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Geoffrey Jordan

Avinash Gandhi

Suzlon Energy Limited (BSE: Suzlon) is a wind energy company based in India that manufactures wind turbine power generators and services wind park systems. Suzlon's aggressive expansion strategy focuses on low-cost production and regional price discrimination. As the world’s fifth largest wind-turbine manufacturer with a market share of 7% globally and 58% in India,^[1] Suzlon has expanded rapidly by acquiring both REpower and Hansen Transmissions International.^[2]

In 2008, Suzlon customers in both the United States and India reported that Suzlon's wind turbines cracked in high winds and failed to deliver the power outputs stated in sales contracts. Other quality control issues led some customers to cancel orders from Suzlon and to purchase wind turbines from other suppliers. The company repaired 1,251 turbine blades for a total of $100 million  in warranty costs in 2009.^[3] Not only are faulty turbine blades expensive to repair, but they also damage the company's image.

The global market for wind turbine installations in 2008 was worth about $47.5 billion, an increase of approximately 42 percent over 2007.^[4] Despite the rapid growth in the wind energy sector in 2008, the turbulent economic environment and global credit crunch have led some of the fast growing markets like the U.S. and Europe to slow in terms of new capacity additions. The credit crunch has also reduced the number of wind projects that are able to close financing, leading to installation postponements throughout the world.^[5] Denmark-based MAKE Consulting estimated that orders announced by wind turbine manufacturers plummeted 56% in the first half of 2009.^[6]

Wind power is a fully renewable source, and it produces little, if any, pollution, making it one of the cleanest sources of power. Though advances in technology are making wind energy more economically feasible, oil prices have made renewable energy sources less financially attractive. However, since fossil fuels are a non-renewable source of energy, alternative energy sources (wind, geothermal, solar) have the potential to become significant sources of energy, and Suzlon is poised to benefit as the fifth largest wind turbine manufacturer in the world. Energy companies like Suzlon are also dependent on government subsidies to bring in revenue, given that oil, coal, and nuclear energy are cheaper, well-established energy sources. Government support of renewables is taking place at the local, national, and global levels, with renewable energy legislation being considered in the United States Congress and being enforced via the Kyoto Protocol.

Company Overview

Suzlon, based in India, specializes in the low-cost manufacture of wind energy solutions that convert the kinetic energy in wind to electricity. Its customers include governments and corporations such as utility companies. The company produces turbines and generators at its production facilities in India, China, Belgium, and the United States and offers comprehensive wind power packages, including servicing for all its products.^[7]

Business and Financial Metrics

July-November 2009 Performance

Suzlon's stock declined the most in more than six month due to a sharp decline in turbine orders.^[6] Analysts estimated Suzlon's loss for the period at 878.7 million rupees. Suzlon's sales fell 31 percent to 47.9 billion rupees in the same period.^[6] Suzlon also announced that it may sell part of its stake in Hansen Transmissions International NV to reduce its debt in order to complete the acquistion of REpower Systems AG.

The global economic slowdown caused wind power equipment manufacturers like Suzlon to see fewer orders in the second half of 2009 than in previous years. Denmark-based MAKE Consulting estimated that orders announced by wind turbine manufacturers plummeted 56% in the first half of 2009.^[6]

In addition to weaker demand for wind turbines, Suzlon lost sales last year after some blades cracked and customers in the U.S. canceled orders. Repairs were completed in September at a cost of $100 million.^[6]

April-June 2009 Quarter Performance

Suzlon reported a net loss of 4.53 billion rupees ($94.7 million) in the April-June quarter, swinging from a net profit of 93 million rupees in the same period last year due to lower sales and postponed wind turbine orders.^[6] As of July 30, Suzlon's orderbook was 83.16 billion rupees for 1,501 megawatts, and the company expects to end the year with an orderbook of 2,400 to 2,600 megawatts.^[6] Of the total, 600 megawatts are from the U.S., 600 from China, 130 from Australia, and 120 from Europe.^[6]

Suzlon explained that demand for wind turbines in India, which accounts to 30-35% of the company's business, was low because India's budget was released in July and customers postponed purchasing decisions.^[6] Additionally, limited credit available for project financing in the U.S. and Europe made some customers postpone orders.

