/stocks/stocks-in-news/Suzlon-looks-to-sell-its-26-stake-in-

Hansen/articleshow/5525802.cms The Economic Times.

62 http://www.cggc.duke.edu/environment/climatesolutions/greeneconomy_Ch11_WindPower.pdf Manufacturing Climate Solutions. Chapter 11. Wind power

40

3-1-2: Product Differentiation:

Wind turbines are differentiated by size and swept of rotor, and adapted to various

conditions at the plant site, for example wind conditions, costal or inland location. These

differences demand different technology for the turbine that will be installed.

Table (3-3) shows different wind turbine manufacturers produce different turbines with a

capacity spam from 600 kW up to 6MW.

From table (3-3) we can see that Vestas and Suzlon have the widest range of products.

This wide range of products gives Vestas a competitive advantage to compete for

contracts for various geographical locations and for different weather conditions, both on

the on-shore and offshore. Vestas focus its production on the V90-3.0MW model, and as

it shows in the table (3-3) the competition comes from GE, Siemens and Suzlon on this

product segment. Together with Vestas, these three companies hold 66% of the total

installed capacity in the American market.

The American market prefers large turbines as the geographical conditions is

characterized by high wind activity.

Table (3-3) Wind Turbine producers and Turbine size offered63

Vestas

GE Wind

Gamesa

Suzlon + Repower

Siemens

Goldwind

Sinovel

850kW 1.6MW 2.0MW 3.0MW

1.5MW 2.5MW 2.5MW 3.6MW

850kW 2.0MW

600kW 1.25MW 1.5MW up to 6MW

2.3MW 3.6MW

750kW 1.5MW

750kW 1.5MW

63 http://www.vestas.com/en/wind-power-solutions/wind-turbines/kw.aspx, http://www.powergeneration.siemens.com/products-solutions-services/products-packages/wind-turbines/products/, http://www.ge-energy.com/businesses/ge_wind_energy/en/index.htm, http://www.suzlon.com/key_differentiators/l2.aspx?l1=4&l2=16, http://www.gamesacorp.com/en/products/wind- turbines/catalogue Global China Wind report 2009 http://www.chinadaily.com.cn/bizchina/2009-06/24/content_8316168.htm

41

The small UK wind turbine manufacturer Clipper Wind is currently developing a 7.5MW

turbine accustomed for the US market64

We can see also from the table the biggest wind turbine manufacturers in China by the

biggest tow man

. This can be a threat to Vestas market share n the

US market, in addition to the already established competition with GE.

Sinovel and Goldwind their production range is 750kW and 1.5MW, and they are in the

process of development of 2.5MW and 3MW, which is a great competitive advantage for

Vestas in china that it has wider rang and it is already producing the 2.5MW and the

3MW, which is also more competitive with the quality and it will give Vestas better

advantage in the future when it will increase its production through the FDI in China, by

having a better chance to win contracts with its divers range of production.

3-1-3: Switching Costs:

Switching cost are the cost that are incurred by the buyers when the change suppliers65

.

Switching costs include for example costs of search and learning, emotional costs and

equipment costs. The wind turbine with increase of production during the last 20 years

reached a level of being a standard product, which is not difficult to switch between

manufacturers while the costumer can find a product with similar product quality. The

obstacle of switching cost is not only finding the similar quality of product but the service

that the supplier offers after the installation of the turbine, timing of installation and the

maintenance if it was included in the contract between the buyer and the supplier of the

wind turbine. However, the obstacles connected to switching costs are considered to be

medium with their strength and it didn’t stop new actors to enter the market.

64 http://www.clipperwind.com/pr_100807.html 65 Anthony Henry 2008, “ Understanding Strategic Management” Oxford University Press Inc.

42

3-1-4: Barriers To Exit.

Investment in wind turbine manufacturing capital intensive, due to the high expenses

required for building production facilities. Such expenses mainly consist of commodity

prices, price of labor and price of capita. Also it has high sunk cost for the machinery and

the costs of research and development, which is high compared to other mature

industries. These cost are considerably high and not easy to be covered in a short time.

That high level of cost will put a big barrier for companies to exit the market. This barrier

will intense the competition between companies in the market while they can’t exit easily

they find them self’s struggling to gain bigger market share.

Conclusion: the big growth in the market and the big demand on wind turbine will

make the rivalry less intensive in the short period.

In the long run the rivalry will be more intensive in terms of acquiring better technology

and the establishment of production facilities in the growing markets. Vestas invested

€650 million in 2008 and the number went op to €1.6 billion in 2009 it also has the

biggest research and development centers and the investment where €119 million in 2008

which is the highest among its competitors.

3-2: Barriers To Entry.

The big growth, in the wind turbine market attracts new entrants. That will decrease

market concentration and it will put pressure on the existing companies profits. This kind

of threat can be avoided by creating barriers to entry. The high expenses for establishing

production facilities for wind turbine manufacturing create big barriers for the new

entrance to the wind turbine sector. Establishing a wind turbine plant requires a

significant allocation of resources and years of R&D. Start-up costs are high, the

production process not easily learnt, and the learning and experience curve is steep66

The other barrier of the wind turbine market is that its highly legislated market,

determining the turbine size, noise created by the turbine and the framework of the

.

66 Krohn, S, Morthorst, PE & Awebuch, S 2009, The Economics of Wind Energy. EWEA p.44

43

turbine. What lead new actors to enter the market like China, which thy reached 70 new

actor, that was because of the Chinese government support through the intensives and

financial support by the government and low foreign involvement in the wind turbine

manufacturing in china, which made the competition low and it became easier for the

new entrants to survive. The entrance of the big companies to the wind turbine sector,

most of it happened through merger and acquisitions to gain existing market share and

technology advantage as it happened when Siemens entered the Danish market by

acquiring the Danish wind turbine manufacturer Bonus in 2004, the acquisition of GE

electric to ENRON wind group in 2002 that enabled these to companies to be in the top

10 wind turbine producers. Also the existing big turbine producers thy merge to sustain

and increase market share like with Vestas merger with NEG MICON in 2005, or thy

merge to have better position in a specific region and access to more advanced

technology and improving product quality which happened with acquisition of Suzlon to

Repower in 2007.

3-3: Threat of substitute.

Energy is generated through the conventional energy sources which is oil, gas and coal,

and what is called the environmentally friendly sources like wind power, solar power,

Wave power and hydro energy, however nuclear power is also considered as a clean

source of energy. The threat of substitutes is the possibility of close substitutes, price-

value characteristic of such substitutes, and the degree of price elasticity of demand.

Substitutes erode profit in the same way as entrants do, by capturing market share and

intensifying rivalry. They act as price ceiling in the market, forcing wind turbine

manufacturers to optimize their production and cost efficiency in order to stay

competitive67

Conventional sources of power are still more competitive in terms of costs and efficiency

compared to wind power and the other renewable energy sources, for that governments

. Substitute to wind energy can be founded on both on the conventional

sources and renewable and clean sources of energy.

67 Pagolatos, E & Sorensen, R, 1986, ”What determines the Elasticity of Industry Demand” International Journal of Industrial organization, Vol 4, pp. 327-350.

44

supporting the wind energy and other clean sources of energy through the incentives and

subsidies, to create market for it. The only competitive advantage that wind energy has

over the conventional energy besides being more environmentally friendly is that its

independent of fuel and the development of prices of oil and gas will not effect it.

The other substitute is nuclear power which is a an efficient source of energy and lower

cost then wind energy, but there is a major concern regarding the disposal of industrial

waste exist. The radioactivity element of uranium that is greatly damages the ecological

balance, and is believed to be the source of many cancer incidents68

The clean source of energy comes the threat of substitution from first the hydropower and

the solar power.

.

Hydropower turbines convert approximately 90% of energy available into electricity,

which is more then what do the wind turbines produce, which is approximately 66%69

The photovoltaic solar advantage over wind power that it doesn’t require turbines that

generates noise and maintenance

. In

the us hydropower produce 10% of the nations demand of electricity, which can be seine

as a strong substitute to wind power from the clean energy sources.

70

This can pose threat on Vestas mainly in the markets for smaller scale power production.

