ANALYSIS - Wind energy supply chain cos need to achieve higher ROC to survive

Over the past 40 years of the wind industry’s development, wind turbine manufacturing companies have spent USD 33.4 billion (EUR 29.5bn) on product development. That investment has led to the deployment of more than 390,000 wind turbines globally.

But the industry also carries a dark secret. That staggering amount of investment has yielded a very poor return on capital (ROC) for most of the companies who have developed and sold wind turbines in the past 40 years. Of the 1,200 wind turbine models ever developed and offered for sale, only 11.6% of them have ever achieved a net positive ROC.

This fact helped spur a period of significant industry consolidation in that same time-frame. For an industry that once had over 200 global wind turbine manufacturers, we are now down to now only 37. For these remaining 37, only 18 of them have a track record for a positive return on capital for at least one of their products sold. All of them will require significant additional unit sales in order to achieve an overall net positive return on capital (i.e. above parity).

However, most wind turbine OEMs have a less than 50% net positive return on capital out of every product sold. This calculation is based upon the non-recurring engineering spent on product development, the CapEx expenditure on manufacturing tooling as well as other associated commercialisation costs. We have also used typical gross margins and sale prices in global markets to calculate these figures.

Historically, the companies who had positive return on capital were successful for a time, and their ultimate undoing were the periods of market or policy uncertainty around the globe which caused them to drain their OpEx coffers.

While many still live on as the proud legacy of some modern turbine OEMs, the fact remains that many companies are still not as profitable as they need to be to survive in the future.

As a result, the industry is likely to see another round of consolidation in the supply chain before the year 2023 due to the increased pricing pressures which the turbine OEMs face. These pressures are partly the result of the loss of permanent subsidies in many markets around the world as well as the growing price competition from auctions/tenders in these international markets.

Additionally, increasing CapEx costs for new product development are introducing a competitive pressure and facilitating the M&A deals between OEMs. The net cost for bringing a 10-kW turbine to market is significantly less than a 5.0-MW turbine. Therefore, not every turbine manufacturing company is well capitalised and has the balance sheet strength to be able to compete by bringing new products to market as a result.

Nevertheless, the survivors of this forthcoming consolidation wave will have figured out a basic equation, but one which requires them to think globally about their product sales and position themselves more intelligently in the markets.

Your average 4 MW - 5 MW onshore wind turbine designed from a “clean sheet of paper” would normally cost approximately USD 120 million – 150 million to bring to market depending on the drivetrain architecture, electrical system, etc. This includes the R&D cost for a new product development program, the costs associated with prototyping, testing and certification, as well as the costs for supply chain buildup in the sub-component sourcing.

That level of investment typically requires sales in the order of 340 – 450 units to achieve a ROC above parity, i.e. more net profit is made from unit sales than the cost of goods sold (COGS) plus the up-front non-recurring costs associated with designing and developing the product in the first place.

The unit sales can be difficult to achieve if companies do not have a globally focused sales strategy for that product model. The desire to offer a product globally needs to be met with practical action for deciding on development partners, targeting project sites, and understanding the competitive landscape.

This process involves first gaining visibility to the current market landscape. You need to be able to answer the question about whether you have the product range which would be capable of competing in the market. This is facilitated by looking at the evolution of rotor size, power ratings, hub heights and other turbine factors in the market.

Additionally, metrics like specific power versus the power rating will inform as to where the concentration of product development has occurred. Gaps in the market represent potential opportunities for product introduction to the market, but the analysis must go even further.

Next, the market potential must be understood, which can be broken down by the specific power range. Taken against the capacity already installed, it is easy to visualise how the gaps in the market have manifested, as many markets have evolved installing wind turbines that only correspond to narrow ranges.

The real opportunity lies in being able to overlay the product portfolio of any OEM to see how the breadth of their products lines up with the existing installed base and the overall market capacity potential. This indicates the extent to which they will face competition in a market segment, or whether their product(s) could fill an unmet market gap that has yet gone under-exploited.

Getting even more granular with this analysis we can see not only the total capacity installed with a breakdown by specific power range over time, but it is also possible to drill through to the next layer down to see how product sales in the market segment have grown over time.

The evolving trend in capacity additions broken down by specific power range will tell a compelling story about the nature of the market and the wind regime. Compared against the market potential chart, it will be clear how quickly certain segments of the market have grown.

It will also serve as a relative indication for how saturated a market segment is and the pace at which the market will shift from exploiting the high wind speed sites with better payback to the developer and owner, versus the lower wind speed sites. Low average wind speed sites may have close proximity to existing transmission capacity to evacuate the power, but it requires more cost-effective technology with the ability to achieve a lower LCOE profile than would be acceptable at a high wind speed site.

This view also has the added benefit of offering companies an opportunity to identify their specific competitors in a given market segment, and seeing trends in capacity additions which have occurred in the past and how that pattern has shifted over time.

Companies will need to ensure that they can compete effectively in a competitive tender for turbine supply by benchmarking their bill of materials (BOM) cost against other companies. This BOM cost benchmark will help codify the relative cost differential for different makes and models to ensure you price the products in a manner that will allow you to win tenders for turbine supply contracts.

Lastly, the companies will need to know the historical trends in buying patterns of developers as well as the selling patterns of their competing OEMs, particularly within the market segments in which they intend to compete. This is visualised through a matrix heatmap showing the amount of capacity for a developer or asset owner which was installed for a given OEM.

This will indicate the extent to which a developer or owner will be likely to source from a particular OEM, and also provides companies with the opportunity to target developers with the knowledge in hand that your product beats your competitors on BOM cost and LCOE.

To achieve a solid return on capital, which exceeds parity to what was invested and results in the product development leading to a profitable product, companies must proactively pursue a strategy for product development and global sales which ensures net positive ROC is achievable.

For years companies lacked the tools and sophistication of analysis to understand these market dynamics. Now, with this new set of data analytics available to them, they can intelligently position themselves to achieve profitable returns on their capital investments.

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