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Date:2ndofMay2011 Authors:

BenjaminWalch,bw83433

JoachimH.Skov,js83798

BusinessanalysisandstrategyrecommendationforVestas:

AcomparativeanalysisofVestas’expansionpossibilities

intheU.S.andChinesemarket

Supervisor:

PhilippSchröder

DepartmentofEconomicsandBusiness,

BusinessandSocialSciences,

AarhusUniversitet

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Abstract

Thewindturbineindustryhasinrecentyearsbeenproclaimedasoneofthesolutions

toaccommodatethefutureenergydemand.Especially,theclimate‐debatehascontributed

tothepromotionofwindenergy;henceitproducesenergywithoutreleasinganyCO2into

theatmosphere.

ThemotivationforthispaperwastoinvestigateVestas’expansionpossibilitiesinthis

highvelocitymarket.Vestashasbeenanalyzedinacomparativeperspectivefromrespecti‐

vely the American and Chinesemarket due to their development, and possible potential

withinthewindindustry.Severalcasestudiesfromsimilarmarketssuchasthecarindustry

has been included to understand the different growth strategies applied and the success

factorswhicheventually lead togrowth. Factors suchasqualityandproduct introduction

havebeenpointedoutashavingcreatedresults insimilarmarkets,andasaconsequence

couldbebeneficialforVestas’futurestrategicdecisions.

Through our report, we have been building up a thorough understanding of how

Vestashasmanagedtoexpandtheirbusinessinamarketwhereseveralfactorslikepolitics,

economics, and demand, has affected the process of producing renewable energy on a

globalscale.

Findings fromthePESTELmodelshowthatespecially the importanceof thepolitical

andeconomical involvements is crucial for the furtherdevelopmentandgrowth.Without

political incentives for growth, and economical support for project execution, the wind

industrywouldneverhaveachieveditsstatus.

Asforthemarketforces,findingsshowedthatespeciallyallthenewentrantsfromthe

emergingChinesemarket imposeathreatthatVestasshouldbeawareof.Astheanalysis

shows,Vestas,howeverstillholdsaleadingposition,eventhoughthecompetitionandthe

influentialfactorshasbeenmoreprevailing.Porter’sfiveforceswerealsousedtoevaluate

someof Vestas’ strengths. Being “born global” Vestas has throughmany years expanded

theirportfolio,whichhas contributed to theadvantageofproviding the rightproductsat

therightplaces.

ThroughtheOLImodel,Vestas’globaladvantageswerespecified.Findingsshowthat

Vestashasgainedasignificantamountofknow‐howthathascontributedto thedevelop‐

mentoftechnologyandinternationalization.Beingasinternationalastheyare,Vestashas

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keptthefocusontheturbineindustry,withoutengaginginanyothermarkets.Theirchoice

with regard to in‐house production and vertical integration has been a good strategy for

ensuringproductqualityandsupply.

ASWOTmodelcollectsthefindingsfromthepreviousanalyses,andsumsuponthe

differentfactors,inordertoprovideaprecisepictureoftheinternalandexternalelements

thatVestasshouldimproveon.Inrelationtothis,theresource‐based‐view(RBV)hasbeen

appliedinordertoevaluateVestas’strengths.AcritiqueoftheRBVisalsodiscussed,since

thetheoryanditsimplicationhasbeentargetfordebate.

TheimplicationofthereportsuggestedthatVestasthroughadifferentiationstrategy

incollaborationwithsmallcompaniescouldensurefuturegrowthandrevenue.

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Tableofcontent

Abstract................................................................................................................................................2

Tableofcontent .................................................................................................................................4Listoftable .............................................................................................................................................5

1.Introduction ....................................................................................................................................6

2.ProblemStatement .......................................................................................................................62.1.ProblemStatement .........................................................................................................................62.2.Problemdefinition...........................................................................................................................72.4.Literaturereview .............................................................................................................................82.5Delimitation......................................................................................................................................9

3.Theory ........................................................................................................................................... 103.1.Vestas ............................................................................................................................................10

3.1.1Vestas’History.........................................................................................................................103.1.2.ContemporaryVestas .............................................................................................................11

3.2.Whywind?.....................................................................................................................................143.3.Areviewofthewindindustry .......................................................................................................15

3.3.1.Thewindindustry ...................................................................................................................153.3.2WindpowerinUSAandChina.................................................................................................19

4.Analysisanddiscussion.............................................................................................................. 214.1.1Political ....................................................................................................................................224.1.2.Economical .............................................................................................................................264.1.3.Social ......................................................................................................................................324.1.4.Technological..........................................................................................................................364.1.5.Environmental ........................................................................................................................414.1.6.Legal .......................................................................................................................................444.1.7.ConclusionPESTEL ..................................................................................................................46

4.2.PortersFive....................................................................................................................................474.2.1Threatofentry.........................................................................................................................474.2.2.Thepowerofsuppliers............................................................................................................484.2.3.Thepowerofbuyers ...............................................................................................................524.2.4.Thethreatofsubstitutes ........................................................................................................544.2.5.Rivalryamongexistingcompetitors .......................................................................................604.2.6.ConclusionofPortersFive.......................................................................................................67

4.3.Theeclecticparadigm....................................................................................................................684.3.1.Ownershipadvantages...........................................................................................................684.3.2.Locationadvantages ..............................................................................................................704.3.3.Internationalizationadvantages ............................................................................................71

4.4.SWOT.............................................................................................................................................714.4.1.Strength ..................................................................................................................................714.4.1.1AssessmentofVestas’strengthsfromaresource‐based‐view.............................................724.4.2.Weaknesses ............................................................................................................................74

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4.4.3.Opportunities..........................................................................................................................754.4.4.Threats....................................................................................................................................76

5.Recommendations .................................................................................................................. 77

6.Conclusion ................................................................................................................................. 80

7.References ................................................................................................................................. 81

Listoftable

Table1,Vestas’marketshare

Table2,Thetop10turbinesuppliersintheperiod2008‐2010

Table3,InstalledcapacityintheU.S.

Table4,InstalledcapacityinChina

Table5,Pestelmatrix

Table6,InstalledcapacityandtheeffectofthePTC

Table7,Coststructureforawindturbine

Table8,CO2EmissionfortheU.S.andChina

Table9,Queueforgridlineexpansion

Table10,EstimatesofwindcapacityinChina

Table11,Overviewofsuppliers

Table12,Supplier’sgrowth

Table13,Capitalcosts

Table14,Rankingofenergysourcesbyprice

Figure15,AllocationofU.S.windresources

Table16,Generationcosts

Figure17,Marketshare2010

Table18,U.S.marketshares

Table19,Turbineoverview

Table20,Allocationofinstalledcapacitybyturbinetype(MW)

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1.Introduction

Theawarenessof theglobal situationwith respect to climate,economyandpolitics

hasnotreceivedsomuchattentionasinrecentyears.Thesefactorsarealsohighlyinfluen‐

tialonthewindturbinesector,whichthispaperputsfocuson.TheDanishturbinemanufac‐

turerVestasistheworldleaderinthisindustry,andthecontentofthisreportisathorough

analysis of the industry with respect to Vestas’ current and recommendation for future

strategies.TheanalysisiscenteredoncomparisonoftheChineseandtheAmericanmarket

applying available analytical and strategic tools and models to obtain a comprehensive

foundationonwhichtodrawconclusionsonthecurrentandfuturestrategies.

2.ProblemStatement

2.1.ProblemStatement

Theproblemstatementofthisbachelorthesisdealswiththeexpansionpossibilitiesof

Vestas,whichisoneoftheworld‐leadingsuppliersofwindpowersolutions.Theanalysisof

thissubjectisbasedonacomparativeanalysisoftheU.S.andChinesemarkets.Toaccom‐

plishthistask,wearelookingatthemarketsthroughdifferentcasestudymodels,suchas

PESTEL,Portersfive,SWOTandOLI

Wewish to investigate how themarket dynamics have changed through numerous

factors,whichwillbediscussedfromthemodels.

Currently, Vestas is theworld leading turbinemanufacturer, but the fast expanding

market within renewable energy, has increased the competition, and the analysis will

therefore provide a picture of how Vestas should position themselves in the years to

come.Wehavechosenanup‐to‐date topicdue to its relevance in relation to thecurrent

globalfocusonclimatechange,greenenergyandCO2emissions.

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2.2.Problemdefinition

Therecentfocusonrenewableenergyhas increasedthecompetitiononthemarket

forwindenergy.AsaconsequenceVestas’positionasmarketleaderisthreatened.Inorder

toremainthemarketleader,Vestasareforcedtoactandimplementastrategythatwill;

• Maintaintheirpositioninthemarket.

• Dealwithhowtoensurefuturegrowthandrevenue.

• Accomplishinternalgoals.

Throughourresearch,thecurrentmarketsituationisanalyzed,andtheactionsthat

Vestasneedtoundertake,forreachingthedesiredsituation,willbeclarified.

2.3.Methodology

By conducting an analysis of Vestas’ expansion possibilities, through a comparative

analysisofthetwofastestgrowingmarkets,thisreportaims,throughanumberofexisting

strategic models, to explain the different factors that affect the future possibilities for

growth. The reasoning for a comparative study is to gain the best understanding of the

marketdynamicsanddiversityofthemarkets.

Asdescribed in theproblemstatement, theaimof this report is toevaluateVestas’

futurepossibilitiesinthemarketforwindenergythroughananalysisconductedbyavariety

ofstrategicmodels.Thedifferenttheoriesapplied,servethepurposeofcreatinganoverall

assessmentofVestasthroughwhichitispossibletodescribeVestasfromdifferentaspects

withrelationtotheirstrategy.Nevertheless,thetheoriesappliedinthereportsupplement

each other to the common goal of analyzing and answering the content of the problem

statement.

In order to analyze the market environment and dynamicsthat affect the turbine

industryinChinaandtheU.S.,thePESTELmodelhasbeenapplied.

Portersfiveforceshasbeenanalyzed,fromVestas’pointofview,toprovideaframe‐

workthatmodelstheindustry,andinvestigateshowtheindustryisbeinginfluencedbyfive

differentmarketforces,withrespecttocompetition.

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Tomake suggestionsonwhereVestas coulddevelopanedgeover thecompetitors,

the five aspects in the framework help to reveal where Vestas should strive to get a

competitiveadvantageintheindustry.

We included theOLIparadigmbyDunning, togetaglobaloverviewof thestrategic

advantagesthatVestaspossesses.

The last and summarizingmodel in our report is the SWOT. Here all the important

findingsaregatheredanddividedintoaninternal(SW)andexternal(OT)view,inorderto

presentasclearapictureofVestasaspossible.

Wehavespecificallychosenthemodelswithanapproachtomarketanalysis,dueto

thedynamicsoftheindustry.Furthermore,byincludingtheoreticalaspectsfromothercase

studies, the combined analysis creates an overall view on the possibilities for further

growth. The report also provides a description of the past, present, and future develop‐

ment,andgivessuggestiontothestrategicconsiderationsthatVestasshouldmake inthe

futureinordertoremaintheleadingturbinemanufacturer.

2.4.Literaturereview

In order to obtain an initial overview of the global market trends within the wind

energy, reports by BTM Consult (2009), International Energy Agency and Global Wind

EnergyCouncilhavebeenapplied.Thesereportsgiveaninsightintothemarket,comment

ongrowthandassessfutureoutlooksforthemarket.

The market environment in China has been described by several scholars. A more

specificoverviewisprovidedbyCheung(2011)andbyLiandMa(2009),whobothpointout

thehighdemandforelectricityinChina.Thehighenergydemandisthemainfactorrespon‐

sibleforthecurrentsuccessandgrowthwithinonshoreenergyandtheincreasedgrowthof

thismarket(Han,Mol,LuandZhang,2009).Theinstitutionalsystemandpoliciesforwind,

and their effectwere analyzedby Liu andKokko (2010) and Levine andPrice (2010). The

casestudybyShileiandYong(2009)analyzesthegovernmentalsettingsandviewonener‐

gy.ThethreatoftheimitationinrelationtoeffectonIPRonFDIinChinahasbeenanalyzed

byAwokuseandYin(2010).

TheU.S.DepartmentofEnergyhassuppliedthemaininformationconcerningtheU.S.

market,whilefurtherestimatesoftheU.S.windresourceshavebeenconductedbyArcher

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and Jacobsen (2003). The issues with regard to the U.S. offshore possibilities have been

assessed by Portman, Duff Köppel, Reisert andHiggen (2009). Both theU.S. and Chinese

marketswere limitedby theirgrid connectionswhichare required fora successful imple‐

mentationofwindenergy.Apossibleoptioninoptimizingtheimplementationprocesswas

assessed through the theory presented by Sivasubramanian, Selladurai, Gunasekaran

(2003).

The various economical aspects of wind energy have been analyzed by Krohn,

Morthort and Awerbuch on behalf of the European Wind Energy Association (2009),

whereas recent supply chain trends have been discussed by (Clarke, 2009) and Douglas‐

WestwoodLimited&BVGAssociates(2006).Anoverviewofthepricelevelsamongenergy

sourceshavebeenconductedbyapplyingnumbersfromSovacool(2009)andSim,Rogner

andGregory(2003)

Strategicmodels fromLynch (2009),Porter (2008),Hill (2009),andHoskisson,Eden,

LauandWright(2000)havebeenusedtoevaluatethestrategyinemergingmarkets.Vestas’

advantages have been evaluated by the resource‐based‐view (RBV) by Barney and Clark

(2007),whileBarney(2001)hasbeenincludedtoassesssomeofthecritiqueofRBV.Case

studiesbyHill(2009),BuckleyandHorn(2009)andPhongpetraandJohri(2011)havebeen

appliedtocomparethewindenergyindustrywiththecar industry,andfuturepredictions

and recommendations have been concluded there from. The threat of disruptive

innovations has been evaluated on the basis of Christensen’s Innovators dilemma from

1997.

2.5Delimitation

The researchof this thesis isbasedonananalysisof thewind turbinemarket, seen

fromtheperspectiveofVestas.Theamountoftheoryinourthesis isduetotheextentof

the paper, limited to only representing a few examples within each topic. Although, our

findings must not be perceived as generalized conclusions, the examples would only

functionasrepresentativefindingstoshowtendencieswithintheindustry.

Finally, this report acknowledges that the analysis and suggested solutions are

interpretedaspossiblewaystogoinstrategicmanagement,andnotasconcretesolutions,

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since itwould requiremuchmore in‐depthresearch toprovideanoverall suggestion toa

strategicsolution.

3.Theory

3.1.Vestas

3.1.1Vestas’History

TheDanishwindmillmanufacturerVestashasalongandremarkablehistory.Thefirst

smallstepsweretakenin1898inalittleDanishtowncalledLem,sincethen,thelongroad

tosuccesshashadmanyup’sanddowns.Economicalsetbacks,managerialproblems,fusi‐

onsandmostofallthecouragetobeapioneerinanundiscoveredmarketforwindenergy

hasbeensomeofthekeywordsforVestasexistence.

Vestasfirstcameupwiththeirnamein1945,andtheactualproductionofwindmills

did not start until 1979, where the pioneers due to an oil crisis, saw an opportunity to

embarkonawindmilladventurethatinthefuturewouldpositionVestasasaglobalmarket

leaderwithinwind energy. The history behind Vestas is thoughmuchmore complicated,

andasthereportwillshow,therehavealwaysbeenmanyfactorsinfluencingthisindustry.

Fromthelate70’swhereVestasdecidedonlytofocusonproducingwindmills,thecompany

developed rapidly (Vestas history, n.d.). Themillswere continuously improved andmade

moreefficient,andwithinafewyears,Vestasexpandedtootherpartsoftheworldsuchas

EuropeandtheU.S..TheNorthAmericanmarketwasoneofthemostlucrativemarketsat

the time, and Vestas established themselves as being one of the world leaders within

renewable energy, but asmany times before (andmany times to come) Vestas ran into

troubles with governmental subsidies and with the mechanical equipment. This meant

major setbacks on themarket, andVestaswas forced to take action, but despite several

bumpsontheroad,Vestasenteredthe21’stcenturyasthemarket leader inwindenergy

(Vestashistory,n.d.).

Themarketforwindenergygrewquicklyinthestartofthe21’stcentury,andVestas

realized that the competition became fiercer. After having survived several internal and

financialcrises,VestasdecidedtomergewiththeotherDanishwindturbinemanufacture,

NEGMiconA/S.ThemergerwithNEGMiconwasabigmouthfulsincebothcompanieswere

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inaweakfinancialposition. Itwasaturbulenttimemakingtwo intoone,andhavingtwo

boardsofdirectorsdidnotease the situation.This lead to several layoffs, andahiringof

DitlevEngelasthenewpresidentandCEOofthecompany.ThedecisionofmakingDitlev

Engel thenewCEOof thenewcompanywasabreathof freshair,andmanywouldclaim

thathe,atthattime,savedthecompanywithhisnewvisionandstrategieswhichwere;The

WillToWin(Sønnichsen,2009).

Ditlev Engel continued to strengthen the united Vestas, and with an aggressive

expansion approach, introducing new strategies, visions and branding (No. 1 in Modern

Energy)hekeptVestastheworldleaderinmodernwindenergy.

3.1.2.ContemporaryVestas

During the recent years, Vestas’ current strategy No.1 in Modern Energy and the

formerTheWilltoWinhasbeenchallengedbothbythefinancialcrisis,upcomingChinese

competitorsandGeneralElectrics’(GE)evergrowingpresence,butVestasstillremainsthe

world’s leadingwind turbinemanufacturer (MakeConsulting&BTMas cited inWindfair,

2011).TheoverallstrategyNo.1inModernEnergyaimsatbeingthebest,havingthemost

satisfied customers, the lowest cost of energy, and being themarket leaderwithinwind

power(Vestasstrategy,n.d.).

Vestas’ vision is to place wind on an equal footing with gas and oil as an energy

source.Currently,onlyabout2percentof theworldenergyconsumption isproducedby

wind energy. If the political decisions aremade to expand the power grid, and thus give

accesstoattractivewindlocations,Vestasexpectsthatthissharecanincreasetoatleast10

percentby2020(Vestasvision,n.d.).TheUSDepartmentofEnergy(2008)expectsthat20%

oftheelectricityinthecountrywillbewindpowergeneratedby2020,whereastheaimin

Chinaisbetween8.3‐12.5%(Li&Ma,2009;Cheung,2011).ThefinancialtargetsforVestas’

No.1inModernEnergystrategyweredefinedonOctober2009,asTriple15.Theaimwasto

achieveanEBITmarginof15percentby2015withcorrespondingrevenueof€15billion;

furthermoreanannualgrowthof15% is required.Triple15 is crucial forensuringVestas’

positionastheworld’sstrongestenergybrandandmanufacturerofwindturbineandgreen

energysolutions.Triple15willbeachievedthroughamorecustomer‐orientedorganization

wherecustomer loyalty, reaching6Sigmaandabroadproduct lineconsistingofdifferent

classesofwindturbines,arenecessaryinordertomeetregionaldemands(Vestas,2010a).

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In2010Vestasgeneratedanimpressive€6.920millioninrevenues,whichcompared

to2009wasnearlya€2.000millionincrease,andprofitswere€156million(Vestas,2011).

Vestaswas the same year obliged to change its accounting principles for revenue recog‐

nitioninordertobeconsistentwithstandardsforDanishlistedcompanies.Thenewstan‐

dardsInternationalFinancialReportingStandards(IFRS)andinterpretations(IFRIC)changed

how and when revenue was recognised. The new policy only recognises revenues when

Vestasdelivers, installsandpassestherisktothebuyer,andnotduringthecompletionof

work as previous. As a consequence, the accounting principles have slightly changed the

financial numbers for 2010 (Aktionærinformation 1, 2011). The implications will be

discussedlateron.

Duringtheyear2010,atotalof4.057Megawatt(MW)wereproducedandshippedby

Vestas.DespitethefactthatitwasthelowestshipmentofMWinthelastfiveyears,Vestas

secureditsproductionfor2011witharecordhighincreaseof182percentinorderintakes.

Theorder intakes in2010 comprise8.673MWplaced in legally concludedorderswhich is

expected to generate shipments for 6.000MW in fiscal year 2011 (Vestas guidance, n.d.).