Solar power requires vast area of land in order to produce sufficient amount of power to

cover large scale of demand. Currently, solar power technology does not posses the same

production capacity as wind power. Currently solar power is not a threat to Vestas, but if

the solar technology develops in the future it will be a real threat to Vestas.

. Solar planes can set up in remote areas and does not

require extension of power lines, thus it is popular in developing countries like India.

3-4: Supplier Power Factor.

Components required for production of wind turbines are often not unique, and wind

turbine manufacturers have the opportunity to switch suppliers if they are not satisfied.

As wind turbines often designed to fit cretin climate, which require a certain model of the

different components, switching costs can be high due the customization of deferent

68 http://www.altenergy.org/nonrenewables/nuclear.html. 69 http://www.altenergy.org/renewables/hydroelectric.html. 70 http://www.altenergy.org/renewables/solar.html.

45

components. The wind turbine sector is not main client for most of the suppliers. For

example, tower manufacturing plants exist mostly to supply wind turbine manufacturers,

but gearboxes and generators have a diversity of customers in deferent industries which

they are considered main customers for them71. Suppliers have deferent barging power on

the wind turbine manufacturers. There are several suppliers for each wind turbine

component, and the market share and degree of concentration varies the deferent

suppliers. The high demand for wind turbines in recent years especially in the USA and

China, and the shortage of supply by wind turbine manufacturers, was a result of the lack

of supply by the wind turbine components suppliers. This gives an indication that, the

market concentration for suppliers is higher then their customers the wind turbine

manufacturers. The lack of supply of wind turbine brought disappointment for turbine

manufacturers that they haven’t been able to supply the market because of the limitations

of their supply chain, and it was also a disappointment for the components suppliers that

they could have sold much more output if they had made extra investment in machinery

few years ago72

The gearbox has the highest bargaining power and it is the bottleneck in the market. The

BTM consultant gave three reasons for this power; first, the market experience shortage

of bearings, secondly there is a high level of maintenance required for gearboxes, and the

third is the limited number of gearboxes produced compared to the demand from the

wind turbine sector

. One of the biggest problems in the supply chain of most wind turbine

manufacturers is the lack of supply of gearboxes. The increase of turbine size from less

then one MW up to 2MW and more, which demanded more specifications in the

gearboxes, which only few suppliers can satisfy the demand, the same for the blades and

towers.

73

. That gave suppliers considerable power, which their number in the

market is limited.

71 BTM Consult ApS 2009, International Wind Energy Development. World Market Update 2008. 72 http://www.ewea.org/fileadmin/ewea_documents/documents/publications/WD/2007_january/0701-WD26-focus.pdf Supply chain: The Race To Meet Demand. EWEA 73 BTM Consult ApS 2009, International Wind Energy Development. World Market Update 2008.

46

One of the most important competitive advantages for wind turbine producers is the

security of supply and the reduction of components costs, uncertainty problem of supply,

lead many companies to integrate backwards on the supply chain and that through the

acquisition of their suppliers or by producing the components at home. That made the

wind turbine sector to be characterized with high vertical integration. The problem of

highly integrated companies, that they will have higher labor costs and higher level of

capital intensity. We can see from the table that most of the big turbine producers have

production at home for their components and that is the case with Suzlon and Gamesa. So

it’s a dilemma for the wind turbine manufacturing companies of how to make a balance

between the security of components supply and the extra costs from increasing the

vertical integration74

Mostly low technology components are produced at home like tower, nacelle and others.

The main reason for low technology components to be produced at home is cost

reduction because they are standard products also there is supply shortage of these

components because of the high demand on turbines. Special producers supply high

technology components, like gearbox, blades and generator. It is obvious that suppliers

have considerable power on the manufactures.

3-5: Buyer Bargaining Power.

The bargaining power of the buyer is the ability and the buyer to extract profit from the

seller through the negotiation of the purchase price75

74

. There are several factors that affect

the bargaining power of buyers in the wind turbine sector, which are the global financial

situation, characteristic of the buyer and the wind turbine market situation all contribute

to the degree of the buyers bargaining power. Wind power suppliers are limited in

comparison to buyers in the market.

http://www.ml.com/media/81290.pdf Wind turbine manufacturers; here comes pricing power. Industry overview. Merrill Lynch. 2007 75 Besanko, D, Dandrove, D, Shanley, M & Schaefer, S 2004. Economics of Strategy. 3rd ed. New Jersey: Wiley International.

47

Buyers as I mentioned before are independent power producers that are supported by

subsidies for renewable energy and utilities (power supply companies) that are required

by governments to include renewable energy in their portfolio. There is a shift in the

structure of the buyers. Utilities are becoming more active in the market and that is

leading a shift in the structure of the buyer. That lead to increase the concentration of the

buyers in the market and it will give the turbine manufacturers a clear picture about

whom thy will be selling to76. That wills also require more technical expertise from the

manufacturers to meet the demands of the more professional new buyers, and enough

production capacity. Also these new customers prefer big turbines because of their large

scale of investment. The new buyers (utilities) are interested in integrating backwards by

acquiring ownership in the turbine manufacturing companies, like the example of

Iberdrola and Gamesa77. The world’s leading utilities owns and operates 36% of the

world wind power installation. The four biggest actors in the utility market hold a market

share of 57% of the utility share. It’s believed that this shift in the structure of the buyer

will give high degree of bargaining power78

.

76 BTM Consult ApS 2009, International Wind Energy Development. World Market Update 2008. 77 http://blogs.wsj.com/environmentalcapital/2009/06/02/headwinds-iberdrola-unloads-10-of-gamesa/tab/article/ 78 The leading global utilities are Iberdrola Renovables (ES), FPL Energy (US), EDP Renovaveis (P) and Acciona Energy (ES). BTM Consult ApS 2009, International Wind Energy Development. 2008

48

CHAPTER FOUR

4- SWOT Analysis of Vestas:

In order to specify the objectives of Vestas business and identify and evaluate the internal

and external factors that affects Vestas business environment, I choose to use SWOT

analysis. SWOT is an abbreviation of strength, weaknesses, opportunities and threats

affecting a company. The first two factors (strength & weaknesses) present the internal

aspects of an organization, and the other two factors (opportunities & threats) addresses

the external aspects of the organization79

Table (4-1): SWOT Analysis of Vestas.

.

Strength Weaknesses

1-Have a strong and well-established experience in producing wind turbines compared to its competitors. 2-Strong global market position. 3-strong position with its R&D compared to its competitors. 4-high costumer satisfaction. 5-have a highly skilled workforce.

1-high reliance on the European market. 2- high concentration of its production facilities in Europe. 3- communication with costumers. 4-long delivery time of turbines. 5- offshore technology.

Opportunity Threats

1- The USA and China growing markets. 2- political support. 3- offshore. 4-Partnership with Boeing.

1-Economical conditions in the US market. 2- The financial crises and how long it will last. 3-political environment in the USA. 4- merger possibility inside the wind turbine sector between Vestas Major competitors. 5-Technological development in other sources of clean energy.

79 Richard Lynch. Strategic Management, 5th edition. Page 302. Prentice Hall 2009.

49

SWOT method is an appropriate method to identify the favorable and unfavorable aspects

affecting the overall objectives of Vestas, which can help Vestas to focus on improving

its investment strategy.

4-1:Strengths.

Vestas has been in the business of developing and manufacturing wind turbine for over

30 years, and witnessed the ops and downs of the market through these years, that gave

Vestas a big experience in the developing and production process of wind turbines and

also a big managerial skills through the long time of being in the market and with all the

difficulties that Vestas managed to pass during the years of its life as a wind turbine

manufacturer, which one of the hardest one of the is the 1986 when it was on the edge of

bankruptcy. This will give Vestas a big competitive advantage over its major competitor

in the industry, which most of them are newly established.

Among its competitors Vestas enjoys having the largest market share for most of the life

of the company, which enabled Vestas to generate cash that it maintained its leading

position with its developments to the company product and invest heavily in R&D that it

is has the largest wind turbine research and development centers in the world with many

sub centers in the world like India, Singapore, USA and around Europe and great

connections of R&D with university and institutions around the world. This R&D net-

work made some big companies like Boeing to seek creating R&D synergy with

Vestas80

Vestas enjoys a high costumer satisfaction; it has been announced 68% costumer

satisfaction as revealed from Vestas loyalty survey in 2009

.

