SIEMENS WIND POWER AND THE U.S. MARKET FOR WIND ENERGY -­‐ AN ANALYSIS OF ENVIRONMENTAL FACTORS IMPACTING A TURBINE MANUFACTURER by Jan Thore Sieck Exams No. 302511 Bachelor Thesis For The Program Of Business Administration Characters (Excluding Spaces, Including Figures): 108.285 Supervisor: Sylvia Grewatsch Department: AU-­‐ School of Business and Social Science Date Of Submission: 01.05.2014 ABSTRACT This thesis is going to examine the wind turbine manufacturer Siemens Wind Power, and its position in the American market for wind energy. The investigation focuses on: 1. How a turbine manufacturer is affected by its market settings? 2. What market scanning tools are able to assist companies in their strategic decision process? In order to be able to answer these questions a qualitative approach was used. To cover the wide range of information different sources were utilized. Academic literature such as books and journals and non-­‐academic sources including web news, homepages and other online data archives have been the main sources. For the analytical portion of the paper, PESTEL analysis, Porters 5 Forces framework, and SWOT analysis were used, since the interplay of the analyses was able to answer the questions to the expected degree. By the use of the three tools it was discovered that the American market for wind energy is tremendously impacted by its surroundings. Especially government interaction, the economic situation, and vertical integration are key characteristics that are impacting wind turbine manufacturers in the U.S. and are of major influence on Siemens Wind Power´s success. Furthermore, the interrelation between different factors has shown to have a tremendous impact, which also was the rationale behind the use of three different analytical tools. Table of Contents 1. INTRODUCTION ............................................................................................................. 1 1.1 RESEARCH QUESTION ........................................................................................................ 1 1.2 PROBLEM STATEMENT ..................................................................................................... 1 2. RESEARCH DESIGN ........................................................................................................ 2 3. SIEMENS ........................................................................................................................... 5 3.1 SIEMENS ENERGY ................................................................................................................ 5 3.2 SIEMENS WIND POWER ..................................................................................................... 5 3.2.1 DANREGN A/S & BONUS ENERGY ........................................................................................ 5 3.2.2 SIEMENS WIND POWER ........................................................................................................... 6 3.2.3 CURRENT SIEMENS WIND POWER AND THE PRESENCE IN THE U.S. ................ 7 4. The American Electricity Market ............................................................................. 8 4.1 RENEWABLE ENERGY IN AMERICA AND THE CAUSES FOR ITS GROWTH ........ 9 4.2 RENEWABLE ENERGY SOURCES IN THE U.S .............................................................. 10 4.2.1 HYDROELECTRIC ....................................................................................................................... 11 4.2.2 BIOMASS ........................................................................................................................................ 11 4.2.3 GEOTHERMAL ............................................................................................................................. 12 4.2.4 SOLAR .............................................................................................................................................. 13 4.3 WIND POWER ..................................................................................................................... 13 5. SIEMENS WIND POWER IN THE AMERICAN MARKET .................................... 15 5.1 ENVIRONMENTAL SCANNING ........................................................................................ 16 6. PESTEL ANALYSIS ....................................................................................................... 17 6.1 CRITIQUE .............................................................................................................................. 19 6.2 PESTEL ANALYSIS SIEMENS WIND POWER ............................................................... 20 6.2.1 POLITICAL ..................................................................................................................................... 20 6.2.2 ECONOMIC .................................................................................................................................... 23 6.2.3 SOCIAL ............................................................................................................................................ 25 6.2.4 TECHNOLOGICAL ....................................................................................................................... 29 6.2.5 ENVIRONMENTAL ..................................................................................................................... 33 6.2.6 LEGAL .............................................................................................................................................. 35 7. PORTERS FIVE FORCES ............................................................................................. 38 7.1 CRITIQUE .............................................................................................................................. 42 7.2 PORTERS FIVE FORCES SIEMENS WIND POWER ..................................................... 43 7.2.1 RIVALRY AMONG COMPETING FIRMS ............................................................................. 43 7.2.2 POTENTIAL ENTRY OF NEW COMPETITORS ................................................................ 46 7.2.3 THREAT OF SUBSTITUTES .................................................................................................... 47 7.2.4 BARGAINING POWER OF SUPPLIERS ............................................................................... 49 7.2.5 BARGAINING POWER OF CONSUMERS ............................................................................ 52 8. SWOT ANALYSIS ......................................................................................................... 53 8.1 CRITIQUE .............................................................................................................................. 54 8.2 SWOT ANALYSIS SIEMENS WIND POWER ................................................................. 55 8.2.1 STRENGTH .................................................................................................................................... 55 8.2.2 WEAKNESSES .............................................................................................................................. 56 8.2.3 OPPORTUNITIES ........................................................................................................................ 57 8.2.4 THREATS ....................................................................................................................................... 58 9. CONCLUSION ................................................................................................................ 59 Bibliography ..................................................................................................................... 61 1. INTRODUCTION Since its discovery, the demand for electricity has increased tremendously and today a life without it is unimaginable. To cover the growing request of electricity, different energy sources are utilized with the major contribution coming from the so-­‐called non-­‐renewable sources. These sources are not only highly dependent on natural scarce resources but are also the main contributor to the contemporary climate change. In order to combat these issues, more and more focus is going towards renewables as an energy source. The wind energy industry had an impressive development during the last decade and is the most utilized renewable energy source worldwide. In the following paper, the reader is going to learn more about the factors that are influencing a manufacturers decision process. The case company that is used is Siemens Wind Power, a subsidiary of Siemens. 1.1 RESEARCH QUESTION I am analyzing the business environmental factors surrounding Siemens Wind Power in the U.S., because I want to find out how a turbine manufacturer is affected by its environmental settings, in order to understand how environmental-­‐scanning tools are able to assist companies in their strategic decision process. 1.2 PROBLEM STATEMENT The purpose of this study is to analyze how Siemens Wind Power is affected by the business market climate in the U.S. In order to be able to evaluate the impact of the company’s environment, three different scanning tools were chosen. During the history of wind energy, the market always was tremendously affected by its surrounding conditions. Especially the U.S. has been, and still is, a market that to high degree is shaped by external market influences. Throughout the last years until today the factors, which are covered with the chosen 1 analytical tools, were in different ways taking a noteworthy impact on turbine manufacturers success. The market factors and their changes were facing manufacturers with many difficulties in maintaining a profitable business. For Siemens this resulted in huge losses, which were forcing the company to lay off workers, while at the same time, management was sensing the need for restructuring the company. This paper is going to analyze the American market in regard to the political, economical, social, technological, environmental, and legislative factors, which are going to be of the major concern in the PESTEL analysis. The Porters Five Sources framework is directing its attention to the rivalry among competing firms, the potential threat of new competitors, the threat of substitute products, the bargaining power of suppliers, and the bargaining power of consumers. Last but not least, the SWOT analysis is used to evaluate Siemens' Wind Power strength, weaknesses, opportunities, and threats. 2. RESEARCH DESIGN What is very common for an economic research is the qualitative study, which was also chosen for this paper (Blumberg et al., 2008). The qualitative study, in comparison to the quantitative, was better able to answer the ‘how’ of our question since especially the interplay of different market factors were contributing to the actual situation of the company. The paper in itself is majorly formal, starting out with a descriptive account of the situation, followed by the analysis, and ending with the conclusion. However, it was not possible to totally keep the study formal and one might discover tendencies into the exploratory study, since additional areas of investigation were discovered along the way. Since the purpose of the paper was to answer both “how a turbine manufacturer is affected by its environmental settings” and “how environmental scanning tools are able to assist companies in their strategic decision process”, the causal study was chosen (Blumberg et al., 2008). However, the reader is also 2 able to discover characteristics of the descriptive study since the first part of the study focuses on finding out who, what, where. In order to be able to answer the research question different information sources were needed, ranging all the way from secondary sources to qualitative interviews. The secondary sources that were utilized were governmental homepages, company homepages, homepages from independent organizations, academic journals, news homepages, and academic books of the management and marketing literature. The first part of this paper, which is majorly descriptive and deals with our case company and the American energy market, was written by the use of information that were found on homepages from governmental institutions and company homepages. To gather information about the American energy market, data that was provided by governmental institutions was used as the primary source. Additionally a variety of independent organizations were able to provide information regarding the market and the different energy sources. Furthermore different history and political academic sources were used as a source for the U.S. historical political development for renewables. Information, concerning the different analytical tools, was obtained through the use of strategy and marketing books, and with additional supplementation via articles found in a variety of academic marketing and management journals. Especially in this part of the paper, a collection of different sources was needed to broaden the writer’s knowledge, while on the other hand allowing taking a critical viewpoint towards each theory applied. The widest range of information was needed for the analytical part. Besides the analytical part being the biggest, it on the other hand is the broadest. In addition to the already mentioned sources, the analytical part was supplied with information from news homepages and interviews. The two interviews that were held in Springfield, Illinois, have both been qualitative. The first interview, which was held with Stan Komperda, who is the Director of Development for American Wind Energy Management Corp., was about the developer and his part in the supply chain and, additionally, about 3 some factors of the American market for wind energy. The interview was chosen to be semi-­‐structured to give the interviewee enough freedom to decide how much to go in depth with each question and what direction to choose. This freedom was additionally helping the interviewer to discover what a wind developer regards as important and what not. The second interview was a focus group interview. The group consisted of three people namely Christopher Nickell, who is the Director of Site Establishment for AWEM Corp, Stan Komperda, and Kyle Barry, who is an independent lawyer dealing with legal issues in regard to the development of wind farms. The interview was about legal issues concerning the development of a wind project and the three different personalities were chosen to widen the discussions horizon. During the interview process the interviewer tried to interact as little as possible to keep the different arguments continuing. However, this was not always possible and an interaction to keep the discussion going was needed from time to time. Both interviews were able to provide the needed data and at the same interesting viewpoints. However, during the research process the writer several times was facing problems, although minor. Especially the use of news homepages turned out to be problematic since the published information not always was reliable. To tackle this problem, at least to some extent, the given data was compared with as many sources as possible. Another problem that was to be handled was the fact that Siemens Wind Power not was willing to give interviews in regard to their contemporary and future strategy. This resulted in an increased focus towards the information that could be gathered. Furthermore, the fact that a recorder was used, to record the interviews, gave the impression that some sentences were shortened to get to the point faster. Additionally the participants of the focus group interview were not familiar with the interview style, which resulted in some answers to be given directly to the interviewer. 4 Additionally, and that has been one of the most influential problems, was the fact that this paper was limited to 110.000 signs. This limitation resulted in the writer not being able to discuss all of the factors that were taking an impact on the case. It was therefore up to the writer to decide what factors to include and which not, which resulted in spending a lot of time reading literature to find out how different factors were taking an impact. 3. SIEMENS Werner von Siemens founded the company in 1847, starting out with producing an improved version of the telegraph (Siemens, 2008). Today Siemens AG is a worldwide operating electronics and engineering company, focusing on the market sectors of energy, industry, healthcare and infrastructure & cities
