“The wind market is volatile and unpredictable, with high fluctuations in volume,” says Arto Lahtela, senior vice president, wind gears at Moventas. “The ability to adjust capacity is key to making profits and those with the greatest vertical integration will suffer the most.

Vestas, the world's largest turbine maker, is probably the highest-profile casualty of the ongoing market slowdown. With its stated goal to create “a more flexible and scalable business”, the company is now in the midst of a restructuring that will see it cut staff by almost a third, from 22,721 in 2011 to 16,000 by end 2013.

To maintain profitability, OEMs must constantly refine turbine performance while cutting costs and increasing manufacturing flexibility. In order to achieve these goals, manufacturers are revamping their supply chains with techniques like lean production, component commonality, just-in-time stocking and strategic supplier outsourcing.

In the early days of wind turbine manufacturing, specialist suppliers were thin on the ground and there was little alternative to in-house production for components of any complexity. Today there is a wide range of approaches, with the likes of Enercon still making most of its parts in-house while others outsource almost everything apart from final turbine assembly.

“There is a movement towards outsourcing and flexible manufacturing,” says Aris Karcanias, managing consultant with BTM Consult - A Part of Navigant. “Typically it is a hybrid model where OEMs retain control over vital components and outsource the rest. The challenge lies in finding the proper balance.”

Highly vertically integrated structures like Enercon's give manufacturers full control of component design, quality and delivery time. Siemens, another successful manufacturer with a high degree of vertical integration, bought independent suppliers and opened new facilities to make its own blades, hubs and nacelles.

When demand is strong and capacity is fully utilized, this arrangement works well as an OEM can maximize income (and hopefully profit) in every part of its internal supply chain. But when demand slackens, the downsides become apparent: high working capital requirements, costly R&D and other overheads, inflexibility and a drain on management resources.

Most wind OEMs have realized that long-term strategic partnerships with specialist suppliers can offer many advantages over in-house production, with many recruiting supply-chain experts from industries like automotive and aerospace.

“The wind business is changing from a niche to a larger industry of global size,” says Edward Rae, who spent 20 years at Nissan, Ford and Peugeot before becoming vice president, global wind supply chain at Alstom. “Good supplier management, better inventory control, long-term innovation and partnerships: in general, it's about making the industry a lot leaner.”

Instead of just making parts for one parent company, independent suppliers of major sub-assemblies like towers, gearboxes and generators can manufacture in higher volumes and diversify by selling into multiple markets, helping them better amortize the substantial investment needed in areas like R&D, testing and plant. An OEM might need to ramp up R&D to develop a new generator every three to five years; what does it do with those experts the rest of the time?

A specialist supplier continuously developing multiple products will be better able to support ongoing R&D and, like marketing agencies and management consultancies, working across multiple sectors allows cross-fertilization of ideas and so a better product. Dow, which supplies many blade manufacturers with resins, foams and adhesives, is a case in point, recently opening its Global Wind Application Centre R&D facility near Zurich.

Outsourcing also helps insulate OEMs from market fluctuations. Suppliers can keep their production lines rolling by selling to other manufacturers or into other sectors, as ZF does with gearboxes. A highly vertically-integrated manufacturer will have to support a collection of non-productive business units and probably make redundancies, as both Vestas and Siemens have recently had to do in the U.S.

“The suppliers take the brunt of the volume risk and the turbine OEM doesn't have to deal with the full impact of a slowdown,” explains Karcanias. “There's less capital outlay and financial exposure, and less exposure to policy risk.”

A Dominant Theme

Outsourcing has been a dominant industry theme in recent years. In June 2012 Vestas sold its tower factory in Varde, Denmark to long-term supplier Titan Wind Energy while Goldwind offloaded its blade manufacturer Tianhe Blade to Sinomatech in May of that year - a complete reversal of the insourcing strategy previously followed by Chinese OEMs.

“That's a very clear indication from two top-10 players that they are seeking to divest fixed assets and pursue more of an outsourcing strategy,” says Karcanias. “Vestas has already shown its intent to pursue a hybrid approach and they are rapidly implementing that.

Gamesa has also slowly been shifting to a more outsourced model over the last decade. In 2007 the company took a 32 percent stake in Spanish tower manufacturer Windar as its part of a joint venture with Daniel Alonso that saw Gamesa divest its own tower factories. As well as Gamesa, Windar now supplies Acciona and Alstom.

“We are trying to get closer to the dynamics of the automotive industry,” says Ricardo Chocarro, Gamesa's operations managing director. “With only one or two days' inventory in the warehouse, working capital can be drastically reduced.”

Cost and capital are the two key metrics, with Gamesa's hybrid Make and Buy supply chain strategy using ROCE (Return on Capital Employed) analysis to decide whether to insource or outsource. Chocarro estimates current overcapacity in the market as 30-40 percent. “We want to use existing capacity, whether ours or a supplier's,” he says. “Any future growth will be covered by outsourcing.”

Gamesa currently works with ZF Wind Power, Bosch Rexroth and Winergy for its gearboxes and partners LM and Tecsis for its blades. The company plans to increase blade outsourcing, currently at 50 percent (down from 100 percent in-house), while maintaining current levels of in-house generator (80 percent) and gearbox (50 percent) manufacturing.

What is a core or non-core component varies widely, and there are no absolute rights or wrongs. Frequently highly profitable and representing serious competitive advantage, certain assemblies are seen as an OEM's crown jewels. Control systems - the brains of the turbine - fall into this category, while almost all turbine manufacturers keep final assembly and testing in-house.