81

Vestas image, great reputation and brand attract highly gave it the opportunity to have a

highly skilled working force and it has highly skilled management team. Vestas is highly

concerned in improving its working force competencies and knowledge through the

. That is an improvement

compared to 2008, which was 54%. That is an indication of Vestas high responsiveness

to the improvements of its product and its relation with its costumers. This satisfaction

will strengthen Vestas costumer loyalty and companies image in the market, which is so

important for a high cost product like wind turbines.

80 http://www.vestas.com/Files/Filer/EN/Press_releases/VWS/2009/090311-VWS_PR_UK-03.pdf 81 Vestas annual report in 2009.

50

further education the company offers, because Vestas realizes the important of the

working force as competitive advantage in the wind turbine industry, which is

characterized as an intensive labor user.

4-2:Weaknesses.

One of Vestas major weaknesses in my opinion is its heavy reliance on the European

market and the concentration of its production facilities in this area. That made Vestas

loses its leading market position in the most growing markets in the world USA and

China. Vestas didn’t have enough production capacity in these two countries to catch op

with the big demand on wind turbines in these two markets, and by having most of its

production capacity in Europe, made Vestas less competitive compared to the home

manufacturing companies in these two countries, because of the higher costs of

transportation and tariffs and also losing the governmental support of these tow countries,

compared to its competitors of home wind turbine manufacturing companies.

Vestas costumer satisfaction survey in 2008 revealed that there is a communication

problem between Vestas and some of its costumers. The issue of communication problem

is a result of Vestas dependency on the international market rather then its home market

which is so limited, compared to its major competitors home markets. Being highly

internationalized that will demand from Vestas better management for its communication

with its costumers whom they belong to different parts and with different cultural and

political background. The issue of communication problem can cause a lose of customers

and market share in the future if it will not be managed well by better identification of the

costumer needs and thereby develop turbines which ensure sale, increase revenue and

bigger market share. Also the same survey revealed dissatisfaction with the delivery time

and quality of the product service, which means that costumers change to other wind

turbine producer and it can harm the reputation of Vestas among its existing customers.

However Vestas determination to change this problem became clear as the internal

mission of “ service Excellence” was put into use. “Service Excellence” mission contains

51

a consistent planning and service levels globally. Vestas have improved but still lack full

competence in maintenance. Even if Vestas is known to have the “know how” in the offshore wind turbine technology

compared to its competitors, it is facing a big competition from one of its main

competitors Siemens, that have proven to be better at offshore wind turbines. Vestas uses

the same onshore wind turbine technology on the offshore. However the harsh weather

conditions at sea have placed unique demands on the foundation, tower and control

system on offshore turbines82

.

4-3: Opportunities.

The big growth in wind energy markets of USA and China, presents a great investment

opportunity for Vestas, especially when Vestas is already having the biggest share in

these two markets compared to the foreign competitors in these two markets. Vestas

realizes the great opportunity and it set its strategy by expanding its FDI in these tow

countries, that supplying the USA from the US, China from China and Europe from

Europe.

The political support for wind energy in Europe, USA and China is a great opportunity

for Vestas investments in these three regions, specially this support is not only because of

environmental concern, but the government realization of the economic benefit that they

can bring to their countries from investment in wind turbine manufacturing in these

countries. For a big company like Vestas should invest in this opportunity and consider to

increase its FDI investments, which they are the most, favored for the governments of

these countries.

The growth in the offshore market is also one of the opportunities that Vestas should

invest in, so it can increase the diversity of its product collection and mange to capture

part of the market that it is losing for Siemens. On September the 19th 2009, Vestas

announced its new product, the V112-3.0 MW offshore that will be their third turbine in

the offshore product line. The first turbine will ready to be installed in late 2010 and by

82 http://www.vestas.com/en/wind-power-solutions/offshore/offshore-wind-turbines.aspx

52

2011 Vestas expects to start its serial delivery83. Vestas believes that the new turbine will

make them more competitive in the offshore market and it increased its offshore R&D84

In March 2009, Vestas and Boeing announced the possibility of partnership. According to

Boeing vice president the Jan Kristiansen, the partnership could help Vestas, which is

undiversified company compared to its main competitors Siemens and GE (General

Electric), to improve the construction of its towers and increase the power of output from

its turbines. Vestas can use this opportunity to learn from Boeing to know how to reduce

the amount of steel in the increasingly vast windmills or even using aerospace to improve

wind resistance

.

85

.

4-4: Threats.

The wind energy industry is capital-intensive industry, which makes the investments in

the Industry highly dependent, on financial investors. Since 2008 with the start of

financial crisis and the collapse of the financial sector, which made investors more

precautious with their investment, because of the scarce financial resources. Also the tax

credit, which made the investment in wind energy industry attractive, became dependent

on the size of the investment and the amount of energy produced. In the USA as a result

of these financial problems, there has been a slow down with the investment in the wind

energy sector and many projects have been postponed or cancelled86

One of the big threats on Vestas future as leading wind turbine manufacturing global

company, is the possible merger between Vestas major competitors, for example

expected merger between Gamesa and GE or Siemens. This will harm Vestas market

share position globally, as it happened between Siemens and Bonus, in 2006 and between

. This slow down in

the economy affected the investment growth in the USA market, which will make the

future investment revenues of Vestas less predictable in the US market. The instability of

the US political environment, concerning the subsidies and aid to wind turbine energy

industry, which lacks long term federal legislation. That will bring some uncertainty to

the investment in the wind industry and also to Vestas future in the USA.

83 ttp://www.vestas.com/Files/Filer/EN/Press_releases/VWS/2009/090914-VWS_PR_UK-08.pdf 84 http://finance.yahoo.com/news/Vestas-Launches-V11230-MW-pz-1924469516.html?x=0&.v=1 85 http://greeninc.blogs.nytimes.com/2009/03/11/boeing-forms-research-partnership-with-danish-wind-giant-vestas/ 86 http://www.diusa.dk/di-in-usa/references-and-cases/articles/the-effects-of-the-crisis-on-renewable-energy.html

53

Sozlun and REpower recently, which made Vestas face intensive competition in the

market and lead to a loss in its market share.

The technological development in other kind of renewable energy sources it present a

big threat on the hall wind energy industry, and specially if the development in these

clean energy sources that makes it cost competitive with conventional energy sources that

will threaten the hall foundation of the wind industry and also the technological

development in the conventional sources of energy by making it environmentally friendly

will have a bad affecters on the wind energy industry. Vestas as undiversified company,

which its core business is the manufacture of wind turbines will be severally damaged

with these tow situations.

54

CHAPTER FIVE

5: The Eclectic Paradigm (OLI):

The eclectic paradigm (OLI) is one of the most dominant analytical framework for

determining the foreign direct investment and foreign activities of multinational

companies. The framework accommodates a verity of operationally testable theories to

determine the foreign direct investment of a company87

The eclectic paradigm shows that the extent, geography and industrial composition of

foreign production undertaken by multinational company can be determined by the

interaction of three interdependent variables, which are (OLI), the first (O) presents the

companies competitive advantages of the company that intend to engage or increase

engagement in foreign direct investment (FDI), which are specific to the companies

ownership of the investing company, the ownership (O) specific advantage.

.

The second (L) is the location attraction of countries and regions that the company

considering to increase its foreign activities.

The third (I) is the internationalization, it is a framework fro evaluating alternative ways

that the company can exploit its competitive advantage in a given country or region.

The eclectic paradigm will reflect the political and economical features of the investing

firms country or region and the country or region that they are seeking to invest or

increase their investment.

Vestas investing in foreign direct investment in the most wind power energy growing

markets, which are USA and China. That is part of its strategy by supplying the USA

from USA, China from China and Europe from Europe. In 2008 Vestas has the second

largest market share in the USA after GE and it has the forth-largest market share in

china, which the biggest share of the Chinese market is taken by three Chinese companies

87 Dunning, John H. (2000). The eclectic paradigm as an envelope for economic and business theories of MNE activity. In. International Business Review, Vol. 9, Iss. 2, pp. 163-190.

