Presentation

Wind Turbine OEMs Struggle to Remain Competitive

North America Wind Energy Advisory

25 May 2011

Matthew Kaplan +1 617 866 5135 [email protected]

© 2011 IHS EMERGING ENERGY RESEARCH, LLC. All rights reserved. Reproduction of this publication in any form without prior written permission is strictly forbidden. The information contained herein is from sources considered reliable but its accuracy and completeness are not warranted, nor are the opinions and analyses which are based upon it. OEMs Struggle to Remain Competitive Turbine Deliveries Slow

North America Market Share Evolution: 2001–2010 Annual Deliveries: 2001–2010 (MW) Top Three vs. Other (MW)

Source: Manufacturers, IHS Emerging Energy Research

The top three North American OEMs faced market share erosion between 2005 and 2009, but this trend reversed course in 2010

North America Wind Energy Advisory – May 2011 Page 2 Wind Turbine OEMs Struggle to Remain Competitive Lower Power Price Environment: Wind Must Become More Competitive

2010 Realized Renewable PPA Prices

Wind PPA Prices 130 PPA Trend Median US Wholesale Power Price 120 ) 110 MWh 100

90

80

70

60

50

40 PPA/ WholesalePPA/ Power (US$ / Price 30

20 Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Contract Execution Date Note: Represents projects online between 2007 and 2010 with contracts executed between January 2007 and June 2010; projects online during the same period but with earlier contract execution dates are omitted. Prices represent realized price for full year 2010, where available, excluding test energy or other pre-COD arrangements. Wholesale power price taken as monthly median of representative sample of US hubs Source: FERC, IHS Emerging Energy Research

Lower natural gas prices and increased competition is pushing PPA prices down

North America Wind Energy Advisory – May 2011 Page 3 Wind Turbine OEMs Struggle to Remain Competitive Wind OEM Competition Segmentation Competition Within the US Wind Market

Market MO Leaders Most

PA

IL

Significant Utility-Scale US Installations US Wind Market Share

New/Potential Entrants Least

Diversified Global Europe- or US- Heavy Industry Asia-Based Wind Based Wind/Renewables Conglomerates Competitors Companies

As competition heats up, there is an ever-increasing gap emerging between leading heavy industrials and new market entrants

North America Wind Energy Advisory – May 2011 Page 4 Wind Turbine OEMs Struggle to Remain Competitive Technology Key Industry Focus Wind Product Rotor Size vs. Nameplate Capacity 5

4.5

4 GE 3.5 Acciona Siemens 3 Gamesa GE Mitsubishi 2.5 Clipper Vestas, Gamesa, Dewind Siemens 2 Market trajectory Acciona

Capacity Rating (MW) DeWind 1.5 High level of product competition REpower GE, Acciona, 1 Northern Power Goldwind 0.5 Alstom 0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100 102 104 106 108 110 112 114 116 118 120 122 124 126 128 130

Rotor Size (meters) Note: OEMs added to exhibits where similar rotor sizes overlap and may not be visible within exhibit Source: Utilities, Developers, IHS Emerging Energy Research OEMs are rapidly introducing new products aimed at increased efficiency and overall cost reduction

North America Wind Energy Advisory – May 2011 Page 5 Wind Turbine OEMs Struggle to Remain Competitive US Wind Manufacturing Map

Major Wind Manufacturing Map (Select Recent Investments) Towers Generators Castings Towers

Blades

Blades

OEM

To wers

Tower Bases Blades

Gearboxes

Bearings

Towers Blades

Suppliers are forced to respond to customer demand for lower costs

North America Wind Energy Advisory – May 2011 Page 6 Wind Turbine OEMs Struggle to Remain Competitive North America Wind MW Added by Country: 2005–2025

United States Wind Capacity Added: 2005–2025*

Historical Forecast

Note: *IHS EER preliminary forecasts subject to revision Source: IHS Emerging Energy Research

Between 2011 and 2025, IHS EER forecasts 7.5 GW in average wind installations per year in the United States

North America Wind Energy Advisory – May 2011 Page 7 Riding the Wind Domesticating the Supply Chain – One Part at a Time

