Essay_Strategy

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Introduction

Suzlon Energy started in 1995, is now among the top global wind
-
power companies. In
terms of market share, they are the Asia’s largest and world’s third largest wind
-
turbine manufacturer (WTM) (Fig
-
1). They provide end
-
to
-
end wind
-
power solut
ion
through their highly integrated business model (Fig
-
2). They are present in 21
countries with their operations spread across USA, Europe, Asia and Australia.





Why China is important to Suzlon?

China is one of the most dynamic and fastest growin
g wind
-
power markets in the world
(Appendix
-
1&2). It is expected to grow from current 10% of global installed capacity to
at least 20%, over the next four years. China’s current installed wind
-
power capacity is
over 12GW and expected to grow up to 100GW by

2020 (Macquarie Research, Aug
2009). China has become increasingly important to global wind
-
power market and to
top global wind
-
power companies. In 2008, Suzlon saw their Chinese wind
-
power
market share declined from 4% in 2007 to 2% (Fig
-
5). Therefore,
they need to focus on
China to make their global position stronger.

Key strategic issue for Suzlon is to achieve 10% Chinese wind
-
power market
share by being cost competitive through expanding manufacturing capabilities
and joint ventures in China, during
next five years.


Strategy
-

2009Page
2



Chinese Wind
-
Power Industry Analysis

Competitiveness of a Chinese wind
-
power industry can effectively be analyzed using
Porter's diamond model
through four primary determinants (i.e. Factor Condition;
Demand Condition; Related & Support
ed Industry; Firm strategy, structure and rivalry)
and two secondary determinants (i.e. Government and Chance) (Fig
-
3).



Factor condition

a.

Wind
-
energy resource:
-

Throughout long coastline and vast land mass, China has rich resource of wind
-
energy with h
uge potential. According to the National Climate Center
assessment, technically exploitable wind
-
energy resource in China is more than
2,548GW. (Junfeng, et al., 2007).


b.

Power
-
generation cost:
-

Wind
-
power involves high generation cost and power price, rel
ative to coal
-
power
and hydro
-
power in China (Li, 2005), which hinders its widespread
commercialization. However, wind
-
power generation cost has fallen steadily with
the rapid expansion of wind
-
power market, which is now just 20% of that 20
years ago (Chen
, 2004). Study has also shown, once scale of world wind
-
power
be doubled, the wind farms cost would decrease 15% (Zhang, 2002).


c.

Human resource & Technology:
-

Lack of skilled human resources in core technology, technological innovation in
terms of R&D and

design of key parts make domestic wind
-
power companies to
depend heavily on foreign companies (Junfeng, et al., 2007).


d.

Wind
-
turbine quality:
-

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-

2009Page
3


The quality of wind
-
power equipments faces a major challenge due to rapid
expansion of wind
-
power manufacturing
. Lack of stringent testing and
certification systems is a problem area to maintain reliability and durability of
wind
-
power equipments (Junfeng, et al., 2007) (The Climate Group, 2009)

Demand Condition

a.

Renewable Energy Development Plan:
-

China has set a t
arget of achieving 15% of its energy to come from renewable
sources by 2020 (widely known as ‘15

20’ plan) (Table
-
1). The wind
-
power target
10GW, set for 2010, was already achieved in 2008 and currently has crossed
12GW level. China predicts to achieve 50
-
100GW of energy from wind
-
power
industry alone (Appendix
-
4).






b.

Ever increasing energy demand:
-


Due to high population and economy growth in China, there has been a rapid
growth in energy demand. Improved living standards and extensive utilization of
electric appliances, electricity have been widening energy demand/supply gap. It
is expected that by 2020, the country’s energy consumption will be almost
doubled (Macquarie Research, Aug 2009).

Firm strategy, structure and rivalry

Competition in Chinese w
ind
-
market is fierce. The cost of turbine is almost 70% of total
wind
-
farm development, in order to make wind
-
power cost competitive, government has
introduced Local content requirement policy which has benefited local wind
-
power
companies enormously. Curr
ently, domestic wind
-
power capacity is 8 GW and by 2010,
expected to reach 12 GW. Many foreign wind
-
power companies (e.g. Vestas, Suzlon,
Gamesa, GE etc.) have established their subsidiaries in China. Some of them have also
recently formed joined ventures
with domestic companies to take advantage of lower
local production cost. Notably in 2008, joint venture and domestic companies together
accounts for more than 60% share of Chinese wind
-
power market (Shi, 2008). There
has been a significant decline in fore
ign wind
-
power companies’ market share in last 2
-
3 years. Despite being highly competitive market, Chinese wind
-
power industry faces a
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-

2009Page
4


huge supply
-
chain pressure.




Related and support industry

The competitiveness of wind
-
power industry mainly depends u
pon close cooperation of
all the supporting industries. These supporting industries are wind
-
turbine and
components manufacturing industry, and grid construction industry.

a.