Energias de Portugal Renováveis, one of the biggest utility companies within renewable

energy, placed themost spectacular order comprising 1.500MWand the possibility of an

additional600MW.Receiving thisordergeneratedmore than justprofit, since it also illu‐

stratedthatVestasareinfavourforsupplyinglarge‐scaleprojects(Aktionærinformation1,

2011).Globally,a totalestimateof200.000MWis installedwhereofVestas isaccountable

for44.114MWorroughly22%.Ithasbeenestimatedthatthetotalpowercapacityinstalled

willreach1.000.000MWinyear2020andthiscallsformoreandsustainableenergysources

(Vestas,2011).Vestasservedatotalof212customersin2010,andduetothenatureofthis

industry,customerloyaltyisessential.Vestas’targetisa75%customerloyaltyby2015and

thelevelhassince2009beenstableat64%(Vestas,2011).Althoughacustomersatisfaction

of64%isimpressive,itisnotacceptablesincethegoalwastoreach70%within2010,and

thusVestas isforcedtoimproveradically inordertoreachthetargetgoalof72%in2011

(Aktionærinformation1,2011).

AccordingtoBentErikCarlsen,TheChairofBoardsofDirectors,Vestasmaintainedits

leadingpositiondue to “…regionalisationof theproductionand thededication toquality,

researchand technologydevelopment.” (Vestas,2011). Consistentwith regionalisationof

manufacturing,Vestas’ForeignDirectInvestment(FDI)inChinaandtheUSduring2010was

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atotalof€789million(Vestasstrategy,n.d.).Theincreasedregionalisationisknownunder

the slogan “In the region, for the region” which describes the strategy of being located

wherethemarketdevelops(Aktionærinformation2,2011).

Table1 from theAnnual report2010 showsVestas’ currentmarket shareby region

andthuswhytheregionalisationandfurtherinvestmentinmanufacturingwasanimportant

step,sincethemarketsinAmerica,AsiaPacificandChinaaretooexpensivetosupplyfrom

Europewith a reasonable cost structure and thereby a competitive price. The division of

areasisrathersimplified,sinceVestas’globaloperationsonlyaredividedinthreemarkets.

In 2010, 22.216 people on averageworked directly for Vestas andwere located in

sales, R&D or production units among others in Denmark, Spain, Germany, the U.S.,

SingaporeandChina. At theendof thefiscalyear2010,23.525wereemployed,which is

nearlyanincreaseof3.000comparedto20.730inyear‐end2009(Vestas,2011).Inorderto

ensurethededicationtowardsquality,morethan10.000employeesattheendof2010had

participated in workshops and received training in Sigma Six and LeanManagement and

thus will enable quality improvement and build a corporate culture where reduction of

costs,errorsandleadtimeareexercised(Vestas,2011).

2010 was also the year where Vestas invested heavily in R&D. In total 2.277 were

employed inVestasTechnologyR&Dat theendof2010comparedwith1.490 in2009. In

order to secure regionalisation,Vestas hasR&Ddepartments in sevendifferent countries

includingtheUSandabrandnewfacilityinChina,thusensuringadiverse,skilledandglobal

researchteam(Vestas,2011).TheintenseinvestmentinR&Dfacilitiesworldwidewasnot

withoutitscost.The€789millioninvestmentinR&DinChinaandtheU.S.willdecreasethe

EBITmargin,whichcollideswiththetargetsforTriple15,butisnecessarytoassureastrong

EBITinthelong‐term(Aktionærinformation2,2011).

OnthefinancialmarketVestas’shareswereamongtoptenmosttradedintheOMX

Nordic40index.59%whereheldbyinternationalshareholders.Comparedto2009thiswas

adecreaseof9%,butVestasintendstoincreaseinternationalownershipinordertobeless

Table1,Vestas’marketshare Europe,Africa Americas AsiaPacific,China

Marketshare(byMW) 49% 29% 22%Source:(Vestas,2010)

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DanishandmoreinternationalsothattheownergroupreflectsVestasinternationalnature

and operations (Vestas, 2011). The stride for internationalisation can also be seen in the

aims for cultural diversity within the organization, which is also a part of TRIPLE 15.

Currently 49% of top 3.000 positions within Vestas are occupied by non‐Danes (Vestas,

2011).

Vestas’ products are not off‐the‐shelf wind turbines, but delivered in a package

solution, resembling of a turnkey project. To start with, Vestas analyses the surrounding

environmentinordertodelivertheoptimalwindturbine.Withproductsrangingfrom850

KW turbines to 3.0MWboth on‐ and offshore, options can provide spot on products for

everypossiblescenario.AfterconstructionVestasstillmonitorsandmaintainstheturbines

(Vestaswindpowerplants,n.d.).

3.2.Whywind?

The benefits accompanyingwind energy aremany, and seen in a retro perspective

pictureoverthelastcoupleofyears,wherefossilenergyhascontributedtoglobalwarming,

lung diseases due to air pollution, acid rain and waste products, the promotion of wind

energyisgettingmoreandmoreattention(Krohn,Morthorst&Awerbuch,2009).

WithemergingmarketsandrapidlydevelopingeconomieslikeinIndia,China,Mexico,

Poland and Turkey, the demand for energy is at an all time high. Especially, it is hard to

exaggeratethegrowingimportanceofChina’seffectontheglobalenergymarket. In2000

thecountry’sconsumptionwashalfofthatintheU.S.,butin2009,ChinaovertooktheU.S.

in becoming the world’s largest energy user (International Energy Agency [IEA], 2010a).

Prospectsforcontinuedgrowth insomeofthemostpopulouscountries intheworld,and

thus increasing demand for energy, combinedwith recent acknowledgements concerning

CO2 and minimizing environmental burdens, wind power is one of the realistic options

withinrenewableenergy.

Windpowerhasthroughinnovationandimprovedtechnology,reachedalevelwhere

thecostperkWhisattractive,especiallyonshorewindturbines.Anin‐depthanalysisofthe

coststructurewillbeprovidedlaterinthepaper.

The price forwind energy has the advantage, that unlike fuel and coal, it is rather

reliable and unaffected by political turmoil, and as a result wind turbines are a perfect

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supplementfortheenergyportfolioofacountry(Vestasprofile,n.d.).Theargumentapply‐

ingtotheenergyportfoliosharesthesamefeaturesastheprocessofinvestinginstocksand

bonds. Theaimof theenergyportfolio isabetterandmorestablebalancebetweenrisk

andincome,toachieveminimalfluctuatingenergyprices(Krohnetal.,2009).Costs incur‐

ringduring theproductionof the turbine itself, is affectedby government incentives and

subsidies,butoncecompletedtheprice isstableandquiteunaffectedbythesurrounding

politicalandfinancialclimate.

Furthermore,windturbinesarefastertoimplementcomparedtoconventionalpower

plants.Within12monthsawindturbinecanbeupandrunning,andstartgeneratingreturn

on income (ROI). In fact, a 3MW turbine from Vestas can pay itselfmore than 35 times

during its life time which is approximately 20 years. (Vestas profile, n.d.). Finally, wind

power isclean,andafterproduction, theturbinesdonotreleaseanyCO2orothergreen‐

housegasses.Duringthefirst3‐6monthsofoperationtime,thewindmillhasequalledthe

amountofCO2usedforsetup.Unlikenuclearitdoesnotconsumehugeamountsofwater,

whichinitselfbecomesascarceresource.

Thewindturbinedoeshowevermeetsomerestrictionsand isoftencriticizedfor its

self‐proclaimedsolutionfortheworldsdemandforcleantech.Someoftheproblemswith

windpowerarethattheturbineshardlyliveuptotheirpromisedcapacityduetoinefficient

wind.Inrelationtothat,demandandproductionofelectricityarenotcorrelatede.g.energy

consumptiondoesnot increaseduringwindy timesanddecreasevisa‐versa (Rosenbloom,

2006).

3.3.Areviewofthewindindustry

3.3.1.Thewindindustry

Governmental directives and subsidies, involvement from members of G20 and

climate organizations have all contributed to the large focus on sustainable energy. The

globalmarketforwindenergyisgettingmoreattentionthaneverbefore,andthepolitical

emphasis on securing a greener future has reached new heights. During the last seven

years,thenumberofinstalledwindcapacityhasbeengrowingonanaverageannualrateof

27%(DOE,2008). In thewakeof the financial crisisand the threatofclimatechange, the

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COP‐15meeting inCopenhagen2009had itsmain focusonreachinganagreementabout

reducing greenhouse gasses, and preventing the temperature from rising further (BTM,

2009). From Vestas point of view, this increased attention has so far been very positive,

sincetheenergyproducedfromwindmillistotallyCO2neutral.

In the USA, the election of President Barack Obama has given rise to Vestas for

increasing their possibilities for further development and expansion on the American

market,sinceoneofObama’selectionpromiseswasagreenerfuture.Thoughthismarketis

highlydominatedbyGeneralElectric,Vestashasmanagedtotakeastrongposition,being

thesecond largestproviderofwindenergyafterGE(GlobalWindEnergyCouncil [GWEC],

2010). TheChinesemarket is characterizedby the aggressive investment in greenenergy

from the government, which makes Vestas’ future seem very lucrative (Aktionærinfor‐

mation1,2011).TheChinesemarket isat themoment thebiggestmarket indemand for

wind energy, but with three fast growing domestic producers (Dongfang, Goldwind and

Sinovel)ithasbecomeharderforVestastoexpandonthismarket(Krøyer,2010).

Itsnoticeablethatonlyonecompany(Vestas)isrepresentedasoneoftheleadersin

almost every region in theworld, and is therefore considered as a global supplier (BTM,

2009).Vestas’declineinmarketsharesisnotnecessarilytobeseenasaweakeningofthe

company,butitisjustafactthatwithallthenewentrants,especiallyinChina,almostevery

top tencompanyhas lostmarket shares in the last years. In2008 the top tencompanies

supplied 85.8%of the global demand, but due to the trend of an intense growth in new

entrants,whichhasbeenfacilitatedthroughanincreasingdemandforwindturbines,new

companies will, in theory, enter themarket until it has been saturated. Therefore, even

though top 10 companies will experience growth, this trend will push the entiremarket

towardsamoreequaldistributionoftheglobalmarketshareandthetop10companieswill

account forasmaller fractionof thetotalsupply,withtheassumptionthatnocompanies

concludeanyM&A(BTM,2009).

17

Table2,Thetop10turbinesuppliersintheperiod2008‐2010

Rank Share2008 Share2009 Share2010

1 Vestas(19.8%) Vestas(12.5%) Vestas(12.0%)

2 GE(18.6%) GE(12.4%) Sinovel(11.0%)

3 Gamesa(12.0%) Sinovel(9.2%) GE(10.0%)

4 Enercon(10.0%) Enercon(8.5%) Goldwind(10.0%)

5 Suzlon(9.0%) Goldwind(7.2%) Gamesa(7.0%)

6 SiemensWind(6.9%) Gamesa(6.7%) Enercon(7.0%)

7 Sinovel(5.0%) Dongfang(6.5%) Dongfang(7.0%)

8 Acciona(4.6%) Suzlon(6.4%) Suzlon(6.0%)

9 Goldwind(4.0%) SiemensWind(5.9%) SiemensWind(5.0%)

10 Nordex(3.8%) RePower(3.4%) UnitedPower(4.0%)

‐ Others(17.6%) Others(18.5%) Others(22.0%)

Total 111.3% 97.2% 101.0%

Sources:(BTM,2009;BTM,2010;BTM2011ascitedinWindfair,2011)

As the table 2 shows, the distribution of market shares has changed in the recent

years.Thereasonbehindthesechangesisasmentionedduetotheriseofnewcompetitors.

Manycompaniesoutsidethetoptenhavebeengrowingrapidly,andhavecapturedmarket

shares in their domestic countries. Sinovel, Dongfang and Goldwind, all Chinese turbine

manufactures,havebeenclimbinguponthe listwithbigsteps,whileVestasandGEhave

remainedinthetop.Itisnoticeablethat“Others”referringtothecombinedshareofother

smaller companies, have been steadily growing. China and USA are the biggest growing

markets, with Sinovel, Goldwind and Dongfang controlling around 60% of their home

market,andGEWindcontrollingaround44%oftheAmericanmarket.

Themarketshareoftheindividualsuppliersiscalculatedbydividingtheirquantityof

MW’sdelivered intothetotal recorded installation inthemarket. Itshouldbetaken into

considerationthat turbineswillalwaysbeunderconstructionandnotyet installed, there‐

fore not calculated in themarkets total recorded instalments, which explains the reason

whythetotalsumforthequantitysupplieddoesnotexactlyreach100.0%oftheinstalled

capacity (BTM, 2009). Another remark is that a company does not have to be globally

18

presenttohavebigmarketshares, if theyarestrongontheirdomesticmarket.Success is

notjustamatterofsize,butitdefinitelyalsoreliesontechnology,developmentandfocus.

Tomaintaintheirpositionasthelargestsupplierofwindenergy,Vestashasinvested

heavilyintheChineseandAmericanmarketinordertostrengthentheircompetitivepower

(Vestas,2011).Theforeigndirectinvestment(FDI)inthesemarketsisastrategythatVestas

has chosen since these markets are the fastest growing. The investment is not just to

expand,but it isanecessity forVestastokeeptheircompetitiveposition.Anotherreason

thathasaffectedVestas’ choiceofmarkets is thegovernmental support that theChinese

and American markets provide. Furthermore, tax advantages and building production

facilities in these countrieswill also spare Vestas for the high cost of transportation and

logistics(Vestas,2011).

Themarket forwind energy is currently dominatedby three specific areas; Europe,

NorthAmerica (U.S.) andAsia (Chinaand India). In2009 these threeareas accounted for

around 86% of the total installed capacity ofwind energy. The dispersion of commercial

wind farms is now close to operating in 80 countries,which inclines thatmany countries

haveembracedthebenefitsandattractivenessofwindpower.Thiswillintimestrengthen

the economy of these countries, which creates job opportunities and attracts investors

(GWEC,2010).Unfortunately,notallcountrieshavethesameconditionsandprerequisites

to execute projects. International protocols do however give these countries the oppor‐

tunitytoreceiveforeigninvestmentsandmakeachangeforthebetter,andtherebytakea

big step towards becoming more environmental friendly and less independent on other

energysources.

Aninterestingdevelopmentinthewindindustryconcernsthefactthatmanufactures

are becomingmore distinguisheddue to the focus on using vertical integration,meaning

buying out suppliers of critical components. This development gives the companiesmore

securityonhavingthecrucialpartsintime,whichagainimprovestheflexibility,notonlyon

beingcapabletoexecutetheorders,butalsoonimprovingtheproductdevelopment.Being

lessdependentonothersuppliersimpliesthatthecompaniesbecomemorecompetitiveby

thefactthatthepricescanbelowered.Furthermore,thecomponentscanbeproducedwith

thewantedqualityandintimewhentheorderscomesin(Clarke,2009).

The structure of the wind industry is somewhat blurred due to the fact that the

turbine manufacturers and utility companies both can act as manufacturers, owners,

19

operatorsanddevelopers. Ineithercase theprocessstartswith themanufacturingof the

turbines. The manufacturing market is dominated by a few large suppliers (such as GE,

Gamesa,Vestas,Siemens,Dongfang,andSinovel),whichare located intheareaswiththe

largestgrowthandactivitywithintheindustry.Themanufacturersdependontheir1sttier

suppliertoprovideessentialcomponentssuchasgearboxes,generators,transformersand

cabling,totheturbine.Furtherupthesupplychain,the2ndtiersupplierdeliversnecessary

partstothe1sttiersuppliers,suchasfixings,flanges,electricalcomponents,machineparts

andrawmaterial(Douglas‐WestwoodLimited&BVGAssociates,2006).

Afterconstruction,theturbinesarehandedtothedevelopers,whichareresponsible

forestablishmentof the turbines, involving the final completionor construction stage.As

mentioned earlier, turbinemanufacturers can also offer full turnkey projects to the final

ownerandthusfillthepositionofthedeveloper.Ownersaretypicalutilitycompaniesthat

have an interest in usingwind energy in either their own portfolio, or due to renewable

energyobligations. Smaller projects are typically ownedbyprivate companies,whereas a

consortium of companies buys the largest projects. Operators provide the daily mainte‐

nanceandday‐to‐dayoperation.Developers,manufacturersandownerscanfulfiltherole

of operator. The supply options therefore enable numerous opportunities for companies

thatareinterestedinimplementationofwindturbines(Douglas‐WestwoodLimited&BVG

Associates,2006).

3.3.2WindpowerinUSAandChina

WhyisUSAandChina,fromVestas’perspective,sointeresting?Asmentionedearlier,

Vestas’ internalmarketshare isonly29%and22%inAmericaandAsia,respectivelywhile

nearly50%ofmanufacturedturbinesaresetupinEurope.Giventhesenumbersoneought

tobelieve thatEuropewouldbemore lucrative forVestas.However,due to the fact that

ChinaandtheU.S.arerespectivelythe1stand2ndbiggestconsumerofenergyintheworld,

andsimultaneouslyinterestedinimplementingwindpowertotheirenergyportfolio,these

twocountriesarehighlyattractiveforVestas(IEA,2010b).

DuringtherecenttenyearstheU.S.windindustryhasexperiencedanunprecedented

growth due to governmental support represented by tax policies (GWEC US, n.d.). From

2008till2009,theU.S.outranGermanyastheworldleaderininstalledwindcapacitybutin

2010themarketsloweddown.(BTM,2009).TheannualtotalinstalledcapacityintheU.S.

20

of5.115MWin2010(40,180–35,169=5,115)matchedhalfofthe10.000MWinstalledin

2009.

Table3,InstalledcapacityintheU.S.

Year 2000 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10

MW 2,578 4,274 4,68

5

6,372 6,725 9,149 11,575 16,824 25,237 35,169 40,180

Source:(GWECUS,n.d.)

The table 3 shows the cumulated development in installed capacity, on the U.S.

market.Theslowdownofthe industryconsequentlymeantthatChina, in2010,surpassed

the U.S. as the country with the largest installed wind capacity. Despite the decrease in

installedcapacityin2010,newfirsttiersuppliershavecontinuedtoenterthewindindustry.

As a result of this, more than 400 U.S. manufacturing plants serve the industry in 2010

(GWECUS,n.d.).Currently,windenergyproduces2%of theU.S.energydemand,but the

U.S.DepartmentofEnergy(2008)havereleasedareport,showingthatwindenergycould

generate 20% of the country’s required electricity by 2030.With a potential capacity for

furtherexpansionandissuingofgovernmentalpolicies,thefuturegrowthforwindenergy

in the U.S. should be secured and thus, it should be an attractive market for Vestas to

engagefurther.

Looking at China, they overtook the U.S. in 2010 as the country with the highest

energyconsumptionintheworld.Thegrowthwithinthewindindustryfrom2000till2004

wasratherunimpressive.Intotal418MWwasinstalledduringthisperiod,whichis2.5%of

the16,482MWinstalledin2009(thenumberscanbeseenintable4).Therecentfiveyears

developmentwastrulyastonishing.Since2005thetotalMWinstalled,hasbeendoubledon

anannualbasisandin2009Chinaaccountedforathirdofthe37.5GWinstalledworldwide

(EnergyDaily,2010).TheexplodinggrowthinChinaandtheslowdownintheU.S.resulted,

asmentioned,inChinabecomingworldleaderinwindcapacityinstalled.

Table4,InstalledcapacityinChina

Year 2000 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10

MW 346 402 469 567 764 1.260 2.599 5.910 12.020 25.805 42.287

Source:(GWECChina,n.d.)

