10 December 2015 Is bigger better for newly created wind gearbox giant ZF? INDUSTRY BACKGROUND established ZF as the third Two newly founded companies, In May 2015, German industrial largest wind gearbox ZF Industrieantriebe Witten SUMMARY group ZF signed an agreement manufacturer in the world. GmbH and ZF Powertrain ZF has taken over Bosch Rexroth's to take over the industrial gears Systems (Beijing) Col., Ltd will industrial gears and Bosch Rexroth AG was formed be added to ZF's recently gearbox segments as part of its and wind turbine gearbox corporate objective to further divisions of Bosch Rexroth AG. in 2001 by a merger of the created Industrial Gears expand its non-automotive After having received the green automation technology units of business unit. business. light from the EU antitrust Robert Bosch GmbH and authorities in November, ZF Mannesmann Rextroth AG. The ZF believes that the acquisition The acquisition will have positive officially announced the company, which focuses on boosts its corporate objective of impact on ZF's existing wind acquisition on 1 December drive and control technology, is further expanding its non- business in terms of product range, 2015. This acquisition is the also one of the top five wind automotive business because technology, offshore wind gearbox manufacturers in the the deal is not only an entry into reputation and client base. second transaction that ZF has made into the wind sector. In world. the business with large Although the two businesses 2011, the company took over industrial gears that are used in geographical locations do not make Belgian gearbox manufacturer With the transaction, ZF is oil rigs, mine vehicles and for a good fit, and overcapacity Hansen Transmission from taking over Bosch Rexroth AG's tunnel drilling machines, but remains a challenge for the wind and other shareholders. production facilities in Witten, also strengthen its wind turbine gearbox suppliers in the near-term, ZF had already been active in Germany with almost 900 gearbox business, a unit where we expect that as a non-pure wind the wind sector before 2011, employees and in Beijing with the group sees ideal future player ZF can mitigate those risks by about 300 employees, as well opportunities for its Industrial leveraging its industrial gears but the acquisition of Hansen, businesses that serve multiple which had been serving the as the service unit in Lake Technology Division. The global industries. wind industry for over 30 years, Zurich, US with 15 employees. map (below) shows ZF's We expect gearbox producers to be ZF’s global footprint in the wind sector under more pressure to secure reliability while further reducing the costs. As a result, more small or medium size wind gearbox suppliers will collapse or leave the market in the coming years.

EXPERT Feng Zhao Director + 45 3342 2658 [email protected]

@FTIConsulting www.fticonsulting.com Source: ZF

footprint in the global wind stages) and the integrated build its reputation in the power market after the design on both the rotor side offshore sector. acquisition. (for 3.0MW turbine) and the generator side (for 4.5MW Broader client base FTI SPARK VIEW turbine). Since adopted From a client perspective, ZF's Larger manufacturing capacity Bosch Rexroth’s medium speed focus has been on European Before the acquisition, ZF gearbox - for its V164-8.0MW wind turbine manufacturers and operated four manufacturing wind turbine, the transaction India’s Suzlon, which acquired plants in Europe, the US, China has further ZF's capability of Hansen Transmission in 2006. and India. To ensure maximum providing the medium speed Sinovel, Envision and most control over quality, all drive train solutions, which has recently GE, are using its manufacturing activities are gained popularity in the past gearboxes, but ZF is not the key performed in-house. With five years, especially in the supplier to those turbine annual manufacturing capacity offshore sector. vendors. Despite Bosch Rexroth of up to 10,000MW, ZF was the sharing almost the same third largest wind gearbox Extended offshore wind track European clients as ZF, its manufacturer in the world after record relationship with United Power, NGC (12,000MW) and Winergy The former Hansen the second largest turbine (10,000-12,000MW). With the Transmissions was one of the manufacturer in China, transaction ZF has added global leaders in the offshore broadens ZF's the client base in another 4,200MW wind sector. Turbine OEMs that the wind sector; meanwhile its manufacturing capacity from chose Hansen gearboxes for relationship with GE will Bosch Rexroth's factories in their offshore machines include strengthen ZF's existing Germany and China, making it Vestas (V90- 3.0MW), Siemens relationship. the world's largest wind gearbox (SWT-2.3MW), (6M - manufacturer in terms of 6.15MW) and Sinovel SL3000 - However, FTI Intelligence notes gearbox production capacity per 3.0MW and SL5000 – 5.0MW). that gearbox manufacturers, annum. Taking over Bosch Rexroth's NGC and Winergy have the wind gearbox unit, ZF has lion's share of sales to GE, while Expanded gearbox size range added to its offshore track United Power has in-house With over three decades of record, as Bosch Rexroth has gearbox manufacturing capacity know-how in wind gearbox been a major supplier to Vestas and a strong business manufacturing and long-term since 1998 and is still the relationship with NGC as well. It partnerships with leading wind gearbox supplier for MHI-Vestas is going to be an uphill battle for turbine vendors, ZF was V112 and V164 offshore ZF if it plans to increase its capable of supplying gear- turbines. The stability and sales volume from these driven wind turbines ranging reliability that ZF has inherited turbine OEMs. from 1.5 to 6.2MW. With Bosch from Bosch Rexroth will further Rexroth's wind gearboxes under ZF and Bosch’s Rexroth’s clients in the wind industry the ZF umbrella, its product range has been expanded from 850kW up to 8.0MW. This also makes it the gearbox supplier to the world's most powerful wind turbine, Vestas V164- 8.0MW machine.