55

Sinovel, Goldwind and Dongfang and it has the biggest market share in both countries

compared to the foreign companies. One of the reasons of these investments is that

Vastas couldn’t benefit enough from the big growth in the se to markets, which is related

to the lake of Vestas production capacity in these two countries. With OLI paradigm I will analyze Vestas competitive advantage compare to its

competitors in these two countries if they were home companies of these two countries or

foreign companies, and also the choice these two countries for international expansion.

Also the will be analysis of why choosing FDI as a choice of internationalization and the

interaction between Vestas competitive advantage and choice of these two countries for

expansion and the choice of FDI to expand their investments in these two countries.

5-1: The ownership advantage (O). The investing firm possession, of some kind of unique and sustainable competitive

advantage or a set of advantages relative to the advantages that are possessed by the

foreign competitors. Advantages such as, the possession of technological and managerial

resources, the possession of monopoly power, and the advantages that are related to the

home country of the investing company.

From day one, the wind energy has been infected by politics, which it will never survive

as commercial source of energy without the support of governments and public. The

political support of the US and Denmark has had had the biggest impact on the

technological development of the wind energy and the establishment and development of

wind energy market. The political strategies for supporting wind energy were deferent, in

Denmark the government strategy for supporting wind energy turned into success

compared to the US, which was disappointing. The US government support strategy for

technological development for wind energy was a top-down technology development

program, where the aim was to develop windmills through computer simulation from the

aircraft industry aiming for developing and building large windmills that are

economically feasible88

88

. Many big American high-tech companies were part of the

research program such as Boeing engineering, Westinghouse and General Electric. The

http://www.telosnet.com/wind/20th.html . Illustrated History of Wind Power Development.

56

program results were discouraging and the companies lost interest in the program after

the governmental support stopped. The us governmental support tax incentives were

based on how many wind mills were erected within a certain number of years, which it

didn’t encourage the manufacturers to develop windmills with high quality.

The Danish successful political strategy for the development of windmill was the bottom-

up market based strategy. That was giving the windmill owners the right to sell their

electricity at a fixed and long guaranteed price paid by all electricity consumers. This

made the windmill market focus on the cost efficient production of electricity, and made

the wind turbine producers to be in gradual technological improvements to produce cost

efficient wind turbines to an actual existing market. This policy resulted in a growth of

the wind energy market. The success of the Danish policy to develop a wind energy

market was that the government established the policies that gave investors the price

stability they needed, enabling the industry to take off and develop89

Vestas is on of the founders and developers of the Danish windmill industry, it was one

of the first producers of the commercial wind turbines in Denmark and it witnessed all

the development process of the wind turbine industry, if they were technological or

economical development. Vestas is one of the so few Danish wind turbine-manufacturing

companies that remained in the industry and it is the leading from the early stages of the

wind industry. Through the life cycle of the 30 years of wind turbine production, there

were large number of wind turbines were produced, and also the wind turbine witnessed

many technological developments if its in the size of the wind turbine or the amount of

electricity that it generates, also the ups and downs of the industry, if it’s the good days of

the California incentives legislations or the bad days of stopping these incentives in the

. The competition

between wind turbine manufacturers in the Danish windmill industry, the knowledge

sharing and the learning effects were also big reasons for the success of Danish windmill

industry and making it a leading industry in the world, in terms of market share and

technology development. The Chinese windmill industry is newly founded industry, and

the governmental incentives and support policy is inspired by the successful Danish

support and incentive policy for the windmill industry.

89 Jens Vestergaard, Robert D. Goddard and Lotte Brandstrup. Industry Formation and state intervention – The case of the windmill industry in Denmark and the United states. Department of International Business. Aarhus School of Business 2003.

57

USA, which many companies went bankrupt in the Danish industry or were forced to

merge with other producers, and Vestas at that time in 1986 were in the edge of being

bankruptcy but it succeeded to go out of this problem. All these development in the

lifetime of the production cycle made Vestas to evolve and develop managerial and

technological skills that made it superior to its global competitors. Vestas long experience

in the wind turbine production business made it realize the importance of technology

development as competitive advantage among its competitors. Technology affects

competitive advantage if it has a significant role in determining relative cost position or

differentiation90. Vestas investments in R&D of wind energy is the biggest in the

industry, it invested €95 million in 2009 and it has the biggest research center for wind

energy in the world, the center of this R&D center situated in Denmark and it has related

R&D in USA, China, Germany, UK. Singapore and India, all these centers gave the

chance to make R&D synergies with big companies and institutions around the world,

like Bowing91

The limitations of the Danish wind turbine market made Vestas more experienced of

being an international company. Its involvements in the deferent markets around the

world gave Vestas the knowledge about political and cultural differences between the

countries and regions and how to deal with these differences. Vestas international

activities are in deferent levels of the business of wind turbine production, the production,

sale and R&D. that is deferent then all its major competitors from the world top 10-wind

turbine manufacturing companies. All of them come from the top 10 markets and all of

them have the biggest share of their market, beside that we see Vestas having a leading

share in all these top 10 markets.

.

In the USA the major competitor for Vestas is the American giant company GE is mostly

dependent on the US market with its supply for wind turbines that it has around 44% of

the US market share in 2008 and it has the second largest share in the global level after

Vestas. GE has great financial resources, which are bigger then Vestas and it has

investments in deferent kinds of renewable energies in its investment portfolio, which is

90 Michael E. Porter. Competitive Advantage. Creating and Sustaining Superior Performance. THE FREE PRESS: London1985. 91www.vestas.com .

58

more diversified company with its business92

The major foreign competitors in the US and the Chinese markets are Siemens, Suzlon

and Gemsa. Siemens is has similar character as GE, but its more international with its

investment in the production and development of wind turbine and it has the same access

to the superior environment of wind energy which is Denmark like Vestas, because

Siemens wind company is situated in Denmark even if the home mother company is

German. Siemens is also diversified company with its business and its investment in

renewable energy contains other investments then wind turbines. Vestas is has the same

competitive advantages with Siemens as it has them with GE in terms of the commitment

to the development of wind turbine technology.

. That diversification on its business makes

GE less connected to the risk of the wind energy compared to Vestas, and also it will

make it more risk averse for the wind turbine business then Vestas, because the income of

the company is not dependent totally on the supply of wind turbines to the market. Also

GE allocation of capital is not all for the wind turbine manufacturing and development

compared to Vestas, which is core business, is the production and development of wind

turbines. Diversification of GE will make the company less devoted then Vestas for the

development of wind turbine technology. Vestas is more superior with its R&D and

technology development, and its portfolio of the investment in the wind turbine

production in terms of location is bigger then GE which most of its wind turbine

production investment is concentrated in the US. As I explained before most of the big

growth of GE market share comes from the US which is the biggest growing market in

the world and because of the week presence of the big foreign companies like Vestas, that

gave the chance to capture most of the market share.

That’s one of the reasons for Vestas heavy investment in R&D so it will compensate the

bigger competitive advantage that GE and Siemens has with their heavy financial

recourses93

Suzlon (India) and Gamesa (Spain), both of these two companies are having the same

character as Vestas, by having wind turbine production as a core business, and by being

more diversified in terms of their international investment in the wind turbine production,

.

92 http://www.gepower.com/home/index.htm 93 http://www.asb.dk/fileexplorer/fetchfile.aspx?file=10346 . Vestas case study collection. May 2008. Copenhagen Business School.

59

they are also on the list of top 10 wind turbine manufacturers in the world, both of them

have the biggest market share in their home countries India and Spain, and their home

markets are in the top 10 wind turbine markets in the world. Both of these two companies

are highly integrated vertically with their supply chain, and Games integrated with one of

its costumers Iberdrola a utility company. Vestas compared to these two competitors has

a big advantage with its home environment and with its R&D network and capabilities.