Wind
-
turbine and components manufacturing industry:
-

So far in china, more than 70 c
ompanies are manufacturing wind
-
turbine unit,
whereas around 100 companies are manufacturing components of wind
-
turbine
unit (CWEA, 2009). Main components of wind
-
turbine units are gearboxes,
blades, generators, bearings, electrical control systems, etc. D
uring 2008,
domestic manufacturers were able to install almost 70% (57% in 2007) of total
installed 6.3GW (Macquarie Research, 2009).

Chinese wind
-
market faces huge supply
-
chain pressure in turbine and its
components production (EWEA, 2009). Domestic comp
anies rely on foreign
companies to supply components, mainly for large wind
-
turbines, which add
extra costs to their products. Currently, local companies make 90% of
components for low and medium scale wind
-
turbines, while components for
large scale turbin
es are mainly imported (He & Chen, 2009).


b.

Grid Construction:
-

From wind
-
power development perspective, grid construction has many issues
in China. Variability of wind
-
power also affects the grid loads and management.
There is a lack of knowledge and stand
ardization of wind
-
power to grid
connection. While planning of grid construction, wind
-
power has not even been
properly considered. In order to support the wind
-
power industry, grid
construction industry must be strengthened (Junfeng, et al., 2007).

Govern
ment

Strategy
-

2009Page
5


Chinese government plays a very significant role in fostering renewable
-
power market.
Wind
-
power industry, in particular, is in their priority list. They have been supporting
local wind
-
market and industry by many initiatives and incentives such as ma
rket
policies, legislations, financial incentives, and taxation etc. (Lema & Ruby, 2006)
(Junfeng, et al., 2007). Some of them are as follow

a.

Policies and Legislations

i.

15
-
20 plan

ii.

Concession Programme:
-

Chinese Government introduced Wind concession programme
s in order
to increase the pricing transparency and scale of development of the
wind
-
power industry.

iii.

Local content requirement policy:
-

As per this policy, to allow turbine deliveries at least 70% of the wind
-
turbine has to be manufactured within the count
ry.

iv.

Pricing Policy:
-

This policy gives rights to pricing authorities of the State Council to
determine grid power price of renewable energy power generation
projects.

v.

Renewable Energy Law:
-

This law puts binding condition on Chinese grid companies to buy
r
enewable energy.


b.

Incentives and Taxations:
-


Government has been providing a lot of incentive to wind
-
power industry.
Investments in this sector are largely driven by government. Government has
given income
-
tax, value
-
added
-
tax (VAT) and import duty reli
ef for
encouragement of renewable energy development (The Climate Group, 2009).

Chance

a.

Global Warming:
-

Chinese government is very serious about global warming effect and committed
to utilize renewable resources for developing a low
-
carbon economy (Appendi
x
-
6). Global warming consideration would continue to act as a big catalyst for
Chinese wind
-
sector in future.


b.

Demand
-
Supply gap:
-

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-

2009Page
6


Ever increasing energy demands along with related supporting government’s
policies are creating a big demand
-
supply gap. Thi
s gap is aggravating into
energy shortage issue, which in turn proving to be unprecedented opportunities
for the Chinese wind
-
power industry.

Summary:

Chinese wind
-
power industry looks very competitive as well as attractive. Despite of the
tough competiti
on, due to increasing power demand, the scope for growth exists for all
companies, Market trends indicate that Chinese wind
-
power customers emphasize
more on cost advantage and quick product rollout than product quality.

Government’s initiatives and incent
ives have bolstered domestic companies and given
them cost advantage. However, they are still dependant heavily on foreign companies in
terms of skills, knowledge, technology and R&D capabilities. Foreign companies need to
target at the cost factor to surv
ive and grow in the Chinese market. Foreign companies
can also look to exploit supply
-
chain issue by expanding their manufacturing
capabilities in China.

Suzlon’s Position in Chinese Wind
-
Power Market

Suzlon’s current position in the Chinese wind
-
power ma
rket can be analyzed by using
BCG (Growth
-
Share) Matrix. It provides a very structured framework to make strategic
marketing decisions (Henderson, 1979). Suzlon’s position can be plotted on BCG Matrix
on the basis of relative market shares and overall Chin
ese wind
-
power market growth.
Relative market share for each company is calculated with respect to market share of
industry leader (Table
-
2).


Previous analysis has shown that government’s structural reform initiatives have been
instrumental in helping do
mestic WTMs, such as Goldwind, Dongfang and Sinovel, in
gaining significant market share (Fig
-
5). However foreign WTMs, Vestas and Gamesa
were able to attain comparatively better market share than Suzlon, due to their solid
base in china and recent expansi
ons in their Chinese production facilities.