21

The growth in China has been obtained on the same basis as in USA through

governmentalenergypolicies.Thefirstrenewableenergylawsarefrom2006(GWECChina,

n.d.).Thispartlyensuredarapidandaconsecutivegrowthinwindindustryofatleast100%

within the industryduringtherecentyears.Thedevelopmentofoffshorewindprojects is

backed up by strong governmental support in order to access and harvest the wind on

China’s Eastern coast. The first projectwas launched in 2010 and the so‐called Shanghai

Donghai BrigdeOffshorewind farmwas the first offshore project outside Europe (GWEC

China, n.d.). The willingness for both off‐and onshore wind farms and governmental

support,makesChinaextremelyattractiveand interestingfor international firmsto invest

in.AsLiJunfeng,secretarygeneraloftheChineseRenewableEnergyIndustriesAssociation,

states: “The Chinese government is taking very seriously its responsibility to limit carbon

dioxide emissions while providing energy for its growing economy,” (Energy Daily, 2010,

para. 4). In other words, when a government with a population of 1.3 billion and an

economyingrowthneedspower,agoldenageforwindturbinemanufacturersistocome.

4.Analysisanddiscussion

4.1.Pestelanalysis

In order to analyse and understand key influences and interconnections between

backgroundscenariosofthecompetitiveenvironment,thePESTELanalysishasbeenapplied

(Lynch, 2009). PESTEL is short forPoliticalEconomicalSocialTechnologicalEnvironmental

Legalasexemplifiedinthetablebelow.Themostessentialpointshasforclarificationbeen

listed in the PESTEL matrix below. The PESTEL with its Environmental and Legal factors

seems more appropriate to apply compared to the original PEST model, considered the

nature of the industry of interest. Table 5, on the next page, shows an overview of the

topicsincludedinthePestelanalysis.

22

Table5,Pestelmatrix

USA China

Political ARRA,RES,PTC,Obama,Lobbying 11thand12thfiveyearplan,Feed‐in

tariffs,CDM

Economical ARRA,RES,PTC,decreaseoil

dependency,supplychain

Feed‐intariffs,CDM,Decreaseoil

dependency,supplychain

Social Liberal‐pricingmodel Governmentalregulated,population

andenergygrowth,fast

implementation

Technological Grid&Transmission,cost

reduction

Grid&Transmission,costreduction

Environmental Onshoreopportunitiesanddeep

offshore,CO2

Onshoreandoffshoreopportunities,

CO2,innerMongolia

Legal Offshore,Systemcomplexity Gridcommitments,IPR

4.1.1PoliticalIntheU.S.theelectionofPresidentObamain2009ensuredaprosperousfuturefor

renewable energy.With thewords spoken by the President during the inaugural address

“Wewillharnessthesunandthewindsandthesoiltofuelourcarsandrunourfactories”

(TheWhiteHouse,2009,para.12)itstoodclearthattheU.S.hastakennewenergycourse

withashiftfromfossilenergytorenewableenergysources.

LaterthesameyearObamaspokeatM.I.T.concerningrenewableenergypoliciesand

hisviewthereof.Theargumentsforrenewableenergyandthevisionofatransitionofbeing

a fossil importing country tobecominga cleanenergyexporting countrywerenumerous.

Firstly,millionsofnewjobswillariseandfutureprospectswouldleadtoanestimatedwind

energy market of $2 trillion over the next two decades. Second, an investment in clean

energywillpreventtheworstconsequencesofclimatechangeandcreateagreenerworld.

Finally,Obamaaddressestheissueofnationalsecurity,sincethePentagonhasdeclaredthe

U.S.dependencyonfossilfuelathreat(TheNewYorkTimes,2009).

The continuous required growth and implementation of Obama’s vision: Replacing

fossilfuelswithrenewableenergysourcesishighlydependentupongovernmentalsupport

and investment. In thewakeof the financial and economic crisis and theprospects for a

23

decline in the renewable energy industry, hereby including the wind industry, the

governmentpassedtheAmericanRecoveryandReinvestmentAct(ARRA)(BTM,2009).The

$787billionstimuluspackagewas the largest singleboost in scientific research inhistory,

and theprofits thereofarenumerousaccording toPresidentObama.Notonly should the

stimulus package stabilize the American economy and help to end the recession, but

furthermoretheARRAshouldsecurethefutureoftherenewableenergysectorintheU.S.

by laying a strong foundation, on which the U.S. could have a strong stance in the

competitionfornewenergysources(TheNewYorkTimes,2009).Obamastatesfollowing

“FromChinatoIndia,FromJapantoGermany,nationseverywhereareracingto

developnewwaystoproducinganduseenergy.Thenationthatwinsthiscompetitionwillbe

thenationthatleadstheglobaleconomy.Iamconvincedofthat.AndIwantAmericatobe

thatnation.It’sthatsimple.”

(TheNewYorkTimes,2009,para.12)

PrecedingtheARRA,tworemarkablestimulipolicieshaveensuredgrowthinthewind

turbineindustry.OnanationalleveltheProductionTaxCredit(PTC)providedthenecessary

taxbenefitsforcompaniestocontinueexpansionandinvestment.Meanwhileanincreasing

number of states introduced a Renewable Energy Standard (RES) (GWEC, 2010). The

economical consequences of these policies are hard not to overstate, and the effects

thereofwillbediscussedintheEconomicalpartofthisanalysis.

Besides thepolitical agenda, lobbying in theU.S. also determines to a great extend

howtheenergyportfolioisbeingformedandwhatitcontains.Conventionalenergysources

and technology have strong market power, and as a result American oil, gas and coal

companies can consequently influence governmental regulation (Sovacool, 2008). On

averagetheoilandgascompaniesspend$31millioneveryyearon lobbying,whileduring

thepresidentialcampaignnumbersraiseto$255million.Butthelobbyingisnotlimitedto

thenationalpoliticallevel.From2003to2006fossilfuelcompaniesspent$58milliononly

onstate levelcampaigns,comparedto$500,000spentby therenewableenergy lobbyists

(MooreascitedinSovacool,2008).

China’sgrowth inthewind industrysectorstarted in2006,whichwasfollowedbya

consecutive annual increase of approximately 100% in installedMW.Numerous different

24

policies were introduced in order to realize this impressive onshore growth. Some are

national,whilstothersareinternationalenergypoliciesunderwhichChinacanharvestthe

benefits.Thoughgovernmentalpoliciesare introduced,Chinahas somespecial character‐

ristics,whichsetsitapartfromothernationsandtheU.S.(Liu&Kokko,2010).Mostsignify‐

cantistheroleofthegovernment,whichplaysamoredominantrolethanelsewhere.The

state controls the development and direction of the wind industry through regulations,

incentives and various laws relating construction, purchase, planning, transmission and

otheractivities related to thebusiness. Meanwhilestate‐owned‐enterprises (SOEs)are to

be found inevery single stageof the industry’s supply chain. Fromrawmaterials till end‐

user(Liu&Kokko,2010).

ThefirstRenewableEnergyLawwasputintoeffectin2006asapartofthe11thFive‐

yearplan(2006‐2010).The lawaimedatdevelopingrenewableenergybyestablishingthe

neededinfrastructureandcapacitytocreateasustainablemarketandindustryatanational

level (Lema & Ruby, 2007). Clear onshore targets were set alongside with a mandatory

proportionoftheturbine’stotalcoststructure,whichshoulddomesticproduced.The70%

costcontentrequirementwouldthusfacilitateandfurtherdevelopnationalwind industry

and lower the overall cost ofwind farm construction through economics of scale and an

efficientlearningcurve(Han,Mol,Lu&Zhang,2009).

Previous the structure of themarket for largewind power projects, bigger than 50

MW,wasbasedontwodifferentbusinessmodelswithdifferentpricesettings(Liu&Kokko,

2010).Onewastheconcessionsystem,controlledbytheNationalDevelopmentandReform

Commission(NDRC).InthissystemtheNDRCannounceditsinvestmentplansandinvestors

wereinvitedtoplaceabidonthecontact.Thebidhadtoincludethelowestpriceatwhich

the operator could supply electricity to the power grid. In the secondmodel the pricing

decisionwas based on a benchmark after local unit cost per kW generated though coal‐

poweredgenerators. In caseswhereelectricitygenerated fromwindwashigher than this

benchmark, parts of the costs were covered by earnings from an “additional renewable

energytariff”,whichwasimposedonallsalesofelectricity(Liu&Kokko,2010).

The reason for this two‐way pricing model was found in the shortcomings and

problemsthatarosefromtheconcessionmodel.Oneproblemwiththeconcessionsystem

wasthatitfavouredcompaniesthatsupplied‐oroffered‐electricitytoextremelowprices.

That motivated companies to place unrealistic low bids, which eventually would put a

25

companyinsituationswhereitwouldbeunlikelytorecovercosts.ItwasparticulartheSOEs

whichwere encouraged by this, since a positive bottom line not always was in the best

interestwhencompared to job creationand localdevelopment (Liu&Kokko,2010).Asa

result projects were often delayed and the possibility of covering the costs diminished,

whilst foreign investorsandoperators,withhighertechnologicalknowledgeandproducts,

oftendecidedtostayawayfromtheconcessionmodel(Liu&Kokko,2010).

In 2009 the feed‐in tariffs were introduced and thereby it replaced the two old

economicalprocesses.Thefeed‐intariffsisapolicymechanismdesignedtoencouragethe

adoption of renewable energy sources to help the acceleration towards grid parity.

However,itdoesnotincludenewoffshoredevelopments(GWEC,2010).

Forprojects lessthan50MWalocalgovernmentalcounterparttotheNDRCcontrols

the projects. In Inner Mongolia, the most attractive region for wind power, the Inner

MongoliaDevelopmentandReformCommission(IMDRC)controlsprojectlessthan50MW.

The separationofprojects by capacity ensures a very efficient and short decisionprocess

which gives a boost to the already rapid increase of installed capacity in InnerMongolia

(Hanetal.,2009).

Whenaproject is completed, the twoSOEspowergridcompanies, theStatePower

Grid Corporation and the Southern Power Grid Corporation, are obliged to purchase all

electricitygeneratedfromwindpoweratthepricequotedintheoffer(Hanetal.,2009;Liu

&Kokko,2010).

With the intense growth prospects for China and especially the Inner Mongolian

region, funds and capital were crucial for ensuring further development. In 2008 the

averageconstructionpricewasabout10,000Yuan/kW,comparedtothedevelopmentgoals

ofinstalledcapacityinInnerMongoliaintheperiod2008‐2010,thiswouldresultinatotal

of 26.16 billion Yuan that had to be funded and invested (Han et al., 2009). Whilst the

ChineseGovernmentandinternationalcooperationprojectsprovidedsomeofthefunding,

therapiddevelopmentcalledforfurthercapital.Onemechanismthathelpedovercomethis

issuewas theCleanDevelopmentMechanism(CDM),whichprovidedtheneededchannel

forforeignfunding.TheCDMisanarrangementintroducedundertheKyotoProtocol,and

basicallyallowsindustrializedcountriesto invest inemissionreductionprojects incheaper

locations such as developing nations. The investor of a CDM project then claims/gains

Certified Emission Reductions (CERs), which can be traded between other industrialized

26

countries and thus recover its investment, while having lowered global emissions (Yang,

Nguyen,DeT´Sercleas&Buchner,2009).Inordertoensurecontrolandregulatethewind

energymarket, CDM investments in China can only occur in companies, which are 51%,

owned by Chinese. The CDM benefits are based on governmental barriers in the host

country and transaction costs between counties. The problem arising in China in relation

withthe51%requirementisthatCDMbenefitsfortheforeigninvestordecreases,andasa

consequencemakestheinvestmentandtheexpectedcashflowlessattractive(Yangetal.,

2009).

Thepoliticalsupport,policiesandincentivesbothgivenintheUSandinChinaareof

utterlyimportancetoensurefurthergrowthofthewindindustry.Fortunately,boththeU.S.

andtheChinesegovernmentseemmotivatedandwillingtocontinuethesupport.TheCDM

mechanismintroducedonaglobalscalehashelpedtofinancepartofthegrowthandwill

stillbeanimportanttoolforfinancing.Thoughlobbyingfromtheoil,coalandgasindustry

currently have the capital for bigger political influence in the U.S., the growth within

renewableenergy, increasedfocusonclimatechangeandCO2reductionwilldecreasethe

oil,coalandgascompaniespoliticalinfluence.

4.1.2.Economical

The financial andeconomical crisis has forced almost every company todowngrade

theirexpectationsforexpandingandprovidingmoreMWtothemarket.

Producingwind energy is one of themost important factors of accommodating the

riskof fuelprice volatility. Theeconomical situationonenergyhasbecomeveryunstable

sinceemergingcountrieshaveanincreasedconsumptionofespeciallyoil,whichhasleadto

a dependency on importing fuel from politically unbalanced areas at changeable prices

(Krohnetal.,2009).Toputthingsintoperspective,thefollowingdatahavebeenprovided

by the EuropeanWind Energy Association (Krohn et al., 2009), which estimates the CO2

savingsand riskminimizationbybuildingwind turbine.A technical lifetimeofanonshore

turbineisaround20years,andforoffshoreitis25years.Analysisshowsthatwindenergy

avoids an average of 690g CO2/kWh produced, and that the average price of a CO2

allowanceis€25/tCO2,whichmeansthat€42millionworthoffuelisavoidedforeachTWh

ofwindpowerproduced.Calculatingwiththesenumbers, thecostofoneTWhgenerated

throughwindpower,wouldmatchaprice level of $90perbarrel ofoil.Withprojections

27

from IEA from 2007 (as cited in Krohn et al, 2009), the oil price in 2010 would be

$100/barreland$122/barrelin2030.Asaconsequenceaccordingtothiscalculation,wind

power will be competitive as long the $/barrel is higher than $90. Furthermore, many

externalfactorssuchasthefinancialcrisis,themiddle‐easternandAfricanturmoilandthe

riseinconsumptionofoil,hasmadethepriceveryvolatileandunpredictablewhichhaslead

tocautiousbuyers.Thoughthisscenario isbasedonEuropeanmeasurements, itdoesnot

change the reality of the global development. TheU.S. is anoil importing country,which

meansthata risingoilpricewillbedevastating for theAmericaneconomy. It is therefore

fairlysafetoclaimthattheinvestmentinrenewableenergy,intime,easethepressureon

theAmericaneconomy.

Aspecialfeatureaboutwindenergyisthatincontrarytootherindustries,itdoesnot

set up production facilities in high‐industrialized areas or in areas with high commercial

value(GWECEconomics,n.d.).Theonlyconcerniswherethebestwindopportunitiesare,

sincethisisthemaindominatorinthedecisionofwheretoplaceawindmill.Thishasalso

somethingtodowiththefactthatwindmillsaredifficulttosetupduetofactorssuchas;

wind potential, noise and space requirements. A positive outcome is that it has helped

strengthening the countryside regional economies, which is also a key factor in the

economic considerations in wind energy. Deserted areas withbeneficial possibilities for

winddevelopmentareoftenareaswith littleor loweconomicalactivity,which iswhythe

wind power industry is invigorating rural regional economieswith job opportunities, and

functioningasacounteractingeffectoftheurbanization(GWECEconomics,n.d.).

According to theGlobalWindEnergyCouncil, in2008 therewerewellover400,000

employedinthewindenergysector,andtheprospectforthefutureis,thatin2020there

will be around 2,200,000 employed, which also is an indication of the opportunities and

especiallythesignificanceofthisindustry(GWECEconomics,n.d.).Thisincreaseinjobswill

facilitategovernmental supportand incentives towindpower inorder tocreatenewand

vitaljobs.

As for the American economy, the development of wind energy is a crucial factor,

sinceTheUnitedStatesisaheavyoilimportingcountry.TheUnitedStatessendsoutmore

thanhalf a trilliondollarsevery year topay theiroil bill, andas for thepoor countries in

SouthAmerica,AfricaandAsia,therecentoilpricehikeshaveruinedtheeconomieseven

more (GWEC Economics, n.d.). As Barack Obama has pointed out in his speeches, the

28

investmentinwindenergywillnotonlyreducedependencyonsupplyofimportedfuels,it

has the potential to displace the imports of fuel. Most significantly, the investment will

improvethenationalbalanceofpayments,notonlyfortheUnitedStates,butalsoforevery

countrythatdecidestoinvestinwindenergyasafutureenergysource(GWECEconomics,

n.d.).

The link between this high future prospect and the economy is that, when the

economy is uncertain and when the unemployment rate is high, any industry that can

contribute to an improvement of these factors will get a high political attention (GWEC

Economics,n.d.).EspeciallyontheAmericanmarket,thejobopportunitiesandjobcreation

hasbeenanimportantfactorfortheeconomy.Theinvestmentinwindenergycanbeseen

asapositivecircle,sincethebenefitswillnotonlybenumerous,butalsonecessary.Wind

energyprovidesappreciatedjobopportunitiesandeconomicalflowwhichbothareamong

themostimportantfactorsinacountry’sdevelopment.

2009wasthehardestyearfinanciallyintheU.S.windenergymarket,andinthewake

ofthefinancialandeconomiccrisis,theU.S.marketforrenewableenergyhasalsotakena

beat,butthegovernmentestablishedarecoveryandreinvestmentactfor2009tostabilize

theAmericaneconomy,andtohelptherenewableenergysectorbackontrack(BTM,2009).

ThepassingoftheAmericanRecoveryandReinvestmentAct,asmentioned,providedthat

theProductionTaxCredit(PTC)wouldbeextendedwithanadditionaltwoyears,sothatit

would run till theendof2012.Extending thePTC isan incentiveandhelp for theenergy

companies tokeepproducing renewableenergy.ThePTCoriginallyenacted in theEnergy

PolicyActof1992,andithasthenbeenextendedseveraltimessincethen.Thethreetimes

where the PTC was not in function, the annual installed wind power capacity dropped

dramatically‐table6onthenextpage.

29

Table6,InstalledcapacityandtheeffectofthePTC

Source:AWEAascitedinUnionofConcernedScientists,2009)

As it can be seen from the table 6, PTC has been an important tool for the

developmentinrenewableenergy.AslongasthePTCisextended,themarketcancontinue

developing, and the big players on the U.S.marketwill be fairly safe. The consequences

whenthePTCwasnotrenewedareclearlydepictedonthegraph.TheexpirationofthePTC

in ’99, ‘01 and ‘03, diminished the incentives for investing in renewable energy in the

followingyears‘00,‘02and’04,respectively.Thereisonemajorhurdleinthisprospectfor

thefuturethough.Sincemanyprojectscantakeyearstocomplete,andduetotherelatively

short extension periods, companies that depends on the PTC will face the risk of not

receivingeconomicallysupportoncetheprojectiscompleted,ifthePTCisnotextended.

In2009thegovernmentwouldoffer2,1centperkilowatt‐hourproducedwhichwould

beahelpinghandtothelargerwindcompanies,sincetheywouldbeabletobenefitfrom

the PTCwith the big amounts of kWh produced. From another point of view the grants

instead of tax credits was designed to help the smaller companies who were unable to

benefitfromthePTC,sincetheydidnothavetheincometaxtopay,andthereforethetax

creditwouldnotbevaluabletothem(UCS,2009)

30

The American Recovery and Reinvestment Act (ARRA) contained more than PTC

extension,sinceitalsoshoweda6billionUSDrenewableenergyloanguaranteeprogramto

help rebuilding the energy sector from the economically downturn during 2008‐2009

(GWEC, 2010). The long‐term goal is to enforce the national renewable energy standard

(RES)toallstates,whichsetsarequirementthatacertainpercentageofpowerineachstate

isgeneratedfromrenewablesources.Currently28statesoperatewithRES(GWEC,2010).

The policies combined ensured supply and demand. The tax credit ensured that

turbine manufacturers could deliver competitive prices in terms of $/kWh compared to

traditionalenergysourcesi.e.asupplyside,whilsttheRESprovidedacustomerbaseandas

a result created a demand. Collectively, the two stimuli policies have increased the

attractiveness of the U.S. market. These policies contributed to an increase from 2.5GW

installed in 2000, reaching a world‐leading capacity at ultimo 2009 with 35GW installed

(GWECUS,n.d.).

TherapiddevelopmentontheChinesemarketforwindenergyismainlyduetosome

massive economical investments. Like in the USA, the Chinese government made some

economical changes in 2009 inorder topromote thedevelopment anduseof renewable

energy.Themostcrucial task toensure thewindpowerdevelopmenthasbeentoensure

funding. EarlierChina ranadual track system forwindprojects,withaproject‐by‐project

governmentapprovalprocessononehand,anda concession tenderingprocess (discount

offers)ontheother.Asmentionedearlierthenowprevailingsystemisthefeed‐intariffs.