Tom Waggoner Manager Supply Chain Acciona Windpower North America AGENDA › Market Demands › The Strategic Approach › GloCal Sourcing › Key Partners Market Demands MARKET DEMANDS

WIND ECONOMIC FUNDAMENTALS 2008 VERSUS 2011 Market Indicator 2008 2011 › Market power has shifted Natural Gas $11/MMBtu $4.3/MMBtu from the OEMs/suppliers to the Utilities given weak Steel $1200/ton $850/ton demand, low natural gas PPA Pricing $65/MWh $35/MWh prices, and weak policies for renewable energy At pre-recession Electricity Demand Growing 2%/year levels RPS Compliance Short of targets Meeting obligations Status

WTG Lead Time 2+ years 6-9 months

The market demands attention to mitigate Cost Drivers. Localization of the Supply Chain can play a key role. MARKET DEMANDS

MARKET DEMANDS IN NORTH AMERICA

› Cost . Highly competitive with pricing dropping 40% since 2008 due to excess capacity › Lead Time . 6 to 9 months vs. 12 to 18 months requires flexibility › Quality . Rapid innovation and increased Warranty period demands drive higher Quality Standards and ability to control › Service . Rapid turn-around of Service to maintain Maximum availability

So how do we decide on localization? The Strategic Approach THE STRATEGIC APPROACH

LOCALIZATION MUST BRING VALUE

› When Foreign Exchange fluctuation brings instability

› Lowest Landed Cost: Consistent and Repeatable

› Rapid proto-type, Component Complexity – Participative Quality Management

› Immediate Service and Repair turn-around, Local expertise

› TCO – Total Cost of Ownership

Competitive on a GLOBAL scale? “GloCal” Sourcing “GLOCAL” SOURCING “GLOCAL” SOURCING

THE ABILITY TO RESPOND TO LOCAL DEMANDS ON A GLOBAL BASIS

Global Footprint – Design Partners

Regional 1 – Rapid Proto-type

Regional 2 – Critical Component

Limited – Commercial Components

The Capability to Respond Globally, within a Localized Supply Chain at a Consistently Competitive Price is a Key Decision Point “GLOCAL” SOURCING

CURRENT STATUS IN NORTH AMERICA

Localized Supply AWNA

Non-U.S. Source 23% North American Suppliers / Subsidiaries are proving the ability to bring value on a U.S. Source 77% consistent basis

Long Term Success requires Development of Key Partners Key Partners for the Future KEY PARTNERS

BECOMING A KEY PARTNER – PERFORMANCE AND INTEGRATION

Cont. Imp. Integration Technology Delivery Quality Selection

Supplier Key Partner LOCALIZING THE SUPPLY CHAIN – ONE PART AT A TIME

HOMOLOGATION DECISION MADE ONE PART AT A TIME

Cost Quality

Bring value at globally Strict Quality Controls competitive cost – to assure Industry Lowest Landed and Leading reliability and Robust Total Cost of availability Ownership Repeatable

Delivery Technology Relevant Ability to provide The capability to grow components and and improve utilizing a service when and systematic approach to where needed continuous improvement MANY THANKS

Tom Waggoner Manager, Supply Chain Acciona Windpower N.A. AWEA WINDPOWER 2011 Conference Supply Chain Development at Gamesa May 25, 2011

James Buddelmeyer Vice-President, Purchasing

23 3 business units dedicated to wind power

GAMESA BUSINESS UNITS 2010 Statistics

REVENUE: $3.5 B

GLOBAL HEADQUARTERS BILBAO, SPAIN

STAFF: 7,200 EMPLOYEES WIND TURBINE MANUFACTURING CENTERS: MANUFACTURING SPAIN/USA/CHINA/INDIA/ BRAZIL IN DEVELOPMENT GLOBAL INSTALLED BASE 21,000MW

GLOBAL RANKING 2010 4 U.S. RANKING 2010 OPERATIONS WIND 3 AND FARMS MAINTENANCE

24 Growth – 30 Countries and growing

INSTALLATIONS

Europe 14,586 MW Americas Asia 2,766 MW 1,726 MW N. Africa 756 MW

2010 Total Global Sales : 2,405 MW

25 Global Manufacturing

CAPACITY 30 Production USA > 1,200 MW Centers

EUROPE > 2,000 MW Components ASIA > 1,200 MW Assemblies Brazil in development Blades Gearboxes UK in development Generators Electrical Control Boxes ANNUAL > 4,400 MW