“If you look at the top Chinese OEMs, very few make their own control systems,” says Karcanias. “Most get them from Danish, German or Dutch suppliers. As those OEMs mature, they will develop their control systems and own turbine designs in-house so that they own the R&D and IP where the long-term value resides.”

When Areva took control of Multibrid in 2007, it was able to make its own supply-chain decisions. A key choice was to bring blade manufacture in-house, with the purchase of PN Rotor in 2009.

“We have chosen to be as lean as we can be, but we decided to be vertically integrated in blade design,” says Areva's managing director Jean Huby. “It was a conscious decision and we have not regretted it. It's an area in which we have made significant improvements in the last few years.”

However, nothing is set in stone and OEMs can often source bespoke designs from strategic partners that offer just as much competitive edge. LM's blades for Alstom are a good example.

The Areva M5000's one-stage compact drivetrain is another component that integrates rotor bearing, generator and gearbox. Areva owns this design but it is manufactured by Moventas.

“It's hard to be vertically integrated in that field; you lose the cross-fertilisation from other industries,” says Huby. “Specialists in that industry bring experience and background that we may not have. Our generator and gearbox suppliers are better at it than we are.”

Thinking Locally, Selling Globally

In a globalized market, OEMs still have to think local when it comes to production. Restrictive local content rules, cheaper finance, shorter lead times and lower shipping costs are just some of the drivers for local manufacture.

“The product is big and heavy, and logistics is an issue. We need to manufacture close to customers,” says Chocarro. “Sourcing locally helps insulate you from changes in the exchange rate and customs duties.

This is where suppliers with enough clout to be global partners prove their worth. Rather than an OEM tying up capital in its own operation, a strong partner will either have an existing plant or will build a new one in exchange for a firm order pipeline. A company like ABB, for example, will be able to deliver parts on almost every continent. However, if there's no local supplier or willing partner, OEMs may still have to set up their own facility.

“The benefits are very country- and region-specific,” says Karcanias. “Outsourcing is not always the right strategy. You might have a factory in each region to spread the risk. Local content requirements in countries like the US, South Africa, Brazil, France and Canada can force a manufacturer to set up a factory there.”

Alstom is a great example of this kind of hybrid supply chain. Like Areva, it had the luxury of choosing its own structure after buying Ecotecnia in 2007.

“The company we bought didn't have in-house capabilities,” says Rae. “Compared to the bigger boys in the market, we have very little vertical integration.”

Alstom opened its own nacelle factory in the U.S. last year, built an assembly plant in Brazil and is constructing another in France for its Haliade turbine. However, the new Haliade blade plant in Cherbourg will be dedicated to Alstom and funded by them, but run by LM Wind. A new generator factory in Saint-Nazaire will be set up and run by GE Power Conversion. Clustering suppliers like this also helps supports lean production methods like just-in-time stocking.

“We want global partners that are willing to set up in the parts of the world where we want to go,” says Rae. “We are bringing Ingeteam with us to Brazil and ABB will set up a generator facility there. For the tower plant in Cherbourg, we will either do it ourselves or work with local partners.”

As a large corporation, Alstom is able to exploit existing facilities. In Brazil, this means co-locating an in-house tower plant with the company's power transmission factory in Canoas and using the vast Taubate hydro factory to manufacture products like castings and power electronics.

“You need to look for opportunities where they crop up,' states Rae. 'We can invest strategically or look at what's available and make expedient choices. You need a flexible approach to supply and manufacturing to do that.”

To encourage a supplier to invest in a new factory, these days OEMs are more than happy to share the facility with competitors in order to assure a full order book. LM Wind's first factory in Brazil will make blades for Alstom as well as other manufacturers.

Large turbine makers are also increasingly open to selling components to competitors, benefiting both parties: the owner increases utilization and income while the buyer avoids the capital investment and risk of running a dedicated plant themselves. Vestas's Pueblo, Colorado, tower plant has taken this route, supplying wind turbine towers to third-party US projects. The two-year agreement could utilize up to 25 percent of capacity and is expected to have created an estimated 100 jobs as REW goes to press.

“Vestas is continuously evaluating its manufacturing footprint and opportunities to utilise the current production capacity better,” says COO Jean-Marc Lechêne. “Producing components for third parties is part of this strategy and this new agreement is the first major step in realising this plan.”

Challenges

There are of course downsides to outsourcing, with weaker quality control one potential problem. There have been both historic and recent failures of outsourced components with OEMs experiencing blade cracking, gearbox failures and poor quality steels in offshore foundations.

Quality isn't the only challenge. One turbine supplier is in dispute with its gearbox supplier because, when market demand went up, the supplier wasn't ready. They had a contract that stipulated minimum and maximum volumes but the supplier only geared up to meet the minimum.

Improved supplier management is the obvious answer, with close communication, common goals and transparent volume forecasts along with initial certification of quality control procedures and ongoing quality monitoring just a few of its constituent elements. Like the rest of lean manufacturing, processes and supporting systems have already been well developed in other sectors.

Of course, the ultimate form of cooperation between two companies is a merger and the wind market now looks set for serious consolidation; Suzlon chairman Tulsi Tanti recently predicted that the “wind sector will emerge with its own big five”.

Life as a large - yet flexible - wind manufacturer has plenty to recommend it. Producing higher volumes of a smaller range of turbine models means economies of scale and a more efficient supply chain, while extensive international operations are less vulnerable to the loss of a single market. The offshore turbine market, with its large capital costs, long lead times and greater deployment risks, demands the serious up-front investment that a larger business can more easily generate.

“Some manufacturers won't be able to make the trip,” concludes Rae. “Others will become more efficient and competitive in every aspect because it is the only way to survive.”

James Lawson is a freelance journalist focusing on the energy sector.

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