Chinaalso introducedanothereconomicalmechanism inorder toaccommodatethe

needoffinancialresourcesfordevelopingthewindpower.In2002thefirstCDMwassigned

between the Netherlands and China. This specific mechanism was designed to attract

foreign funding for domestic Chinese wind projects. The funding country could buy CO2

reduction credits (CERs), by paying a specific amount ofmoney per ton of CO2 reduction

thatthewindfarmwouldsave(Hanetal,2009).

Though there are different tariff categories, depending on the region’s wind

resources, the new feed‐in tariff is considerably higher thanmost of the old ones in the

concession system. The advantagewith the new system is that it attractsmore investors

since the primary focus is more long termed, and the tariff will apply for the whole

operationalperiodofawindfarm(GWEC,2010). Inrelationtothis,China isutilizingtheir

economyofscaleintwoways.Thefirstwayisbydevelopinglarge‐scaleprojects(economy

31

of scale)andtheotherway isbyenhancing the localmanufacturingofwindturbinesand

otherequipment(GWEC,2010).

The massive economical support, both coming from governmental initiatives and

internationalfundingarecrucialforthefurtherdevelopmentinwindenergy.Thoughwind

energy has been proclaimed to be one of the future solutions for solving the growing

demandforelectricity,thewindenergypricesarestillfacingtoughcompetitioncompared

toconventionalenergyresources.

Especially the Chinesemarket is having problems compensating for the economical

differencesinenergyprices.Thetotalcostsofawindpowerprojectconsistsofconstruction

costs,maintenance costs, salary costs, taxes and loan interests, but the fuel (wind) is of

course free. Still, due to the poor infrastructure and the high construction costs, the

economicalprospectislong‐term,sincemanyofthecomponentsandturbinesareimported

which alsoputspressureon thepriceofwindenergy (Hanet al. 2009).When comparing

importedturbinesandcomponentswithdomesticones,therecanbeadifferenceonupto

30%. The implication of having such high costs and using imported parts is that the

electricityfromwindfarmsislesscompetitivecomparedtofossil‐fuelledenergy.Withsuch

a low profit margin for the wind

farms, the political initiatives

mentioned in the Political section

of the PESTEL analysis, is focused

on improving the wind power

projects and thus making it more

comparable to the existing energy

sources.

As table 7 shows (Krohn et

al., 2009), the cost allocation is

being heavily dominated by the

turbine costs, which amounts to

more than ¾ of the total

manufacturingcosts.Thoughthese

estimations are calculated for the

Table7,Coststructureforawindturbine

Investment

(€1,000/MW)

Shareoftotalcost%

Turbine(exworks) 928 75.6

Gridconnection 109 8.9

Foundation 80 6.5

Landrent 48 3.9

Electricinstallation 18 1.5

Consultancy 15 1.2

Financialcosts 15 1.2

Roadconstruction 11 0.9

Controlsystems 4 0.3

Total 1,227 100

Source:(Krohnetal.,2009)

32

European market, a projection of the same cost structure to Chinese and foreign

manufacturerswillyieldasubstantialextraexpenseinshapeofimportedparts.

4.1.3.Social

How does the social factor influence Vestas’ performance and opportunities in the

U.S.andChina? Theanswerregardinghowchanges insocial trendscan impactand influ‐

ence the demand for precisely Vestas’ products, is rather difficult to address, since the

average consumer of electricity in generalwould not be the same individual that initially

buysthewindturbine.Theend‐userofthewindturbineindustryisingeneralnottheutility

companies,buthouseholdsandindustrieswhichrequireelectricity.Inthatsense,theonly

directtangiblemeasurablesocialeffectisconsumptionofelectricity.

AspreviousmentionedChinaovertooktheU.S.asthebiggestconsumerofenergyin

2009.The increase inenergyconsumptiondoesnotseemtohalt inanear future.Witha

prospect for continuous growth in population, further economic development based on

manufacturing and a growing GDP allowing bigger consumption, China’s demand for

electricity is likely to triple between 2008 and 2035 (IEA, 2010b). Currently, consumption

and energy needs are more fundamental compared to developed nations. However it is

especially the flourishingmiddle class of Chinawhichwill contribute to the next state of

energyconsumption(Ma,2010).

A new product, which will be available for the rising middle class, is the car. The

substantial increase innumberof themiddleclasspopulationentailed thatChina in2009

overtook the U.S. as the largest market for cars (Ma, 2010). On a global scale, oil still

accountsforthebiggestfossilenergytypewitha28percentsharein2010.Comparedwith

2008, this is a decrease of 5%, which partly is due to higher prices explained by higher

demandfrome.g.IndiaandChina,andtheeffectontheoilandfinancialcrisis(IEA,2010b).

Since carsareoneof theprimary sources foroil consumption,Chinahasbegun intensive

investmentinelectricvehiclesandsupportingtheinfrastructureinordertominimizeemis‐

sions of CO2. Forecasts estimates 500,000 electric cars by 2015, and a total of 220,000

installedrechargingpoles(StateGridCorporationOfChina[SSCG],2011).Iftheelectriccar

becomesthenew“Volkswagen”ofChina,dependencyonoilwilldecreaseandeventually

ease prices, which may put oil in a competitive spot for longer time. Nonetheless, the

demandforelectricitywillrise.

33

UnlikeChina,theresidentialenergyconsumptionpercapitaintheU.S.isforecastedto

declinesomewhere between 10 ‐ 39% till 2035 (U.S. Energy Information Administration

[EIA],2010a)

Whereas China during the last decade has experienced a boost in energy

consumption, theU.S. has beenmore stable.However, the energy demandwill probably

continue to grow and its prime drivers will be population growth which will lead to an

increasingdemandforhousing,commercialfloor

space, manufacturing and transportation (EIA, 2010a). As a contrast to China, the

growthintheU.S.canbecharacterizedasanexpansionofanestablishedcommunity,and

thereforethegrowthislessenergyrequiring.Chinaisstillinthedevelopmentphase,which

calls for a higher energy demand. The boost in the energy consumption in terms of CO2

emissionscanbeseeninthetable8.

Besides increasing energy consumption, a more intangible social variable is the

generalattitudetowardswindpower.Withinthecorrelatedprocessandcausalityexisting

between utility companies, political support, government, grid operators and the turbine

manufacturers, the impact of the social attitude basically depends on which form of

governmentalisbeingappliedinthegivencountry.Thequeriesarewhethertheattitudeof

the consumer/citizen canbe imposedon thegovernmentornot?Whether the consumer

hasan influenceonwhichenergysourcecontributes theelectricitysupplied in thepower

plug?

Despite social trends

and fads among the

publication in relation to

clean energy, the decisions

onwhich energy source to

utilizearemadeentirelyby

the government. The

government controls and

interveneswiththesupplyofenergythoughtheSOEs,policiesandincentives,andtosome

extend also controls the demand, since energy efficient policies during the recent years

havebeen introduced(Zhouetal.,2010).Anexample is therequirement fromtheChinese

government, where the Chinese utility companies have to purchase all wind energy

Table8,CO2EmissionfortheU.S.andChina

Source:(Zhou,Levine&Price,2010).

34

domestically produced. This action basically excluded the consumers from the decision

makingprocesswhetherornottobuygreenenergyfromrenewableenergysources.Inthis

examplethestatesecuredademand.ThegovernmentinBeijingisinahierarchicalposition,

wherethedecisiononwhichenergysupplytouseisbasedonwhattheconsumersandlocal

governmentsneedinsteadofwhattheywant,whichinmanycasesmaybeindirectconflict.

Shilei and Yong (2009) analyzed the difficulties and the macro‐environment for

implementingenergyefficiencyretrofitforexistingresidentialbuildings(abbr.:EERFERB)in

thenorthernheatingregionofChina.Theissuewasprimarilythatlocalgovernmentsdidnot

recognizetheimportanceandnecessityofanenergyefficient installation.Thiswasdueto

threefactors:

a)Limitedawarenessofclimatechangeandglobalenergycrisis,andasaresultthe

localgovernmentwouldratherapplythecapitalinotherprojects.

b)Localgovernmentspursuedshort‐termachievements,whichwouldbring

immediaterecognition,andsincetheEERFERBiscomplicated,doesrequirelarge

capitalinvestmentsandislong‐termoriented,itseemedlessattractive.

c)Despitethatthecentralgovernment(Beijing)hasa“onevoteveto”systemwhich

givesthemsovereignty,actualdisincentivesareneededtobeimplementedforlocal

officialswhofailtomeetthegoalsforEERFERB.

Finally,italsoleftBeijingwiththechallengetoassesshowtodistributeavailableresources

fortheproject.Theprojectwasin2009stillatthedemonstrationphaseduetothelackof

funding(Shilei&Yong,2009).

The establishment of wind farms, especially in remote and rural areas, has some

highlyvaluedsocialbenefitstoitssurroundingcommunity.Firstly, improvedinfrastructure

andinconsequencetransportationofpeopleandgoods,facilitateseconomicdevelopment.

Secondly,surveysrevealthatthegrowthofrestaurantsandhotelsnearwindfarmstripled

after the construction of a wind farm. The final benefit is somewhat interrelated to the

growth in hotels and restaurants, namely an increase in tourism (Han et al., 2009). The

economicalbenefittosomepartsofthelocalcommunity,doesbuildupsomegoodwillfor

thewindturbineindustry.Otherpartsofthelocalcommunity,suchaslocalherdsmenwho

35

loosegrassland, consider thewind farmsasan impediment for theirbusiness (Hanetal.,

2009).

Recentacknowledgementsof consequencesof sustainableenergy sources regarding

climatechangeandpollutionhasactedasacatalystforimplementationofenergyefficient

policies, and has kick‐started the Chinese government to focus more on sustainable

development(Ma,2010).Negativeclimatechangeandmoreenvironmentalpollutiondoes

notsharetheexactsamecommonalities,thecommontraitisthatbothareabyproductof

China’spursue towardseconomicalprosperity.Asstatedprevious inaquote, theChinese

government takes theentire issueon renewableenergyvery serious.This is expressed in

energy laws, introduced from both the 11th and the 12th five‐year plan concerning

efficiencyandrenewableenergy,(Shilei&Yong.2009;Zhouetal.,2010;Ma,2010).China’s

swiftimplementationofpoliciesandrestrictionsonlyunderlinesthis.

AspreviousmentionedtheelectionofObamagaverisetoanincreasedgovernmental

support and incentives to renewable energy, but a collateral benefit was the gain of a

spokesman for renewable energy and climate change. The focus that he brings on

renewableenergyisimportant.UnlikeChina,thedecisionprocessintheU.S.isbasedona

democraticsystem,andasaresultthepublic interest isdirectlyandindirectlyreflectedin

the country’s policies concerning renewable energy and energy efficiency, such as the

previousmentionedARRA,RESandPTC.

Whereas China requires the purchase of all wind energy produced and as a result

thereof generates demand, the Americanmarket ismore liberal. The demand is primary

driven by governmental interference and the consumer itself. The only mechanism that

directly controls the demand for wind energy is the RES, which specifically requires that

utilitycompanieshavecertainpercentageofenergytobegeneratedbywindpower.Since

notallstateshaveimplementedRES, it isnotcertainthattheconsumerautomaticallywill

receiveashareoftheelectricityproducedfromwindenergy.Themarketconditionsinthe

U.S.giveconsumerstheoptiontofreelychoosewhichelectriccompanythatshouldprovide

the electricity, and as a result 24 power companies offer wind‐generated electricity(U.S.

DepartmentofEnergy,n.d.)

In order to summarize; The American increase in energy demand is rather small

compared to the increase in demand in China. The demand for wind energy in China is

controlledbythegovernmentandcurrentlyitisrequiredthattheSOE’sbuyallwindenergy

36

produced. In theU.S. the demand forwind energy is created through the consumer and

federalpoliciessuchastheRESandthePTC.

4.1.4.Technological

The focus of the ongoing analysis is on the overall market prospects and develop‐

ments;hencethetechnologysectionofPESTELwillbetreatedonanoveralllevel.

Theexternaltechnologicalfactorsforthedevelopmentofwindpowerareamongthe

most crucial, and a well functioning energy infrastructure is the backbone within wind

power.Thedevelopmentwithin theseareas, isbymanyanalystsconsidered tobeoneof

severalsolutionstotheCO2emissionproblemssincenewtechnologicalsolutionsaredeve‐

lopedinagreementwithasustainableenvironment.Thetechnologicalfactoriscloselycon‐

nectedtotheeconomicalfactorsince,asthetechnologymatures,thepotentialofapossi‐

blecost reduction increasesover time,butalsoenablespowersystemstoenhance larger

productions(IEA,2009).Anotherimportantarea,thatinrecentyearshasattractedfocus,is

thedevelopmentofsmall‐scalemillsthatdoesnotneedanygridtofunction.Thisfactwill

bediscussedlaterinthissection.

Thetechnologicaldevelopment intheU.S.attractsagreatdealofattention.Several

forecastsaboutfuturescenariosandgoalsconcerningthepercentageofrenewableenergy

tocovertotalenergyconsumptionhavebeenpresented.Inthisindustrythemostcommon

benefitsfromR&Dhavebeentoimprovethecapitalcoststructureandperformanceofthe

products. Using lightermaterials, improving the learning curve and reducing risks are all

areasthatR&Dtriestoimprove(DOE,2008).

However,anothervariableisconsideredastheactualdenominatorforgeneralimpro‐

vement, not only for the distribution of energy, but also for collecting and utilizing the

energy;thepowergrid(DOE,2008).

Inorder tocollect theenergyproduced in themostefficientway, thegridbetween

theproducers,utilityandusersmustbeoptimaltobenefitmostfromtheenergyproduced

and eliminate waste. To accommodate the expensive grid connections, the smaller mills

producing100kWor lesshavebecomeapopularalternativeasanenergysourceinareas

wherethepossibilityforbigwindparksdoesnotexist.Thephenomenoniscalledsmallwind

or“distributedwindenergy”,whichisareferencetotheuseofsmallwindturbinestocover

local demands or small households. The installation of small windmills without any

37

requirement for grid, reduces thepressureon the technological developmentandenergy

demand. The small plants are even supported financially, and this reduces the up‐front

capitalcostsfortheconsumer(DOE,2008).

Threetypesoftransmissionsystemsthatcanbeusedtotransportationofwindpower

exist.TheseincludeExistinggrid,newlinesandin‐regiontransmission,butnewalternatives

arebeingdeveloped,sincemuchoftheenergycanbelostduringtransport.Transmissionof

theelectrical energy is essential andexpensive, not tomention a crucial need for proper

transport, so it is very important fornewconstructions that thegridandconnectionsare

operatingwiththebestqualitypossible(DOE,2008).

It is a crucial factor for the technology to develop the grid simultaneouslywith the

developmentof large‐scaleprojects.EspeciallyChinaand theU.S.are facingaverycostly

gridexpansioninordertoaccommodatetherapiddevelopmentthatthesemarketsexperi‐

ence (BTM, 2009). The American long‐term plan for securing the growth of sustainable

energy is inspiredbytheEuropeanSupergridwhich isaconceptualframeworkallowinga

wideruse,andbetterdistributionofenergy.TheuseofHighVoltageDirectCurrent(HVDC)

cablesareoneofthebestwaystodistributeenergy,sincethelossesandcostsarekepttoa

minimum (BTM, 2009). Obviously, the purpose of an advanced electricity system is to

transmit power fromwind‐rich areas, to areaswith ahighdemand.Abigobstacle in the

Americanmarket, istointegrateamoreefficientgridsystem,andwithprojectswaitingin

line to get the approval, a new planning model has been introduced, which for safety

reasons implies, that the involvedpartnersmustprove their creditworthiness, inorder to

enterthegridconnectionqueue.Theproblemisthattheenergyoftenhastobetransported

on longdistances, fromwhere it is produced towhere thedemand is.When the current

linesdonotperformthistask,alotofenergyiswasted,andtheproductionismoreorless

goingtowaste,eitherduetopoorgridorlackofcapacity(BTM,2009).

ThewayofoptimizingtheAmericanrenewableenergystatus,bytakingalookatthe

transmissionplansforthedifferentwindscaleprojects,isadifferentwayofputtingprojects

inprogress.Conductorshavemanyrules to followbeforea transmissionplancanget the

permissiontobeapproved,andmanyoftheprojectsmustwaitina“queue”.Anexampleof

anapprovalqueueisillustratedintable9onthenextpage.

38

Table9,Queueforgridlineexpansion

Queue Transmissionproject Capacity(kV) Targetyearonline Newwindcapacity

1 JuandeFuca 500 2012 550

2 McNary‐JohnDay 500 2012 1,200

3 WallaWalla‐McNary 235 2012 400

4 BPAOpenSeason Varies Varies 4,716

5 MontanaAlbertaTie 230 2010 600

6 CapX2020 345 2012‐14 2,275

7 SouthwestIntertie 500 2011‐13 1,200

8 Populus‐Terminal 345 2010 1,600

9 TranswestExpress 600 2013‐14 2,200

10 CO‐WYIntertie 345 2012‐13 900

11 Pawnee‐SmokyHill 345 2013 500

12 Tehachapi 500 2009 2,600

13 Tallgrass/PrairieWind 765 2013 5,800

14 SPPbalancedportfolio 345 2012‐13 ‐

15 Northwest‐Woodward 345 2010 1,800

16 CREZ 345 2012‐13 9,859

Total 36,200

Source:(WindPowerMonthlyJuly2009ascitedinBTM,2009)

AfurtherargumentforimprovingthetransmissionprojectsisthefactthattheAmeri‐

can government has invested heavily in renewable energy, and since the U.S. has a big

demand for energy, a faster queue would result in more energy, less pressure on the

demand,lessspendmoneyonimportedenergy,andabetterchanceofreachingthefuture

goalsforrenewableenergy.

Table9illustratesthedetailsof16newtransmissionplans,whereoffourarealready

under construction. Depending on the upgrade, projects can take several years and cost

billionsofdollarstoconduct.AsdemonstratedinananalysisbyBassett&Todd(1993),the

rule of Shortest Processing Time (SPT) could give inspiration on how to improve the

efficiency inthewaythatthewindprojectsareapproved.TheSPTrulehasbeenusedfor

many years to optimize the workflow and create greater efficiency, through a series of

39

mathematicaltestsandmeasurements.Theideainthissituationistolookatwhichtrans‐

mission projects that have the longest and shortest processing time, compared to their

powerpotentialandcosts,and thenarrange them in thequeue.The ideaarose fromthe

factthatbottlenecksituationsoftenarecausedbythegridsystem,whichhavenotgotany

excess capacity available for theelectricity (BTM,2009).Althougha statistical analysis on

thequeuehasnotbeenperformed,theSPTruleshouldbeseenasatoolthatcouldmake

the processing of the queue more efficient with respect to the money invested in each

project vs. the amount of newwind capacity. If the “cost‐benefit” analysis couldwork, it

wouldprovideamoreefficientwayofexpandingthenewcapacityofenergy.

China is facing somewhat the same bottlenecks as the Americans do. In China, the

windiest areas are in theNorth,whichmeans that supplyof energy isoften far from the

areaswithhighpopulationdensityandwithhighdemand.Notonlyisacostlygridconnec‐

tionnetworkrequired,butthecostandweaknessofthetransmissionisalsotobeoptimi‐

zedinordertoimprovethepowertransmissions(BTM,2009).Thelargestgridenterprisein

China;StatePowerGridCorporationofChina,investedin2009;CNY31.3billiontoconstruct

powergridlines,andtoppedtheamountin2010byinvestingCNY41.8billiontoconstruct

23,200kminterconnectionlines,whichcorrespondstoalinegoingmorethanhalfaround

theequator(SGCC,2011).