Suzlon also reported that product prices may fall 10% during the second half of the fiscal year, which runs from April 1 to March 31, but falling commodities prices will offset any effect on sales margins.^[6]

Suzlon Net Income and EBITDA from 2005 to 2008 in Rs crore^[9]

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Turbines

Suzlon produces two major lines of turbines: the Megawatt series and the Multi-Megawatt series, which can generate energy in capacities from 350 kilowatts to 2.1 megawatts.^[10] Watts are a measure of power, and the main differences between the two series is the power-generating capacity.^[11] Suzlon's wind parks are multi-turbine parks that allow the company to increase profit margins through economies of scale. In addition, once turbines are produced and installed, Suzlon maintains a low level of revenue by servicing wind turbines.

The most recent innovations in Suzlon’s product line are the S52 - 600 kW and S82 - 1.50 MW wind turbines.^[10]

• The S52-600 kW turbine is designed for the low-to-medium wind energy needs across India.^[10] The size and capacity of the turbine open up the wind energy market to smaller investors, businesses and industries at an affordable price.
• Suzlon's Megawatt-series S82 - 1.5 MW wind turbine incorporates several innovations, including Micro Pitch technology in which blades can achieve 0.1 degree of pitching resolution in a response time of just 30 milliseconds, a Flexislip system that offers maximum slip as high as 16%, a high performance gearbox, and an advanced yaw system.^[10]

Globalizing Strategy and Vertical Integration

Suzlon is focusing on globalizing through a number of methods. First, it benefits from India's depreciating currency, the rupee, as its products are seen as cheaper by the rest of the world. Second, Suzlon offers varying packages in different places depending on price levels; in China, where prices are low, Suzlon offers full power plants, but in the U.S., Suzlon installs cheaper turbine generators. This price discrimination allows Suzlon to cut costs while maximizing its profit margin. Finally, Suzlon is increasing its global reach with its R&D branch in Europe, production in India and China, and a sales focus in the top global wind markets. In 2005, 90% of Suzlon’s sales were in India; by 2008, international sales accounted for 60% of the total.^[3] Suzlon’s presentations to investors predict exports will jump to 75% of total sales in 2009, with the U.S., China and Europe accounting for an equal share.^[3]

Suzlon continues to expand its operations to new countries as well as strengthen its position in existing markets. For example, in January 2010, Suzlon received its first order in Sweden from Triventus AB, a Swedish wind power developer. The company ordered two 2.1 MW wind turbines.^[12]

Suzlon's Sales by Geography^[7]

Acquisitions and Divestitures

Before the financial downturn in 2008, Suzlon aggressively pursued an acquisition strategy to absorb smaller competitors and to vertically integrate along its supply chain. For example, in June 2007 Suzlon acquired the German wind turbine manufacturer REpower for $1.7 billion (USD) in order to reduce competition and to acquire new product lines. REpower controls 10% of German market share and gives Suzlon a strong foothold in the Western European market.^[13]

However, a weakened U.S. wind turbine market has made Suzlon managers reconsider its expansion strategy. Suzlon sold a 35% stake in a subsidiary, Hansen Transmissions, for $370 million, as part of its efforts to reduce debt.^[14] After selling Hansen, Suzlon's stake in the gearbox maker declined to 26% from 61%.^[14] This is the second divestment of Suzlon's stake in Hansen in 2009, with the firm selling 10% in January to the London-based investment firm Ecofin.^[14] Suzlon bought the Belgium-based Hansen in 2006 for $565 million.^[14]

Suzlon remains saddled with debt from its rapid expansion strategy. Suzlon took on major debt in 2007 to acquire REpower for $1.7 billion and to build new factories in the U.S., China, and India.^[15] Credit Rating Information Services of India estimated that the $2.2 billion of net debt Suzlon reported for the end of 2008 was 1.5 times its equity at that time.^[15]

In December 2009, however, Suzlon repaid its loan facility of $780 million from its acquistion of Hansen Transmissions International NV and announced a new five-year loan of $465 million from the State Bank of India.^[16] Now, Suzlon's consolidated net debt is lower by $350 million, and its total debt has been reduced by 15%.^[16] Its debt-to-equity ratio is still high at 1.1.^[16] As Suzlon continues to reduce its debt, its interest payments will also decline.