26 Significant investments in R&D…focused on new technology and product improvements

 7 R&D centers in Spain, US, Singapore & China. Planned centers: United Kingdom, India (Chennai), & Brazil.

 Over $395 Million invested over last 5 years

 Investment to exceed $220 Million over the next 3 years

 162 registered patents at the end of 2009

 Gamesa leads and takes part in advanced R&D Wind Energy programs in Spain, the U.S. and the rest of Europe

27 Gamesa US Overview

US Headquarters, Langhorne, PA

Design, manufacture, and development of wind turbines and farms

Nacelle Center of Excellence , Fairless Hills PA Blade Center of Excellence , Ebensburg, PA

Offshore Wind Technology Center, Chesapeake VA

900+ employees

2,400 MW installed in the U.S.

$200M invested since 2005 in PA

28 Commitment to the US Market

Fairless Hills & 3.000 Ebensburg MW GEUSA purchases manufacturing Navitas Energy GTC, Inc shifts installed facilities headquarters to Oxford First at groundbreaking Valley, PA Mendota Hills (63xG52)

1.000 MW 2.000 MW installed installed

2002 2003 2004 2005 2007 2008 2009 2011

GWUS opens office in Sales and Austin, TX Gamesa opens US Development Headquarters in Offices in 7 US Philadelphia, PA Cities

Gamesa/ Northrop Grumman

R&D G80 Wind G87 Wind Farm at farm Henry Kumeyaay Hills

29 Commitment to the US Market Nacelle Center of Excellence Fairless Hills, PA

 Brownfield site rehabilitation in 2005-6 (Formerly US Steel Fairless Hills Site)

 235,000 sq. ft. Factory in three production bays and 75,000 sq. ft. Warehouse.

 93 acres of land. US Steel Fairless Works,  Access to Rail & Deepwater circa 1960 Port

 Gross investment > $70 MM

 Currently produce nacelles & hubs.

 Additional bays available for expansion

30 Commitment to the US Market Blade Center of Excellence Ebensburg, PA

 Greenfield site installed in 2005-6.

 Plant produces wind turbine blades

 168,000 sq. ft. Factory with offices and warehouse included in plant.

 Total of approximately 29 acres of land - ample FG storage

 Gross investment > $65 MM including land, building, equipment.

 Upgraded from G87 to G90 blades in 2009-10.

Additional $20MM invested in North American Facilities in 2009

31 Over 2,400 MW installed in the US… 900+ under construction

BIG HORN

HARDSCRABBLE LEMPSTER

BUFFALO VALEY VIEW BEAR CREEK RIDGE II WINNEBAGO TOP OF LOCUST RIDGE MENDOTA EBENSBURG IOWA & FAIRLESS HILLS HILLS & GSG ALLEGHENY BARTON RIDGE CHESTNUT FLATS AIRFORCE CAYUGA SLYINA P.HEIGHTS RIDGE FIRST MARINE MT. STORM FARMER CITY

WINDSTAR KINGMAN DE,MPSEY

KUMEYAAY SANDBLUFF BARTON CHAPEL

MESQUITE & 24 Wind Farms POST OAK in 17 States

32 Gamesa Logistics & Service Support Resources

3 Service Centers 3 Regional Warehouses 25 On-Site Warehouses

On-Site Spare parts and tooling warehouses

Major Regional Warehouses

Regional Service Centers

33 Wind industry is transforming rapidly

o Regulatory uncertainty in US 1 o Growth in Asia and other emerging markets MARKET: o Offshore growth will accelerate after 2013 o Wind turbine technology changing rapidly

THE SLOWDOWN o Increasing demands by operators–utilities and OF 2009 & 2010 2 CLIENTS: large developers HAS o Wind power internationalization requires TRANSFORMED WTM global support THE WIND o Competition based on offering the lowest CoE INDUSTRY and availability over the wind farm's life

o Large industrial conglomerates increasing 3 SUPPLIERS their market share o Smaller, local players are reducing their presence

