European Wind Energy Advisory ID#EW 975-080925

The Risks of Market Relocation: Addressing the Challenges of a Global Industry

Zaragoza, Spain 25 September 2008

Eduard Sala de Vedruna Senior Analyst +34 93 467 6750 [email protected] The Risks of Market Relocation Agenda

– The Market Today

– Supplier Manufacturing Presence

– Relocation considerations: Wind Power Demand, Component Supply, and Policy

– Wind Turbine Supplier Major Expansion Plans

– Addressing the Key Challenges of a Globalised Industry

– Conclusions

European Wind Energy Advisory – September 2008 Page 2 The Risks of Market Relocation Wind Power Installed Base by Region

18.8 GW 56.7 GW

17.4 GW 507 MW

597 MW

Source: Emerging Energy Research Europe remains the leading wind power region, accounting for 60% of the global installed base, although the US and China have surpassed and Spain as largest growing markets, accounting for nearly 45% of capacity added in 2007

European Wind Energy Advisory – September 2008 Page 3 The Risks of Market Relocation Main Wind Turbine Supplier Manufacturing Presence

Scandinavia Enercon Winwind Denmark: Siemens

UK: Canada Vestas GE AAER Germany : Enercon, Fuhrländer Enercon GE, Multibrid, Repower, Vestas Japan Mitsubishi USA: Acciona Spain: Clipper Acciona, Alstom Italy: China: DeWind Eozen, GE, Gamesa Vestas Acciona, Dongfang, GE Fuhrländer M-Torres, Vestas Gamesa, , Nordex GE Sewind (Shanghai Electric) Gamesa , Suzlon Repower, Vestas Mitsubishi Enercon Windey, Winwind Suzlon Repower Suzlon Repower Vestas Vestas Enercon

Key Australia Vestas 1-5 players

5-10 players

>10 players

Source: Vendors, Emerging Energy Research

Source: Vendors, Emeging Energy Resesacrh In the past two years, wind has become a global industry with leading players establishing a transnational presence to serve booming demand in new markets

European Wind Energy Advisory – September 2008 Page 4 The Risks of Market Relocation Market Demand by Region

600,000 Cumulative Installed Capacity by Region *

500,000

ROW 400,000

North America 300,000 Megawatts Asia Pacific 200,000

Europe 100,000

0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Emerging Energy Research * EER April 2008 forecasts with US June 2008 revision While Europe will remain the largest wind power region, demand will become increasingly diverse with North America and Asia accounting for a growing share of global installed base

European Wind Energy Advisory – September 2008 Page 5 The Risks of Market Relocation Turbine Supplier Component Sourcing Strategy

In-house Production Outsource Production

Gearbox

Bearings

Controls

Generators

Blades

Towers

Castings

Consensus Positioning among top 20 suppliers Key Pinch Point Source: Emerging Energy Research Regional diversification and component shortages are forcing turbine vendors to reconsider procurement models - establishing relationships with new suppliers, considering acquisitions, or adopting hybrid-sourcing models

European Wind Energy Advisory – September 2008 Page 6 The Risks of Market Relocation Policy Driving Relocation

Favorable customs duties/ export credit assistance/financial and tax incentives Local content requirement/ high import duties

Combination of “carrot” and “stick” policies Source: Emerging Energy Research Policy has played an important role in relocation, with governments using carrot and stick mechanisms for stimulating the creation of a local wind manufacturing industry

European Wind Energy Advisory – September 2008 Page 7 The Risks of Market Relocation Turbine Supplier Major Capacity Expansion Plans

Europe North America Asia ROW

X

X

X

X

X

X

X X X

Source: Vendors

European Wind Energy Advisory – September 2008 Page 8 The Risks of Market Relocation Addressing the Key Challenges of a Globalised Industry

Level of Risk*

•If negative change impacts •Increased exposure to wind local market, export to other policy framework changes i.e. countries in region Political Challenges end of PTC in US •Rely on local admin. and •Corporate environments with support team with experience diverse patent, labor, tax regimes in local operations

•Relocating home market talent •Lack of local know-how, skilled to start foreign operations labor force •Training programs Management •Controlling and maintaining Challenges standards of quality across regions •Recruiting from top local engineering/business schools for •Managing international workforce skilled jobs

Low to medium level of risk *Level of risk changes over time in each market and as the industry matures Medium to high level of risk High level of risk Source: Emerging Energy Research

Wind turbine suppliers must address a number of challenges associated with running a transnational operation …

European Wind Energy Advisory – September 2008 Page 9 The Risks of Market Relocation Addressing the Key Challenges of a Globalised Industry

Level of Risk*

•Component supply value chain management •Transportation and cost issues •Component suppliers following in footsteps of clients (OEM) Supply chain •Location choice management and setting up production sites in Logistics •Exacerbated component supply new regions bottlenecks Challenges •Local component suppliers •Assure quality levels emerging •Maintenance, repair of critical components

Low to medium level of risk *Level of risk changes over time in each market and as the industry matures Medium to high level of risk High level of risk Source: Emerging Energy Research

… among which logistics and supply chain management are critical

European Wind Energy Advisory – September 2008 Page 10 The Risks of Market Relocation Conclusions

• Europe remains the largest wind power region, although global demand is shifting to North America and Asia, creating new opportunities and challenges for industry players

• Wind turbine suppliers expanding their manufacturing presence to meet regionally diverse demand, following different levels of delocalization

• While geographic diversification of demand has played a key role in market relocation, policy has also played a part in driving wind turbine suppliers to establish manufacturing operations in key markets

• While leading vendors like Vestas, GE, Enercon and Gamesa lead the way in regional expansion, smaller players like Acciona, Nordex, Multibrid are now looking to increase their share of the global market by moving to new wind power demand hubs

• Although regional diversification represents significant benefits, wind turbine suppliers face significant political and operational challenges when moving abroad

• To make Spanish/European manufacturing competitive, vendors have to look for economies of scale and leverage quality advantage as China increasingly competitive on cost

• Globalization has to be seen as an opportunity. Design and IP are Spanish/European companies’ competitive advantages

European Wind Energy Advisory – September 2008 Page 11 Emerging Energy Research

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European Wind Energy Advisory – September 2008 Page 12