Suzlon bought Repower the German wind turbine manufacturer, to enter to on of the

superior wind turbine manufacturing environments in the world to sustain its

competitiveness with the leading companies like Vestas. And also Suzlon tried to sell its

share in Hansen the gearbox manufacturing company to finance its acquisition for

Repower, because being highly integrated with your suppliers it will not give the

companies a bigger market share, it will expose the company for another kind of risk that

is related to the supplier business and it demand some financial resources that it can be

better invested in increasing the production capacity of the wind turbine manufacturers at

time where the growth in the market at its peak which should be utilized 94

In China, Vestas local competitors are Sinovel, Gold wind and Dongfang, which their

share of the Chinese wind turbine market, is around 56%. Sinovel and Gold wind are one

of the top 10 global wind turbine manufacturers and their entire market share comes from

the supply of their home market China. Vestas is competitive compared to these three

major Chinese companies, with its international market share, with its technology and

R&D activities and home market environment. These three companies gained their big

market share because of the week presences of the major international companies with

their manufacturing facilities, the three Chinese companies had a great support from their

home government to manufacture wind turbines and supply the Chinese market, and also

the benefit of lower transportation and labor costs.

.

All the top 10 manufacturing companies are exposed to the same risk in the market and

specially the political risk, and of the biggest competitive advantage elements for all of

these companies in the major markets like the USA and China is having production

facilities that enable them to supply these markets from the home of these markets, so

they can capture the governmental support that most of these companies dependent on.

94 http://www.livemint.com/2009/06/29224403/Suzlon-likely-to-sell-its-stak.html

60

And after that having the superior technological and managerial capabilities which is

Vestas is leading with these capabilities among its competitors.

5-2: Location Advantages.

The location advantage comes from the economical differences between nations or

regions. The host country must have advantages that can attract investors to make foreign

direct investment in these countries. Advantages that arise from:

• Advantages that are related to supply oriented variables, especially that are related

to comparative advantages of immobile assets like land, labor and infrastructure,

and also that are related to the availability, quality and price of natural resources,

transportation costs and artificial barriers to trade.

• Advantages that come from the demand related variables, which are the market

(local and neighboring markets) size, character and growth potential.

• Advantages of the structural side of the country, the economical and political

systems of governments of the host country, which is the investment incentives

one of these, related systems.

• Advantages that arise from the diversification of the company’s investments

portfolio, which minimize the risk exposure of the investing companies, risks

such as exchange rate, political risks.

Vestas choice of countries like the USA and China to expand its foreign direct investment

came for many strategically important reasons. These tow regions have the most highly

growing wind turbine markets in the world, the US market had an average accumulated

growth rate of 44% for the period between (2005-2008) account for 29% of the global

market share of wind energy installed capacity and the Chinese market had an average

accumulated growth rate of 112% for the period between (2007-2008) and account for

61

22% of the global market share of wind energy installed capacity. The growth of these

two markets is expected to last for long time as it has been mentioned in the BTM95

The incentives in these two countries are mostly for the home producing wind turbine

manufacturing companies, like in the USA the government demands a 50 % of the

production process of the wind turbine should be in the USA so the producing company

can benefit from the governmental incentives, and in China the government demands a

70% of the production process of the wind turbine should be in China so the

manufacturing company can benefit from the governmental incentives

.

96

These two reasons of markets big growth and governmental incentives are the most

important reasons for Vestas to invest in the expansions of its FDI in these two countries,

so it will sustain its market share as number one among its competitors by capturing the

growth in these two countries. The other reason is to reduce the exchange rate risk

exposure that comes from these two countries in terms of the exchange rate of the dollar

to the euro and Chinese currency to the euro, because both of these countries are the

biggest revenue generating for Vestas after Europe, 26% of Vestas revenues comes from

the USA and 14% comes from China and 60% from Europe, also the effect of changes in

exchange rates on the prices of production in Europe compared to the production in these

two countries

.

97

The other reason from these FDI investments is to reduce the cost that is associated with

the transportation of the products and tariffs costs, compared to the home producers in

these two countries. The wind turbine manufacturing business is a labor cost intensive

. The increase of Vestas foreign direct investment in the US and China

will increase diversification of Vestas production portfolio between its major markets

Europe, USA and China, and it will give Vestas greater competitive advantage over its

major competitors in these major markets, by creating a complementary production

system between these three regions, that will enable Vestas to benefit from advantages in

each of these three countries, in terms of components costs, R&D network and the

fluctuations in exchange rate between these three regions, which can be profitable to

switch production from one country to another while it will be lower with costs even if

the switching costs and tariffs costs will be included.

95 BTM Consult ApS 2009, International Wind Energy Development. World Market Update 2008 96 http://www.gwec.net/ 97 Vestas annual report 2008.

62

business and the labor cost in Europe compared to these two countries is high and

specially to China, so investing in these two countries will eliminate the labor cost

advantage of the home producers in China and in the US compared to Vestas, and one of

the biggest.

5-3: The Internationalization Advantage.

Firms that possess ownership advantages over their competitors, will be more beneficial

for them to use them then selling them or leasing them to a foreign firms98

. The firm must

have control over its investment and exploit its competitive advantage on its own. That

can be done, by establishing a holly owned subsidiary which is more preferable to other

entry modes like licensing and or joint venture. The advantages of internationalization are

• To reduce transaction and coordinating costs of arm’s length markets and non-

equity contractual relations. Such costs include opportunism and those cost that

are made to protect the reputation of the contractor.

• To reduce the risk of external agents behaving against the interest of the company.

• Avoid the costs of search and negotiation.

• To create synergies of knowledge creation and increase activities.

• To capture economies of interdependent activities.

• To avoid and exploit the governmental intervention with tariffs, quotes, price

control and the incentives and subsidies.

In the USA and China wind energy is highly supported by the governments of these two

countries. Chinese government demands a 75% of the production process of the wind

turbine should be in China, so the wind turbine manufacture can benefit of these

incentives, and the utilities in China are owned by the government, which the choice of

wind turbine suppliers are controlled by the government to give a protection for home

98 Dunning, John H. The Electric Paradigm of International Production. Journal of Business studies; Spring 1988;19,1; ABI/INFORM Global Pg.1

63

wind turbine manufacturers. In the USA the government demand 50% of the production

process of the wind turbine should be in the USA, so the wind turbine manufacturer can

benefit from the governmental incentives. This reason of the home production support of

these to countries, which are the biggest growing market in the world for wind energy

installation will make all the big companies to enter the market through FDI or Merger

and acquisition of existing wind turbine manufacturing companies, so they can be

competitive enough in this market with the local companies.

Vestas strategy to increase its FDI in these two countries came as result of its market

share decrease in the last two years compared to the years before as it has been shown in

Table (1-1), that’s because its focus was the European market and how to sustain its

position in this market, by having most of its production facilities in Europe and specially

its home country Denmark, which it reduced its competitive advantage in the most recent

growing markets the US and China, by having higher costs due to the tariffs and

transportation costs and losing the chance to benefit from governmental incentives which

the home manufacturers of these countries are benefiting from, also it didn’t manage to

have the production capacity that enable it to supply the highly demanding markets.

With Vestas high reputation and its technological competencies and also its high scale of

production, all these will put barriers for new entrants if Vestas increase its FDI in these

tow countries and also will give Vestas the opportunity to sustain its market share

position as number 1 wind turbine supplier.

Producing in these two countries will reduce the communications problems with Vestas

costumers, especially when the costumers are now mostly big utilities in these two

countries, which their demands are more complicated then a privet investors, due to the

larger order by these costumers (utilities) and the bigger sizes of wind turbines thy

demand.

In China the Government the governmental control over the quality of the wind turbine

will give Vestas an advantage over its local competitors with its big technology and

quality control, which can be seen from Vestas costumer’s satisfaction 68% in 2009,

from Vestas annual report 2009.

In the USA and China, both countries support for the wind industry and especially for

wind turbine home manufacturing, that’s to benefit from the high employment in this

64

sector and to develop the countries wind technology I believe that with give Vestas high

competitive advantage in these two countries and specially China.

Chapter six

6-1: Vestas Supply Chain.

The high growth in the wind industry that comes from the political support of using

renewable sources of energy, created big demand on wind turbines which exceeds the

supply. This high growth putted big pressure on the wind turbine manufacturers supply

chain of components.

Vestas as the biggest global wind turbine manufacturer in the world faces a big

challenges with its supply chain. Its challenge comes from how to secure the supply of

sufficient capacity and timely deliveries of its components from its suppliers. The supply

chain importance comes from its relatedness to Vestas ability to fulfill its obligations to

its costumers.