Though both presidents (Hu Jintao and Barack Obama) are/have been running a

politicalagendawithsustainableenergy,rankingwithahighpriority,thetwocountriesare,

inordertoreachtheirindividualfuturegoals,stillfacedwiththesamebottleneckproblems

ofhaving to invest inbetterandmoreefficientpower transmissionnetworks, inorder to

accommodatethedemandandthefastdevelopmentinthewindturbineindustry(Li&Ma,

2009)

Havingpointedoutthegridconnectionsasthebottleneckinthisindustry,aninteres‐

tingperspectivecouldbetoapplyaSynchroneManufacturingSystem(SMS) intothepro‐

cess(Sivasubramanian,Selladurai,&Gunasekaran,2003).Thefollowingexampleshouldbe

consideredasa(thoughsimplified)modelforexplainingtheprocessofhavingabottleneck

that results in a reduced output and causes higher expenses in shapes of resources,

material,andtime.

A study of a company that operates in the medium scale manufacturing industry

producingsmallmotorsandpumpshas,throughasimilarandsimplifiedlinearprogramming

40

model(LPmodel)withasmallamountofconstraints,shownthemechanicsoftheproduc‐

tion system that is being optimized (Sivasubramanian et. al., 2003). Usingmathematical

toolsforsolvingindustrializedproblemsisanacknowledgedwayofoptimizingtheproduc‐

tion and output. Applying amathematical tool such as the SMS system, or the LPmodel

couldease thebottlenecksituationsandpossiblycreatea smoother flow.Althoughmany

constraints(e.g.demand,supply,costs,wind,andgovernmentallaws)havetobetakeninto

consideration, the objective function in this case would be the improvement of the grid

system‐beingabletotransportlargeamountsofenergyoveralongdistance,fromdeserted

areaswithalotofwind,intothecitieswherethedemandishigh.Thecontrolandmanage‐

mentofaSMSsystemisallaboutevaluatingtheprogram,activity,scheduleanddesign,and

theircontributiontoasuccessfulaccomplishmentofthecommongoal(Sivasubramanianet

al.,2003). Furthermore, the twowaysofmeasuring theperformancearewitha financial

pointofviewandanoperationalpointofview.Thefinancialmeasuresthecash flow,ROI

and net profit whereas the operational view concerns throughput, inventory and opera‐

tionalexpenses (Chase&Aquilanoascited inSivasubramanianetal.,2003).Althoughthe

studyhasbeenperformedonamediumscaleindustry,manyofthevariablesaretranslata‐

bletothewindmillindustryindicatingthatacomplexLPmodelcouldbeappliedwithinthis

specificindustry.

As mentioned earlier, to accommodate the rapid market growth, the Chinese

government and SGCChas, as a contribution to recover from the financial and economic

crisis,investedheavilyintheconstructionofnewpowergrids.Implementingspecialpolici‐

es,which regards includingpower grids in largewindpowerprojects, e.g. byusingHDVC

power lines, has helpedmoving electricity fromprovincial to regional areas (BTM, 2009).

Especially thewindy areas in the upper part of China, has proven to be problematic, not

only due to poor transmission, but also because of the transportation conditions. Even

thoughitbylawhasbeenenactedthatthegridcompaniesareresponsiblefortransmission

lines,thereisnorequirementonthequalityoftheline,noraduedateofconstruction.This

results in a huge pressure on the grid companies, mostly financially since the price of

constructing 100 km of transmission lines, costs around 350 million Yuan ~ 53,4 million

dollars(Hanetal.,2009).

Toconclude,awellfunctioningandstablepowerinfrastructureishighlynecessaryand

ofhighimportanceforsecuringgrowthandbenefitsofwindenergy.BoththeU.S.andChina

41

have invested heavily in order to optimize this. Large investments in power grids and

transmissionwillthereforealsogiveaboostinthewindturbineindustry.

4.1.5.Environmental

The environmental factor of wind power assesses two topics. Firstly, the weather

conditionsandsurroundingsintheregionsofwindmillswhichdetermineswhetheron‐and

offshoreturbinesarefeasible.Secondly,howtheclimatechangesinfluencethewindpower

industry.Thelatterissueconcerningclimatechangeandtheeffectsthereofwithrespectto

thewindturbineindustryhasbeenaddressedintheforegoingpart.Thefocusofthissection

is to evaluate the potential capacity and options for the type of turbineswhich could be

implementedinthegivenenvironmentalsurroundings.

China has one of the most favorable wind capacities in the world. However, it is

difficulttoputanexactnumberonthepotentialcapacity,whichismeasuredinGW.Organi‐

zations and the government have conducted several analyses in order to estimate the

capacity.Inordertocreateoverviewthereofandageneralpictureofthesituation,ameta‐

analysishasbeenconducted,andtheweightedaveragehasbeencalculatedasanoutput.

Table 10 on the next page presents an overview of the different agencies and their

estimatesontheonshoreandoffshorecapacities.

42

Table10,EstimatesofwindcapacityinChina

Agency Onshore

cap.

Offshore

cap.

Notes Source

NationalMeteorological

Bureau(NMB,2004‐2005)

253GW

(3,226GW)

297GW

(4,350GW)

Basedonlow

measurements.10m

aboveground

(Lietal.,

2007)

ChinaMeteorological

Administration(CMA,2006)

253GW 750GW Basedonlow

measurements.10m

aboveground

(Hanetal.,

2009),(Liu&

Kokko,2010)

UnitedNationsEnvironment

Program(UNEP)cooperation

withUSNationalRenewable

EnergyLaboratory(NREL)

(2006)

1,400GW 600GW Basedonhigh

measurements.50m

aboveground

(Hanetal.,

2009;Li&

Ma,2009)

ChinaNationalClimate

Center(2006)

2,548GW ‐ Basedonlow

measurements.10m

aboveground.

ExcludingtheTibet‐

plateau.

(Li&Ma,

2009)

ChineseAcademyof

Engineering(CAE)

300GW‐

1,400GW

‐ (Li&Ma,

2009)

Note:Numberswithbracketsistheoreticalcapacity.

At first it seems that the difference in capacity of NMB and CMA compared to the

evaluation conducted by UNEP in collaboration with NREL, is due to the difference in

measuringprocedure.Highergrounddistancewillresultinmorepowerfulandstablewind

i.e. thepotentialandtherebythewindcapacity is largerwhenmeasuredthisway.Archer

andJacobsen(2003)showedthatonaverage,windspeedataheightof80misbetween1.3‐

1.7m/s faster than speedmeasuredbywhat is referred toas “commonmethods”which

implieswindmeasures10maboveground level. Incontrast, theChineseNationalClimate

Center measured a significant higher onshore capability at 10m and additionally did not

include theTibetplateau,whichhas favorablewindconditions (Liu&Kokko,2010). From

table 10 the calculated average onshore capacity is 1025.67GW ((253+253+1,400+2,548

43

+300+1,400)/6=1025.67GW).Theaverageoffshorepotentialhasbeencalculatedto549GW

((297+750+600)/3= 549GW). That gives China an estimatedwind capacity of 1574.67GW.

Withatotalof874GWofcoalplants,windfarms,nuclearpowerstationsandhydroin2009,

the potential wind capacity is nearly twice as high compared to total installed capacity

(Cheung, 2011). The Inner Mongolian region has some of the highest wind resources in

China.Thetechnicalpotentialcapacitywasin2008estimatedto150GW,ofwhichlessthan

2.5%atgiventimewasexploited(Liu&Kokko,2010).

Onewayofestimatingthewindcapacityisbyincludingexternalvariables,suchasthe

numberofmillswhichcanbeinstalledinaspecifiedarea,theeconomicconditionsandthe

technologicalandtechnicalperformanceoftheturbine(Li&Ma,2009).Giventhetechnolo‐

gicalvariable, itseemsdifficult todeterminea fixedwindresourcecapacity foracountry,

andwithcurrentdevelopmentsandimprovementswithinturbines,thecalculatednumber

could be seen as a minimum of achievable capacity in respect to current and past

technologicalknow‐how.

Another way of evaluating wind power resources is on a cost basis, where one

procedureestimates the capacitybasedonhowmuchwindenergy that is available for a

certaincostor less.TheU.S.DepartmentofEnergyhasappliedthismethod,anddetermi‐

ned that approximately 8000GWwill be available for $85/MWh or less (DOE, 2008). The

calculationdid,however,notincludethetransmissioncosts,whicharehighlyconsiderable.

Taking the transmission cost into consideration, approximately 600GW and 400GW,

respectively can be exploited at on‐ and offshore locations which can enter existing

transmissionsystems (DOE,2008).This is roughly theequivalent to theestimategivenby

EIA(2007)(ascitedinDOE,2008),whichassessedU.S.windresourcesto983GW.Inorder

to put this into perspective, the total U.S. installed capacity in 2009 was 1,025GW (EIA,

2010c). The installed capacity was higher than China’s; the reason thereof is that, as

mentioned, China first overtook the U.S. with installed capacity in 2010. The highest

resourcesofwindare tobe found inOklahoma,SouthDakota,NorthDakota,Kansasand

Nebraska. However off‐and onshore resources have been located along the south and

southeasterncoastsof theU.S. (Archer&Jacobsen,2003).Dueto thewaterdepth in the

U.S., offshore turbines are still too expensive to implement, but future technology

improvements in R&D for deepwater turbines will probably make this huge capacity

availableforexploitation(DOE,2008).

44

Both theU.S. andChinadoes currentlyhavehugewindcapacity, andas technology

will improve, even more wind resources will be accessible. In the long run, it is highly

unlikely that insufficientwind resourceswill be the determinant for generating an upper

limitforturbinesinstalled.Afactorsuchasdiversityofenergyportfolioislikelytointerfere

before.

4.1.6.Legal

ThelegalperspectiveintheU.S.andChina,respectively,isinthissectionlookedupon

intwodifferentways.Thisismainlyduetothedifferenceindemographyandgeographical

opportunities/challenges.

The American government has, as mentioned, implemented several laws for

promoting renewable energy. The recovery act and the subsidy in shape of PTC are just

some of the initiatives taken to promote a greener future. Presently, the most difficult

processconcernsthediscussionofwheretoplacenewoffshoreprojects.Thereasonbehind

is, that these decisions cannot be accepted only by governmental force, but must go

through federal and state jurisdictions, including several laws, before an actual approval.

Furthermore, the federal government does not have a system that enhances energy

projects on outer continental shelf lands (sea outside the individual states’ jurisdiction)

(Santora,Hade&Odell,2004).Currently,theyarebeingpermittedonacase‐by‐casebasis.

Althoughthepotentialforextractingenergyfromoffshoreprojects is large,theroadfrom

thedrawingboard tocompletionmightbeoneof themostcomplicatedones in termsof

involvement fromnumerous services of endangered species,wildlife, fish‐ and in general

the entire marine zoning. Once these negotiations have been sorted out, the matter of

publictrustviolations,visualimpactsandshippinglanesarejustsomeofthefactorswhich

also have to be considered (Santora et al., 2004). Since a finished regulatory framework

doesnotexist, thegovernment isworkingondifferent ideas.Leasingagreementscopying

theUK frameworkor simplymodify the frameworkused foroffshoreoil andgas industry

which is already functioning and dealing with the same factors (Santora et al., 2004;

Portman,Duff,Köppel,Reisert&Higgins,2009).

Thequestionliestowhichofthepossibilitiesthatarethemosteffectiveandbeneficial

for the American society. Copying the existing framework from offshore oil and gas

constructions is a plausible solution, though the time frame for this operation and the

45

further approval for future offshore projects are unknown. On the contrary, copying the

frameworkfromoneoftheleadingcountriesinoffshorewindprojects,theUK,willrequire

alotofadaptionduetothedifferentoffshoreconditionsandlegislations.Aduplicationof

thisframeworkwillalsoberiskysincetheadministrationtimeintheUKiscausingsomeof

theprojectstowaitinalinetogetgranted.Thetimeusedforsubmittingconsentapplica‐

tions,getting itgranted,gettingconstructionpermissionsandtheactualcompletiontime,

amount to several years (Gibson & Howsam, 2010). The American government should

therebyevaluatethealternativesonabasisofthecostsandtimeframeinordertocomeup

withasolutionthatsuitstheAmericansocietyinthebestpossibleway.

TheChineselegislationsregardingrenewablewindenergy,ishighlydeterminedbythe

government only. Themost powerful legislation is theRenewable energy law from2005,

which sat regulations for the grid companies and the power companies. The law was

recently revised in April 2010 with the addition that grid companies should guarantee a

percentageoftheenergytocomefromrenewableenergy(Cheung,2011).

To support the development of renewable energy, the Chinese government has

chosenadifferentangletopromotetheawarenessoftheenergyconsumption.Beingable

toproducehugeamountsofrenewableenergyisnotsolelyasolutiontotheplansandgoals

setforthecountry.Hence,itisnotasustainablesolutiononlytolookforward,disregarding

thepresentsituation.Toaccommodatethisproblem,theChinesegovernmenthaveinmany

yearsbeen investing in aproject called ‘‘EnergyEfficiencyRetrofit for ExistingResidential

Buildings’’ (EERFERB). This project should help optimize the energy consumption by

introducing better heating systems and isolation in the northern parts of China, ensuring

lesswasteofenergyandabetter indoorclimateinthecolderareas(Shilei&Yong,2009).

Theprojecthasbeendevelopedthroughseveralyears,andmanyongoingimprovementsin

differentnorthernareas throughout theyearshavebeenconducted.Therewasnodoubt

that retrofitting buildings was a method that could eliminate waste with a substantial

amount, which was also supported by retrofit demonstration in 1979 which showed a

energy efficient rate of 27,48% according to (Shilei & Yong, 2009). Accomplishing such

resultsbecameanincentivefortheChinesegovernmenttokeepimprovingandinvestingin

EERFERBto,notonlygetbetterenergyconsumption,butalsoheightenthelivingstandard

forpeopleinthenorthernregions(Zhao,Xu,Li&Gao,2006).

46

Anotherimportantissueistherelationshipbetweenintellectualpropertyrights(IPR)

protection and FDI in Chinawhich have been examined in the study of Awokuse and Yin

(2010).Chinawas in1992 forcedtostrengthentheirpatent lawsby theU.S.andagain in

2001whenjoiningtheWTO.Sincethenthepatentgrowthratehasincreasedsteadily.The

findingsofAwokuseandYin(2010)werethatimprovementsonIPR(includingpatentlaws)

tendtoprompthorizontalFDI inacountrywiththesamecharacteristicsasChina(a large

marketandhighthreatofimitations).AfurtherbenefitforChinawouldbeastimulationof

technologytransfer.

4.1.7.ConclusionPESTEL

Through the analysis we can conclude the following: The political aspect in the

windmill industryhaveonbothmarketsamassive influence.AlthoughChinaand theU.S.

areoperating in twodifferentways, thegovernmental support iscrucial for theexistence

and development of renewable energy. The economical impact on the industry is closely

connected to the political aspect, since subsidies and support are the foundation for

investmentanddevelopmentofwindenergy.Furthermore,bothcountrieshavecleargoals

for the future energy status, but as it is for now, the capital involvement is necessary to

reachthosegoals.Wefoundthatthesocialfactorsincludepopulationandtheconsumption

of energy. This reflects how the view on demand and consumption are, both on a small

almostindividuallevel,butalsoonthegovernmentallevel.

Thetechnologicalimpactonthisindustryhastoouropinionamajorimpactonfurther

development.Themainconcernisnotonlyonmakinglargerandmoreproductivemills,but

better grid systems and cost reductions in the projects seems to be themost important

within technology. We found the environmental impacts to be centered on the CO2

emissions and the feasible conditions that wind energy requires. This came as no big

surprise, since one of the biggest benefits concerning renewable energy is the minimal,

almostnonexistentemissionofgreenhousegasses.

With the legal factorswecould conclude that theAmericangovernmenthadavery

complex system when projects should be permitted, whereas the Chinese government

focusedoncertaingridcommitmentsinnewenergyprojects.

47

4.2.PortersFive

In order to analyse the competitive environment and strategic outlook for Vestas,

Porters (2008) model for the five competitive forces has been applied. The aim of the

analysis is toassesshowVestas inthefutureshouldcopeandoperate inrelationtotheir

competitors.ThefivecompetitiveforcesofPortersmodelare:

1. Threatofentry

2. Thepowerofsuppliers

3. Thepowerofbuyers

4. Thethreatofsubstitutes

5. Rivalryamongexistingcompetitors

4.2.1Threatofentry

Entry barriers are unique factors that characterize every industry in differentways.

Barriers in the wind turbine industry are highly affected by the expensive start up costs

related to setting up production facilities, and investing in R&D. Typical costs in a wind

turbineinstallationincludes;rawmaterials,foundation,roadconstruction,cabling,transfor‐

mers, transport, craning, assembly, tests, legal matters, insurance, maintenance, repair,

spare parts and administration (Krohn et al., 2009). Another important factor for new

entrants is thesteep learningcurve,andtheprocessingtime.Aprojecthastogothrough

several instances, and since the completion time of projects can take several years, it

requiresasubstantialamountofstart‐upcapitalbeforetherewillbeanyrevenue(Krohnet

al.,2009).

Duetothehighstart‐upcosts,manycompaniesmakeuseofmergers,acquisitionsor

joint ventures to enter the market without having to build up years of technological

expertise and know‐how. It is a common trend in any given industry; especially joint

ventures have been a popular method for achieving better cost allocation, but also for

ensuringawiderrangeofexpertiseindifferenttechnologicalareas(Buckley,2007).

In China new entrants are faced with challenges such as; inexperience and lack of

technological skills. On this basis the most common entry strategy has been to acquire

48

technology through licensing fromforeigncompanies thatarenotpresent inChina (Liu&

Kokko,2010).

One of the natural barriers to entry is themarket demand. A large demandmeans

potential profit for established companies, but it also attracts new entrants. On the

opposite, low demand scares away new businesses, since profitability is more or less

proportionaltomarketdemand.Todrawaconclusionfromthis,China’spopulationgrowth

andtherebydemandhascausedthewind industrytoexplode intermsofnewplayerson

themarket.Attheendof2009,around70companieswereactiveontheAsianmarket,and

60ofthemwerelocatedinChina(BTM,2009).

Having entered the industry for turbine manufacturing, the capital‐intensive

investmentsinproductionfacilitiescreateanaturallargebarrierforexitingthemarket.This

also applies to smaller interrelated businesses, since collaboration between companies

ofteninvolvessomesortofbindingcontracts(Buckley,2007).

Although the entry barriers are quite high, licensing the technology from foreign

companiescanlowerthebarriers,andthecostgeneratedbyR&Dcanbeavoided.Especially

China experiences a massive boost in new companies due to the increased demand for

energy.Asdemandwillbesuppliedalongsidethepossibilityofdominancebyfewerbigger

companies,barrierstoentrywillberaised.SincebigcompaniessuchasGE,Vestas,Siemens

andGamesaprimarilydominatetheU.S.market,itismoredifficulttoentertheU.S.market

than the Asianmarket,which is characterized by having awide range of possible energy

suppliers.

4.2.2.Thepowerofsuppliers

Thenumberof suppliersand their relationshipswith themanufacturersare interes‐

tingtolookat,sincebothpartiesaretryingtobepowerfulandcapturesomeoftheprofitin

the industry. The bargaining power of the manufacturers is determined by how many

suppliers they have, and by the amount of suppliers on the market. In this section the

supplychainandtheimplicationsthereofwillbeanalysedwithrespecttothecompetition

andmarketevolution.

Whenanalyzingthesupplierpower,therearesomemarketcharacteristicswhichhave

tobetakenintoconsiderationinordertoevaluatetheirstrengths.Suppliersarepowerfulif

thereareonlya fewconcentrated supplierson themarket.Alongsidewith this, powerful

49

manufacturersenhancetheimportanceofseveralsuppliers,tominimizetheriskandavoid

high switching costs. Additionally,manufacturers also prefer tomake long term relation‐

shipswiththesamesupplierinordertosavecosts.Opposite,standardizedproductstendto

decreasethesupplierspower.

In thewindturbine industry it iscrucial tohaveasecurity insupplyofcomponents,

since both profits and the reputation of the company are at stake. The best established

companies are those who can control their suppliers either by buying them (vertical

integration)orbymakinglongtermcommitments(MerrillLynch,2007).Long‐termcommit‐

mentsareaboutmutual trust,and the loyaltybetweensupplierandbuyer regarding that

eachpartwillcomplywiththecontractis important.Long‐termcommitmentsalsoinclude

thatthesupplierisabletodeliverwantedcomponentsandexecuteprojectsintimeforthe

sakeofbothcompanies.