(Siemens AG, 2013). At its current stage the company is employing 370.000 people in 190 countries, while generating yearly revenue close to 105 billion Euros (Siemens AG, 2013). 3.1 SIEMENS ENERGY Siemens energy sector is divided into different areas namely; energy services, power generation, power transmission and wind power (Siemens,
2013). The energy sources in Siemens product portfolio are wide ranging from renewables like wind, solar, and hydroelectric, all the way to the non-­‐renewable sources like coal, and gas (Siemens, 2013). In 2013, Siemens energy sector had a workforce of approximately 83,500 and received orders that were accounting to 28.8 billion Euros, generating a total profit of 1.95 billion Euros (Siemens, 2013). 3.2 SIEMENS WIND POWER Siemens wind power has a history of more than 30 years and is the world’s oldest wind turbine manufacturer (Siemens Wind Power, 2013). 3.2.1 DANREGN A/S & BONUS ENERGY The whole basis for the Siemens wind power sector was made in 2004 through an acquisition of Bonus Energy (formerly Danregn Vindkraft A/S). Danregn started its wind turbine business in 1980, with producing 15 turbines, each with a capacity of 25-­‐30 kW (Bonus Energy, 2003). A year later, Danregn 5 founded the company Danregn Vindraft, which was now producing a 55 kW turbine that was to be exported to the USA in collaboration with Difko A/S
(Bonus Energy, 2003). Due to the boom on the American market, Danregn Vindkraft decided to establish a service company in the U.S while at the same time changing its name to Bonus A/S in 1983 (Bonus Energy, 2003). In 1985 Bonus stopped selling turbines on the American market due to the cuts of governmental support under the Reagan administration (Sherlock, 2011). However the company was still maintaining its presence by carrying out retrofitting activities on turbines made by other manufacturers (Bonus Energy,
2003). During the time after 1985, Bonus A/S was nearly exclusively focusing on their Danish domestic market, with directly developing new technologies for offshore wind projects (Bonus Energy, 2003). In 1991 Bonus A/S participated in the world's first offshore wind park in Vindeby, Denmark (Siemens, 2012). The Vindeby offshore wind park consisted of 11 turbines with a total capacity of 5 MW (Siemens, 2012). 3.2.2 SIEMENS WIND POWER In 2004 Siemens entered the wind industry market by acquiring Bonus A/S (Siemens, 2008). After the acquisition, Siemens rapidly continued investing into their new wind business, since they saw a high potential in the industry
(Siemens, 2008). In 2005 Siemens bought one of Bonus Energy's former partners, AN Windenergie GmbH, which was dealing with sales and services (Siemens,
2008). One year later Siemens bought a former blade factory, LM Glassfiber, while at the same time investing into new offices, warehouses and production facilities at its headquarters in Brande (Siemens, 2008). The new acquisitions were made to better control quality, delivery, production, etc. However, Siemens did not only invest domestically. In 2007 Siemens opened a blade factory in Iowa (USA), which was consisting of different facilities for warehousing and manufacturing
(Siemens, 2008). The reason for directly investing into the market was caused by the fact that the American growth rate started to increase and that corporate owned facilities were able to decrease transportation cost and at the same time increasing delivery speed (Siemens, 2010). During the time between 2005 and 2010 the American market had an average growth rate of more than 35% and in these five years Siemens installed a capacity of 3.6 GW, which was enough to 6 supply more than one million households with clean and renewable energy
(Siemens, 2010). During the last years, Siemens presence on the international market for wind energy has grown tremendously. At the end of 2010 Siemens again directly invested into foreign markets, with its first rotor blade manufacturing plant in China and Canada, and a new nacelle production in Kansas (Siemens, 2010). The investment was caused by new orders in these markets, while analysis at the same time were predicting enormous growth rates for the wind turbine industry
(Miller, 2013). In 2011 Siemens again decided to invest into the expansion of their wind business. One Hundred Fifty million Euros were to be invested into their R&D center in Aalborg and Brande (Siemens, 2011). Additionally, this money was used to expand the headquarters in Brande, since the facilities were too small to accommodate the growing number of employees (Siemens, 2011). The fact that both the wind power and the solar & hydro sectors have grown dramatically, lead to the decision of realigning the renewables business into two independent units (Siemens, 2011). This was caused by the fact that both the wind and solar industry were on different stages of their development and because the workforce has grown more than 10 times since 2004 (Siemens,
2011). The realignment was made to better customize the strategies for the two different industries and was, additionally, the main reason to replace the wind power headquarter to Hamburg, Germany (Siemens, 2011). 3.2.3 CURRENT SIEMENS WIND POWER AND THE PRESENCE IN THE U.S. Today the Siemens Wind Power sector accounts for more than 10.000 employees of which more than 1.500 directly are employed in the U.S. (Siemens,
2013). To the present day Siemens has installed a total of more than 13.000 wind turbines with approximately 4.800 of them generating clean and renewable energy in the American market (Siemens, 2013). In total, their turbines are accounting for a capacity of more than 22.000 MW globally, with close to 8.500 MW in the U.S. (Siemens, 2013). 7 At its current stage, Siemens Wind Power has 10 locations in the U.S. The American headquarters for the wind power business is located in Orlando, Florida, and was established in 2005 (Siemens, 2013). Through the headquarters in Orlando, they manage a nacelle assembling facility in Hutchinson, Kansas, a rotor blade manufacturing facility in Fort Madison, Iowa, a research and development center in Boulder, Colorado, an offshore office in Boston, Massachusetts, a distribution center in Wichita, Kansas, and four different service locations in Orlando, Houston, Texas, Goldendale, and Woodward
(Siemens, 2013). All of these locations are relatively new and none of them was established before 2005 (Siemens, 2013). Siemens Wind Powers contemporary goal is to drive down the cost of wind energy and thereby be not only be competitive with other energy sources but to also to be independent of subsidies (Siemens, 2013). The strategy to obtain this goal is to build highly efficient, solid, and reliable turbines that are easy to install and are able to supply reliably for long timeframes (Siemens, 2013). 4. The American Electricity Market The United States is currently the biggest producer of electricity and at the same time its largest consumer. In 2013 U.S electricity consumption accounted to 4.05 million MWh, which was supplied by energy sources such as coal, gas, nuclear, renewable energy sources and oil. (U.S. Energy Information
Administration, 2014). The biggest electricity sources used in America are coal with 39%, followed by natural gas accounting for 27,5%, nuclear for 19,5%, and renewables and other sources accounting for 12,8% and 1,2% respectively (U.S. Energy
Information Administration, 2014). The biggest consumer group of the supplied energy is the residential sector with 37%, the commercial sector with 36%, the industrial sector with 26,5%, and the transportation sector that accounts for less than 0.5% (U.S.
Energy Information Administration, 2014). 8 Figure 1. EIA, Feb 2014, Electric Power http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_1_01 Monthly, Figure 1 shows how the supply by the different energy sources has changed during the time between 2003 and 2013. The most noteworthy increase was made by the sector of renewables (excluding hydroelectric). Starting out with supplying around 80.000 MWh in 2003, which was equal to approx. 2% of the total energy supply, the renewable sector (excluding hydroelectric) has increased its supply to 270.000 MWh, equal to 6% of the U.S total supply of electricity. The following part is going to look more detailed at the American market in regard to the renewable energy sector, while directly putting increased focus towards the wind energy. 4.1 RENEWABLE ENERGY IN AMERICA AND THE CAUSES FOR ITS GROWTH The first step to push renewables was made in the 1960s, where The National Environmental Policy Act for the first time recognized the importance of protecting the national environment (GENESLAW, 1995). Air pollution and the use of scarce natural resources where the main causes for the Congress to impose responsibilities on the federal government (GENESLAW, 1995). In the 1970s the U.S Environmental Protection Agency (EPA) was established due to the continuing damages that were made to American natural 9 areas (EBSCO HOST, 2014). The goal of the EPA was to reduce the dependency on natural resources like fossil fuels, and to develop energy sources with a long-­‐
term sustainable future (EBSCO HOST, 2014). In 1973 the oil embargo came and the U.S were pressured since they were not able to cover their domestic demand with their own production (Eckhart,
2012). This lead to calls for energy independency while creating programs and policies that were supporting clean and renewable energy sources (Eckhart,
2012). However, the support for renewables and its research and development were slashed with the Reagan Administration in 1981 (Sherlock, 2011). In addition to the bad political situation for renewable energy sources, the oil and natural gas prices declined tremendously between 1985-­‐1986 which made it even harder for renewables to develop (Eckhart, 2012). In 1992, the Energy Policy Act (EPACT) was carried into effect, which contained titles such as the ‘Independent Power’ that was eliminating the 49% ownership-­‐rule that said that utility companies were not allowed to hold a major part in the energy plants that were supplying them (Eckhart, 2012). These new laws were the basis for the modern energy structure the U.S. has today, where big companies own energy plants such as wind farms, coal power plant, or nuclear power plant etc. (Eckhart, 2012). From 2000-­‐2010, 30 of the 50 American states adapted to some form to the ‘Renewable Portfolio Standard’, which requires an increase in production for energy supplied by renewable energy sources (IHS, 2010; Eckhart, 2012). The 30 states targeted a goal of 20% of all energy being supplied by renewables by 2020
(IHS, 2010). 4.2 RENEWABLE ENERGY SOURCES IN THE U.S The renewable sector in the U.S consists of the hydroelectric sector, the wind sector, the biomass sector, the geothermal sector, and the solar sector. Figure 2 shows all renewable energy sources used in the U.S., and the proportion of electricity supplied by each of them, while figure 3 shows the change of supply between 2003 and 2010. Figure 2. EIA, Dec 2013, Annual Energy Outlook. http://www.eia.gov/electricity/annu
al/pdf/epa.pdf 10 Figure 3. EIA, Feb 2014, Net Generation from Renewable http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_1_01_a 4.2.1 HYDROELECTRIC Sources. The biggest renewable energy source in the U.S. is hydroelectric. A hydroelectric power plant requires the power of moving water like rivers, ocean waves, or other streams of water (NHA, 2013). Figure 3, the column of ‘Hydroelectric Conventional`, shows the energy supplied by this sector. In 2013, the hydroelectric energy source provided approx. 7% of the total electricity supplied, while generating more than 55% of all the electricity supplied by renewables. Not only is hydropower the biggest renewable source in the U.S, but additionally one of the cheapest with a price of $0.09 per kW/hr., where only power plant types such as natural gas, wind and geothermal are able to compete
(Eia, 2013). By the end of 2012 the industry employed close to 300.000 workers across the U.S. However, this renewable energy source has not shown to develop much during the last years, which insiders say is caused by the fact that other renewable energy sources received governmental support and the fact that hydroelectric power plants are restricted to a limited amount of development areas (NHA, 2013). 4.2.2 BIOMASS Leaving out wind energy to make a more detailed description, we have biomass as the third biggest renewable energy source. Biomass is biological material, usually from organisms like plants, which in a thermal, chemical, or 11 biochemical conversion produces energy (Biomass EC, 2014). Figure 3 shows the net generations for biomass in four different columns, all together having supplied close to 60.000 MWh. in 2013. With this number the biomass sector has supplied approx. 11% of the total renewable energy generated in 2013. The price for one kW/hr. has been $0.11 in 2013 and thereby supplied for the same cost as nuclear power plants (Eia, 2013). By the end of 2011 the industry of biomass energy employed around 15.500 people all over in the U.S, but, like the hydroelectric industry, the industry of biomass energy neither has shown big growth rates during the last ten years (Biomass Power, n.d.). The net generation of electricity supplied by biomass in 2003 was 53.000 MWh., while ten years later it increased to 60.000 MWh (Eia, 2013). The only slow growth of the biomass industry has different causes. First of all biomass is said to be a carbon dioxide neutral energy source, since the process of generating energy releases approximately the same amount of carbon dioxide that is being recovered by the growth of the plants (NREL,
2014). Additionally, it is being criticized that areas where food could be grown, are utilized for plants that in later stages are getting destroyed for the supply of energy (NREL, 2014). 4.2.3 GEOTHERMAL The fourth biggest renewable energy source is geothermal energy; supplying around 4% of the total renewable energy in the U.S. Geothermal energy uses magma that is heating up water and by that creating pressure which is going to drive electric generators (Union of Concerned Scientists, 2014). Plants for geothermal energy are placed in areas where the earths’ crust is relatively thin and where it is easier to access the hot core (Union of Concerned Scientists,