In 2005 Vestas witnessed the worst financial performance, with an EBIT margin (Earning

before Interest and Taxes) of -3.2%. The biggest reason for this bad performance was the

shortage and delay of the key components, which had a bad effect on the delivery of

turbines to costumers and the overall performance. Even if the company made an increase

in revenues of 52% from the year before, it also made loss of €116 millions. Most of that

loss came from an extraordinary increase in warranty provisions, caused by faulty

components in turbines delivered, and the delays that caused by shortage of key

components. Examples of the shortage and delay of key components effect on the

companies overall performance are:

• Delayed components deliveries have reduced capacity utilization, slowing down

or even stopping production.

65

• Offshore: The delayed in nacelle completion, towers and nacelles have been

shipped to site separately.

• Delays are costly to sea transport in general:

. A ship is costing $20,000 per lay day

. Ships have been dispatched with incomplete cargos

• Delayed components have caused late commissioning, leading to additional

penalties.

In 2005 there was a change of Vestas CEO, the new CEO had a big challenge for making

reforms in the companies activities and specially the issue of components supply chain.

The security of key suppliers was one of the most important parts of the strategy that has

been made by the new government of Vestas:

• Vestas will source in low-cost countries to secure more competitive prices.

• Because Vestas is expanding its FDI in the most growing markets, which is the

USA and China, it will source more in US Dollar to reduce the risk of currency

fluctuations.

• Vestas will never depend on one supplier, and it will have at least two suppliers to

its key components.

• Vestas prefer suppliers that are present in all the key regions for Vestas, and

specially Europe, USA and China that can increase the flexibility for Vestas.

• Vestas wants its strategic suppliers to follow its expansion from Europe into the

global world of wind energy and specially the USA and China.

The complexity of Vestas components supply chain came with the increase of Vestas

global production activities. That’s because Vestas historically is dependent with its key

components supply on European-suppliers companies that have high technical skills and

proven service performance. As Vestas revenues started to be more and more from

outside Europe, it started to be important for Vestas to add to its existing network of

suppliers a new supplier’s partnership. That’s because buying components from

suppliers in Western Europe and selling the produced turbines in markets other then

Europe exposed Vestas to exchange rate fluctuations in terms of the Euro to other

currencies. Also the requirement of the host countries of Vestas FDI, to produce around

66

50% and 70% of the wind turbine components in the USA and China, that is another

reason beside the exchange rate fluctuations that makes Vestas to seek new partnerships

with suppliers from these two countries or suppliers whom having production plants in

these countries, also Vestas will benefit from the lower production costs of these

suppliers, which will be reflected on the price of the components that will be supplied to

Vestas. One of Vestas action is the establishment of Shanghai procurement office, which

was to build relationships with Asian companies that can supply components like steel

fittings, small machined parts, plastic unites, cables and screws.

Vestas as a wind turbine manufacturing company is distinguished with its high degree of

vertical integration, which it manufactures most of most of the components of the wind

turbine at home, when these components cannot be purchased from external suppliers.

This strategy of Vestas by being having high vertical integration, Vestas will be more

flexible and less dependent on its suppliers. Here are Vestas productions Business Unites:

• Vestas Blades A/S: Manufacturing blades.

• Vestas Towers A/S: Manufactures Towers.

• Vestas control systems A/S: Manufactures controllers.

• Vestas Nacelles A/S: Manufactures nacelles. Including casting, machine parts and

generators.

Table (6-1) shows Vestas major components suppliers. We can see from the table that

Vestas is highly dependent on the suppliers with the Gearbox and the Generator, and the

other components Rotor blades, Towers and Controllers it has production at home for

these components and also has some suppliers like LM for Rotor Blades and LM is the

major supplier for the wind turbine industry, DMI for towers and NEG for Towers and

controllers.

Towers are usually produced locally where projects are built, because they are so heavy

and big, and it will have big transport problems if they will be produced in deferent

location.

With the Gearbox Vestas is highly dependent on two major suppliers Hansen and

Winergy. Hansen supplies 30% of the wind turbine industry and Winergy supplies 40%,

67

and Suslon owns Hansen and Winergy owned by Siemens, which are both Vestas major

competitors.

Table (6-1): Vestas major components suppliers99

Turbine

manufacturer

.

Rotor blade Gearbox Generators Towers Controllers

Vestas Vestas, LM Bosch,

Hansen,

Winergy,

Moventas

Weier, Elin,

ABB,

LeorySomer

Vestas,

NEG, DMI

Vestas, NEG

All the information for the Vestas supply chain I had it from:

http://www.asb.dk/fileexplorer/fetchfile.aspx?file=10346 A case study made by the CBS

on Vestas for researchers.

http://www.ewea.org/fileadmin/ewea_documents/documents/publications/WD/2007_janu

ary/0701-WD26-focus.pdf Supply chain: a report from EWEA.

www.Vestas.com and Vestas annual report 2008.

6-1-1: Supply chain risk. The high growth in the wind turbine sector during the last 6 to 7 years, putted the supply

chain of key components for the wind turbine manufacturers at a big risk, and as I have

explained before how it affected Vestas profits in 2005, by making a losses of €116

millions. Management of supply chain in the wind turbine sector is one of the most

important competitive advantages that a company can have, for what a big roll it has on

the company’s hall performance. By securing the supply chain for company it will make

it ready to meet the big demand of the market, and most companies started to secure their

99 http://www.ewea.org/fileadmin/ewea_documents/documents/publications/WD/2007_january/0701-WD26-focus.pdf Supply Chain: The race to meet demand. Page 28

68

supply chain of key components, by producing them at home and be highly self sufficient

like Gamesa or acquiring their suppliers like Suzlon and Siemens with their acquisition

for their Gearbox suppliers as I mentioned before.

In the supply chain of key components, the Gearbox is a vital part, because it requires a

highly sophisticated production technique and in addition to that, the global supply of

Gearbox is very limited. There used to be around six companies in the world, which are

producing Gearbox for all the turbine manufacturers, and 70% of the supply comes from

companies, which are main competitors for Vestas. The gearbox was and still of the most

important components for Vestas with its supply chain, and with the situation of 70%

concentration of the gearbox supply on the hands of Vestas major competitors, that will

bring a risk of supply of the gearbox in the future, by making the priority of the supply

for the two owners (Suzlon and Siemens) and after that the others and Vestas is one of

the others which don’t have a home production of the Gearbox. The gearbox issue is an

important issue to be solved by Vestas while it is increasing its FDI in the USA and

China. Vestas should invest in the home production of Gearbox in the USA and China,

beside the four suppliers that it has to reduce the risk of dependency on the limited

suppliers of Gearbox, but at the same time it needs to be supplied with a big part of its

use to Gearbox from its suppliers, because the production costs of gearbox by suppliers is

lower the at home for Vestas or any other wind turbine manufacturer, because suppliers

benefit from the economics of scale with their production for Gearbox, that’s because

their production not only for wind industry , but for other industries too, and also

suppliers benefit from economic of scale by producing gear in bigger scale to supply

many manufacturing companies. I believe also Vestas shouldn’t merge or acquire on of

its Gearbox suppliers as Suzlon and Siemens did because it will exposed to a deferent

kind of risk, and it will use heavy capital, which it will better use it with its FDI

expansion. Also it’s a good strategy of having four suppliers of Gearbox, that will create

flexibility for Vestas and it will have bigger diversification for its risk that is related to its

Gearbox suppliers.

There is another source of risk that’s connected to Vestas supply chain, which other then

key components. This risk comes from steel, the most important row material that Vestas

uses with its production of wind turbine, which is 90% of steel needed for its production,

69

and especially heavily used in the production of towers. Steel is a commodity and it has a

standard price in the commodity market and its price is related also to interest rate that

makes the price of steel exposed to fluctuations. That will expose Vestas overall

production costs to the risk of steel price. To reduce the steel price risk, companies like

Vestas use hedging techniques, by buying Futures from the markets, which is a contract

that enable Vestas to buy the Commodity in the future, with price that will be set in

advance, to secure Vestas from the future price increase of steel or any commodity that it

heavily uses. The use of hedging techniques should be secured and controlled by the

company to prevent the use of this technique of turning into speculations, which can be

highly risky100

.

6-2: Risk Management of Vestas.