34 Games is Responding to the Changing Market Gamesa Value Proposition:

Competitive CoE Superior reliability and service offering

The right products with superior technology

Extensive geographical presence Flexible response times

17

35 Gamesa US Overview

Introduction of New Products: 2010:  100 Meter Tower & Seismic towers  Introduction of 90 meter rotor – Class IIIA winds  High altitude package designed for 2000 meters (6000 ft)  Cold weather package designed for -40C  Gamesa NRS (Noise Reduction System)  O&M Services - Improvements and expanded coverage

2011:  G9X 2.0 MW wind turbine – Designed for Class I, IIA & IIIA winds  G10X – 4.5 MW wind turbine

36 Technology Leadership…G10X 4.5MW

State of the Art Technologies • Compact power train • 2 sectioned blade • 1,300,000 engineering hours been dedicated exclusively to the G10X 4.5MW turbine • 240,000 hours specifically to testing • 350+ tests on components and sub-systems • Designed in collaboration with our suppliers

37 Ambitious product innovation roadmap

38 Gamesa Goes Offshore ..UK & US 2 New platforms: G11X 5.0MW & G14X 6.0/7.0MW

Global Offshore Headquarters in London Sites in Scotland, Total investment of €50MM R&D engineering center in Glasgow

U.S Offshore Wind Technology Center….. In Partnership with Northrop Grumman

U.S . Center opened February 2011, Chesapeake, Va 60 engineers jointly working to design the G11X

Design, development, and testing of the G11X prototype Installation of 2 prototypes by 2012 along the Mid-Atlantic coast First offshore turbine to be developed in the US Gov Bob McDonnell 39 Gamesa Global Purchasing

Global purchasing presence Resources in EU/NA/ASIA/INDIA Strategic purchasing approach Total cost of ownership Focus on local supply chains Reduce cycle time to meet customer needs Optimized logistics patterns Supplier development program Performance metrics & feedback Introduction of lean techniques Improve process & eliminate waste

40 Gamesa Global Purchasing

Opportunities for NA suppliers exist in several areas:  Specific quality inspection providers:  Electrical & electro mechanical  Gear box inspection  Firms that can do Operations & Maintenance work up tower in the wind farms  Preventative maintenance and/or “punch-list” work  Requires extensive certifications  Suppliers of large industrial portable generators  Fabricators of large, machined weldments  Electrical cabling  Metallurgical towers

41 Gamesa US Purchasing

Opportunities for NA suppliers exist in several areas:

 Engineered tools, fixtures and inspection devices for maintenance of wind turbines

 Transport of major assemblies to the wind farms

 Environmental inspection services

 Construction contractors to complete the civil work on the wind farms  Support the erection of wind turbines

Needs: suppliers that can bring technological solutions to improve wind turbine availability and reduce COE!

42 Gamesa Supplier Requirements

 Successfully pass initial supplier quality assessment

 ISO9000 Certification

 ISO14001 Certification plan to achieve

 World class competitive cost structure

 Advance technological capabilities

 Advance product quality planning (APQP) system implemented

 Production part approval process (PPAP) implemented

 Successful Homologation in Gamesa system

 Lean culture and techniques utilized

 Manufacturing & administration

 Healthy Financial Status

43 Certification & Homologation Process:

Homologation Process Steps:

 Phase 1: Supplier’s Qualification Assessment

 Phase 2: Supplier Feasibility (Capability & Capacity)

 Phase 3: Process and Product Design

 Phase 4: Process Validation and Serial Mfg. Approval

 Phase 5: Initial Samples

 Phase 6: PPAP Closing. Start of Mass Production

44 Supplier Balanced Score Card

o Cost (Purchasing) o Quality (SQA):

Material cost reduction as a % of spend NCR’s # at production

Acceptance of contract terms NCR’s cost percentage

Long Term Agreement in place NCR’s # at wind farm

Productivity reduction plan in place? Advance quality planning

Supplier currently in Gamesa SIP program? Lack of notification deduction o Delivery (Planning): o Technology (Eng.):

Delivery performance to due on dock dates Catia/Cad facilities

Participation in Gamesa pull system? Bench mark technology

Following packaging instructions? Best practices design

Lead time reduction plan in place? Design capabilities/DFSS

Line disruption deduction Design failure deduction 45 Growth fundamentals are in place:

Why Wind??