2014). When it comes to employment, the sector of geothermal energy had a workforce of approx. 13.500 people in 2010 (GEA, 2010). The price for one kW/hr. of geothermal energy is $0.09 and by that makes it one of the cheapest energy sources (Eia, 2013). In 2003, the geothermal sector supplied around 14.500 MWh and reached, 10 years later, 16.500, which equals a growth of 12% in ten years. Like biomass and hydroelectric, also geothermal energy has not shown big growth 12 rates during the time between 2003 and 2013. The slow growth is caused by the fact that the technology cost of geothermal energy plants is generally higher than for example for wind or solar (EIA, 2011). Additionally, geothermal power plants are extremely dependent on area specific characteristics and by that limit their growth possibilities (EIA, 2011). 4.2.4 SOLAR The smallest renewable energy source in the U.S. is solar energy. Solar energy can be generated by photovoltaic and thermal solar power plants (SEIA,
2014). Figure 3 and the columns of “Solar Photovoltaic” and “Solar Thermal” are showing the development of the energy supplied by the solar industry. Starting out with supplying around 500 MWh in 2003, the industry now supplies more than 9.000 MWh. The biggest change here was made in the area of photovoltaic, starting with supplying 2 MWh in 2003, to reaching a supply of 8.300 in 2013. The reason for this enormous growth is not only caused by governmental support, but also the fact that installments of photovoltaic can be placed on nearly every surface where the sun is shining (SEIA, 2014). Although the development went fast for solar energy, the price is still not competitive with other energy sources. The price for one kW/hr. of photovoltaic generated electricity is $0.14 and $0.26 for thermal solar electricity (Eia, 2013). One of the main reasons, that are causing the relatively high price of solar energy, is the fact that, although the industry is still small, the total workforce is unproportionally large, with more than 100.000 employees at the end of 2012
(ACORE, 2013). 4.3 WIND POWER Wind power has a long history in the U.S., reaching all the way back to the 18th century (U.S. Department of Energy, 2014). In the beginning, the energy, which was supplied by the mills, was used for grinding corn and other grains or pumping water, while in the 1930s it started to be used as an electricity source
(Iowa Energy Center, 2014; U.S. Department of Energy, 2014). The efficiency at that time was low and one wind turbine only had the capacity of lighting one or two bulbs, or operating a radio receiver (Iowa Energy Center, 2014). However, the demand for wind turbines was high since many households were not connected 13 to the power grid (Kaldellis & Zafirakis, 2011). In the 1950s this changed and the central power grid was extended to nearly every American household, which resulted in a heavy decrease in demand for wind turbines and development was nearly dormant for the following 20 years (Kaldellis & Zafirakis, 2011). In the 1970s the Oil Embargo reawakened the interest in renewables and especially wind energy (Sherlock, 2011). The fact that energy prices were climbing and the availability of conventional fuels was decreasing resulted in governmental investments into the development of the wind energy industry
(Iowa Energy Center, 2014). The input came from the National Aeronautics and Space Administration, The National Science Foundation, and The U.S. Department of Energy, which all contributed to the development of 13 experimental turbines that were causative to the basis of the turbines used today, not only in the U.S. but worldwide (Wind Energy Foundation, 2014; Iowa
Energy Center, 2014). The new technology increased the efficiency and effectiveness dramatically, with turbines being able to supply around 700 households (Iowa Energy Center, 2014). The fast development of the industry and the governmental investments resulted in many startups with more than 50 different turbine suppliers in the 70s (Iowa Energy Center, 2014). However, due to massive consolidation, the industry had less than a dozen domestic suppliers by the end of 1977 (Iowa
Energy Center, 2014). Between the time of 1973 and 1986, the whole structure of the supply of electricity generated by wind changed tremendously. It now became usual investing more and more into big wind farms instead of single turbine production (Iowa Energy Center, 2014; Wind Energy Foundation, 2014; Kaldellis &
Zafirakis, 2011). Today wind energy is still one of the fastest growing renewable energy sources. Looking at Figure 3, we see that the sector was supplying around 11.000 MWh in 2003, while it now supplies more than 167.000 MWh., generated by an installed capacity of 60.000 MW (AWEA, 2013). The growth in these 10 years accounts to a total of more than 1500%. When looking at the supply in 14 percentage, generated by wind power to the renewable supply in total, we see that they contributed 3% in 2003 and more than 32% in 2013. In 2012 the wind energy industry employed more than 75.000 people all over in the United States, with approx. 25.500 working in the area of manufacturing (ACORE, 2013). Since 1980 the price for one kW/hr., generated by wind turbines, fell by more than 90% and supplies, at its current stage, for a cost between $0.09 and $0.22 (AWEA, 2013). The big variation of the energy cost, supplied by wind energy, is caused by different factors. First of all, wind turbines are showing enormous differences in their efficiency, which especially is connected to the turbines age. Secondly, wind turbines need wind to produce and best prices are only secured when the wind level stays constant and strong over longer periods
(U.S. Department of Energy, 2014). Other factors that are influencing are the efficiency of the electricity grid, the distance to the supplied utility company, and weather conditions that are resulting in deterioration (U.S. Department of
Energy, 2014). 5. SIEMENS WIND POWER IN THE AMERICAN MARKET The last part gave an introduction to our company and the American energy market. The following part is going more into depth and at the same time we are switching from an exclusively descriptive viewpoint into a more analytical perspective. Before starting with the analysis it is important to note that turbine manufacturers are extremely dependent on Wind Developers. Wind Developers, sometimes independent, sometimes owned by utility companies, are companies that are developing the actual wind farm, which then is sold to an investor. Generally wind developers have three things they look for (Barry, 2014). 1. Resource: How does the wind level look like? 2. Proximity to demand: How close are you to your demanding consumers? 3. Interconnection: How to interconnect the wind farm and how much is to be built by yourself? 15 When a project is developed these companies are dealing with a wide range of issues concerning the project of a wind farm e.g. political, legal, market, economical etc. (Komperda, 2014). Important for the turbine manufacturer is the fact that the developers usually choose their own supplier that is fitting best to their needs (Komperda, 2014). The factors influencing the decision which supplier to choose are wide ranging but usually relate to factors such as technology, maintenance, quality, price, capability and availability (Komperda,
2014). During the analysis we are going to discuss factors that not always directly are affecting our manufacturer, Siemens, but the developers, which is the section in the supply chain getting the actual product to the customer. Inside the literature of strategy there are several theories, every single one using a different approach to analyze. In this paper the theories that are being used are to explain market characteristics and on the other hand to analyze our company in regard to the factors taking influence on strategic decisions. Since this is the case, we are using the PESTEL analysis, Porters Five Forces, and the SWOT analysis. Before starting each analysis, the theory is going be explained and its limitations are pointed out. 5.1 ENVIRONMENTAL SCANNING Since businesses are aiming at improving their success and ensuring their survival, it is important for managers to acknowledge the conditions in which their business is placed (Pickton & Wright, 1998). Environmental scanning allows people to discern information and knowledge form the ongoing environmental signals they receive every day (Slaughter, 1999). The environmental conditions should be of enormous influence in the decision processes that might, and mostly is, influenced by the surrounding settings (Hollensen, 2011). When monitoring the environment, managers are able to gain knowledge not only about their business in itself, but additionally about the market/industry in its whole (Hollensen, 2011). However, when using environmental scanning techniques it is important to first of all design a scanning frame, which is going to help the practicing 16 person to decide what might be of importance for his business case (Adler &
Gundersen, 2008). Complementary to the information that is received automatically, a good environmental scanning process always needs huge amounts of data that must be gathered (Slaughter, 1999). Organizations that are not paying attention to the wide range of information that is surrounding them often tend to lose touch with vital information about products, suppliers, markets, competitors etc. (Hollensen,
2011). On the other hand, a company that adapts to the techniques of environmental scanning are able to evaluate their environment on a regular basis, which makes it possible not only to perform good contemporary but in the long run as well, since adaptation to changes are able to be made earlier since information is on hand (Hollensen, 2011; Adler & Gundersen, 2008). The following analyses are going to focus on those environmental conditions, some internal and some external. What is noteworthy before starting is the fact that nearly all of the factors, at least to some extent, interrelate with each other (Hollensen, 2011). Because this is the case, the reader will most of the time be able to draw parallels between each the factors that are analyzed. Additionally it is important to note that not all sub-­‐factors that are having an impact are discussed and only the most influential were picked and analyzed. While the analysis was made the writer tried to avoid running into the problems that were acknowledged in the critique of each applied theory. This was mainly caused to increase the papers validity and usefulness. 6. PESTEL ANALYSIS The PESTEL analysis, which is an advancement of the PEST analysis, is a tool that is commonly used in the market scanning process (Hollensen, 2011). The analysis is used to analyze the macro-­‐environment, that is, analyzing the main external and uncontrollable factors which mostly are, influencing the decision making process of an organization (Kotter & Schlesinger, 2008; Johnson et al.,
2007). 17 Philip Kotler, who is an American professor, consultant and marketing author, noticed that the PESTEL analysis has shown to make its user understand an organizations business position, the general causes for market growth or decline, and additionally the opportunity and potential of a business related project (Hollensen, 2011; Kotler et al., 2009). PESTEL is an abbreviation for Political, Economic, Social, Technological, Legal, and Environmental. The analysis in itself is going to examine each factor and how they are influencing the business of the company (Johnson et al., 2007). Let us take a look at the six different factors, which are included in the PESTEL analysis, in more detail: •
Political: The question we want to answer here is how the political situation of the area where we are dealing in might affect the industry/business. Factors that are of interest here are for example to what extent the government is interacting in our industry e.g. the support they are giving, the taxes they charge etc. •
Economical: Here we might want to find out how the economic situation, of the country we are doing business in, looks like and later what factors are influencing us as an organization. Factors that might be of interest are usually the distribution of income, the inflation rate, the demand/supply situation etc. •
Social: A question that might get asked here is how important is culture and to what extent is the community shaped by it? The social part of the analysis covers factors such as demographics, religion, population analysis etc. The knowledge that is obtained here is able to answer questions about people’s habits and attitudes e.g. higher energy demand during the Christmas season in Christian countries, viewpoint towards different energy sources. •
Technological: Here we might want to answer what technological innovations might be of importance in the future and on what level the market is right now. We evaluate how favorable the technology, that the market contains, might be for our business. This of course always 18 depends a lot on our product and high innovation in technology might in the end even be unfavorable e.g. another wind turbine manufacturer that is able to provided a better turbine than we are. •
Environmental: When talking about the environment in the analysis we refer to the natural environment like climate, weather, geographical position etc., and not the market environment related to all the other factors as we did it in the last sections. In this part of the analysis we want to know how the environment fits to our needs e.g. are there enough open fields to build wind farms and how does the wind level look like. •
Legal: We might want to answer if there are any regulatory or restrictions in our industry or if there might be some in a future outlook. Although this factor is often criticized for being too closely related to the political part of PESTEL, it has shown to provide a more precise picture in comparison to a PEST analysis. When analyzing the legal part in another country, the company often starts to face new possibilities while on the other side new restrictions e.g. patents on technology, restrictions of some materials. 6.1 CRITIQUE Of course the PESTEL analysis is not perfect and the user needs to keep its limitations in mind. The PESTEL analysis is not mathematics and problems are to be encountered when trying to assign a value to the findings. Having a qualitative tool, instead of quantitative, results in an evaluation that needs to be qualitative as well (Yüksel, 2012). This limits PESTEL in being objectively or rationally analyzed which ravages in the results not being comparable (Yüksel, 2012). Another problem is connected to the fact that PESTEL claims to use a holistic approach. However, this is not the case and every single factor is usually measured and evaluated independently, which might result in a picture that is far from reality (Byars, 1991). However, since this factor has shown to be of such 19 a significant influence, the modern use of PESTEL usually includes the interplay of each factor (Byars, 1991). Additionally PESTEL is said to neglect different factors in different cases, which may be of different importance (Byars, 1991). In some industries political interaction might to high degree influence a company’s profitability, while technological factors, on the other hand, only are taking minor impacts. This might result in the factors differing tremendously in their importance and their actual impact on the business (Byars, 1991). 6.2 PESTEL ANALYSIS SIEMENS WIND POWER Since we now know the most important facts about the PESTEL analysis, it is time to use the theory in practice. The following part of this paper is going to start out with analyzing the political aspects that are influencing Siemens Wind Power. 6.2.1 POLITICAL During the last decades federal and state governments have had an enormous impact on what energy source is going to succeed and which are not