Strategy
-

2009Page
7




In 2008, Chinese wind
-
power market growth was 116% (CAGR) (Appendix
-
2). Domestic
companies like Sinovel, Goldwind and Dangfang along with Vestas were able to attain
high market share in a high wind
-
power

market growth and therefore, as per BCG
Matrix, they are
‘Star’
. Global top companies like Gamesa and Suzlon saw their market
share declined appreciably in 2008. They occupied relatively low market share, despite
of high wind
-
power market growth. This rai
ses many questions on their strategy and
hence they are
‘Question Mark’
.



Suzlon has potential to become a
‘Star’

from
‘Question Mark’
and

eventually turn

Strategy
-

2009Page
8


‘Cash Cow’

once Chinese wind
-
market gets matured. Strategic directions available for
them, to inc
rease their market share, would be either market penetration or product
development. Considering the current market growth, market development or
diversification may not be suitable and feasible for them. They need to target at the
competitive advantages o
f market leaders to penetrate the market.

Competitive advantages of domestic companies:
-

i.

Expansive manufacturing capabilities with extensive government support
allow domestic Chinese companies to use low price as competitive
advantage. Therefore, market pe
netration would require intensive
competition with domestic players on the basis of cost.

ii.

Domestic companies focus more on lower range turbines (below 1.25MW)
(Appendix
-
5), as they lack technical capabilities in producing high range
turbine. They manage to

roll out these products in relatively quick time,
however in doing that sometimes they tend to compromise on product
quality.


Suzlon’s current status:
-

i.

Suzlon is globally known for its high level of vertical integration (Appendix
-
3),
but their insignific
ant manufacturing capabilities and integration networks
in China, make them capture only marginal fraction of market share.

ii.

Although globally they manufacture wide ranges of wind
-
turbines but in
China they focus only on high
-
range turbines (range more than

1.25MW)
(Appendix
-
5), which adds more cost and time to their low
-
range imported
turbines. As per EBNDRC & ERINDRC (2008), major imported wind
-
turbines
components cost 10
-
20% costlier than similar systems made in China.

Conclusion

Having analyzed both tool
s, it is concluded that Suzlon needs to be more cost
competitive in order to strengthen their position in Chinese wind
-
market. Wide energy
demand
-
supply gap is an opportunity for them but in order to take advantage of that,
they need to expand their manufa
cturing capabilities and become integrated in China.
This would also enable them to reduce their product rollout time. Many Chinese
domestic companies, including Goldwind and Dangfang, are heavily dependent on
Suzlon (REPower) for technical resources (i.e.

design, license, knowledge, skills etc)
(Appendix
-
7). Their technical and supply chain (i.e. turbine components and
accessories) dependencies can strategically be a big advantage for Suzlon. Forming
strategic alliances with domestic companies would allow
them to combine their
technology with lower local production cost in China. Joint ventures would not only
allow them to take advantage of low
-
cost and low
-
range turbines, manufactured by
domestic companies but also make them indirectly eligible for governm
ent’s incentives.


This essay applies Porter’s diamond model to analyze Chinese wind
-
power industry
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-

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9


competitiveness. The analysis has addressed one facet on this model, the significance
of government’s impact on the wind
-
power industry competitiveness. A
s per
O’Shaughnessy (1996), this model simplifies the impact of policies, history and culture
on economic development. China’s global competitiveness has been influenced
significantly by the interaction between MNEs and Chinese government, following the
pa
ce of globalization. There are also many questions raised on Porter’s competitiveness
measurements (Cartwright, 1993; Hodgetts, 1993; Rugman & Verbeke, 1993). Many
scholars are critical to Porter's diamond on the basis of the role of FDI, Globalization,
MN
Es and governments in the industry/national competiveness (Cartwright, 1993;
Grant, 1991; Hodgetts, 1993; Oz, 2002).

This essay also applies BCG Matrix to analyze the position of Suzlon and their
competitors in Chinese wind
-
power industry. This tool is too

generic to give a sound
basis to develop strategy as it uses only two quantifiable measures (i.e. market growth
and market share) in determination of company/product success (Wensley, 1981). Day
(1997) argues that while developing strategies or allocating

budgets, matrix based
analysis such as BCG Matrix can be very misleading. In addition to over
-
simplification
issue, markets and categories definition along with cut
-
off points do significantly
influence the analysis results. Market definition involves ele
ment of judgement which
depends on the way market is viewed (broader or narrower view). It also ignores the
dependency between business units (e.g. sometimes ‘Dogs’ can complement ‘Star’ to
grow).

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-

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Appendices

Appendix
-
0:
-

Group Members

0905724

0813166

0905
924

0905014

Appendix
-
1:
-



Appendix
-
2:
-




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Appendix
-
3:
-



Appendix
-
4:
-




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Appendix
-
5:
-



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Appendix
-
6:
-



Appendix
-
7:
-


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