Trends and Forces

Suzlon is heavily affected by changing energy paradigms. The price of fossil fuels, increasing environmental awareness, and the possibility of significant global climate change all are contributing to changes in the social, political and economic views of how energy should be produced.

Problems with Suzlon's Turbines Threaten Long-Term Viability

Suzlon's turbines have gained a reputation for being faulty. In early 2008, U.S. customers complained of cracking turbine blades; in August 2008, the company came under fire from Indian customers for supplying turbines having control issues, shaking in the wind, and producing less energy than guaranteed by sales contracts, causing utility companies to incur large costs.^[17] In April 2009, Suzlon signed a contract to supply blades for 75 turbines in a project being managed by REpower in China's Shandong province. REpower rejected the turbine prototype provided by Suzlon and ordered the equipment from another supplier.^[18] And though Suzlon promises its customers that turbines will be available to produce power at least 95% of the time the wind is blowing with limited downtime for maintenance, often its products have had significantly lower availability rates.^[3]

Faulty turbine blades and quality control issues lead to lost revenue, and contracts that Suzlon loses due to faulty equipment are awarded to its competitors. Additionally, Suzlon incurs significant costs in repairing faulty turbine blades. As of September 2009, Suzlon has only two wind turbines in the United States left to retrofit with new blades after replacing the blades on all of its nearly 400 turbines in the country.^[19] The company undertook the retrofit program after cracking caused one blade to break off a turbine in Illinois in 2008.^[19] Suzlon reported in 2008 that it has spent $30 million (Rs129 crore) to fix faulty wind turbines.^[3] Not only are faulty turbine blades expensive to repair, but they also damage Suzlon's company image.

Consumer Demand for Renewable Energy and Clean Energy

Electrical Generation by Source for 2008^[20] Excluding hydropower, less than 3 percent of the U.S. power generation comes from renewables such as wind and solar

The global market for wind turbine installations in 2008 was worth about $47.5 billion, an increase of approximately 42 percent over 2007.^[4] Growth in global wind capacity in 2008 exceeded the average growth rate for the past 10 years. Global wind capacity increased 27,051 megawatts in 2008, ending the year at 120,798 megawatts.^[4] This represented a growth of 29% in 2008 with the U.S. overtaking Germany as the world's leading wind power generator.^[4]

U.S. wind capacity increased by 50 percent in 2008 to 25,170 megawatts.^[4] As of 2008, Suzlon had 1,910 MW of wind capacity installed in the U.S., accounting for 55% of its global installations.^[7] For the first time, wind power represented Europe's leading source of new electric capacity with 8,877 megawatts added, compared to 6,939 megawatts of natural gas capacity added and 763 megawatts of coal capacity added.^[4] By the end of 2008, wind power accounted for 8 percent of the European Union's power capacity, enough to generate 4.2 percent of the region's annual power needs.^[4] At the end of 2008, the European Union accounted for 267 MW of Suzlon's total installed capacity, or 8%.^[7] Asia accounted for almost one-third of global wind capacity additions in 2008.^[4] China ranked second after the United States, with approximately 6,300 megawatts installed during the year.^[4] This doubled its cumulative wind capacity for the fourth year in a row.^[4] Suzlon had 586 MW (17% of total global capacity) installed in China and 160 MW (5%) in India. Suzlon has benefited from the increase in demand for wind energy in 2008, especially given its strong presence throughout the world. Suzlon has recently become more globally diversified; in 2005, 90% of Suzlon’s sales were in India; by 2008, international sales accounted for 60% of the total.^[3] Suzlon’s presentations to investors predict exports will jump to 75% of total sales in 2009, with the U.S., China and Europe accounting for an equal share.^[3]