(Post, 2013). In this industry it is under no circumstances possible to talk about fair and total competition and many detractors even say that governmental actions like squeezing taxpayers, rigging regulations and taxes, and implementing must-­‐take provisions are a discrimination of the market (Post,
2013). The following section is going to look at how political intervention made and is making an impact on the wind industry. In 1978 the industry of wind energy for the first time received governmental support. At that time it was The Energy Tax Act that was containing titles such as the Investment Tax Credit (ITC) for wind energy
(Sherlock, 2011). During its history the industry was shaped tremendously by governmental interactions like the Production Tax Credit (PTC) or the Renewable Energy Standard (RES) (Sherlock, 2011). However, the most important support in the history of wind energy in America has been the Production Tax Credit (PTC). The PTC was first enacted in 1992, as a part of the Energy Policy Act (Sherlock, 2011). At its inception, the PTC was providing an 20 adjusted tax credit of 1.5 cent per kWh in comparison with its most recent 2.2 cent credit before its last expiration (Sherlock, 2011). The PTC was granted for the first 10 years of operation for energy that was supplied by wind turbines
(Sherlock, 2011). The support was made to increase investments into development and production of the wind energy industry, while at the same time providing a basis for wind to be competitive to other energy sources (Sherlock,
2011; AWEA, 2013). Another way to look at the PTC is that it is a governmental tool to price carbon dioxide (Barry, 2014). At its contemporary point the U.S. is not pressing charges on CO2 that is released into the atmosphere, and power plants such as coal and gas are releasing tons of it every day (Barry, 2014; EPA, 2011). When looking at the PTC from another angle, it could be argued that it is a mechanism that still, in some way, presses charges by not providing the same support to all energy sources (Barry, 2014). Currently, President Obama and the Democratic Party control the Executive Branch and Legislative Senate of the U.S. government with Republicans controlling the Legislative House of Representatives. After the election in 2009, the president, who has expressed himself very favorable towards renewable energies, has insured the industry a high degree of governmental support (Galbraith, 2009). However, the situation at that point of time was more complicated due to the financial crisis hitting the U.S. hard and every penny spent was to be well considered (Summers, 2009). The goal by support the wind industry was not only caused by governmental pressures from other countries, but additionally the American pursuit of fossil fuel independency, the creation of jobs, an increase in energy efficiency, the deceleration of the climate change, and the environmental protection in general
(Sherlock, 2011). These goals were financed by incentives that already have been of importance for many years but after the election of Obama, with an increased focus on tax credits, direct grants, and the renewable portfolio standard (NREL,
2008). 21 The PTC, which has been shown to be the most important governmental support incentive, had nine different amendments and expirations that caused enormous fluctuations in the installment of capacity in the wind energy (AWEA,
industry
2013). Figure 4 shows the annual installment of wind energy in megawatt from 1997 to the third quarter of 2013. At the end Figure 4. AWEA, 2014, Federal Production Tax Credit for Wind Energy. https://www.awea.org/Advocacy/Content.aspx?ItemNumber=797 of 1999, 2003, and 2012, we see the impact of the expiration of the PTC, which has been significant every single time. The effects are ranging from drops of 76% in 2001 and 2004, all the way to drops of 99% in 2013. However, the positive impacts are as noticeable as the negative ones. The PTC resulted in a tripled investment between 2007 and 2012 accounting to an annual average of $18 billion (AWEA, 2013). The yearly installment since the Obama election in 2009 was ranging from 5GW all the way to 12GW (AWEA, 2013). Additionally, the PTC made it possible for manufacturers, including Siemens, to produce the biggest part of the needed components themselves and domestically on the U.S. market, which was caused by companies investments into manufacturing facilities in 44 states, all together supplying 72% of all turbine components (AWEA, 2013). In comparison to 2006, where more than 77% of all components were imported, the domestic production increased nearly 50% (AWEA, 2013). On the other hand the PTC is still said to be extremely unpredictable, which in the end is an enormous burden for the wind energy industry, since investors, developers, and turbine manufacturers themselves are not able to foresee the situation in the long term (Brown, 2014). As of December 31. 2013 22 the PTC is expired and nobody knows when it is going to be reactivated. However, there have been different future predictions expecting the PTC to be renewed. Ron Wyden, a Democrat who chairs the Senate Finance Committee, submitted a proposal in March 2014, aiming at a renewal of different tax incentives (Doering, 2014). Although the proposal did not include the PTC, both Wyden and the officials representing the wind industry, are expecting the production tax credit to be included (Doering, 2014). Additionally Chuck Grassley, a supporter of the PTC and Senator, together with bipartisan support from 26 senators and 118 House members are encouraging Congressional leaders to extend credits helping the creation of jobs and the development of the renewable energy industry (Doering, 2014). This happened in March 2014, but with uncertain success, since Republicans, which are aiming at a permanent change in the country’s tax code, lead the House chamber (Doering, 2014). 6.2.2 ECONOMIC The next factor of PESTEL that is going to be analyzed is the factor regarding the economical conditions on the American market that are surrounding Siemens Wind Power. Before starting it is noteworthy that the reader from now on will be able to draw parallels between the different sections of PESTEL. Especially this part is going to relate remarkably to the political section since governmental intervention is influencing the economical foundation for the wind industry dramatically. Although some factors that are going to be analyzed might seem to be repeated, the approaches are different in their nature. The financial crisis of 2007 has been of major influence in nearly all industries (Sikorski, 2011). Still today many countries are suffering due to the damages the financial crisis caused which resulted in decreased expectations for the following years (Sikorski, 2011). However, the situation in the U.S. was not as traumatic and the installed capacity was above manufacturers and economist’s expectations (AWEA, 2013). One reason for this is that the U.S., like many other economies as well, are supplying the market with cheap money to keep the 23 economy running. In the U.S. it is the Federal Reserve System (FED) buying assets such as treasury bonds or mortgage-­‐backed securities with newly-­‐created money (Aziz, 2013). To the present, the FED has supplied several trillion of dollars of liquidity, which not only resulted in a prevention of a crash but even the stock market rising to new records (Subramanian, 2013). Although many detractors were predicting the American inflation rate to increase dramatically with the market being flooded with cheap money, the inflation rate has shown to stay relative stable while even showing tendencies of decreases (U.S. Bureau Of Labor Statistics, 2014; Aziz, 2013). During the last two years the inflation rate was staying relatively stable between 1 and 2 per cent. According to Milton Friedman (1969), an inflation rate is “healthy” when it stays between 2 and 3 per cent. This percentage should be taken as a target goal by federal banks since a too high inflation is for example able to decrease purchasing power, while on the other hand a negative inflation, called deflation, might cause decreases in wages etc. (Cogley, 1997). Next we will examine the supply/demand situation on the American market for electricity as it relates to the employment rate. Since the invention of electricity the major sources always have been non-­‐
renewable. Today, no country is dominated with supply by renewables and will be many more decades until this is going to be the case. Also, the U.S. is majorly supplied by non-­‐renewable sources, but as already mentioned, aiming at increasing the renewables contribution. At its contemporary point the U.S. produces more energy than it consumes, but on the other hand still lacks to establish electrical grids in some areas, especially in rural Alaska (AWEA, 2013;
REAP, 2013). In 2014, Obama announced that new investments into American energy infrastructure are going to be made, which not only is going to extend the existing grid but also increase its capacity (Holdren, 2014). The development of wind farms, which exclusively are placed in rural areas, has shown to contribute to the development of the American infrastructure for energy and on the other hand was able counteract the process of urbanization by increasing rural job demand (NREL, 2008). According to an outlook made by the National Renewable Energy Laboratory, the industry of 24 wind energy is expected to create more than 6.3 million jobs, both direct and indirect, between 2007 and 2030 (NREL, 2008). What however is important to note is the fact that many of these jobs are connected to the construction or manufacturing, which are able to decrease when the demand of new turbines is low and the market starts to be saturated (NREL, 2008). The potential of job creation are especially crucial when political decisions are to be made. A major task of the government is to decrease the unemployment rate and industries that are favoring job development are often in a much better position than industries where the level is expected to stay constant. Siemens Wind Power is, like every other company, affected by this economical situation and was, during the last years, profiting of the cheap money on the market. However, what has shown to be of immense influence is the unpredictability of the FED and its monetary policies. During the last month there were several speculations about the FED changing their policies, which every single time resulted in a decline of the American stock index, the Dow Jones. The effect of the unpredictability of the FED, as with the unpredictability of the PTC, faces investors with an increased degree of risk and by that decreases their willingness to invest in long-­‐term projects like the development of a wind farm. However, the fact that it is able to provide jobs and that the market is far from saturated still favors the industry. 6.2.3 SOCIAL The social factors of a country are one of the factors showing the biggest variation of importance in different industries. The wind industry, however, is said to be remarkable influenced by these conditions and the reason for this is going to be found in the following section. Before starting it is important to note that the individual consumer, of the energy supplied by a wind turbine, is not the direct customer of the turbine in itself. The wind developer, already introduced earlier, is an important part in the supply chain when it comes to the social factors inside the market, since they are 25 deciding what turbine and manufacturer to choose and where to place the wind farm. The United States of America has a very high demographic variation and therefore a high variation of attitudes as well. In 2013 Charul Vyas and Dave Hurst together with Navigant Research, published a consumer survey in regard to attitudes towards energy and environment. The survey was conducted with 1.084 U.S. adults with a sample balanced by nationality and demography. The first part of the survey was in regard to different energy sources and vehicles running on renewable sources. The servants had 6 different possible choices: Very Favorable, Favorable, Neutral, Don’t Know, Somewhat Unfavorable, and Strongly Unfavorable. The outcomes, where only “Very Favorable “ and “Favorable” are included, are represented in figure 5. Figure 5, Vyas; Hurst, 2013, Energy and Environment Consumer http://www.navigantresearch.com/wp-­‐assets/uploads/2013/12/WP-­‐EECS-­‐13-­‐Navigant-­‐
Research.pdf Survey. As the figure shows, both the renewable energy sources, solar and wind were favored by more than 70% of the servants. Wind and solar were unfavorable for 7% and 6% respectively, with the rest having a neutral or don’t know attitude towards the renewable energy sources (Vyas & Hurst, 2013). Solar, which scored a little higher on the favor scale than wind, gives more consumers, in comparison to wind, the opportunity to install their own panels, by that producing their own energy and having the freedom of decision. The customer thereby perceives solar as a more feasible energy source than a wind turbine, which in itself is too costly for most people. Another factor that is said to increase peoples favorability towards solar is the fact that the installment 26 of solar panels, at least on rooftops, does not take enormous impact on the overall impression of the area and neither has impact on the environment surrounding it (SEIA, 2014). A wind turbine, on the other hand, is much more noticeable, is subject to more Not In My Backyard (NIMBY) issues, and additionally has, a perceived impact on the wildlife lying inside the habitats surrounding its placement (NWCC, 2010). Figure 6 shows the consumer favorability for wind energy by demographics. First of all it is noticeable that peoples favorability towards wind energy increases as their education level increases. Also income, which is positively related to the degree of increases education, people’s favorability towards wind. A higher degree of education, which generally causes more long term oriented decisions, favors Figure 6. Vyas; Hurst, 2013, Energy and Environment Consumer Survey. http://www.navigantresearch.com/wp-­‐
assets/uploads/2013/12/WP-­‐EECS-­‐13-­‐Navigant-­‐Research.pdf the fact that wind energy decreases the fossil fuel dependency and additionally protects the environment when evaluating in long terms. A higher income, on the other hand, is allowing people to spend more on energy and since most of the renewable sources, on their contemporary level of technology are not able to provide energy to the same low price as their nonrenewable rivals are, the favorability to renewables increases when income raises. The three last factors, gender, age, and ethnicity, are said to be influential since they are related to both income and education (Aarora, 2006; O'Neill &