As in any other industry, the fear of bottlenecks is also present in thewind power

industry.Thesituationwheresupplierscannotkeepupwithdemand,andthereforeslows

down a production or project, is one of the worst nightmares for the manufacturing

companies.Toaccommodate this risk,manybigwindenergycompanieshaveboughtout

suppliers of critical components, including generators, blades, towers and gearboxes

(Clarke,2009).

Duringrecentyears,verticalintegrationhasbeenatrendthatmanycompanieshave

used.Havingsuppliersinhouse,doesnotonlyensurecostreduction,betterqualitycontrol

andaccuracyondelivery, italsomakessurethatothercompaniesdonotcopythespecial

technology and design (Clarke, 2009). Furthermore, many of the wind turbine manufac‐

turershavechosenmultiplesuppliersforaspecificcomponent.Thisismainlyduetotherisk

factor. Ifthesupplier issuddenlynotabletoprovidethecriticalcomponentsforaproject

anothersuppliermightbeabletodeliverthewantedcomponent.Thistypeofbusinessalso

functions as a competitive advantage to integrate backwards on the supply chain, since

costsandrisksareeasiertocontrolinaninhouseproduction

Astable11onthenextpageshows,thetrendofhavingcriticalcomponentsinhouse

isverytypical.Forexample, inVestasrotorblades,generators, towersandcontrollersare

delive‐red by suppliers owned by Vestas. The content of the table is from 2007, and it

reveals that there are only a few suppliers to the different specific components; this has

though changed in recent years, as theChinesemarkethasgrownboth inmanufacturers

50

andsuppliers.Despitethefactthatmanyneweasternsuppliershaveenteredthemarket,

thebigcompaniesstillholdsabitofscepticismstowardsnewsuppliersduetotheunknown

factorsofquality,loyaltyandconfidentiality(Clarke,2009).Itisthoughplausiblethatwithin

a reasonable amount of time with increased numbers of suppliers, the competition will

inducelessbargainingpowerfromthesupplierside,whichagaincouldlowerthepriceson

components.Sinceprice,particularly in this industry isasensitive factor, the lowerprices

could give rise to more projects regarding renewable energy. Presently, the economical

backbonehasbeenthesubsidiesandgovernmentalsupport,butwithcompetitioninprice

of components, the market could get even more potential for future growth (Douglas‐

WestwoodLimited&BVGAssociates,2006).

Table11,OverviewofsuppliersVerticalIntegration

Rotorblades

Gearboxes Generators Towers Controllers

Vestas Vestas,LM Bosch,Rexroth,

Hansen,Winergy

(Siemens),

Moventas

Weier(Vestas),

Elin,ABB,

LeroySomer

Vestas,

NEG,DMI

Costas

(Vestas),NEG

Dancontrol

GEEnergy LM,Tecsis Winergy(Siemens),

Bosch,Rexroth,

Eickhoff,GE

Loher,GE DMI,

Omnical,

SIAG

GE

Gamesa Gamesa,

LM

Echesa(Gamesa),

Winergy(Siemens),

Hansen(Suzlon)

Indar(Gamesa),

Cantarey

Gamesa Ingelectric

(Gamesa)

Enercon Enercon Directdrive Enercon KGW,SAM Enercon

Siemens

Wind

Siemens,

LM

Winergy(Siemens) Siemens,ABB Roug,SAM Siemens,KK

electronic

Suzlon Suzlon Hansen,Winergy

(Siemens)

Suzlon,Siemans Suzlon Suzlon,Mita

Teknik

Clipper

WindPower

Tecsis Clipper Potencia Emerson,

Anston

Clipper

Nordex Nordex,

LM

Glasfiber

Winergy(Siemens),

Eickhoff,Maag

Loher,VEM Nordex,

Omnical

Nordex,Mita

Teknik

Source:(MerrillLynch,2007)

51

In relation to this, the turbinemanufacturersoperatewith verydifferent strategies.

Althoughthecontentof table11dates to2007, it still confirmsthedifferentstrategies in

themarketsincethestrategychosenbytheSpanishGamesa,hasbeentohaveallcompo‐

nentsinhouse,whereastheAmericanGEhasgoneintheotherdirection,outsourcingmany

ofthecomponents(EuropeanWindEnergyAssociation,2007).Itishardtoclaimwhichone

ofthestrategiesthatisthebest,sincetheybothhaveprosandcons,inducingthefunctio‐

nalityofthesupplychaintobethedeterminingfactor.

It is interesting to see how the different wind turbine companies have chosen

differentmarketstrategies,andtoassessthefactorsthataffectthisdecision.Inmanyways,

theindustryresemblesthecarindustry,inthelightofthemarketdynamicsandconsistently

changingdemands.Globalization, improvedcompetition inpriceand technology,environ‐

mental responsibilitiesandsafety requirementsare justsomeof theprospects thataffect

thegrowthanddevelopmentopportunitiesinbothindustries.

AresearchpaperconductedbyPhongpetraandJohri(2011),includesPortersbusiness

strategies,andexaminesdifferentbusinessstrategiesamongautomobilemanufacturers in

Thailand. It is interesting to assess the similarities and variations in choosing the most

suitable strategy in the two different industries. The study conducted showed that cost

strategies are preferred above differentiation strategies, and that the strategy is highly

dependent on the targetmarket. Furthermore, choosing the right strategywill lead to a

positive effect in the organizational performance, which is measured by market‐value,

volume and share, thus revealing the status of the companies. Compared to the wind

turbine industry,manyof the same factors affect thebusiness strategy. Similarly, the car

industry is integrating parts of their supply chain with the same purpose as for wind

turbines,cuttingcostsandensuringperformance.Thecarindustryismucholder,whichalso

implies that is has experienced a much longer development, placing the industry in a

situation where price is the main competition. However, as described above, the trend

withinthewindmillindustrycouldgointhesamedirection,duetotheincreasedcompeti‐

tioninmanufacturersandsuppliers.Currently,suppliershavealargebargainingpower,but

ifthedevelopmentcontinues,thismightdecreaseinthefuture.Additionally,thecustomers

arenotasdiversifiedasonthecarmarket,resultinginlessspecifications.Asaconsequence

thecompetitivefactorinthewindindustrymightverywellbetoensurethelowestpricesof

energythroughalowcostofproduction.

52

Having analysed the supplier power, this leaves Vestas characterized as a company

that has focused on integrating vertically. Having established different production

departments all over theworld including: Vestas Nacelles, Towers, Blades, Technology&

R&DshowsthatVestas’strategyistolowercostsandensureahighproductquality(Vestas

profile,n.d.).

Table12,suppliersgrowth

Components/materials Supplier’06 Supplier’08 Supplier’09 Increase(%)from’06–’09

Rotorblades 10 18 30 200

Gearboxes 14 19 28 100

Electricgenerators 8 21 42 425

Bearings 9 18 36 300

Powerconverters n.a 14 37 164(increasefrom‘08)

Powertransformers n.a 19 29 52(increasefrom‘08)

Castings 12 46 65 441

Forgings 8 35 59 637

Source:(BTM,2009)

Table12aboveshowstheamountofsuppliersforeachimportantcomponentinthe

turbine industry. The positive trend in the table clearly shows an explosive increase in

suppliers,especiallyintheperiodfrom‘08–‘09.Thetableconfirmsthatsincethesupplyof

gearboxeshasthesmallestpercentageincrease,thebottleneckismostlikelytooccurhere.

4.2.3.Thepowerofbuyers

Thenumberofbuyersisasignificantfactorthatcontributestothedegreeofbargai‐

ningpower,comparedtothenumberofsuppliers.Thewindturbinemarketcontainsmany

buyers in shape of utility companies, governments and local states which results in an

increasedcompetitionamongthedifferentwindenergycompanies.Thefinancialsituation

ontheglobalmarketis,asinmostotherindustries,acriticalfactorfordeterminingtheprice

oftheprojectthroughnegotiation.ChinaandtheU.S.havemadeiteasierforthebuyersto

place a good deal, since the many regulations for renewable energy and subsidies have

helpedtheturbinemanufacturerstocutcosts,andtobeabletoofferlowerenergyprices.

In China, the government buys contracts through SOE’s, which by the end of 2008

53

accounted for almost 90% of the installed capacity (Liu& Kokko, 2010). Furthermore, as

described previously, in 2005 China required that 70% of the turbines should be manu‐

factured domestically, which limited the buying power in shape of buying from foreign

manufacturedwindturbines.

InlargescaleprojectswheremanyMWhareexpectedtobeinstalled,theamountof

suppliersarerelativelyfew,comparedtosmallscaleprojects,whereespeciallyallthenew

companies from the East have increased the bargaining power of the buyer. This can be

supportedbythefactthatthesupplychainhasbeenbuildupbothintheU.S.andinChina,

shiftingthemarketfrom“sellers”toa“buyers”markets.Thusempoweringthebuyerwith

emphasisonhigherproductqualityandlowercosts(BTM,2009).

Itisahelpingfactorforthewindturbinecompanytobeabletoprovideawiderange

of turbine sizes and have a large portfolio, so that the customer has the opportunity to

choosebetweensmallandbigturbines,aswellason‐andoffshoreturbines.Inthiswaythe

company having a large diversity of products has an advantage compared to a company

havingonlyanarrowrangeofproducts.

Vestas is one of the most vertical diversified companies in relation to products.

Currently,they provide 14 different onshoremills, ranging from850kW to 3.0MW, and 3

offshore mills ranging from 3.0MW to the newest project with 7.0MW (Vestas turbine

overview,n.d.).Beingabletofulfilspecificrequestsandconditionshasbeencrucialforthe

amountoforders thatVestasget,and it isacompetitiveadvantageforVestaswhenthey

arecompetingon themarket forneworders.Whenoneof thebiggestutility companies,

EnergiasdePortugalRenováveisplaceda1.500MWorder, itwasnotonlyadeclarationof

trust,butitalsoshowedthatVestasareconsideredasoneofthetopcompaniesforexecu‐

tinglargescaleprojects(Aktionærinformation1,2011).

RemarkablyenoughVestashasnotloweredtheirprices(pricedumping),byconside‐

ringtheaggressivecompetition.Theirstrategyhasbeentoconvincethecustomersthatthe

products they deliver are of the best quality, and thereby also is worth the money

(Aktionærinformation1,2011).

Vestashasclearadvantagesinbeingabletodelivertolarge‐scaleprojectsandhaving

abroadportfolio,butin2010Vestas’profitwasonlybasedonatotalof212customers.The

customerdoeshaveagreatdealofpower,whichplacescustomerrelationshipmanagement

CRMinapositionofuttermostimportance.Vestas’educationofemployeesandconstant

54

developmentofnewgoalsforincreasedcustomersatisfactionisanindicatorofhowserious

Vestasiswithregardtotheircollaboration.Itisnotonlytheproductsthatmustbeperfect,

butthecommunicationanddialoguewiththecustomersisakeyfactorforVestas,inorder

forthemtoprovidethebestservice,thushavingthehappiestcustomers.

4.2.4.Thethreatofsubstitutes

Normally,thethreatofsubstitutesisbasedonpriceelasticity,butasdescribedinthe

previoussection,windpowerhasnumerousmacro‐factorfeatures,whichneedstobetaken

into consideration. In this context the price elasticity is defined on the output delivered:

Electricitymeasuredby$/kWh.BesidesthepriceperkWh,whichforsomeisthedominating

factor, elements such as job creation, CO2 savings, higher degree of independence from

fossilenergy,safetyanddiversityinenergyportfolioarealsoofimportanceandshouldbe

includedintheconsiderations.

The substitutes for wind power are fuel sources and technologies, which can be

exploited to generate electricity. The dominant fuel and technology types for generating

electricity are the following: coal, gas, nuclear, hydro energy, bio fuel, and solar energy

(Cheung2011;EIA,2010b).Inordertoassessthethreatofsubstitutionofthese,twometa‐

analyseshavebeen conducted. The tables that show the findings are tobe foundon the

next page. Table 13 evaluates the capital costs for generating one kW,whereas table 16

examines generation costs i.e. how much does one kWh cost depending on the

technology/powersourceapplied.Thetablesareshownonthefollowingpages.Sincethe

method for calculating the costs are based on numerous different assumptions and

methods (like transmission costs and governmental support) it would be incoherent to

comparethenumbersfromonesourcetoanother.Furthermore,itisafactthatdataonall

technologiesarenotavailable.Asaconsequenceofthis,thetwotableswillbedescribedin

broadtermsandcomparedbypercentage.

55

Table13,Capitalcosts

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56

When lookingat thecapital costs,an interesting trend is thatwindpower isamong

the cheapest. The numbers from Sims et al. (2003), point out that wind power is the

cheapestoftherenewableenergysources,andjustascheapassomeofthenuclearpower

prices.Oneveryimportantpoint,whichmodifiesthiscost,istherecentacknowledgement

concerningdecommissionofnuclearplants.Thiscostoftenequalstheinitialcapitalinvested

intheconstructionoftheplant(Sovacool,2009).AcordingtoSimsetatthecheapestoption

isgas,whichis50%cheaperwhencomparedtothepriceofwindpower.Whenlookingat

the data applied by Sovacool, wind power is the cheapest, but the data only includes

nuclearandrenewableenergysources.Whencomparinghydro,whichhasthelargestshare

ofrenewableenergyintheworld,towindpower,itis11%moreexpensive[(((1,900/1,710)‐

1)*100)=11.1%].AlsoEIA(2010d)placeshydrotobe16%moreexpensivethanwind,which

inthiscase isspecifiedasonshorewind[(((2,291/1,966)‐1)*100)=16.%].Onaverage itcan

beseenthatwindpoweristhecheapestofallrenewableenergysources.Onefinalremark

isthecostestimatesmadebyDOE(2008),whichinpercentilehascalculatedthelowestcost

tobegas, compared towind, coal andnuclear. Table14 showsa simpledepictionof the

data.Itranksthecheapestenergysourcestothemostexpensiveones.Inthetwoscenarios

wheregasisnotincludedintheestimates,windisrankedwiththecheapestcapitalcosts.

Table14,Rankingofenergysourcesbyprice

Source CheapestMostexpensive

(Simsetal.,2003) Gas Wind,Nuclear Coal,Nuclear Biofuel,

Nuclear

Nuclear PVandsolar

(Sovacool,2010) Wind Hydro Biofuel Nuclear PVandsolar

(DOE,2008) Gas Wind Coal Nuclear

(EIA,2010a) Wind(onshore) Hydro Wind

(offshore)

Biofuel PVandsolar

Whenevaluatingthegenerationcost,i.e.$cent/kWh,someofthenumbersaremore

ambiguous.For instancethecostperkWhforwindpower,asstated inSimsetal. (2003),

spansfrom3‐8cent.Theratherimprecisecostisduetothenatureofwindenergy,where

varyingwind strengthwill generatepoweratdifferent costs. Inhighwindareas costsare

lowandvisa‐versa. TheU.S.DepartmentofEnergyhason the figure15presentedbelow

giventheestimatesforthedistributionofaccessiblewindareasinrelationtocostperkWh.

57

Theestimatesare forbothoff‐andonshore turbines.Thedistribution resemblesa slightly

uniformdistributioni.e.virtuallyshowsastraight‐lineincreaseincosts.

The first four rows in table 16 on the next page, shows that wind power prices in

AnnexI,non‐AnnexIcountries(underwhichChinaiscategorized)andtheU.S.,areamong

the cheapest. In general forAnnex I andnon‐Annex I countrieswindpower is only tobe

surpassedbybio fuelas thecheapest. In theU.S.,gasappears tobe thecheapest source

followed by coal and eventually wind. When concerning the average price per kWh for

Annex I and non‐Annex I countries, coal surpasses bio fuel as the cheapest, and as a

consequence places wind power as the third cheapest option. Whereas comparing the

UnitedStateswithAnnexIcountries,thescenarioisunchanged.Comparingthesefindings

withpricescalculatedbyKrohnetal. (2009),onecaneasily see the impactonCO2 tariffs

whichhasbeenincluded,andasaresultmakeswindpowerthecheapestoption.

Figure15,AllocationofU.S.windresources

Source:(DOE,2008)

58

Table16,Generationcosts

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59

Finally,EIA(2010b)numbersshowsthatgasistheoverallcheapestfollowedbyhydro,

nuclear, coal and onshore wind power.When comparing wind to coal and gas, which is

beingutilizedinpowerplantsthatincludeCO2captureinthecostofgeneratingelectricity,

onshorewindpowerischeaperexceptforgaspricesbyEIAestimates(2010b).Thebenefit

oftheCO2captureislessemission,andthussavingsontariffs.

Despitetherathercompetitivegenerationcosts,windpowershouldnotbeaddressed

solely on these numbers. Asmentioned previously, wind power receives various govern‐

mentalsupportandbenefits,whichiftheeconomicsofwindpowerwerecompetitive,this

supportwouldhavebeenredundant.

Anotherissue,isonethataffectstheentireenergysector;theoilprice.Sincetheprice

onoil iscorrelatedwithenergy,anaggressive,andhighlyunlikely,pricedumpingbyOPEC

will generatecostsofwhichwindpowerno longerwillbecompetitive.Thiswas thecase

whenoilpricesplungedinthesummerof2008,whichleadtoadecreaseof91%ingreen

energyinvestmentintheU.S.forthefirstquarterin2009(Scott,2009).

The consequence of these twomatterswill have twomain implications for Vestas.

Instead of focusing on a strategy based on lower prices, which is the standard strategy

appliedagainstsubstitutes,oneshouldcurrentlyratherfocusontheotherbeneficialassets

which wind turbines possesses. Such assets could be water savings, green energy, life

quality intermsof lesspollution, jobcreationandasuitableoptionforacountry’senergy

portfolio.Thisbeingsaid,itwasnotanattempttodiminishtheimportanceofthecosts.The

importance of R&D within this field can hardly be overstated. It is only through intense

investmentsinR&Dthatwindturbinesovertimewillbeoptimized,thecostwillbereduced

andthepricewillnolongerbeanissueofmatter.

60

4.2.5.Rivalryamongexistingcompetitors

The market for wind turbines is dominated by ten companies, who in 2010 had a

combinedmarketshareof78%.Vestasiscurrentlystillthebiggestsupplierofturbineswith

aworldmarketshareof12%.Figure17belowshowsthemarketsharein2010.

Figure17,Marketshare2010

Source:(MakeConsultingandBTM,ascitedinWindfair2011)

Asthegraphshows,43%ofthemarketisdominatedbyfourcompanies,andalthough

Vestasatthepresenttimeismarketleader,themarketsharesandthusthecompetitionis

quiteclose.Nonetheless,Vestashasoneclearadvantagecomparedtoitscompetitors.They

are less dependent on one specificmarket. Vestas is generating its revenues from three

differentmainmarkets:Europe/Africa,AmericaandAsiaPacific/Chinaonwhich49%,29%

and22%, respectively are placed.According toVestas’ track record (Vestas, 2010c), their

windturbineshavebeeninstalledin64countries.Aspreviousstated,thiscategorizesVestas

astheonlyglobalsupplierwithintheindustry.

In theU.S.GE is the indisputablemarket leader,withmore than46%of themarket

sharein2009(GWEC,2010).ThestrongpresenceintheU.S.explainswhyGE’smarketshare

isamongthebiggest,butalsodisplaysGE’sdependenceontheU.S.market,andgivesan

22%

12%

11%

10%

10%

7%

7%

7%

6%

5% 4%

Marketshare2010

Others

Vestas

Sinovel

GE

Goldwind

Enercon

Gamesa

Dongfang

Suzlon

SiemensWindPower

UnitedPower

61

explanationofGE’slimitedpresenceontheinternationalmarket.EventhoughGErecently

increaseditsactivityontheChinesemarketthroughaJVwithlocalHarbinPowerEquipment

Company, theyarestilldependenton thehomemarket (RedHerring,2010). In totalGE’s

49%shareoftheJVisassessedto$26.7million.