Enhanced medium speed drive EXPERT train technology Feng Zhao As a proven drive train solution Director provider, ZF has products + 45 3342 2658 covering both the conventional [email protected] design (featuring a combination of one or two planetary stages @FTIConsulting and one or two parallel gear www.fticonsulting.com Source: FTI Intelligence, 2015

Geographical fit is not ideal Chongqing gearbox have a next five years will be in the Germany and China are combined capacity of more than range of 43.7GW to 54.6GW “We can expect more locations for Bosch Rexroth's 17GW per annum. per year. In this scenario, no small or medium size two gearbox manufacturing bottlenecks are likely to occur facilities. Since ZF has already The 2011-2013 contraction of and, in fact, overcapacity will wind gearbox suppliers built its wind gearbox the international wind market, remain a challenge for gearbox will leave the wind production business in both however, had a major impact on suppliers, especially, in the industry in the next two countries, there is likely to be the supply of gearboxes. Due to 2017-2019 period, when key significant overlap in sales and the slump in demand, the markets like the US and to three years.” marketing. According to FTI utilization rate of facilities at Germany are expected to suffer Intelligence Global Wind Supply some of the major suppliers from policy uncertainty. Chain Database, the was lower than 50 percent. transaction has increased ZF's Despite the rebound of global Overcapacity is a challenge that gearbox manufacturing capacity market in 2014 and has forced nine gearbox in Europe and China to 7GW+ an even better outlook for manufacturers (both tier 2 and and 4GW+ respectively. 2015, the near-term market 3 suppliers) to leave the wind outlook is not promising for the industry since 2012 and this Bigger does not necessarily gearbox suppliers. situation is likely to persist in mean better at present the near-term (Jahnel- As a critical component that At present, there are more than Kestermann is good example), makes up approximately 15 25 wind turbine gearbox it is imperative for ZF to find the percent of turbine costs, the suppliers active in the global right strategy to increase its gearbox used to be a bottleneck supply chain. Collectively, they relatively low utilization rate in that constrained global wind provide more than 60GW of the coming period. power development. wind main gearboxes per annum. However, we expect that the Following market growth in recently created Industrial North America and Asia, the Based on FTI Intelligence's Gears business unit at ZF can three key European suppliers Global Wind Market Demand mitigate the risks since it is not Winergy, ZF and Bosch Rexroth Forecast Update released in a player that is purely active in established production facilities October 2015, we believe that the wind gearbox business. We in the US, China and India, global wind gearbox demand also believe that its multi- resulting in an overall will be around 43.7GW in 2015, industries business model has significant expansion of their but gearbox suppliers are likely put its wind turbine gearbox unit annual manufacturing to face market volatility in the in a position where it can share capacities. By the end of 2011, next two years before demand resources and facilities with the three suppliers were starts catching up again in other industrial gears capable of supplying more than 2019. businesses. 25GW. In China, local gearbox manufacturing capacity was Taking into account the fact CONCLUSION rapidly built up since 2005 that the industry normally The acquisition of Bosch when a 70 percent Local maintains 20-25 percent extra Rexroth's industrial gears and Content Requirement (LCR) capacity to avoid supply wind turbine gearbox segments came into force. The two bottlenecks and supply the makes a lot of sense for ZF as it leading local gearbox O&M market, the total global fulfills its corporate objective to manufacturers NGC and demand of gearboxes in the further expand its non-

Wind gearbox demand and supply forecast (including offshore) EXPERT 2015 2016 2017 2018 2019 Feng Zhao Director Total demand in MW installation 43,734 40,882 34,990 36,953 38,851 + 45 3342 2658 [email protected] Total demand with 25% reservation 54,668 51,103 43,737 46,191 48,564

Maximum supply as of Q3 2015 60,000 60,000 60,000 60,000 60,000 @FTIConsulting www.fticonsulting.com Source: FTI Intelligence, 2015

automotive business and helps It brings new customer United to achieve greater scale for its Power into its client base and industrial gears business. will strengthen its relations with GE. Both turbine OEMs listed in Looking at the impact of the the top 10 turbine supplier acquisition on ZF's existing wind rankings have great growth business, it seems positive as potential, although competition well, because: is tough among the gearbox manufacturers that supply 1. With the acquisition of Bosch them; Rexroth’s wind activities, ZF further underlines its Despite the fact that there is commitment to wind power. not a particularly good ZF Wind Power will be able to geographic fit between the two leverage the group’s businesses, and that, innovation and industrial overcapacity is set to continue process knowledge building to be a challenge, we expect wind gearbox solutions for that as a diversified player ZF next generation wind can mitigate those risks by turbines. sharing resources and facilities with other industrial gears 2. It has further increased ZF's business units that serve wind turbine gearbox different industries. manufacturing capacity. As the world's largest wind In addition, the acquisition turbine gearbox simply reflects the recent wave manufacturer, it will enjoy of consolidation in the wind more benefit from scale and turbine manufacturing market be able to lower its product and global wind supply chain. cost; With the size of wind turbines 3. It has expanded ZF's gearbox getting bigger, owner- size range up to 8.0MW and operators are increasingly made it the supplier for the focusing on the levelised cost of world's largest wind turbine; energy (LCOE), as well as cost reduction targets for offshore 4. It has further enhanced its wind, meaning that gearbox existed medium speed drive producers are under pressure train technology that has achieve reliability while further become increasingly popular reducing costs. for the multi-MW wind turbine segment; As a result, we expect that more tier 2 and tier 3 suppliers especially from Asia Pacific will 5. Bosch Rexroth's extensive EXPERT offshore wind track record find it hard to survive competition with the major wind Feng Zhao will enhance ZF's reputation Director in the sector. It makes ZF the gearbox suppliers like ZF, Winergy and NGC. We can + 45 3342 2658 only supplier that has [email protected] supplied both the world's expect more smaller or medium size wind gearbox suppliers will largest conventional DFIG @FTIConsulting and medium speed PMG leave the wind industry in the next two to three years. www.fticonsulting.com wind turbines so far; Bosch's product will also give ZF full portfolio coverage at