O'Neill, 2006; Perry & Gundersen, 2011). 27 Although the American government is trying to reduce the pay inequality in regard to pay and gender, men are still earning an average of close to 20% more than their female colleagues (Perry & Gundersen, 2011). Education, on the other hand, is higher for women; they earn more bachelors and master degrees but lack behind on doctorates (IES, 2013). The difference in education is in comparison to the pay/gender relation much smaller and only accounts to less than a 5 per cent difference (IES, 2013). Also ethnicity and income, as well as education, are related to each other
(O'Neill & O'Neill, 2006; Aarora, 2006). The average Caucasian man earns on average $819 dollars a week, which is lower than the Asians who earn $952, but higher for both African-­‐American and Hispanics who earn an average of $621 and $569 respectively (U.S. Deparment Of Labor, 2010; U.S. Census Bureau, 2011). Between ethnicity and education there is also a correlation to be found (Aarora,
2006). The highest percentage of people having at least a bachelor degree are found within the Asian race with close to 51%, followed by Caucasians with 32%, and Black and Hispanic with 19,7% and 13% respectively (Aud & Fox, 2010). When putting this data in relation to the outcomes in figure 6, we see that, expect for the Hispanic race, there is a correlation between ethnicity and education
(U.S. Department Of Education, 2010) The conclusion here, when generalizing, is that the most supportive groups of people consist of Asian, Hispanic or Caucasian descent, has a high income, is highly educated, their gender is male, and they are 65+. However, is important to note that, although dividing by those factors, every group within each factor had at least favored wind energy with 59%. In the end, although people generally say they favor wind energy, there still arise problems when it comes to the actual construction of the wind farm. Typically a wind farm consists of dozens to hundreds of turbines that are placed on a land of thousands of acres. The actual farm additionally consists of sub-­‐
stations, access roads, and transmission wires that are placed within and around the farm. Problems that arise are connected to aesthetic and acoustic factors and opponents tend to become NIMBYs. An attitude the literature calls “not in my backyard” or shortened NIMBY. 28 By now we know the general U.S. attitude towards wind energy and what problems might arise. However, since a country's population does not directly decide on decisions, regarding the development of wind power, other stakeholders are of importance as well. The U.S government, which is elected every fourth year, is running their campaign before election to advertise about their future goal of the country. During the last years, especially the Democratic Party has pronounced itself very favorable towards wind energy and its development (Handley, 2012). However, energy is only one of many issues that are lying inside a parties campaign and it would be false to conclude that every American voter, who is pro wind, would decide to go with the Democrats. Also wind developers are extremely affected by people’s attitude towards wind energy. Being backed by a big community increases the chance of success for a project, and it is important for the developers to take those factors into account (Nickell, 2014). When deciding where to build it is therefore not only important to decide by market and legislative conditions, which are going to be elaborated later in this analysis, but also the ethnographic characteristics of the areas and to what extend its inhabitants are supporting wind energy. But as already mentioned earlier, although most people say they favor wind energy there are still problems that might arise. To avoid these problems it is important for developers to include the local community make them aware of the potential problems and benefits that the wind farm is going to contain before starting construction. 6.2.4 TECHNOLOGICAL The technological level of a turbine is crucial for manufacturers success. It is not for nothing that R&D is one of the biggest costs that manufacturers are facing. Besides a company’s internal level of technology, the country’s specific energy infrastructure is of tremendous importance. This part of the analysis is going to analyze the overall technological level of the wind turbine manufacturers in the U.S while additionally putting focus on the general infrastructure of the country. 29 The U.S is a very big country, but in comparison to many others, not that populated. The population density in the U.S is 84 per one square mile, 609 in Germany, and 333 in Denmark (U.S. Census Bureau, 2011). Countries facing a higher density of population, like Germany, often already have established wide-­‐
ranging streets and water pipes plus additionally transmission lines, distribution circuits, and substations, which are crucial for the transport of electricity
(AWEA, 2013). On the other hand, a country having a lower density of population often has areas where these infrastructures still lack behind or just are not the capable of dealing with the huge amount of energy a wind farm produces (Komperda, 2014). Additionally to that, areas that might be able to handle the amount of energy, with the necessary infrastructure components already installed, are often extremely quickly occupied by developers (Nickell,
2014). As a reaction to those concerns in the energy infrastructure, Obama signed a memorandum for the first Quadrennial Energy Review (QER) (Holdren,
2014). The memorandum, which was signed on January 9th 2014 and was fulfilling a commitment from the Climate Action Plan, which ensured that the federal government is continuing to meet economic, market, and security goals
(Holdren, 2014). The QER is going to focus directly on the infrastructure for energy e.g. transmitting, storing, and delivering (Holdren, 2014). The plan is to establish 200.000 miles of high-­‐voltage transmission lines, 2.2 million miles of local distribution circuits, 300.000 miles of transmission pipelines, and hundreds of processing plants and storage facilities for natural gas (Holdren, 2014). Besides the importance of the transmission lines, distribution circuits, and substations being present, it is also very important that the quality and technological level, of the components used, are high since it is able to increase the efficiency dramatically (Chakrabortty, 2014). When using old or components of bad quality the losses on the way to the end consumers are able to decrease wind farms profitability, while additionally decreasing its eco-­‐friendliness (Chakrabortty,
2014). When developing a wind farm it is very important to keep these infrastructure characteristics in mind. Building a wind farm in a rural area where 30 no streets, transmission lines, or substations are present, the project might dramatically increase its cost since all of this is to get build. Looking at the technological level within the suppliers of a wind turbine, we find different factors that are to be taken into consideration. What is said to be one of the major disadvantages of wind energy is the fact that wind is not able to provide energy, independent from other sources, over longer terms (EIA, 2011). Except for solar, wind is the only source where the supply cannot be ensured totally, which results in wind energy only being used in connection with other sources (EIA, 2011). However, during the last years not only has the size of the turbines increased but also their overall efficiency. Siemens, or at that point Danregn, started out with producing a 25 kW onshore turbine in 1980. Today the company’s turbine portfolio consists of 4 different turbines, 2 onshore and 2 offshore, having a capacity between 2.3 and 6 MW (Siemens, 2013). The turbines are designed to work under different environmental conditions, the G2, their smallest onshore turbine with 2.3 MW, being able to handle a wide range of different wind conditions, the D2, their biggest onshore turbine with 3.2 MW, working best under strong wind conditions, the G4, their smallest offshore turbine with 4MW, designed to work under a wide range of offshore conditions, and the D6, their biggest offshore turbine, working best with strong wind conditions (Siemens, 2013). Inside each platform of turbine the developers are able to decide on which rotor blade to make it fit best to the environmental conditions (Siemens, 2013). GE-­‐Energy, Siemens strongest competitor on the American market, offers a wider range of onshore turbines but on the other hand only one offshore turbine. Their on-­‐shore product portfolio, which ranges from 1.7 to 3.2 MW, contains 8 different turbines (GE-Energy, 2014). Their only off-­‐shore turbine is a 4.1 MW turbine, and aims, in comparison to others, not to be the biggest but rather to stand out by its reliability and availability (GE-Energy, 2014). Although efficiency, capacity and reliability are all very important factors in themselves, there are other factors that the average person might not think about. Information provided by a wind developer tells that especially factors 31 regarding sound have shown to take an enormous impact on the actual realization of a wind farm (Komperda, 2014). Owners of the land, where the wind farm is to be build, are often going to live close to the turbines and might therefore be affected by the noise the nacelle and the rotor blades produces. The noise has shown to impact people’s health and is, although rarely, causing headaches, insomnia, blurred vision, difficulties in thinking and remembering, dizziness, or even tinnitus (Ryan, 2014). For a turbine manufacturer it is therefore important to take these factors into account when developing a new onshore turbine. Generally, a turbine can be quieter at certain sound frequencies as the rotor diameter increases since the blades are going to move slower, but other acoustic frequencies can be louder. On the other hand, larger turbines may increase the problem of shadow flickers, which are shadows made by the rotor blades. The process of R&D of a wind turbine is still going to implement enormous changes in the next few decades and also the fact that investments into infrastructure are made are going to change the situation. Already today different technologies are able to reduce the noise factor of a turbine tremendously while additionally eliminate shadow flickers, due to another design of the turbine (Lombardo, 2013). Additionally engineers are trying to develop a technology that makes it able to store the electricity produced by wind turbines, which would make it possible for wind to be the only energy source if the average production would exceed consumption (Bullis, 2014). However, this technology is still in its first stages and it is going to take some more years to go into production. Generally Siemens, although having a smaller portfolio, has positioned them favorably. Focusing only on a smaller range enables them to profit of economies of scale while on the other hand directing more resources to a smaller group of products. Also the planned infrastructure investment increases the favorability of wind in general since it decreases costs that are associated to the construction of a wind farm. 32 6.2.5 ENVIRONMENTAL Now we are going to take a look on the factors that are, or might be, of importance for wind energy in regard to the environmental conditions. As already noted earlier, the word environment used in the PESTEL analysis refers to the nature of the country or the biotic environment. Before starting it is important to know how wind energy actually works since there actually are many factors that are taking influence that most people do not note. Wind power is actually a form of solar energy (WED, 2014). Wind is caused by the uneven heating of the atmosphere made by the sun, by the rotation of the earth, and additionally the irregularities of the earth’s surface (WED,
2014). Furthermore, the oceans surrounding the areas, the different geographical terrains/elevation, and the vegetative covers influence wind and its speed
(WED, 2014). The U.S. is one of the biggest countries worldwide, which results in having different climate zones. The climate zones are ranging from desert climate in Arizona and California to subarctic climate in Alaska. Additionally to that, the U.S is surrounded by the Atlantic and Pacific Ocean. These two factors, both climate zone and circumvallation of both oceans contribute to U.S. having 7 different air masses throughout the country. When developing a wind farm it is necessary to keep these factors in mind. It is not only important to focus on the average wind level of the specific areas, but also the overall variation in it. Although turbines, during the last decades developed impressively, natural disaster still have to be taken into account. Earthquakes, hurricanes, tornadoes and floods are all able to cause enormous damages, not only to the turbines themselves, but also to all the different components that are included in the wind farm (Lawson, 2013). Most commonly all of these parts are well insured, but the premium increases when placing the wind farm in an area where these natural disaster are more likely
(Lawson, 2013). The increase in premium is not only affecting the owner of the 33 farm but especially the end consumer since it increases the cost of production and by that the final price. So where should developers place wind farms to make the highest profit? Generally the best wind levels are obtained in the coast and mountain areas plus additionally the Great Plains ranging from North Dakota all the way to Texas