46 Attractive opportunities mostly in Emerging markets:

7 7 47 Aligned with the main international ethical corporate principles

48 Corporate perspective…simply “globalization” . 1,600MW sold in 2004 Gamesa:. Top Global markets: Spain, Presence, Italy, Portugal, & China Local Focus

U.S. Market receptive to wind (2004)

. Dynamic market conditions

. Positive signs…Estimates showed the U.S. could top 15,000 MW of total installed capacity by the end of 2009

. 7 states plus DC legislated RPS’s

. 500 utilities in 34 states offered green pricing programs

. Early 2005 Project announcements of large projects, 4 of the top 5 were 200+MW PTC

49 Developing a Supply Chain as a Wind Industry Start-up Company

Bill Berghoff DIRECTOR OF MANUFACTURING Permanent Magnet Generators and Power Converters Full design and manufacturing • Only PMG manufacturer in USA

Industries • Wind • Industrial • Transportation

Company • Partnerships • Right people doing the right things • Innovation driven How a Start-Up Differs From an Established Company

Growth from technology or industry need Incomplete organizational competencies Investment funded by active partners Historical relationships Reputation Vertical Integration vs. Assembly Competencies

Vertical Integration Assembly

• Machining • Design • Fabrication • Sourcing • Stator Winding • Assembly Processes

Strategy

Core Competencies Supplier Value Proposition Danotek Supply Base Strategy Supply Base Development Strategy Differences

Typical Progression Danotek Progression

• Self evaluation • Supplier discussions • Quote • On-site visit • Review of technical • Ownership introduction specifications • Alignment discussions • Revised quote • Competency evaluation • Supplier evaluation • Program management • Supplier fit evaluation determination • Quote Danotek Typical Supplier

Privately owned

Domestic facility headquarters, often Midwest

Strategy to enter wind industry

Military, medical or industrial product critical mass

Advanced technology or competency expertise

Global outreach Danotek Supplier Interaction

Assessment during design and quote phase Full design reviews • Mating parts and full assembly • Functional use Complete open door exchange at facilities • Designers, engineers, floor technicians and quality personnel Customer • On-site customer review of facilities and capabilities • Suppliers are partners through to our customer Danotek Partnership Example: Loc Performance Expertise: Machining complex rotating assembly parts • Military final drive • Turbo assemblies

Danotek design • Max run-out 0.004”

Loc Performance Solution • Max stack-up run-out surface 0.0002” • 20 Times less run-out with No Added Cost Danotek Partnership Example: Merrill Technologies Expertise: Design, machining, fabrication and assembly • Machine tools • Assembly cells

Danotek situation • MFG medium speed generator

Merrill Technologies solution • Prototype assembly process • Re-locatable MFG cell Danotek Supply-Base Partnership Take-Away

Complementary skill sets

Advanced technology or industry offerings

Understand cost structure prior to quoting

Understand partnerships and start-up companies

Transition from prototype to production

Passion for wind diversification Three Phases Throughout Production

Start Up Phase •Local/Domestic Expertise •Design & Engineering Driven •Prototype Production •Fast Turnaround •Higher Cost Production Phase •Selected Partnership Global & Local Sourcing •Contingency Support • •Quality & Cost Driven •Established Organizations •Technical Partnerships •Volume Capability CI / CR Phase •Design Improvements •Supplier Re-Alignment •Logistics Optimization Danotek Supply Base Partnerships Evolving

Competitive through product manufacturing Competitive through global outreach Competitive through bundled global buy Follow and support Danotek in low cost regions New low cost partners for CI/CR phase Partners continue involvement with new product development Questions?

www.danotekmotion.com

Bill Berghoff Maureen Dempsey DIRECTOR OF MANUFACTURING GLOBAL SUPPLY CHAIN MANAGER [email protected] [email protected] 734-426-5976 ext 401 734-426-5976 ext 178

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