VestasmarketshareintheU.S.wasin200718%.InorderbemorecompetitiveVestas

has setupmanufacturing facilities in theU.S.. Thiseliminated foreignexchange rate risks

andloweredtransportationcosts.Morethan$1billionwereinvestedinthemanufacturing

plant located in Eastern Colorado (Ryser, 2010). An investment of this size naturally

facilitatedahighbarriertoexit,sincefailureintheU.S.marketwouldbecatastrophic,and

asaconsequenceVestasisforcedtohavesuccessintheU.S.market.Table18belowshows

themarketsharesfor2007ontheAmericanmarket.

Table18,U.S.marketshares

Company GE Vestas Siemens Gamesa

Marketshare(07’) 46% 18% 16% 10%

Source:(Ryser,2010)

ThetendencyforagreenfieldinvestmentintheU.S.doesnotsolelybelongtoVestas.

Siemens invested$50million inanacelleassemblyplant,Gamesaalsobuiltanacelleand

blade factory, while Suzlon invested in blademanufacturing plants located inMinnesota

(Ryser, 2010). Vestas’ investments includedR&D facilities, nacelle, tower and two blade

factories, which could supply 90% of components required for the assembly of a final

turbine(Vestas,2011).TheinvestmentsbySiemens,GamesaandSuzlononlycoveredpart

of theproduction,andasaconsequence, theyhave to importvariouscomponentswhich

willincreasetransportationcostsandeventuallytheentirecostoftheturbine.

WhencomparingVestas’initialentrymodewithhowToyotaenteredtheU.S.market,

one can see clear similarities. In the beginning Toyota gained a significant market share

throughexport (Hill,2009).A JVwithGeneralMotorsandeventuallyagreen field invest‐

mentwas carriedout inorder tominimize transportation costs, avoid importquotas and

hedgeforforeignexchangerisks.To improveefficiencyandqualityToyotaemployeesand

suppliers were given education and the result was double and triple‐digit growth in

productivity.TheeducationofemployeeshaslikewisebeeninitiatedatVestas.

62

The increased productivity and

high level of quality can be traced to

Toyota’s obsession for continuously

improving andmaking operations more

effective.These factorsaresomeof the

main drivers behind Toyota’s success,

and at the current moment, Vestas is

somewhere in the phase of educating

employees,whicheventuallyshouldlead

to higher productivity, quality and

effectiveness. Ditlev Engel states that

Vestas’commitmenttowardsqualitywill

be its main competitive advan‐

tage,whencomparedto itscompetitors

(Aktionærforeningen2,2010).Andseen

how Toyota has conquered the U.S.

marketthroughthisstrategy,itshould,if

implemented correct, give Vestas the

competitive edge,whichwill lead to an

increasedmarketshare.

The biggest competitors in China

are the SOE’s Sinovel, Dongfang and

Goldwind. Their standard technology is

the 1.5MW and 3.0MW turbine. Vestas

has the 4th biggest market share. The

competitionwiththesecompaniesisstill

strictly local, since total exports by

Chinese wind turbine companies only

counted 21 turbines in 2009 (GWEC,

2010). What sets China significantly

aside fromtheU.S., is theamountof turbinemanufacturers.Over60 localmanufacturers

supplytheChinesemarket,andsincethesmallerfirms’technologicallevelandexperienceis

Table19,Turbineoverview

Sources: (Vestas turbine overview, n.d.;

Sinovel turbine overview, n.d.; GE turbine

overview,n.d.;Goldwindturbineoverview,n.d.)

63

lessthanVestas’theyarenotyet indirectcompetition. ,theyshouldstillbetakenserious

since being a rather unpredictable threat as they have to act and manoeuvre their

operationsinquitecreativeandinnovativewaysinordertogainmarketshare.Accordingto

Christensen(1997)thiscouldverywellleadtosmallcompaniestointroduceproductswith

traitsthatwilldisruptthecurrentmarket.

Accumulated, these 60 turbine manufacturers capture about 75% of the Chinese

market.Onecouldfeartheconsequenceofstrategicalliancesamongthese,butaccording

toLiandAtuahene‐Gima(2001)suchalliancesactuallyhindersthetechnologicalandinno‐

vative performance of new venture companies. This might be due to scares managerial

resourcesandinexperience.However,thestudiesbyLiandAtuahene‐Gima(2001)didnot

differentiate the typeofalliances,and thusonecanonlyassessanoverall generalization.

The studies did although indicate that support from governmental institutions are quite

importantinordertoincreasetheeffectivenessofthesenewventures.Someofthegovern‐

mentalsupportandincentivesareontheborderlinetowhatisfaircompetitionaccordingto

WTOrules(Ichniowski,2010).Asaconsequence,thisgivestheChinesemanufacturessome

leverage, when compared to Vestas and other foreign companies. Especially the bigger

companies suchasSinovel,GoldwindandDongfang,hasanextraadvantageadditional to

economicsofscale.

Besides the Chinesemanufacturers,GE is an obvious threat. AlongsideGE, Siemens

shouldalsobeconsideredasathreat.Notsolelyduetotheirmarketshare,butduetothe

fact thatbothcompaniesareonFortune500andplacedonplaceno.13and40, respec‐

tivelywhich implies that their financialbackbone is rocksolid (Global500,2010).Fortune

500isamagazinethatrankscompaniesbytheirgrossrevenue.

An additional factor in gaining leverage over one’s competitors is through product

differentiation. Table 19 shows the product portfolio of the four leading manufacturing

companies; Vestas, Sinovel, GE and Goldwind. The first part of the table shows all the

products,whichthegivencompanyhasinitsportfolio,whereVisthediameteroftherotor

measured inmeters. The second part of the table allocates products by capacity (kW or

MW). It is interestingtonoticethatVestasasmarket leaderhasthebiggestproductport‐

folio,whichmakes themmore capable of delivering the specific product required by the

customer. Additionally, Vestas’ turbines can be deliveredwith aGridStreamerTM system.

Thisnewsystemtakesintoconsiderationthedifferentgridrequirementsinvaryingmarkets,

64

andtheGridStreamerTMisbuilttoensurehighergridstability.Vestas’combinationofsize,

transportation ease, and theGridStreamerTM systemawarded their V90‐ 3.0MW turbine

with a gold medal for “Most Innovative Power Technology of the Year” by Asian Power

Awardsin2010(Vestas,2010b).

WhatdistinguishesVestas’portfoliofromitscompetitorsisthewidearrayofproducts

both in termsof rotor size, buteven toahigherextend in termsof capacity. Sinovelhas

concentrateditsmodelsroundthe3MWturbines.ThesametrendcanbeseenatGEforthe

1.5MWmodel. This leavesone implication forVestas.Aspreviousmentioned,Vestas can

deliverproducts,whichmightbemoreoptimalinagivenenvironmentduetotheextensive

portfolio. A possible trade‐off could decrease this advantage. Since Sinovel, GE and

Goldwindbasicallyusesthreeturbines,inrespecttoMW,thisstreamlinesandstandardizes

operations to a bigger extend and thus might generate further economics of scale. The

statementbyDitlevEngel,whostatesoutthatVestas’strategywillnotbebasedonprice

dumpingbutquality,reinforcestheassumptionthatVestasfocusesmoreonquality,andas

result appears less price competitive (Aktionærinformation 1, 2011). The projected

operatinglifetimeofawindturbineis20years,andonecouldimagineascenariowherein

thelongrunaqualityturbinewillactuallybecheaperduetoreducedO&Mcostsandlonger

serviceperiod.

Vestas has specified the 850kW turbine for the Chinesemarket, and this turbine is

100%producedinChina.Itissuitedforthespecificenvironment,andfurthermoreeasyto

transportandasa result lessdependentongood infrastructure (Vestas turbineoverview,

n.d.). As it canbe seen from table 20, in 2008, this typeof turbinewas among themost

popular.

Aquiteinterestingobservationisthatin‘08,69percentoftheturbinesinstalledwere

smallerthan1MW.

Table20,Allocationofinstalledcapacitybyturbinetype(MW)

Sharein‘08 600kW 750kW 850kW 1300kW 1500kW 2000kW Other

Shareofcapacity(%) 12 28 29 1 18 2 10

Cumulative(%) 12 40 69 70 88 90 100

Source:(ChineseWindEnergyAssociationascitedinLiu&Kokko,2010)

65

YetVestashavebeenunwillingtostartupproductionoftheirlargerturbinesinChina.

Thisisduetothefear,eventhough,asmentioned,thepatentlawshavebeenstrengthened,

ofimitationandtechnologytransfer(HeascitedinLiu&Kokko,2010).Theremainingparts

are imported, and as a consequence it generatesmore cost due to loss of governmental

subsidiesandtransportationcosts(Liu&Kokko,2010).Currently,thestandardforturbine

capacity is increasing,andthe2‐3MWclass isbecomingmorepopular,whenseen froma

supplieraspect.InthefutureVestas,thoughtheypursuequalityoverprice,mightendina

situationwheretheyhavetomoveproductionofbiggerturbinestoChina,inordertolower

costs. The startup of a production and further investment in China is primary a question

abouttiming.Iftheystartproductiontooearly,thethreatofimitationwillbehigh,whereas

ifVestasreactstoolate,theywilllosepossibleprofit.Inotherwords;productintroduction,

in the sense of when to start producing bigger turbines in China, is quite critical for

operations.

Thecompetition inmakingoffshoreturbines isafairlynewmarketthatshowsgreat

potential.Althoughtheprospectsaregood,thecompaniesembarkingintooffshoreprojects

are still very cautious. High costs of installation, lack of grid capacity, few suppliers for

marineturbinesandinvestmentcapitalhasputupanaturalbarrier(BTM,2009).

Floatingoffshoremillsarestillonlyat theexperimental level,andhavingall therisk

factors to take into consideration, makes many turbine manufacturers concentrate on

developingonshoreprojects.Thisbeingsaid,a fewcompaniesarecompetingonoffshore

contracts (BTM, 2009). The pioneers are Siemens Wind Power and Vestas that through

many years of testing anddevelopment, has established themselves asmarket leaders in

producing offshore turbines. Far behind are RePower and GE and other new entrant

companiesthatoperatewithprototypesandexperiments(BTM,2009).Oneofthereasons

for the ranking in the offshoremarket is due to the European shallow‐water technology

(deployingmillsat20‐30meters,highest),whichU.S.andmanyothercompanieshavenot

beenabletouseintheirowndomesticwaters(DOE,2008).

It is also estimated that offshore wind capacity is around 50% more expensive

comparedtoonshorewindenergy,butthattheoutcomeoftermsofloadhourscanreach

the double. These estimates put pressure on smaller companies, to invest in offshore

technology, in order not to lose market shares in the future (Krohn et al., 2009).

It is however a longsome process that requiremany years of planning, and according to

66

GibsonandHowsam(2010)thetimeframefromcontentapplicationtillcompletioncantake

several years. The analysis is based on UK processes and administration, but the UK

structure is not necessarily the same in other countries. As a consequence of the

development,projectsinChinaandtheU.S.havethoughbeenstarted.Thus,waterturbines

havebeendeployedinbothcountries,bydomesticcompanies,butitstillstaysbehindthe

Europeandevelopment(GWEC,2010).

Toyota’s progress on theChinesemarket is once again quite similar toVestas’. The

followingcasepresentedbyBuckleyandHorn(2009)pointsoutsomeofToyota’ssuccess

factors.Withmorethan200localandforeignautomakersontheChinesemarket,itshares

someofthesametraitsasthemarketforwindpowermanufacturers.Toyotastartedwith

importing cars, followed by a JV, and finally manufacturing facilities were built through

Greenfield investments.Next stepwere tailoredproducts, specific for theChinesemarket

andproduced completelyunder theToyotabrand. The850kW turbine fromVestashas a

similar background. Once being established on the market and after having captured a

significant share, themore expensive luxurymodel was introduced. Despite a latecomer

disadvantage, Toyota succeeded in gaining a 10 per centmarket share. The successwas

mainlyduetotwofactors;productintroductionandspeed.Toyota’sinitialproductshelped

them gain market share and once R&D, manufacturing and supply chain for these were

established,moreexpensiveproductswereintroduced.Inthiswaynewentry‐modelswould

benefitfromthepreviousoperations(thehaloeffect).Thesecondfactorwasspeed,since

theChinesemarket is highly volatile and in a constant flux. The speedof operationswas

ensured with decentralization, and thus empowering local subsidiaries to manage the

necessarychangesinthemarketenvironment.Vestashasestablisheditsfoundationwithits

850kWturbine,andbiggerturbinesareimported.UnlikeToyota,productionlocationofthe

biggermodelisfurtheraway,whichwillhaveaneffectoncosts.Insteadofbeingtheleader

of the production, Vestas should wait for the market to decide what the new standard

shouldbe.Previousitwasthe750‐850kWturbines,butasinvestmentininfrastructureand

morestablegridconnectionsincreasesodoesthebenefitsforinstallingbiggerturbines.As

aconsequencethenewstandardturbinewillbeinthe2–3MWclass.Vestasshouldstart

producingthelesshigh‐techcomponentinChinafortheirbiggerturbines,whileimporting

theessentialpartswhichcouldbevulnerableforthethreatofimitation.

67

Asforspeed,VestashassubsidiesinChina,butdataconcerningtheirmanagement

andlevelofautonomyisratherdifficulttoretain.

4.2.6.ConclusionofPortersFive

Following is a summary of some of themain points discussed and analyzed in the

PortersFivemodel.ThethreatofentrantsisfairlylowintheU.S.andwilldeclineinChinaas

thedemandwillbemet.

Since most of Vestas’ components and parts are produced in‐house the power of

suppliers is reduced, although gearboxes are still a crucial part, since it is supplied by

independentmanufacturers.

The power of buyers is considerable since the customers for Vestas only numbers

around200. Inorder to accommodate this,Vestashas to applyCRMandgood service in

order to retain and keep customers for further sales and profit generation. This is not

limitedtotheU.S.andChina,buttooperationsworldwide.

Thethreatofsubstitutesistwofold.Ononesidewindturbinesshouldnotbejudged

byitsprice,butratherontheadvantagesthataccommodateswindpower.Thisplaceswind

energy in a unique position since no other renewable energy has the exact same traits.

However,whenconsideringprice,historyhasshownthatoilpriceandotherfossilfuelscan

haveagreateffectontheattractivenessofwindpower.Inrelationtothat,iftheoilprices

wouldsuddenlyplunge,Vestas’productswouldbemoreunattractive.DuetofocusonCO2

reduction,theeffectthereofwouldprobablyonlybeintheshortrun,sinceoilandfossils,

nomattertheprice,stillwillleadtoincreasedemissions.Withprospectsforincreasedfossil

prices,anddecreasedcostsforturbineproduction,theattractivenesswouldonlyincrease.

The onshore rivalry among existing competitors is fairly high, and the recent market

developmenthasequaled themarket shareof the top10 companies. In theU.S.General

Electric is dominating themarket, but investment in production plants for Vestas’ bigger

turbines,seemsasagoodcounterattackinordertochallengeGE’sstand.InChinaSinovel,

Dongfang and Goldwind are the biggest players, but recently small companies have

emergedduetotheunsupplieddemand.

Vestas’ advantage in both markets is their experience, diverse horizontal product

portfolio,qualityandtechnologicalleveloftheirproducts.WiththeoffshoremarketVestas

hasanimpressivemarket‐share,andbeingengagedwiththetechnologyandhavinglearnt

68

through trail and errors, give them an advantage compared to novices in the offshore

market.

4.3.Theeclecticparadigm

In order to fully assess and have a complete understanding of Vestas’ strategic

advantages, the Eclectic paradigm also known as the OLImodel, by Dunning (2001), has

beenapplied.Thereasoning thereof is thatsomeof thestrategicadvantagesobtainedby

VestascannotbeevaluatedbyoperationsinChinanortheU.S.,butasanoutcomeoftheir

globalendeavor.TheEclecticparadigmrepresentstheideathatthedispositionofaglobal

firm is based on three factors; ownership advantages, location advantages and

internationalizationadvantages.

Vestaswasforcedtoengageintheglobalmarketandactglobalduetotheinsufficient

home market. Since several competitors only are represented in their home market,

(referring toChinese turbinemanufacturers),Vestaswill be able to gain anadvantageby

some assets acquired through their global operations. To get a concrete overview of the

advantagesthataremoredistinctiveforVestas,somegeneralfactorshavebeenexcluded.

TheadvantageofproductioninChinagivesaccesstocheaplabourandmanufacturing,and

removes some transportation costs.When compared to firms that import theirparts and

products, Vestas has an advantage due to their vertical integration. Nevertheless, when

seenincontrasttoChinesefirms,theadvantagevanishessincebothhavethesameprere‐

quisitesconcerningcheaplabourandproduction.Correspondingistheexampleofpolitical

support.SincethisassetisnotstrictlyreservedforVestas,butingeneraltargetstheentire

industry,itdoesnotpointoutaspecificadvantageforVestas.

4.3.1.Ownershipadvantages

When operating on a global scale, the ownership of certain acquired assets, which

oftenareintangible,iscrucialforovercomingthecostsoccurringwhenconductingbusiness

abroad.The“costofforeignness”isgeneratedthroughfactorssuchasattainingknowledge

concerningthenewmarkets,communicatingandoperatingatadistance,andovercoming

legal,institutional,culturalandlanguagecontrast.InemergingeconomiessuchasChina,an

understandingoftheinstitutionalframeworkisimportantinordertounderstandtheimpact

69

of strategies applied, but also how the institution affects the company itself (Hoskisson,

Eden,Lau&Wright,2000).SinceVestashassubsidiariesintheU.S.andChina,thepsychical

distance to themarket is decreased, but the other factors are still present. Some of the

main intangible assets that Vestas have acquired are technology and managerial skills.

Vestas’ intense investments have, although it required a sacrifice of the EBIT margin,

resultedinR&Dfacilitiesinsevendifferentcountriesworldwide.

TheglobalR&Dnetwork,whichhasbeenestablished,hassomeprosandcons.Since

beingdecentralized,itenablestheseparatefacilitiestofocusmoreontherequirementsand

environment in their particularmarket, and therefore develop products designated for a

particularenvironment,purposeand function.Anexample thereof is theGridstreamerTM

systemandthe850kWturbines.ThedispersionofnumerousR&Dfacilitiesenablesanother

benefit;knowledge‐transfer.Experiencesanddevelopmentsinonemarketcanbeappliedin

other markets. An example is the possible drawback of the duplication in a given R&D

process,whichwillneitherincreaseproductivitynorgenerateprofit.

Besides R&D, Vestas has, by being one of the pioneers within the industry, gained

experience and understanding through trial and error. When comparing total installed

turbines,Vestashascurrentlyinstalledover35.500turbines,whichisapproximately20.000

morethanGeneralElectric(GEturbineoverview,n.d.).BothR&Dandhands‐onexperience

havecontributedtothecurrentleveloftechnologyandgiventheirproductsanadvantage

edge.

Whereas Vestas’ technological expertise ensures that their products are competitive, the

managers and mindset at Vestas ensures growth in the global market. Unlike Chinese

competitors (Sinovel, Goldwind&Dongfang), Vestas’ small and limited homemarket has

workedasacatalystforengagingearlyintheglobalmarket.Thisevolutionhasfacilitateda

moreglobalmindsetandadiversemanagementwith49%oftoppositionoccupiedbynon‐

Danes.Thediversityandearlyexperiencesbyoperatingontheglobalscenedoesenrichthe

management,andshouldbeseenasanadvantage.

70

4.3.2.Locationadvantages

Thelocationadvantagesisthekeydeterminingfactor,whenacompanychoosea

markettoexpandin.

Thewindstrengthisnotachangeablefactor,whichmeansthattheresourcesinthebest

suitedareaareunlimited,andtherebyequalforall.Althoughthelocationsofwindresour‐

cesaredeterminedbytheglobalclimate,therearestillseveralfactorstotakeintoconside‐

rationwhenexpandingtootherareas.

Asmentionedearlier,Vestaswasatanearlypointforcedtolookattheglobal

possibilities,duetothelimitedexpansionpossibilitiesontheDanishmarket.Expandingto

themostprofitableandpotentialmarketsforwindenergy,inthelightofdemandandwind

resources,Vestashasformanyyearsdevelopedtheirlocationstrategy,andtherebyalso

increasedtheirlocationadvantagesastheymovedintonewmarkets.Asthecompetition

grewandmorecompetitorsenteredthemarket,Vestas’locationadvantagesdiminished.