(AWEA, 2013). According to the American Wind Energy Association the best 3 states for the development of a wind farm, when evaluating by the average wind level, are North Dakota, Texas and Kansas (AWEA, 2013). In the following part we are going to look at North Dakota in more detail to see what factors might influence the decision of where to establish a wind farm. North Dakota is placed in the northwestern continental area of the U.S. Being placed in the continental climate zone; North Dakota is characterized as having cold winters and hot summers and experiences a wide variety of weather conditions. This area is especially influenced by the continental arctic and continental polar air masses, which results in having the highest average wind level of the U.S., with a speed of approx. 11 meters per second (NOAA, 2002). The National Renewable Energy Laboratory and the Associated Weather Services calculated the states capacity, when subtracting protected areas, to be 770.000 MW, which is more than all of the U.S. fossil-­‐fueled power plants produce together (NREL, 2014). With this number North Dakota is the 6th biggest wind resource area in the U.S. (AWEA, 2013). North Dakota ranks as number 3 when looking at the percentage of energy supplied by wind (AWEA, 2014). At its contemporary point the state has a total installment of 995 turbines together producing 1.6 MW which accounts to approx. 15% of the states total electricity production (AWEA, 2013). Especially due to the states climate the energy consumption stays high all year long with air-­‐conditions running in the summer and heaters in the winter times. Per capita the state is placed at the 4th most consuming state in the country, with an average of 19.8 kWh per person, which is more than 7kWh higher than the U.S average (CEC, 2011). 34 What is important to note when evaluating the wind capacity of different areas is that there not only are different methods to calculate these numbers but also the ongoing development in the industry with bigger and more efficient turbines being put into production (Söder, 2009). Different countries use different formulas to calculate the capacity of wind and all of them are giving the user another result. Factors that are influencing the calculations are the level above ground where the wind is measured, what technology is used, and what time of the year and day is measured (Söder, 2009). Using different methods might make a project much more attractive than using another and it is therefore crucial for developers to keep this in mind (Söder, 2009). Often using different methods together the user is able to eliminate errors that are arising in others, by that giving a more realistic picture (Söder, 2009). Generally the environmental conditions are more than just good for the installation of wind turbines. However, it is important to remember that the cost of building a wind farm is not only connected to the installation of the turbines but also the total grid (Nickell, 2014). This is one of the reasons why states such as North Dakota, South Dakota, Wyoming and Montana are not totally covered with wind farms, since not only demand is too low but also the actual cost of establishing the grid would go into the billions (Nickell, 2014). However, generally the environmental conditions may outweigh these other concerns depending on project specifics. 6.2.6 LEGAL Numerous legal issues can arise when it comes to the development of a wind farm. Also this factor is going to deal more directly with the wind developers instead of the manufacturers, since it is the developers facing and dealing with the issues. Especially the topic concerning the land and its owners where the farm is to get build is going to be discussed in more detail. In the U.S. a wind farm usually stretches over several hundred up to several thousands of acres and therefore contracts with many different landowners are to be made (Nickell, 2014). The land is not only going to be used 35 for the turbines themselves but also the electrical grid containing sub-­‐stations, high voltage transmission lines and distribution circuits (Komperda, 2014;
Nickell, 2014). The lease agreement, which is going to be signed by both parties and usually last for 30 years, is going to address the period of the lease, how much is be leased, how much is to be paid, how the payment should be made, what rights the developers and the landowner receives, what the termination rights are, how the components of the farm are to be insured, and how it works after the lease agreement expired (Nickell, 2014). Furthermore it is important for the developers to ensure that there are no easements that are covering that area where the farm is to get build, since, especially coal and gas companies are able to exert their easements by that eliminating the developers contracts made with the landowners (Komperda, 2014; Barry, 2014). However, besides needing the approval from the landowners, the developers also needs the local governmental agencies, who control the siting process, to agree on the project (Nickell, 2014). During the development of a wind farm, developers usually run into several problems that are causing the area to shrink little by little (Nickell, 2014). According to Kyle Barry, an attorney dealing with the development of wind farms said that especially zoning codes are contemporary facing developers with issues (Barry, 2014). Zoning control is the division of geographical area (e.g. residential, commercial, agricultural, mining zone etc. Laws control each zone and only some of the zones are eligible for the construction of a wind farm typically agricultural. Since the industry of wind energy, in comparison to others, is relatively young there are new laws executed on regular basis, which changes the whole legal system for a project. Especially zoning is affected by this which is caused by the fact that not only more turbines are installed but also are they getting bigger and bigger. As already mentioned in the technological factor, especially noise and shadow flickers are causing these new laws, since they not only are affecting the land owners themselves but also the local community living close to the turbines. Since there a many problems a project might run into, developers tend to sign an option with the landowners before signing the actual lease agreement (Nickell, 2014). This option is going to ensure the developers of having the “option” of leasing the land while being able to continue development without 36 the duty to lease the land (Nickell, 2014). When continuing the development, developers are going to deal with the so-­‐called commercial agreements, which we are going to look at now. Commercial agreements are agreements such as the turbine purchase agreement, the warranty, operation and maintenance agreement, and the power purchase agreement. The turbine purchase agreement is an agreement, either soft or hard, between the developers of a wind farm and a turbine manufacturer (Komperda,
2014). Both parties are by the use of a contract ensuring when to pay, how to pay, when to deliver, how to deliver, who has to install the turbines, who is liable during the shipping process, and often who has to deal with maintenance and warranty for the next years. The cost of the turbines for a whole wind farm goes into the hundreds of millions, sometimes billions, and the way of financing is to be well considered
(Nickell, 2014). Due to the high cost, the developers, which at that point of a project usually already are backed by an investor, are passing this part over. It is now the task of the investor, who might be a utility company or a pension found etc., to finance the project and to contact a lender if needed (Komperda, 2014). The reason for investors entering into the agreement might be motivated by tax benefits connected to the PTC, or the fact that the project is seen as an reasonable investment (Barry, 2014). When looking for a way of financing the PPA starts to be of importance since it is securing the energy, produced by the farm, to be purchased by a utility company (Barry, 2014). When having the PPA, financing usually becomes easier, since you can ensure your lender that you have regular cash flows coming in (Barry, 2014). However, the PPA is sometimes hard to acquire (Nickell, 2014). One factors causing the PPA to be hard to get is the fact that wind is an intermediate resource, which means that it is not possible to ensure that the wind level is going to stay constant during the time of agreement, and because wind still is more expensive than other energy sources and especially than the energy supplied by its nonrenewable rivals (Barry, 2014;
Nickell, 2014). Another factors is related to the grid owner, who might force you to decrease your output if the grid would be overloaded when the total amount 37 of energy would be injected, which would result in your purchaser not getting the total possible output (Nickell, 2014). However, there are also factors increasing the chance for a wind farm to receive a PPA. One factors is the renewable portfolio standard, already elaborated earlier, which however is facing increasing competition form the stock market where utility companies might decide to invest in options on renewables (Barry, 2014). The issues discussed above are only a few of many. It is essential, not only for the developers but for the manufacturers as well, to keep in mind where problems might arise since they are able to cancel a whole project. Especially the fact that new laws, which might have an enormous impact on the industry, might be executed on a regular basis needs attention by both the developers and the manufacturers. 7. PORTERS FIVE FORCES Porters Five Forces is a framework developed in 1980 by Michael Porter, a professor in strategic management. Porter, who is said to be one of the founding fathers of strategic management, wrote more then 17 books and developed several different analytical tools for corporate strategy (Kotler et al.,
2009). However, one of the most popular tools, not only around managers but also around business schools all around the world, is the five forces framework
(Hollensen, 2011). The framework is to help a company to evaluate both the potential profitability inside the industry and on the other hand its own competitive position (Hollensen, 2011). When using the framework the company analysis five different factors that are to evaluate the nature of competitiveness in a given industry (Hollensen,
2011; Kotler et al., 2009). These five different forces are elaborated in the following part. The first force we are going to look at is “Rivalry Among Competing Firms”. This force is usually said to be the most influential one of all the five different forces (Kotler et al., 2009). Rivalry Among Competing Firms is the 38 rivalry between companies offering a product that is able to provide the same basic feature e.g. a turbine by Vestas or Siemens (Kotler et al., 2009). For the firm to have a competitive advantage, they might implement different strategies. Some of the most used strategies here are lowering prices, enhancing quality, providing additional services, increase warranty coverage, or adding new features (Kotler et al., 2009; Hollensen, 2011). In general, the rivalry increases as soon as the number of competitors increases, since all of them are aiming at increasing profitability and sales (Kotler et al., 2009). However, not only the number of competitors has shown to take impact on the degree of rivalry in the industry, also the size and capability of the competing firms, changes of market conditions such as demand declines, a wide range of substitutes, low entry barriers, generally high fixed costs in the industry, and leaving barriers are high, have all shown to increase the intensity of rivalry (Hollensen, 2011). Another factor that had tremendous influence on the competition within the same industry is the modern way of information access. Since the Internet, everybody is able to gather information not only about a product in general but also to compare prices between several retailers. This new way of information access tremendously increased competition and is extremely favorable for the end customer. The second force we are going to look at is the “Potential Entry of New Competitors”. As soon as the entry barriers into an industry are low, it increases the overall intensity of competitiveness (Hollensen, 2011). Mostly barriers to enter an industry are connected to factors such as the level of technology and know-­‐how that is needed, the experience that other firms in the industry are having, the loyalty customers have to their preferred brand, the capital that is required to enter, the development of distribution that is needed to deal out the product, the degree to which patents cover specific features of the products, the general access to raw materials that are needed, and governmental regulatory like tariffs or restrictions etc. (Kotler et al., 2009). However, it sometimes happens, although entry barriers might be high, that new companies are entering the industry with products that might be cheaper, have a higher quality etc., which might be caused by an innovation that 39 the company discovered or a big company having a lot of resources that is able to profit of economies of scale (Hollensen, 2011). Because things like that might happen, it is always crucial that firms within the industry monitor the market and are able to react accordingly to threats like this. The third force we are going to look at is “The Threat Of Substitute Products”. A substitute is a product or a service that is going to provide the end used with closely the same feature (Hollensen, 2011). The car industry faces substitutes such as motorcycles, public transports, walking or biking etc. Generally most products are facing different substitutes that the end consumer might switch to. Substituting a product is often caused by price sensitivity, which means that consumers are switching products as soon as price passes a certain level (Hollensen, 2011). However, there are several factors influencing the decision of substituting a product, elements such as technological/innovative advancement, product image, general design, product-­‐connected services etc. (Hollensen, 2011). The pressure in the industry increases when the switching cost for the customer is relatively low and when the substitutes price decreases (Kotler et al.,
2009). The cost of switching varies tremendously, and while switching from a Snickers candy bar to a Mars candy bar might be generally cheap, the cost of switching from a bike to a car might be extremely expensive. For a company to estimate the threat that a substitute product might have, it is important to constantly monitor their rivals holding a potential substitute. The next force getting elaborated in more detail is “The Bargaining Power of Suppliers”. The bargaining power of suppliers in an industry is said to be higher when there is a small number of suppliers, when there are no substitutes, when the switching cost of raw material or components is high, or when the market is unimportant to the suppliers (Hollensen, 2011). Mostly it is both in the interest of the supplier and the producer to build a loyal long-­‐term relationship, which is securing high quality, reasonable prices, continues development of the relation, and saving both parties from long and costly inventories (Hollensen,
2011). 40 Companies that have been very successful in their industry, often tend to make a backward vertical integration, which means that they are buying their own suppliers (Kotler et al., 2009). Suppliers that are too expensive, not reliable, or just not able to meet the company’s needs often cause this action (Kotler et al.,
2009). However, more common is the use of external suppliers. This is especially true for small or medium sized companies, since the demand usually is smaller than for their big competitors (Kotler et al., 2009). Big suppliers are able to profit from economies of scale by that having the possibility to offer their products at a relatively low price (Hollensen, 2011). Companies that are not having an ownership in their own suppliers, often tend to have strategic partnerships with their suppliers. Those partnerships often allow both parts to reduce cost associated with logistics and inventory with strategies such as just in time delivery (Hollensen, 2011). Additionally to that partnerships are able to increase the speed of availability of next generation components, increase quality of the supplied goods, and in general decrease cost in several areas that both companies otherwise might be facing (Hollensen, 2011). The last force in the Porters Five Forces framework is “The Bargaining Power of Consumers”. There are said to be different characteristics that make the bargaining power of consumers rise namely: high concentration of consumers, big consumer group, consumers are buying in large amounts/volumes, or many suppliers (Hollensen, 2011). For companies to stay competitive with their rivals, they often tend to offer extras such as extended warranties or after purchase services (Kotler et al., 2009). By offering extras, like the one just mentioned, companies want to increase a consumer’s loyalty to the brand, by that increasing the chance of buying their products again (Hollensen,