Vestas is multinational wind turbine manufacturing company, which means that has

production, sales and R&D activities in deferent parts of the world. Vestas generates

around 40% of its revenues from outside Europe, which means in deferent currencies

then Euro. Vestas has most of its production facilities in the time being in Europe and its

mostly concentrated in Denmark that will make Vestas supply its customers outside

Europe form Europe, because its production capacity is not enough outside Europe, to

cover the big orders that it had in recent years from China and USA which are considered

the biggest markets in the world and also orders from deferent parts of the world.

That will make Vestas exposed to the risk of fluctuations in exchange rate, which is one

of the biggest risks that Vestas is dealing with its risk management, because of its affect

on the overall revenue that comes from deferent parts of the world and with deferent

currencies which should be converted to Euro and also the effect of exchange rate risk on

the costs of production that will delivered from Europe to countries with deferent

currency the Euro like China and USA. This kind of risk that all multinational companies

are exposed to can be eased or eliminated by using financial instruments from the market

or entering into swaps to exchange currencies between companies through financial

100 Brealey, Myers, Allen. Corporate Finance, Eighth Edition, 2006. MacGraw-Hill Irwin.

70

institutions like banks. The use of financial instruments is useful to reduce the risk of the

company’s transaction exposure, which is related commodity prices as I explained before

with Vestas Supply chain, the risk of exchange rate fluctuations, and the risk of interest

rate. But even if the use of financial instruments is useful, it is also limited for managing

Operational Exposure that comes from operations of the company like Vestas for some

reasons101

First: financial instruments have fixed maturities, that can be shorter then Vestas planning

horizon, which means Vestas should enter several financial contracts. However, if

meanwhile exchange rate changes, the expected exchange rate and thus the value of the

future financial instrument will be affected. That will bring losses that related to the

contracts risk for Vestas even if these contracts will secure a price.

:

Second: Even if Vestas found financial instruments that are sufficient to the firm-

planning horizon, it may not beneficial for Vestas to use this long-term financial horizon.

By engaging in long-term financial hedging, Vestas may raise its exposure in the long

run, that if Vestas engaged in a contract to supply wind turbines outside Europe, financial

instruments can diminish its exposure by means of foreign currency loan. If there will be

a problem with continuing to supply the contract for some reasons, Vestas will end up

having foreign currency loan and no foreign currency revenues.

With Vestas new strategy by investing in the expansion of its foreign direct investments

in the USA and China, so it will supply the US from USA, China from China and Europe

From Europe. It will be a portfolio for Vestas activities that will diversify Vestas risk

exposure, by creating a hedge against the risk of exchange rate exposure and its affect on

Vestas overall performance, and it is also for Vestas FDI investments can be considered

as investing in flexibility, that by having the chance to benefit from exchange rate

fluctuations, by switching production for some parts of the wind turbine whenever the

switching costs are lower enough that makes Vestas switching production profitable,

which can be a competitive advantage over its local competitors whom are only

101 Jeannette Capel. Limburg Institute of Financial Economics, University of Maasricht (A Real Option Approach to Economic exposure). Journal of International Financial Management and Accounting 8.2.1997

71

producing in these countries or the foreign competitors in these countries whom are less

diversified with their FDI like Vestas102

There is another risk that Vestas and all the companies in the industry are facing, which is

the political risk. The wind energy industry, with its high dependence on the political

support of governments, and international organizations, with the tax incentives and

subsidies, that has been the case in Europe, USA and China which are the biggest

markets in the world and thy are the main markets for Vestas.

.

Firm specific risks are understood as political risks that affect companies at corporate or

project level, often due to a conflict between the foreign company and the host

government103

The affects of political risks started with turbine sector since 1986 in the USA, when the

government didn’t renew the legislation of supporting investment in the wind energy. At

that time in Denmark, which was at that time the biggest producer of wind turbines, many

wind turbine manufacturers have went bankrupt, and Vestas was in the edge of

bankruptcy at that time.

.

In the last tow years the political risk that has been seen in the USA and China, with their

regulations of production requirement of components in these two countries, 50% of the

components of wind turbine should be produced in the USA and 70% in China. Such an

alteration creates ripple affects for wind turbine manufacturers, as they must facilitate an

increased share of production in the domestic markets, which are the USA and China.

There are obstacles like additional costs and delay in delivery might arise from that

situation, also problems of losing the chance to benefit from the growth in these markets,

as it happened with Vestas in these two markets, China and the USA.

Since 2008 the world is suffering from global financial crises, which has affected most of

the countries that supporting wind energy, and that will slow that might slow down the

demand for wind turbines in some of these countries, and the USA on of the countries

that has been affected mostly of this global financial crises, due to the big size of its

102 Jeannette Capel. Limburg Institute of Financial Economics, University of Maasricht (A Real Option Approach to Economic exposure). Journal of International Financial Management and Accounting 8.2.1997 103 David K, Eastman Arthur I, Stonehill Micheal H, Moffett. Multinational Business Finance. Eleventh Edition. 2007. Pearson, Addison Wesley. Chapter 17.

72

economy. These crisis can put constrains on the governmental support for wind energy,

due to the lack of financial recourses.

For Vestas increase of its investment In FDI in the USA and China, and supplying each

of USA, China and Europe from the same region, that will also reduce the Vestas specific

risk that comes from political and economical conditions of these three regions. It will

create a portfolio that can compensate the slow down of demand from one country can be

supported from the bigger demand from the other. That’s because, even if these three

countries are connected with their economy due to the international investments between

them and other parts of the world, they have also differences with the nature of their

political and economical policies, and also the extent of how they are affected by the

financial crisis. The motive for political support to wind energy in these three regions is

also different to some extent, some of the which is more concerned about the

environment, because of the pressure of public support to be more environmentally

friendly beside the economical benefits and that is in Europe, and some are seeing the

wind industry as compensation for the losses in the other industries and it will create jobs

opportunities for the ones who lost their jobs in other industries, beside being

independent with the source of energy and environmentally friendly which is the situation

in the USA, where it has been used in the presidential elections too, and in China its also

about the economical benefit that comes from investments in wind energy with its

realness to many industries and to create a source of energy that is dependent of

fluctuations of conventional energy sources like Oil. Each one of the political systems is

slightly deferent with the extent of their commitment and the motives behind these

commitments. So it will be less risky for Vestas in terms political and economical risk to

be diversified with its investments between these three countries104

.

There is always a risk that so high for all the wind turbine industry, which is the

dependence of wind turbine industry dependence with its existence on the political

support of governments and till now with all the development in wind turbine technology,

104 David K, Eastman Arthur I, Stonehill Micheal H, Moffett. Multinational Business Finance. Eleventh Edition. 2007. Pearson, Addison Wesley.

73

it didn’t succeed to make wind energy competitive with conventional energy in terms of

costs or energy efficiency production which means no economically wind energy is no

competitive with conventional energy sources and no market forces supports wind energy

without the political support. Technology developments in the wind turbine industry it

has been and still evolutionary developments and there is no revolution in the technology

innovation that makes wind energy competitive with conventional energy in terms of

costs and efficiency. That makes undiversified companies in the industry that their only

business is producing wind turbines and the development of wind turbines, are in high

risk position, which Vestas is one of them. Vestas as it is the biggest wind turbine

manufacturer company with its recourses and aggressive investment in the industry will

be mostly damaged compared to its competitors if there will be unfavorable changes will

happen the governmental support of the countries of its major markets.

74

Conclusion.

From my analysis of the environment, industry and Vestas I concluded the following:

The political support to the wind energy industry is driven from the economical benefit

that comes from the wind turbine manufacturing industry. The wind turbine

manufacturing industry is related to many manufacturing industries and raw materials

industries like steel industry and also the heavy use of labor in the wind turbine

manufacturing. That what made the governments in the USA and China connects the

incentives for the wind turbine manufacturers conditioned on the manufacturing of wind

turbine components should be 50% in the USA and 70 in China.

Most of Vestas manufacturing plants are in Europe and mostly in Denmark, that situation

made Vestas market share decline for its week manufacturing presence in the most

growing markets like USA and China, and that made Vestas less competitive with its

local rivals whom are favored by the governments that gave them the chance to benefit

from the governmental incentives for the wind turbine manufacturing in these countries,

and also Vestas has less competitive advantage in terms of transportation costs and labor

costs. That made Vestas put its strategy by expanding its FDI in these two growing

markets the USA and china to eliminate the weakness of its position in these markets and

benefit of the big growth in these markets, which will make it, sustain its position as

number one in the wind turbine industry.