The 2008 Financial Crisis has slowed growth in the wind energy sector in 2009

Despite the rapid growth in the wind energy sector in 2008, the turbulent economic environment and global credit crunch have led some of the fast growing markets like the U.S. and Europe to slow in terms of new capacity additions. For example, Emerging Energy Research estimates that new wind plant activations in Europe in 2009 could drop by as much as 18% compared to 2008.^[5] Europe is expected to add 7,836 megawatts of wind power capacity in 2009, down from 9,556 in megawatt additions in 2008.^[5] The credit crunch has also reduced the number of wind projects that are able to close financing, leading to installation postponements in the United Kingdom, Italy, and France.^[5]

According to the Danish consulting firm MAKE, wind turbine manufacturers reported a 50% drop in orders in the first half of 2009.^[21] In response to falling demand, Suzlon cut 90 of the 300 workers it had employed at its Minnesota plant in 2009, which has the capacity to build 300 turbines per year.^[19] However, analysts expect demand to increase in the fourth quarter. Suzlon expects to sell equipment capable of generating 2,600 MW of electricity in the year ending March 31, 2010, down from 2,790 MW installed a year earlier.^[21] The projected drop in Suzlon’s sales volume will be its first in at least six years; the company’s sales volume has increased every year since the period ended March 2004.^[21]

Pollution Control

Oil and coal combustion release carbon dioxide and monoxide, as well as nitrogen oxides, sulfur oxides, ozone, and other pollutants that contribute to acid rain, smog pollution, as well as asthma and respiratory problems in the general populace. Increasing awareness of these issues has led to movements to push for government regulation of pollution, and higher energy prices have driven development of clean coal technologies. However, coal and oil can only be burned cleanly up to a certain point and, as a result, there is growing support for government investment in clean energy sources such as wind power. Suzlon is poised to benefit from this trend as it is already an established producer of wind power technology.

Falling Oil and Gas Prices Limit Demand for Renewable Energy

Fossil fuels and coal are not renewable because there is a limited quantity of both resources on the earth, and the replenishment of these resources takes hundreds of thousands of years. As oil becomes more rare, prices increase and new energy sources become increasingly feasible from a financial perspective.

Oil and gas prices have fluctuated heavily over the past few years, but the most recent trend has been a significant decline in prices. The price of crude oil fell from a record high of nearly $150 a barrel in July 2008 to around $50 a barrel in the first quarter of 2009.^[22] As falling oil and gas prices lead to more affordable commercial electricity, consumers limit their demand for new, often expensive sources of renewable power.

Suzlon would benefit from decreases in the production cost of wind turbines as technology improves and production processes become more efficient.

Objections to Wind Power

The main objections to wind power stem from environmental costs. Many wind parks are shut down for part of the year because of bird migration patterns and turbine-related bird deaths. Furthermore, turbines occupy land; though larger turbines produce more power, they also occupy more land to operate safely. Since man-made installations can have adverse effects on terrestrial ecosystems, environmentalists have lobbied the government to prevent the installation of wind parks.^[25]

Government restrictions on foreign wind turbine suppliers in China

Some Chinese localization rules like those at the largest wind farm in the world in Rudong, China, prevent non-Chinese manufacturers from selling turbines. These rules require 70% of turbine equipment to be sourced and built domestically.^[26] The Chinese government has also sought to eliminate turbines with capacities of less than one megawatt, a policy which is favorable to domestic Chinese turbine manufacturers.^[26] China's National Energy Administration predicted that China's wind power capacity is likely to rise from 12,000 megawatts at the end of 2008 to 30,000 megawatts by the end of 2011, a goal that will require about 100 billion yuan ($14.6 billion) in investment.^[26] However, unfavorable policies for foreign turbine manufacturers in China put companies like Suzlon at a disadvantage and weaken their foothold in one of the most promising wind markets in the world.^[26]

Despite China's stringent policies regarding sourcing of wind turbines, it still represents a market with the most growth potential in the world. China relies on coal to generate about 70 percent of electric power.^[27] The country is expected to have 120 million to 150 million kilowatts of installed wind power capacity, totaling 7 to 9 percent of the national total installed electricity capacity, in 2020, according to the China Energy and Environment Technology Association.^[27] This represents an enormous investment opportunity for wind turbine manufacturers such as Suzlon.