2011). Additionally to the factors above that are influencing the bargaining power of consumers, also product characteristics are taking an enormous influence. Standardized and undifferentiated products, where substitution is easy, often face the consumer with a higher degree of bargaining power
(Hollensen, 2011). Furthermore the consumers discretion in whether and when they purchase the products, increases the pressures on the selling company since 41 inventory cost often are of substantial influence in their balance sheets. Like in the first force as well, also this force is has shown to be of more and more importance with the modern exchange of information. Since customers are able to retrieve information, in regard to price, product characteristics etc., they are able to compare on an everyday basis by that increasing the chance of switching to another brand or a substitute product. 7.1 CRITIQUE The Porters Five Forces framework is like every other strategy tool not perfect. Although it by many of its proponents is characterized as one of the most powerful tools for the analysis the business environment it still has its limitations and detractors (Stonehouse & Snowdon, 2007). One of the critique points is in regard to the unit of analysis, which in Porters framework is the industry rather than the individual firm (Rumelt, 1991). The reason for this being a bad thing, according to Rumelt (1991), is caused by the fact that every company is different in its nature, which results in every company facing different factors that are to be analyzed (Rumelt, 1991). Rumelt (1991) argues that firm’s specific factors are way more important than industry factors when it comes to evaluating potential profitability (Rumelt, 1991). Another critique point is connected to the fact that the Porters Five Forces framework implies that that every force applies equally to every firm in a given industry. Detractors on the other hand see every force affecting every company differently, at least to some extend (Stonehouse & Snowdon, 2007). According to them, the Porters framework ignores reality in regard to for example a company’s size (Stonehouse & Snowdon, 2007). Additionally, and that is especially interesting for our analysis, is the fact that the Porters framework is said to be static (Stonehouse & Snowdon, 2007). Since environmental conditions in most industries change regularly, using a static tool is only able to evaluate for a short term (Stonehouse & Snowdon, 2007). 42 7.2 PORTERS FIVE FORCES SIEMENS WIND POWER Since we now know the most noteworthy characteristics of the Porters Five Forces framework, we are able to use the theory in practice. 7.2.1 RIVALRY AMONG COMPETING FIRMS The energy industry, as already mentioned in the description of the American energy market, is supplied by several different sources. The actual product that we are looking at is electricity. This part of the Porters Five Forces Framework is going to look at the rivalry only within the wind industry. Although the product features of electricity are the same, other sources are going to be analyzed in the part of “The Threats of Substitute Products”. This is done since the process of producing the electricity is branding the product to a significant degree. Figure 7. AWEA, 18.07.2013, U.S. Wind Energy Industry Manufacturing and Supply Chain. http://www.awea.org/Resources/Content.aspx?ItemNumber=4609 seven Figure 7 shows the biggest manufacturers turbine on the American market. GE Energy, an American company, has been the market leader since many years, and had an installment of more than 5 GW in 2012, which is equal to a market share of 38% (AWEA,
2013). GE Energy is followed by Siemens Wind Power, which had a market share of 20%
Figure 8. SNL Energy, 2013, Top 10 Turbine Manufacturers. http://www.worldofwindenergy.com/wind_resources/research-­‐and-­‐
analysis/snl_energy_reports_top_10_turbine_manufacturers.html (AWEA, 2013). Vestas, a Danish 43 manufacturer and the world’s largest supplier of wind turbines, has been on the third place with a total market share of 14% (AWEA, 2013). Since 2010 both GE-­‐
energy and Vestas have lost 5% of their market share. On the other hand both Siemens and Gemensa were able to gain market share, with 5% and 2% respectively. To eliminate confusion, figure 8 shows the projected market share while the data from AWEA were able to provide the actual installment data. However, what is noteworthy in the development of manufacturers on the U.S market is that there only have been 5 in 2005 installing more than 1 MW, while having more than 25 in 2012 (AWEA, 2013). The rapid growth of the market and the governmental incentives to support production and development also captured the attention of other manufacturers and the market is starting to receive more and more suppliers. The increase in competition leads the manufacturers to even more consider what strategy to follow. As we remember from the technological factor of PESTEL, GE-­‐Energy is offering a broad range of turbines that generally have a lower capacity than the turbines manufactured by their competitors. One of the reasons that GE-­‐Energy is able to offer a wider range of turbines is the fact that they originate from the American market. In comparison to the other big suppliers, GE has through its whole history been active in the U.S., which allowed the company to establish facilities all around America (GE-Energy, 2014). This allows GE to safe huge amounts of costs related to logistics, which is a tremendous part of their competitors cost. Another noteworthy advantage is the fact that GE, as a result of its descent, was able to gain a lot of experience on the domestic market, by that being able to take more variables into account when deciding on strategy. However, GE-­‐Energy´s focus, which during its history nearly exclusively was directed towards the U.S., causes the company to lack behind on the international market and only leaves the U.S. as their main pillar. Vestas, who is the world’s biggest turbine manufacturer, is placed third on the American market. Like GE also Vestas has a quit broad product portfolio, which at its current stage consists of ten different turbines. The turbines capacity ranges from 1.8 MW to 3.3 MW, which is extremely close to the capacity of GE´s turbines. In contrast to both GE and Siemens, Vestas is exclusively focusing on 44 the wind industry, which on the one hand excludes Vestas from the synergy between different industries that GE and Siemens experience, but on the other hand neither can be affected negatively by another business branch and allows the company to totally focus on one industry. However, also Vestas, in order to be more competitive, invested directly into the American market and opened different facilities that are dealing with manufacturing of tower, nacelle and blades, research & development, maintenance, and services (Vestas, 2013). Together their manufacturing plants are able to supply approx. 90% of the components that are required to assemble the final turbine (Vestas, 2013). Being able to supply the major part with the domestic production not only saves Vestas shipping costs, which decreases the overall cost of the turbine, but also cuts the delivery time to the customer. Siemens Wind Power offers, in comparison to GE and Vestas, a smaller range of products but on the other hand with a bigger capacity. Although Siemens has invested heavily into the American market, they tend to stick to a rather small but powerful product portfolio. Having a smaller product portfolio does not need to be a bad thing in itself since Siemens is able to profit from economies of scale to higher degree. In comparison to GE, who produces most of its components domestically, Siemens nacelle assembling facility in the U.S. manufacturers only one nacelle which is to be used with a 2.3 MW turbine
(Siemens, 2013). This, although they are able to supply most of their blades domestically, results in increased slack time and huge costs that are associated with logistics since many of the parts are to be shipped from Siemens production facilities in Denmark. However, one of the main advantages that the company is having is the fact that they are the oldest turbine manufacturer worldwide. This not only results in Siemens being extremely experienced but also contributed to the many patents the company is holding (Siemens, 2013). Another advantage the company has is that they not solely are dependent on the American market. At its contemporary point the company 4th biggest supplier of turbines worldwide and is active in Asia, Europa, America, Africa, and Australia. 45 What is interesting in the industry of wind energy is the fact that usually companies that are charging premium prices and are producing high-­‐end turbines are succeeding. The competition that at least at its contemporary point is between the big suppliers rises especially through the fact that many of them have invested a lot into the market, which increases the exit barriers since none of the manufacturers are willing to give up their huge investments. However, on the other hand the rivalry decreases, at least for Siemens since their product portfolio to high degree is able to differentiate itself. 7.2.2 POTENTIAL ENTRY OF NEW COMPETITORS Generally the industry of turbine manufacturers is said not to face noteworthy threats by the potential entry of new competitors. At its current stage the industry is lead by European and American manufacturers, which were the first to start in the industry by that possessing the highest amount of experience and know how. Although Suzlon, an Indian company, has shown to compete generally well, there is still no Chinese or Korean manufacturer that made it under the top five manufacturers on the American market (AWEA, 2013). The main causes for the Asian companies having trouble to enter the market is their lack of experience since most of them are relatively new to the industry (Trahish, 2012). Additionally the American market shows to have several different entry barriers a new competitor has to overcome. First of all an entry would need enormous investments to be competitive. Companies entering the market need to have a turbine that is able to compete with the domestic supply and usually domestic manufacturing facilities are to be established to, first, reduce costs associated with logistics and, second, to increase the delivery speed. Furthermore, entering companies need to be sure that no patents on the market are violated and that their turbine design is allowed to operate in the market. However, although the risk of new entrants is low, there still might be companies that are able to enter. It might be a company that is to able find a 46 niche in the market or a big company that is able to raise the needed investment. Especially Samsung, who started its wind business in 2010, might become a potential competitor. Samsung is ranked no. 14 in the Fortune 500 list, with a jump of 6 places from 2012 where the company was number 20. Also if the company would not able to invent their own competitive technology, they still would be able to acquire a smaller wind turbine manufacturer. Acquisitions have been the basis for both Siemens and GE, which demonstrated that the strategy might work. 7.2.3 THREAT OF SUBSTITUTES When analyzing the threat of substitutes, we first have to define what product actually would be a substitute for a wind farm/turbine. This depends tremendously on the potential customer and if the renewable characteristic is of major influence. When this is the case, the only substitutes are other renewable sources like solar, hydro, and geothermal, with biomass taking a position in-­‐
between, since it is carbon dioxide neutral. However, if the resource is not of concern then the non-­‐renewable sources are able to be a substitute. In addition, the fact that many investors, especially big companies, are looking for an investment only, we have other substitutes showing up that are able to be used as investment e.g. stocks, bonds, funds, options etc. During this analysis we assume that the only customers are the potential purchasers of the actual wind farm. This is due to the fact that wind developers although they hypothetically are able to substitute, usually lack knowledge inside other energy industries. Additionally to that we assume that the only substitutes are other renewable sources. If we would take the two other scenarios into account, and especially the one where the wind farm is seen as an investment only, we could continue this analysis forever. So, besides renewability, what other factors are this analysis going to take into account? To find an answer on the question “The Threat of Substitutes” we need first of all to understand how the different sources are functioning therefore we need to keep in mind the information that is provided in section 4.2 and 4.3. 47 Figure 9 provides us with information concerning the cost of a plant in regard to the different renewable energy sources. Transmission investment is the amount of Dollars you need to spend on the electrical grid per MWh injected. The overnight cost is the cost related to the construction of the power plant per. kW. The fixed costs of O&M, which means operation and maintenance, is the amount of money you have to spend every year on per kW. The variable cost of O&M is based on the cost of activity per MWh and only is affected when the plant is running. Figure 9. EIA, 2013, Updated Capital Cost Estimates for Utility Scale Electricity Generating Plants. http://www.eia.gov/forecasts/capitalcost/pdf/updated_capcost.pdf Let us now put the information provided above in relation to wind energy. The overnight capital cost for an onshore wind farm is $2.213 per kW, which is the lowest cost inside the market of renewables. Connected to the cost of construction of a wind farm, we have an average cost of $3.2 per MWh for the transmission construction. This number is lower than for solar but higher for the 3 other sources. The fixed O&M costs of $39 per kWh a year are lower for all of the sources except for photovoltaic. Last but not least we have the variable cost 48 of O&M where there only is one sector that is affected, namely Biomass with $17.4 per MWh. It is crucial to keep in mind that this information was calculated as an average from the available data. A potential investor is not able, at least not by the use of these numbers, to predict the profitability of a project, since every project concerning a power plant is unique. What is important to note is the fact that the provided data, both be AWEA and EIA, are from 2012, which means that the PTC still was making an impact on the overall profitability of wind energy. Since the PTC is expired, and we already know what impact this is having, we can conclude that customer’s favorability of wind with high probability decreases. This does not automatically mean, that the overall likelihood of substituting wind with another renewable source increases. The reasons for this is that many potential customers tend to wait rather than investing into a source that maybe at its contemporary point might look more profitable but in comparison to the long term outlook and the probable reactivation of the PTC, is not able to compete with wind. 7.2.4 BARGAINING POWER OF SUPPLIERS It is important to note, before starting to analyze, that the supply of raw materials and components, for the manufacturing of a turbine, needs to be well considered since a turbine is a highly advanced and expensive product. Being able to supply a high quality product with a fast delivery is able to increase a company’s reputation, by that taking impact on the overall profitability (Crane et