Vestas FDI expansion in the USA and China will reduce and supplying these countries

from their home and Europe from Europe will reduce Vestas exchange rate risk exposure

75

and create flexibility for Vestas to benefit from the exchange rate fluctuation by

switching production of some components of the wind turbine between these three

regions in way that it will make it benefit from switching. Also there will be a reduction

of risk that is related to the decline of demand in one of these regions that will be

compensated partly by the bigger demand in the other regions.

Vestas strategy by having more then one supplier will make it risky with its supply of its

components from its suppliers, even till now Vestas didn’t include in its strategy to

produce the gearbox at home and that is one of the major weaknesses of Vestas position

in the market. For that l believe Vestas should invest in at home production of gearbox.

Vestas being undiversified company and its dependence on a business which exist

because of the political support, that makes Vestas highly exposed to a risk that can’t be

eliminated with techniques of risk management of Vestas, it’s a risk that comes from

general environment of the countries that Vestas is producing and selling in, and that risk

is related to political risk of the countries. I suggest that Vestas should include in its

future strategy to invest in deferent businesses to diversify its overall risk and I believe

that the best business for Vestas to invest in is utility business, in specific it will

beneficial to integrate or buy some share in its costumers, so it will sustain its position in

the market and diversify its self with deferent business.

76

Bibliography:

Danish Wind Energy Association. profile of the Danish wind Industry. http://www.e-pages.dk/windpower/10/fullpdf/full4b8670ba33dbf.pdf http://telosnet.com/wind/20th.html Illustrative History Of Wind Power Development. GWEA, Global Wind Energy Association. http://www.gwec.net/index.php?id=125 EWEA European Wind Energy Association www.ewea.org/index.php?id=1551: Economics of wind energy, EWEA http://www.ewea.org/index.php?id=201

The economics of wind energy (A report by the European Wind Energy Association)

March2009.http://www.ewea.org/fileadmin/ewea_documents/documents/publications/rep

orts/Economics_of_Wind_Main_Report_FINAL-lr.pdf.

Krohn, S, Morthorst, PE & Awebuch, S 2009, The Economics of Wind Energy. EWEA http://www.ewea.org/fileadmin/ewea_documents/documents/publications/WD/2007_january/0701-WD26-focus.pdf Supply chain: a report from EWEA. George Sterzino, Technical report, (Wind Turbine Development: Location of Manufacturing Activity in the US), 2004. Renewable energy policy project. ,http://www.repp.org/articles/static/1/binaries/WindLocator.pdf. EWEA, Employment of wind energy. http://www.ewea.org/index.php?id=1638 American Wind Energy Association. http://www.awea.org/legislative/#PTC

http://www.fas.org/sgp/crs/misc/RL34546.pdf CSR Report for Congress. Wind power in

United States. 2008, Jeffery logan.

77

http://www.cggc.duke.edu/environment/climatesolutions/greeneconomy_Ch11_WindPower.pdf Gloria Ayee, Mercy Lowe, (Manufacturing Climate Solutions). Chapter 11. Wind power, Center on Globalization. USA Chinese Renewable Status Report October 2009 http://www.globalbioenergy.org/uploads/media/0910_REN21_-_Background_Paper_Chinese_Renewables_Status_Report_2009.pdf

www.vestas.com and Vestas annual report 2008.

http://www.powergeneration.siemens.com/products-solutions-services/products-packages/wind-turbines/products/, http://www.ge-energy.com/businesses/ge_wind_energy/en/index.htm, http://www.suzlon.com/key_differentiators/l2.aspx?l1=4&l2=16, http://www.gamesacorp.com/en/products/wind- turbines/catalogue

BTM consult. International Wind Energy Development. From 2005-2008.

http://www.ewea.org/fileadmin/ewea_documents/documents/publications/WD/2007_janu

ary/0701-WD26-focus.pdf Supply Chain: The race to meet demand. Page 28

Directive of the European Parliament and of the Council on the Promotion of the Use of Energy from Renewable Sourceshttp://ec.europa.eu/energy/climate_actions/doc/2008_res_directive_en.pdf The COP15 website. http://www.denmark.dk/en/menu/Climate-Energy/COP15-Copenhagen-2009/AboutCop15dk/ . DTI Scottish Enterprise 2006, Doing Business With Wind Turbine Manufacturers: Becoming Part Of Their Supply Chain, page 10. http://www.hienergy.org.uk/documents/Doing%20Business%20with%20Wind%20Turbine%20Manufacturers.pdf

U.S-China economic engagement: key mechanisms, opportunities and challenges: March 19, 2008, Available online at <http://www.state.gov> [accessed September 2008]. International Energy Agency. World energy outlook 2007: Fact sheet—China; 2007. Department of Energy, energy efficiency and renewable energy) Annual report on U.S. wind power installation, cost, and performance. 2008(US)

78

http://iowaindependent.com/14302/obama-hails-wind-energy-incentives-as-win-win http://www.ml.com/media/81290.pdf Wind turbine manufacturers; here comes pricing power. Industry overview. Merrill Lynch. 2007 http://www.energytribune.com/articles.cfm?aid=1390 Puffed up. Economist, 00130613, 12/5/2009, Vol. 393, Issue 8660

. http://www.asb.dk/fileexplorer/fetchfile.aspx?file=10346 . Vestas case study collection. May 2008. Copenhagen Business School. Jens Vestergaard, Robert D. Goddard and Lotte Brandstrup. Industry Formation and state intervention – The case of the windmill industry in Denmark and the United states. Department of International Business. Aarhus School of Business 2003. Pagolatos, E & Sorensen, R, 1986, ”What determines the Elasticity of Industry Demand” International Journal of Industrial organization, Vol 4, pp. 327-350. Dunning, John H. The Electric Paradigm of International Production. Journal of Business

studies; Spring 1988;19,1; ABI/INFORM Global Pg.1 Simon Kuznets, Economic Growth of Nations: Total Output and Production Structure (Cambridge, Mass.1971), pp. 144-151, 160-161, 316-317.

Porter, ME 1979, ―How Competitive Forces Shape Strategy‖. H arvard B usiness

Review, pp.137-145.

Vernon, Raymond (1966). International Investment and International Trade, in product cycle. In: Quarterly Journal of Economics, Vol. 80, Iss, 2,pp.163-190. Jeannette Capel. Limburg Institute of Financial Economics, University of Maasricht (A Real Option Approach to Economic exposure). Journal of International Financial Management and Accounting 8.2.1997

David M, Chuck, Young Beak. Systematic Risk of Multinational Corporation. Journal of

International Business Studies 29,2 (second quarter 1998): 263-279

Alfred D. Chandler. (Scale and Scope) The Dynamics of Industrial Capitalism. Harvard

University Press 1990.

Richard Lynch, 2009, Strategic Management, 5th edition, Prentice Hall, Financial Times.

79

Besanko, D, Dandrove, D, Shanley, M & Schaefer, S 2004. Economics of Strategy. 3rd ed. New Jersey: Wiley International. Porter ME, 1995,Competitive Advantage. Creating and Sustaining Superior Performance. THE FREE PRESS: London.

David K, Eastman Arthur I, Stonehill Micheal H, Moffett. Multinational Business

Finance. Eleventh Edition. 2007. Pearson, Addison Wesley.

Brealey, Myers, Allen, 2006, Corporate Finance, Eighth Edition, 8th edition, New York: MacGraw-Hill Irwin.

Anthony H, 2008 Understanding Strategic Management. Oxford University Press.

80

APPENDIX: Compression between MW that has been installed by Vestas and by the

overall industry and the growth rate of MW installed for the years between 2004 and

2008105

.

Industry

supplied MW

Growth rate in

MW supplied

by Industry

Vestas supplied

MW

Growth rate in

MW supplied

by Vestas

2004 8154 -2% 2783 53.5%

2005 11542 42% 3186 15%

2006 15016 30% 4239 33%

2007 19791 32% 4503 6%

2008 28190 42% 5581 24%

Average 27.6% 26%

105 BTM consult. Wind energy report (2004-2008).