Government Regulation of Energy Markets

Clean energy companies are highly dependent on government subsidies and support to bring in revenue, given that oil, coal, and nuclear energy are cheaper, well-established energy sources and hold oligopolistic control over the world-wide energy market. Given this dependence on the government, many environmental and social movements are focusing on pressuring the government to pave the way for a transition to renewables. Furthermore, many government endorse local renewables as an alternative to foreign fossil fuels, in an attempt to create energy independence. Government support of renewables is taking place at local, national, and global scales. One significant example is that in September 2009, the U.S. government announced it had awarded more than $500 million in grants to help finance wind projects under a $787 billion stimulus package designed to help revive the economy.^[19]

The Kyoto Protocol

The Kyoto Protocol is an international agreement to reduce greenhouse gas emissions in a global effort to stop climate change. The Kyoto Protocol mandates emissions caps through cap-and-trade systems of trading carbon credits. This system has the potential to benefit Suzlon as many countries make the transition to renewable energy such as wind power.

The U.S. has not ratified the treaty and has no plans to do so. China, while part of the treaty, is classified as a developing country and therefore has no obligation to lower its emissions.

Domestic Legislation

Given the fear of global warming and pollution, which has led to increasing social support for clean energy sources, governments around the world have implemented legislation that indirectly leads to increased revenues for Suzlon. Examples include:

• California has mandated that 25% of electricity come from clean sources by 2020 and 75% by 2050^[28]
• The Obama administration authorized $100 billion of spending and tax breaks for green projects by signing the stimulus package into law^[29]
• The Renewable Energy Standard bill, which would require utilities to generate 6% of their energy from renewables by 2012 and 25% by 2025, is being considered at the committee stage in the United States Congress^[29]
• The European Union aims to get 22% of its energy from clean sources by 2010^[30]
• China's Renewable Energy Law raises the target for the total percentage of renewable energy used in the country to 10% by 2020^[31]
• In February 2009, President Obama extended tax credits for wind and increased the amount the government will spend on those credits by 30 percent.^[32] Obama said he would invest $15 billion a year in renewable energy sources to create five million new energy jobs through 2018.^[32]

Legislative mandates like these benefit renewable energy companies because they force utilities companies to turn to other power sources, allowing companies like Suzlon to enter a crowded energy market. Also, such legislation usually leads to government support for renewable energy companies in the form of fiscal incentives.

Competition

Top Suppliers of Wind Turbines in 2008^[1]

Suzlon, which owns a 7% global market share,^[1] has several major competitors in the wind energy sector.

• Vestas (VWSYF) (19%): Vestas Wind Systems A/S is a Denmark-based company that develops, manufactures, markets, and maintains wind power systems that utilize wind energy to generate electricity. It is the largest manufacturer of wind turbines and wind energy systems in the world.
• General Electric (18%) is a conglomerate with business units in energy, industrial and consumer technology, media, and finance. GE's wind energy division has installed over 10,000 wind turbines worldwide comprising more than 15,000 MW of capacity.^[33]
• Gamesa (GCTAF) (11%) is a Spain-based holding company that, through its subsidiaries, develops renewable energy solutions. The company manufactures and sells solar and wind farm components, such as solar panels and wind turbines.
• Enercon (9%) is a German-based manufacturer of wind turbines. Enercon has installed about 13,000 of its turbines in more than 30 countries.^[34] In addition to its turbine manufacturing business, Enercon manufactures a desalination system that converts sea water into drinking water.
• Siemens (7%) is an electronics and electrical engineering conglomerate. Its renewable energy division manufactures wind turbines for both on- and off-shore applications.

While most of these companies are well-established in the global market, Suzlon's ability to produce in low cost countries (China and India) and its focus on high-potential energy markets gives it a powerful competitive advantage. Its growth over the past two years suggests that the business is taking full advantage of expanding markets while improving its efficiency to increase profitability. Suzlon also offers the most turbine models, one for each general wattage category (except for the highest capacities). The chart below illustrates the wide range of generating capacity that Suzlon has in comparison to its major competitors.

