‘Flight To Quality’: A Long-Term Look At Supply Chain Components

NAW Staff
Written by Bruce Hamilton
on July 26, 2012 No Comments
Categories : New & Noteworthy

10190_factory-shot_250x250 'Flight To Quality': A Long-Term Look At Supply Chain Components There have been significant changes in the supply chain for the wind power manufacturing industry over the past five years, most recently triggered by the worldwide economic downturn. The tight supply-chain situation has been eased since the severe global financial crisis weakened the growth rate of wind power deployment two years ago.

A balance of supply and demand was finally reached for all key components and materials this year due to a slower-than-expected economic recovery in most industrialized countries. In fact, there is an overcapacity for many components and materials using standard processes.

As a result, a ‘flight to quality’ has been seen in all wind turbine manufacturers' recent supply-chain strategies.

In a buyer's market, fierce competition for both quality and price has already pushed many suppliers, mainly from China, to the edge of collapse. Although established European suppliers are better positioned compared to newcomers, reducing the product cost without sacrificing margins is still a challenge. Clearly, more consolidation will be seen in the supply chain in the next few years.

The following conclusions have been reached for key components, materials and the offshore wind sector:

Blades. In-house production of blades by the top 15 wind turbine manufacturers was about 31.7 GW in 2011, almost double the 2009 figure. The largest in-house capacity (in rank order) was provided by Vestas, Siemens, Enercon and Suzlon, with more than 20 others with a capacity ranging between 2.5 GW to 3 GW annually.

Out of more than 40 independent suppliers, LM Windpower delivered 14% of the blades used in the wind industry in 2010, with a notable increase in its market share in the U.S., maintaining its position as the world's largest independent blade supplier, despite a relatively supressed market.

Despite LM's continued expansion program in China, its market share is probably set to decline, as Goldwind, a key client, acquired two blade manufacturing facilities in China. This has been combined with increased competition based on turbine price in China, forcing original equipment manufacturers (OEMs) to use lower-cost solutions.

All but the smallest independent players can manufacture blades for turbines over 3 MW, which is a significant increase from 2010, when only three independent suppliers could supply blades of that size. The 2011 demand of 46 GW will likely be met, with about 40 GW produced in-house or by LM. Even if no expansion occurs in the blade manufacturing industry, the current capacity should meet global demand for the next five years.

Gearboxes. Over 40 gearbox suppliers cater to the wind market, of which 50% are from China. Only 12 are capable of supplying the offshore market. With increased development in the direct-drive (DD) market by Goldwind, Enercon and XEMC, the global gearbox supply chain has continued without bottlenecks since 2008. Direct-drive turbines are anticipated to make up to 20% of the market by 2013, reducing the need for gearboxes. Approximately 60 GW of gearbox capacity is available, with most of this centered around European suppliers. It is important to note, however, that not all gearbox suppliers have reached their announced annual capacity level due to the current market conditions in the U.S. and China.

In fact, in most cases, suppliers have had to adjust their plans based on the current situation. Capacity should therefore easily meet the demand of 46 GW in 2011. In Asia, local suppliers serve as the largest market players, a result of the previous 70% domestic-content requirement in China. Competition in the Asian gearbox market is fierce, with an emphasis on increased quality recently visible due to a slumping demand in China.

Electric generators. Three types of generators – doubly fed induction generators (DFIGs), DD generators and permanent-magnet generators (PMGs) – are available in the current global wind generator market. Enercon is the sole user of a unique annular DD design (100% produced in-house with no intention to outsource), thus the current generator supply chain only needs to cater to DFIGs and PMGs. About 80% (31.5 GW) of generators are DFIGs, although the market is shifting toward DD PMGs, now almost 11% of the market. No visible bottlenecks for the global generator market exist, with about 40 GW delivered in 2010 and a capacity of about 100 GW available in 2011, thus leading to a foreseeable 50 GW overcapacity.

Nearly 90% of generator suppliers identified are capable of producing DFIGs, and with DFIGs recently losing market share to PMGs, it is unlikely that they will be in short supply over the next three to four years. The supply-chain situation for PMGs, however, is different. Last year's demand in the DD PMG market was nearly 4.8 GW, with Goldwind and XEMC as the major manufacturers creating this demand.The 20 European and U.S. PMG suppliers, including The Switch and Converteam, will supply the increasing number of turbine manufacturers turning to DD PMG technology, including GE, Nordex, Alstom, Sewind and United Power.

However, key questions remain over resource availability, with 97% of the resources controlled by China. The rising price of rare-earth materials, seminal to the manufacture of PMGs, could also lead to a range of strategic diversification from turbine OEMs and generator suppliers alike.

Bearings. Since the end of the financial crisis, there have been no supply constraints in the previously bottlenecked standard-size bearings market. The major suppliers remain SKF and FAG, while Rothe Erde serves as the major slewing bearings supplier, although newer entrants in the Chinese market are serving as competition. Although acceptable supplies for the larger bearings exist today, the capacity and resources available to cater to this larger segment are still in a delicate balance, particularly for the extra-large single- and double-row tapered roller bearings, which used to be the key bottleneck in the supply chain.

Given the trend for larger turbines, pending takeoff of the offshore market, a lack of qualified suppliers and an unfavorable investment climate, investment in the research and design and technical machinery necessary to deliver the larger bearings to market is scarce. Assuming the current financial climate improves, a strong demand over the next three to five years will result in a critical bottleneck in the extra-large bearings market.

A number of Chinese suppliers have entered the bearings market, but few are able to sustain production due to competition from major European suppliers and concerns over quality. Despite lower raw-material prices in Asia, most suppliers choose reputable European and North American sources. Should prices continue to escalate, bearings suppliers may turn to raw materials from China and India.

Towers. With over 60 significant tower suppliers, an increase in supply of 58% has been seen on the 2009 figure, leading to a total of about 49,100 towers a year, with approximately 30% of global tower manufacturers capable of offshore supply. The average turbine size in 2010 was 1.65 MW, implying a manufacturing capacity of 81.2 GW per year, almost double the necessary capacity to meet market demand in 2011; therefore, there is no risk of a bottleneck forming. Assuming tower capacity is maintained at today's level (i.e., no further investment), then demand will match supply in 2015.

Market globalization for towers has become common, with no regard for supplier location unless government mandated. This overcapacity is centered in Europe, however, where expected growth in the offshore market will help to offload the supply for those technically qualified. Most of the tower suppliers seek supply agreements with turbine manufacturers and project developers, as this appears to be the most viable long-term strategy.

Bruce Hamilton is director of energy at Navigant Consulting. He can be reached at (503) 476-2711 or bruce.hamilton@navigant.com.

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