Beneficialfactorssuchascheaplabourandpoliticalsupportarenowbeingexploitedby

numerouscompaniesbesidesVestas.

ThelocationadvantageofVestasisironicallynotduetoasinglelocation,butbybeing

globallyestablished.Thisfacthasreducedtheriskmanagementofoperations,sincetheyno

longerhavetorelyonasinglemarket,butcancollaborateacrossseveralmarkets.Being

abletosupplyChinafromChina,andtheU.S.fromtheU.S.hasnotonlyreducedtrans‐

portationcostssignificantly,buthasalsobeenaconsequenceofthepoliticalenforcements

ofturbineproduction.InChina,70%oftheturbinemustbeproduceddomestically,whereas

thenumberis50%intheU.S.

The decentralization has also brought other positive economical adjustments. The

exchangerateriskexposurehasbecomeamorecontrollablefactor,sinceforeigncurrency

volatilityisreducedwhenthepartsareproducedinthesamecountryastheyaremeantto

be set up. This kind of currency hedging is defined as operational hedging, and it has

become a popular choice, to accommodate eventual exchange rate risks and political

instability.

IncreasingtheforeignactivitiesandFDIhascontributedtothefactthatVestas

currentlyhasinstalledover40,000turbines,andthataturbineisinstalledevery4thhour

aroundtheclock(Vestas,2010c)

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4.3.3.Internationalizationadvantages

TheadvantagesthatVestashasacquiredthroughtheinternationalmarket,haveonly

beenobtainedsince theyhaveutilized theirownedsubsidiaries in theirentryandgrowth

strategy, instead of licensing and exporting products. The advantages by own production

ratherthanproducingthroughapartnershiparrangement, is lessnegotiationwithoutside

partners, tighter control over operations, higher protection of know‐how and more

knowledge sharing between the different facilities. Although risks associated with

establishingtheirownsubsidiaryarepresent,thelongtermgoalis,thatitismoreprofitable

tousetheadvantages,ratherthansellingthem.

4.4.SWOT

TheaimfortheSWOTanalysisistosum‐upthefindingsfromthePestel,PortersfiveandOLIanalysis.

4.4.1.Strength

Having been the pioneer in the wind turbine manufacturing, Vestas has through

severaldecadesdevelopedastrongpositiononthemarket,notonlybybecomingtheworld

leader in turbinemanufacturing, but also by proving their rights by building strong, well

functioning wind turbines, strengthening their brand and being at the cutting edge in

technology.

Inlateryearsoffshoretechnologyhasbeeninfocus,duetothemassivepotential,and

by thenewestaddition, toanalready impressiveportfolio,Vestashasset thebarhighby

introducinganew7.0MWoffshoreturbine(Vestasturbineoverview,n.a.).

ThelargeststrengthforVestashasbeenmanyyearsinthebusiness,developingknow‐

howandbecomingaglobalcompanywithproductionfacilitiesallovertheworld.

Having decentralized manufacturing, and thereby cut costs in transportation,

integratedverticallywithseveralsuppliers,andreliedonastrongmanagementwithDitlev

Engel as the leading character, are all factors that have contributed to today’s promising

futureprospects.

72

Someof theadvantages that accompaniesdecentralizationarebetter flexibility and

fasteradaptiontothespecificenvironment,betterdecisionmakingprocessesduetomore

detailedinformationaboutthemarketdevelopments,andmostimportantabettercontrol

ofcompanyresources(Hill,2009).ThesefactorscanalsobeassessedwithregardtoVestas

from the fact that they have managed to expand to several markets globally with the

concept;Intheregion,fortheregion(Aktionærinformation1,2011).Withastatementlike

thatfromVestas,itleadsthethoughtstotheterm,glocal,whichfitstheirstrategyofbeing

a Danish company, with subsidiaries around the world that acts according to the local

marketenvironment.

TheexperiencethatVestashasgainedthroughseveralyears,canbeseeninthelight

ofhavinganaccumulatedmarketshareof45%ontheoffshoremarket,andeventhoughit

isastrengthandanimpressivenumber,aminorcriticalmindwouldputthenumbersinto

context,sincethe45%onlymakesup3%ofVestastotalinstalledMW,whichconcludesthat

evenmore energy could be invested in the huge potential there are in offshore projects

(Vestasannualreport,2010).

4.4.1.1AssessmentofVestas’strengthsfromaresource­based­view

According toBarneyandClark (2007), theSWOTmodeldoeshave its shortcomings,

sinceitfailstosetupamechanismorlineofcriteriainordertoidentifythestrengthsofa

company.Theessenceoftheresource‐based‐view(RBV)istodoexactlythat.Theresource

is being defined as an asset (tangible or intangible) such as management, knowledge,

information, organizational processes, R&Dprocesses and so on;whichwill contribute to

and improvetheoperationswithinthecompany(Barney&Clark,2007).Thecriteria fora

keyresourcearethattheyhavetobeVRIN;

• Valuable‐inthesenseofeitheroutperformingcompetitorsorreducingweaknesses.

• Rare

• In‐imitable‐theresourceshouldbedifficulttoduplicate

• Non‐substitutable

Unlike the Five Forces by Porter, the RBV is based on assumptions that resources

beingcontrolledbycompaniesarenothomogeneous,andfurthermorenotperfectlymobile

73

acrossdifferentfirms,thusheterogeneityofresourcescanbelonglasting.Vestas’strengths

are, as previously mentioned their brand, experience and skills, both technological and

managerial,gainedfromexperience.Furthermore,importantstrengthsarealargedegreeof

decentralization,riskmanagementwithregardto lessdependencyonasinglemarketand

moreflexibilityandknow‐howwhichiscreatedthroughR&D.

When judged by the VRIN standards, the advantages of decentralization, risk

managementandR&Ddoesnot liveuptothecriteriaconcerningbeing in‐imitableandto

some extend neither rare nor non‐substitutable. Although if the R&D is defined as the

processbeingundertakenwhenconductingresearch,thiscouldalsoberare,in‐imitableand

non‐substitutable.

InordertofullyevaluatethisR&Dprocess,empiricaldataandmorein‐depthanalysis

isrequired.AnexampleofauniqueR&Dprocess,andonthataccountalsoaresourcewhich

leadstoasustainablecompetitiveadvantageistheoneknownasGoogle.Theprocessitself

oftenfulfillsalltheVRINcriteria,whichisthecasewhenassessingtheknow‐howandskills

generated through experience. Both technological skills and managerial skills are very

difficulttoimitate,valuableforthecompany,non‐substitutableandrare.Thesameapplies

totheVestasbrand.

In 1991, Priem and Butler’s critique of the RBV raised several important issues

concerning the criterion for assessing a resource and the development of value (Barney,

2001).ThefirstissueisthattheRBVistautologicale.g.avaluableresourceisaccordingto

the VRIN criteria’s valuable, which is self‐verifying. Besides the tautological critique, the

model fails to acknowledge the possibility of equifinality (Barney, 2001). The problem of

equifinality is based on the fact that several different resources can generate the same

advantages,andasaconsequence,couldnotbeasourceofcompetitiveadvantage.Despite

the critique raised by Priem and Butler, the resource‐based‐view accommodated by the

findings of the OLI and Porters Five, substantiates the strengths and advantageous

resources.

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4.4.2.Weaknesses

Through our analysis of Vestas and themarket forwind turbinemanufacturers,we

havemetmanyfactorsthathavehadaremarkable,eitherpositiveornegative,effectonthe

companies.Vestashasthoughmanagedtokeepasteadycourse,butinbetweenthelines,

someargumentsappearasweakspotsfortheleadingturbinemanufacturer.

To Vestas, a company that solely operates on turbinemanufacturing, a variation in

orderintakeshasclearconsequences.Notonlydoesitaffectthepotentialearnings(EBIT),

buttheshareholdershavewatchedtheirsharesplummet,asintheperiod2009‐2010where

theorderintakedroppedfrom6.131MWto4.057MW,adropof34%(Aktionærinformation

1,2011).

Anotherexamplewasin2008wherethesharepricedroppedfrom692to191,inonly

twomonths; resulting in an unbelievable drop inmarket value ofmore than €10 billion!

AlthoughVestasquicklyrecovered,thetrustandcredibilitytookaserioushit,whichcould

onlyberestoredthroughprogressandhardwork(Aktionærforeningen1,2011).

Theweaknessisonlyclear,seeninacomparisonwithcompanieslikeGEandSiemens

WindPower,whichbothare companies thathaveadiversifiedportfolioandoperateson

differentmarketswith different products. Although the drought can hit all companies, it

doesnothavethesameeffect,ifthereareotherdepartmentsofacompanythatgoeswell.

BothGEandSiemensareconglomeratecompanies,operatinginmulti‐industries,andlisted

asrespectively#13and#40ontheFortune500.

Another common weakness in the wind turbine industry is the heavy reliance on

political support in promoting renewable energy. Asmentioned earlier in the report, the

politicalincentivesforencouraginggreenenergyinformoffinancialsubsidies,iscriticalfor

themanufacturersinordertoensureprofits.

Thesamegoesfortheincentivesinimplementinggridconnectiontotheprojects.The

two markets of interest (U.S. and China) have both invested heavily in improving and

developing grid systems to ensure the supply of energy. Having wind parks with non‐

sufficient grid lines is waste of energy, and it has therefore become a complementary

processinwindturbineprojects.

75

4.4.3.Opportunities

Thereareseveralopportunities,whichmighthelptoensureVestas’ futurerevenues

and advantages. Recently, the offshore turbines have become more attractive. One

disadvantage is the increasedcost relatedto theconstructionof the foundation,andthat

offshoreturbines,whenbottom‐mounted,requiresshallowwaters(Borgen,2010).Inorder

toovercomethesedisadvantages,floatingwindturbinesarecurrentlybeingconsideredasa

solution.Besidesavoidingfoundationcosts,afloatingmillwouldovercometherequirement

ofshallowwaters,andasaconsequencecouldbe installedplaces,whichpreviouslywere

economicallyunjust(Borgen,2010).Countries,whichareinshortageofshallowwaterssuch

as USA and Japan, will suddenly be able to generate offshore wind power. This could

suddenlybecomeahugepotentialforVestas,with45%oftheoffshoremarket,andmany

yearsofexperience,theycouldbethefirsttooperateontheseplaces,comparedwithother

offshore manufacturers. The entire construction process it though time consuming, but

influencing the political decision process through lobbying, could help accelerating the

process.

Another opportunity is the option of vertical forward integration i.e. generation of

revenuefromtheelectricitythatthewindturbinesproduce.Onecouldimagineacontract

where Vestas would sell its turbines at reduced price, and in exchange Vestas would be

granted a certain percentage of revenue that the sales of electricity would generate. A

benefitthereofwouldbelong‐term,stableandpredictableprofitsources.

In 2009 Vestas announced that they would collaborate with Boeing’s R&D

departments formutualbenefits (Vestas,2009).AlthoughVestascurrentlyhas the largest

R&Dunit in thewindturbine industry,collaborationwithBoeingcould leadto interesting

joint research projects and investments (Vestas, 2009). Vestas, compared with General

ElectricandSiemens, isstrictlyawindturbinemanufacturerandasaconsequencecannot

transferknowledgegeneratedinotherbusinessareas,whichimpliesthatcollaborationwith

Boeingmustbeseenasagreatopportunity.

AnotheropportunityforVestaswouldbetoincreaseverticalintegration,bothfor‐and

backwards.Forwardintegrationwouldbeconstructionofpowergridandtransmission,and

invest or partner up with utility companies, andmanaging the sales of electricity.While

backwards integration would secure critical components, through a closer collaboration

76

with suppliers. E.g. the U.S. market does currently have over 400 companies with wind

turbinemanufacturing.

4.4.4.Threats

Some of the primary external threats which Vestas is currently exposed to involve

bottlenecks,imitationsoftechnologyinChina,disruptivetechnologiesandthedevelopment

in other renewable energy industries. As long as various parts of Vestas’ components for

theirturbinesareoutsourced,theywillfacetherisksofaholdupinproduction.Anoption

couldbebackwardvertical integrationorproducingthecomponents in‐house, inorderto

accommodatepossiblebottlenecks.

The threat regarding imitation of technology in China will probably decrease in

correlationwithastrengtheningofpatentlaws.AlthoughthiscouldprotectVestastosome

degree,atighteningoftheselawswillnotshieldthecompanyfromthethreatwhichcould

arise from disruptive technologies. The term was introduced by Christensen (1997), and

describesaninnovationwhichdisruptsthemarket.Theinnovationconsistedinkeepingthe

initialfunction,butreorganizingitintoadifferentpackage/form.Theattributesofthenew

productwere only valued by a small emerging customer segment, and therefore of little

importance, compared with the regular customers. The disruption occurs when the

attributesoftheinnovativeproductarevaluedhigherandpreferredbythemainstream.In

otherwords,inadisruptivetechnologyitisnotthemainfunctionoftheproductthatdiffers

fromtheprevious,butmoretheusabilityandimplementationofthesame.

In order to clarify this, Christensen (1997) used the hard disk drive industry as an

example. The main attribute of the first hard disk was storage capacity (Mb). As a

consequence the $/Mb became the measure of how good the product was. As mini

computerswasintroducedonthemarket in1981,asmaller8inchdiskdrivewithahigher

$/Mbfollowed.Since thisnewproductdidnothavea low$/Mbratio, themanufacturers

andmainstreamsawthe8inchdiskasunimportant. Astheminicomputergainedmarket

share,sodidthe8inchharddisk,andeventuallyitbecamethenewstandard.Thesuccessof

the8inchdiskdrivewasitssize,whichallowedittobeinstalledintheminicomputer.

ThereasonthatChristensenchosethis industrywasthe instabilityof itsnature,and

howitevolvedthrougharepeatingpatternofdisruptiveinnovations.The8inchdrivewas

superiortothe5.25inch.Howeverthepriceofthe8inchwasnotsuitablefornewdesktop

77

computers. Though the $/Mb ratio for 5.25 inch was much higher, it had less capacity

resulting in lower unit compared to the 8 inch, and as a consequence was installed in

desktopcomputers.

In order to hedge this threat, wind turbinemanufacturers should observe for new

smallinnovationswithintheirmarket.Ifanupcominginnovationisdiscovered,Vestasmight

have to either invest directly in small firms or create spin‐offs thatmight embrace these

innovations,andasaconsequenceovercomethisthreat.Iftheinnovationisdisruptive,the

company could integrate this in their portfolio, and as a result remain competitive. This

proposalwillalsohelpVestastostandstrongeragainstthesmallcompanies,bothsuppliers

andmanufacturersthatmergeduetotheunsupplieddemand.

A final threat forVestas’operation ismarket limitation/saturation.Althoughcurrent

demandishuge,therewillbeanaturallimitforhowmuchwindgeneratedenergyacountry

canrelyon.Thenatural limitissetbythethoughtofhavingadiversifiedenergyportfolio,

andasaresultthemarketwilleventuallybesaturated,andreplacementofoldturbineswill

becomethemainincomesource.

5.Recommendations

Thefollowingisapresentationofourmainfindings,thestrategiesforcopingwiththeseand

furtherbenefitsfromthestrategiesrecommended.

Findings

• LimitedpatentlawsretainsVestas’productionofadvancedturbinesinChina.

Theproposedactioncouldbe:

• TimingforproductintroductionandproductioninChina.

WhendealingwithChina’spatentlawsandinrelationtothat,theriskofimitation,timingof

productintroductionandlocalproduction,isanaction,whichwoulddecreasetheriskand

threat.Fromouranalysis,oneofVestasmainstrengthsistheirtechnologicalknow‐how,

andshouldbepreservedasmuchaspossible.

78

Findings

• Lackoffinancialstrength.

• OffshorecompetitionwithSiemens.

Theproposedactioncouldbe:

• Exploittechnologicaladvantages.

• Influencepoliticaldecisionprocessthroughlobbying.

Vestasshouldcontinuetodeveloptheirtechnologicalskills,know‐howanddiverseproduct

portfolio. Through R&Dmore products such as the latest 7MW offshore turbine, can be

introduced to the market. R&D will also be essential in developing offshore turbines to

“deep”waterturbines,whichisbestsuitablefortheU.S.environment.Theimplementation

thereofwouldchallengeGeneralElectric’sdominancewithintheU.S.market,andSiemens’

positionintheoffshoremarket.Theinadequatelegalframeworkforoffshoreturbineshas

to be strengthen.Anoption for this is to engage in lobbying andpush for a quick imple‐

mentationofthelegislationrequired.IfnecessaryorganizewithothercompaniesandU.S.

stateswhichhaveinterestinoffshoreproducedwindenergy.

Findings

• Vestasproducesmanycomponentsin‐house,butdoesstillencounterabottleneck

problemforsomeparts.

• Inbothmarkets,smallcompanieshaveemergedduetotheunsupplieddemand.The

smallcompaniesconsistofsuppliersandmanufacturers.

• Smallcompaniesmightcomeoutwith"disruptiveinnovations".

• BoththeU.S.andChinawantstohavedomesticproductionandpoliticalincentives

encouragethis.

• Themaindemandtendstocomefrombiggerprojects.

• Chinaislookingforquickandreactivecompanies.

• Bigproductionplantsarerequired.

• Theexpansionandconstructionofpowergridandtransmissioncausesbottlenecks.

• Revenueiscurrentlygeneratedthrougharathersmallcustomerbase.

79

Theproposedactioncouldbe:

• Moreverticalintegration,tobecomemoreindependentfromsuppliers.

• Tosetupaninfrastructureforbigproductionplants.

• Toimproveflexibility,individualserviceandthepotentialofinnovation.

Thesolutiontothat,andtheability tomeetdemandandexpandthebusinessarea,

mightbeacloserco‐operationwithsmall,innovativeandflexiblecompaniesatalllevelsof

production,supplyandinstallation.Givingthemthepossibilitytoparticipateinbigprojects

and in consequence eliminate them as competitors, gaining individual service flexibility,

secure innovation and the supply of crucial parts. The subsidiaries should be givenmore

autonomy depending on their size and credibility. For China it would lead to a faster

decisionprocessandlocalproduction.IntheU.S.,theindividualserviceforthecustomeris

very important, due to the liberal market perception. The aim for the subsidiary is to

enhancebettercustomerservice.

Gaining control over installation would give the opportunity to integrate grid

connections and transmission as a part of the package deal when assigning a project to

Vestas. The result would be a reduction of bottlenecks created by the lack of power

infrastructure. Partnerships with both suppliers and grid companies would remove the

threat of dependency on a single industry, future market saturation of wind turbines,

substitution of other energy sources and to some extend the consequence of volatile oil

prices.FurthermoreifVestasengagedcooperationwithautilitycompanyandstartedselling

theelectricitythemself,therelianceonasingleindustryandfewcustomerswillbefurther

reduced.

80

6.Conclusion

The main focus of this paper was to evaluate Vestas’ expansion possibilities. The

strategyneededshouldaccomplishvariousgoalsandgiveanswertotheproblemsdefined;

how Vestas maintain their position in the market? How to ensure future growth and

revenue?Andhowtoarchiveinternalgoals?

Throughout our paper we have evaluated the different market environments,

surroundings, competitors and Vestas themselves alongside with their operations. Our

analysis of the environment showed that political support is currently necessary for the

windindustry,butalsobenefitsthegovernment intermsof jobcreation,productivityand

economicgrowth. In relation to themarket, thecompetitionhasbecomemoreandmore

fierce and Vestas’ position has been threatened. Vestas’main advantagewas defined as

beingtheirtechnologicalskillsandexperience.

Theactionrecommendedwasfurtherverticalintegration,bothinrelationtosuppliers

ofcomponentsandforwardintegrationinrelationtogridandtransmission. Investment in

biggerplants,improvesflexibilityandCRM,exploittheirtechnologicalstrengthsandsecure

innovativebusinesspartners.Thestrategywouldoverallbeadifferentiationstrategybased

oncooperationandintegrationwithsmallerlocalcompanies,inwhichVestaswillbeableto

deliveranentirepackagesolutionincludingthepowerinfrastructureandmorereliableCRM

system.

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