It should be noted that the two largest manufacturers, GE and Vestas, produce high capacity turbines. Suzlon produces most capacities, except turbines over 2.5MW, while GE and Vestas produce over 3MW. Low-energy turbines take less area to operate while high-energy turbines produce more power but take up more physical space.

Market Share

Suzlon commanded 7% market share globally and 58% in India in 2008^[1]

% Change in Wind Market Share (2006-2007)^[41]

References

1. ↑ ^{1.0 1.1 1.2 1.3} Environmental Leader: Wind Turbine Market Share Revealed
2. ↑ Business Standard - Suzlon: Regaining Power
3. ↑ ^{3.0 3.1 3.2 3.3 3.4 3.5 3.6} Wall Street Journal Live Mint: Suzlon’s US wind turbine plans hit new turbulence
4. ↑ ^{4.0 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9} Reliable Plant: Wind power growth in 2008 exceeded past decade
5. ↑ ^{5.0 5.1 5.2 5.3} International Sustainable Energy Review
6. ↑ ^{6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9} Wall Street Journal: Suzlon Falls Most in 6 1/2 Months on Quarterly Loss, Nov. 3, 2009
7. ↑ ^{7.0 7.1 7.2 7.3} Suzlon FY 07-08 Annual Report: Management Discussion and Analysis, p. 7
8. ↑ Suzlon FY 07-08 Annual Report, "Financial Highlights" p. 10
9. ↑ Suzlon Annual Report, FY 07-08, p. 10
10. ↑ ^{10.0 10.1 10.2 10.3 10.4} Suzlon Products & Services
11. ↑ Suzlon Multi-Mega Watt Technical Specifications
12. ↑ Steelguru: "Suzlon Energy wins order from Triventus AB"
13. ↑ Reuters: India's Suzlon Energy completes REpower acquisition
14. ↑ ^{14.0 14.1 14.2 14.3} IndiaInfoLine: "Suzlon Energy rose 1.12% to Rs 85.95 at 11:08 IST after the company won a 31.5 megwatt capacity order from Rajasthan State Mines and Minerals."
15. ↑ ^{15.0 15.1} WSJ: "India's Suzlon Energy Is Buffeted by New Headwinds"
16. ↑ ^{16.0 16.1 16.2} Business Standard: Suzlon Energy Inching Ahead
17. ↑ WSJ: "India's Suzlon Energy Encounters Headwinds at Home"
18. ↑ Industrial Wind Action Group: "Suzlon falls most in 3 months on faulty blade report"
19. ↑ ^{19.0 19.1 19.2 19.3} RPT-Reuters Summit-UPDATE 1-Suzlon sees 400-500 MW in new orders
20. ↑ SeekingAlpha: Electric Utilities: Coal vs. Renewables
21. ↑ ^{21.0 21.1 21.2} Bloomberg: Suzlon Says Orders May Increase on Project Funding
22. ↑ Bloomberg Commodities: Energy Prices
23. ↑ Montana Environmental Information Center
24. ↑ Suzlon FY 07-08 Annual Report, Management Discussion and Analysis, p. 5
25. ↑ Industrial Wind Action Group: Impact on Birds
26. ↑ ^{26.0 26.1 26.2 26.3} Foreigners swept aside as wind power blows through China, June 4, 2009
27. ↑ ^{27.0 27.1} Debate over excess capacity blows up in China's wind power sector
28. ↑ National Wildlife Federation: "Charting a New Path for California's Electricity Generation and Use"
29. ↑ ^{29.0 29.1} Business Green: "Congress floats renewable energy bill"
30. ↑ Energizing Spain, p. S5
31. ↑ Renewable Energy World: "China Passes Renewable Energy Law"
32. ↑ ^{32.0 32.1} CNET: The next big thing in wind: Slow wind, huge turbines
33. ↑ GE Energy
34. ↑ Google Finance: Enercon
35. ↑ Nordex Wind Turbines
36. ↑ Siemens Wind Turbines
37. ↑ Enercon Wind Turbines: Technical Specifications
38. ↑ Gamesa Products
39. ↑ GE Wind Turbines
40. ↑ Vestas Wind Turbines
41. ↑ Suzlon FY 07-08 Annual Report - Management Discussion and Analysis, p. 6