al., 2009). Reputation, which is the overall to the company’s favorable or unfavorable name it has in the public, is able to increase potential customers willingness to purchase their product (Crane et al., 2009). Often the related cost of increasing reputation is relatively low in comparison to the beneficial outcome, and an increase in it should be pursued (Crane et al., 2009) One of the most noteworthy characteristics, when looking at the supply chain of a manufacturer, is the fact that nearly all of them have integrated vertically, at least to some extend (Lawson, 2013). Vertical backward integration, 49 when talking about the supply chain, means that a company is acquiring their own suppliers (Hollensen, 2011). Siemens has different subsidiaries in the U.S. that are established by them. In addition, the company acquired Winergy Drivesystems, which is supplying a nacelle for installment on the American market (Siemens, 2013). When owning suppliers the manufacturers are able to increase their control of quality and delivery, while at the same time reducing the overall cost, since all of the activities are made internally in the company
(Hollensen, 2011). Furthermore the company can ensure that the supplier is only dealing with the parent company, by that excluding rivals form the technology that the subsidy supplies (Hollensen, 2011). Increasing the backward vertical integration is especially making sense when the demand is high, not only in the short term but also in a long-­‐term future outlook. Another way of ensuring higher quality standards and faster delivery is sub-­‐contracting (Hollensen, 2011). Siemens has sub-­‐contracted different components in long-­‐term agreements on different markets (Siemens, 2013). In the U.S. Siemens states that especially their offshore partners are exceptional reliable, but on the other hand faces problems with their onshore partners that were not able to supply stable and to a reasonable cost, at least during the last years (Siemens, 2013). However, backward vertical integration has also shown to increase risk, particularly when having economic downturns (Hollensen, 2011). Being vertically integrated decreases a company’s ability to adjust capacity, which especially is able to cause huge losses when demand is low, since all fixed costs are to be paid independent of production (Hollensen, 2011). Especially at its contemporary point where the market faces extreme demand fluctuations with uncertain subsidies, both internal in the industry and externally on the whole American market, the vertical integration faces companies with huge pressures. Vestas, who to high extend was vertically integrated, started to restructure their business between 2011 and 2012, by cutting staff with almost a third. Also Siemens is complaining about the contemporary situation since they are facing overcapacity that is resulting in losses (Siemens, 2013). 50 “Good supplier management, better inventory control, long-­‐term innovation and partnerships: in general, it's about making the industry a lot leaner” says Edward Rae, who is vice president for Alstom´s global supply chain (Lawson,
2013). The main cause for this is that independent suppliers are able to specialize on one component like gearboxes, blades etc. (Hollensen, 2011). This would allow the suppliers have products that are to be sold to different manufacturers on different markets, which would results in economies of scale what means a decrease of costs through the increase of output (Hollensen, 2011). When looking at Siemens future plans, we see that the reaction to the instability of the market is going end up with Siemens focusing more on being supplied with components, rather than producing it themselves (Siemens, 2013). Very important to them is that especially the supply of the heavy and large components should be covered domestically since this not only decreases shipping time and the associated risk, but also increases control since a higher-­‐level communication is possible
(Siemens, 2013). When evaluating the bargaining power of suppliers, by the information above, we need to take two different scenarios into accounts. The backward vertical integrated company usually demands raw materials and only a small amount of pre assembled components. This decreases the bargaining power of the suppliers, since the demanded material, which majorly is steel, is not only supplied by many different suppliers but also is regulated on the stock market since it is a commodity. Also the fact that Siemens is extremely big decreases the bargaining power of suppliers because Siemens is able to integrate further backwards when the supplier’s price is to high or when quality standards are not met. However, the new way of supply, how Rae is predicting it, is going to increase the suppliers bargaining power. Then again it is not possible to say to what degree the since this is dependent on the number of supplier, the degree to which patents are controlling the technology the demand situation etc.
(Hollensen, 2011). 51 7.2.5 BARGAINING POWER OF CONSUMERS In comparison to many other products, the bargaining power of customers is a little more complicated in the wind industry. This is caused by the fact there are two buyers that are of concern, first it is the developer of the wind farm and, second, the buyer of the actual project. This part of the analysis is going to focus on the buyers of the actual turbines or better the wind farm. Due to the large size of a typical American wind farm today, the number of potential buyers has decreased dramatically. During the last years the political situation has tremendously influenced the attractiveness, of a wind farm, since it was supported by different subsidies. Usually a wind farm is purchased by either a utility companies, a local government, or a pension fund. However there are other investors like big companies that are investing into wind energy, which not rarely is caused by tax benefits related to the investment (Nickell, 2014). In comparison to many other industries, customers of a wind farm in a different way care about price, which is caused by the fact that the purchased product is going to generate revenue in itself. What is important for investors is that the farm is equipped with turbines that are high in capacity, that the grid is connected properly, that the efficiency is high, that the technology used is reliable, that demand for the electricity is on hand etc. All of these factors then are related to the farms cost and its profitability is calculated. Project developers, which usually are the part of the supply chain between the manufacturer and the customer, have to take customer into account. When developing a wind farm the developer usually first choose where to build and afterwards what turbine to use. Since every geographical area, at least to some extent, is unique, there usually only is one turbine that fits best. Preferable than lowering the sights of the project, the developer is going with the one turbine that showing the best characteristics for his project and allows the highest marginal return. All this of course decreases the bargaining power of the buyer. However it is noteworthy that, in comparison to an everyday product, the buyer is constantly calculating on the profitability of the project. This results in the 52 turbine manufacturers to adjust prices to stay within a level where the average project is able to make enough profit out of the chosen turbines. It is however not possible for manufacturers to predict a projects cost since they are related to many different factors e.g. energy infrastructure, governmental support, wind level etc. 8. SWOT ANALYSIS The SWOT analysis has a long history in the literature of strategy, ranging all the way back to the 1960s where it was invented by Albert Humphrey, a former American business and management consultant. The analysis was and is to evaluate internal and external factors after 4 different criteria, namely: Strengths, Weaknesses, Opportunities, and Threats (Pickton & Wright, 1998;
Piercy & Giles, 1989; Kotler et al., 2009). Although environmental scanning tools are often criticized for focusing too much on external factors, both Strengths, which is determining the organizations strong points, and Weaknesses, which is determining the organizations frailties, are internal factors, which means that they are used to analyze within the organization (Lee et al., 2000; Piercy & Giles,
1989). Opportunities, which are the organizations future or contemporary openings, and Threats, which are the potential intimidations the organization is facing, are external factors that are to analyze the environmental settings surrounding the organization (Lee et al., 2000; Kotler et al., 2009). It is important to note that both internal factors are within the control of the organization; factors that might be included here are internal financing, marketing, accounting etc. (Lee et al., 2000). The external factors are, in contrast to the internal factors, not controllable by the organization; areas that are included in the external factors often relate to political factors, technology, economical factors, competition etc. (Lee et al., 2000; Piercy & Giles, 1989). The basic idea behind the analysis is to assist practicing managers or businessmen, in the strategic management planning process, and since its invention it has done so relatively good (Pickton & Wright, 1998; Kotler et al.,
2009). One of the most praised characteristics of the SWOT analysis is its 53 simplicity and the way it makes the user focus on the key factors/issues that might be of importance for the organizations development. According to Wehrich (1982), the SWOT can either be used at its whole or the user might build a combination of two factors (Lee et al., 2000). The following SWOT analysis for Siemens in the American wind industry is going to use the SWOT analysis in its totality, since the goal is to obtain an overall picture of their current position. 8.1 CRITIQUE Besides having its proponents the SWOT analysis also has its detractors. During its history the SWOT analysis has severely been criticized for being a conventional and sole tool for formulating a company’s strategy (Kotler et al.,
2009). According to Hill and Westbrook (1997) the SWOT tool is often so misleading that it should be scrapped totally. (Hill & Westbrock, 1997) Although SWOT is loved for its simplicity it as the same time is one of its major critique points. Detractors say that, when using SWOT, the user tends to oversimplify the issues a company is facing and at the same time lacks to allocate the importance and level of influence that each finding in the analysis has (Hill &
Westbrock, 1997). This often leads to a conclusion where the user sees the weak strengths and strong weaknesses as being balanced, with the same situation often happening for opportunities and threats. Another question is whether the external factors can be categorized as favorable or unfavorable only? According to Erhard Valentin (2005) this should be acknowledged by the SWOT analysis since user often tend to run into this very tricky question (Valentin, 2005). Generally detractors say that the SWOT analysis needs to include more guidelines, limitations, and criteria for prioritizing (Mintzberg, 1994; Valentin,
2005). Especially lacks on how to use a finished SWOT are acknowledged by different disparagers. An example here would be how companies should deal with the opportunities found and how an appropriate decision about which opportunity to pursue is made (Hill & Westbrock, 1997). 54 8.2 SWOT ANALYSIS SIEMENS WIND POWER Now we are going to use SWOT to analyzes Siemens Wind Powers environment on the North American market. The analysis is additionally summing up on many of the points that were analyzed in both the PESTEL and the Porters Five Forces analysis, resulting in a shortened conclusion of this paper. Therefore we are assuming that the reader keeps the information, provided above, in mind while reading the SWOT analysis. 8.2.1 STRENGTH When evaluating the strength of Siemens Wind Power it is important to keep in mind that the company is part of Siemens, which is one of richest companies worldwide. Additionally it is important to remember that wind energy in itself is extremely favored by the community, which is backing the development in comparison to other nonrenewable sources. Siemens diversified business and the fact that the company is operating not only in many segments but in many geographical markets as well, gives them the advantage of interconnecting their businesses with each other. Market entrants are often easier for companies that already have entered the market in one industry, since both market knowledge was gained and relationships were made. Also the fact that Siemens demand of raw materials or components is sometimes shared with different of their industries, makes them able to exploit supplier relationships that are gained in one segment to be used in another
(Senn, 2006). Additionally, and that is one of the most important influences from the mother company, is the fact that Siemens Wind Power is able to rely on financial support when the business is showing to have difficulties. This was especially helping Siemens Wind Power when governmental subsidies expired and made them able, in comparison to Vestas, to maintain their position in the market without the need to restructure immediately. However, there are also strengths inside Siemens Wind Power that not directly are related to their mother company. As we know Siemens is the oldest wind turbine manufacturer, which not only means that they were able to develop 55 technologically but also gain experience throughout many years. During that time the company was able to establish wide-­‐ranging relations with suppliers and other partners e.g. utilities, maintenance companies. Additionally Siemens Wind Power has, during its history, established and acquired several different facilities in the U.S, which not only increased their presence but also decreased cost associated with communication and logistics. Also their turbine portfolio, which is much smaller than the ones from their competitors, but on the other hand more powerful, has shown to give them the advantage of holding a differentiated product portfolio. Especially their new offshore turbine, which is one of the biggest turbines world-­‐wide, seems to fit the American needs and several projects are under development (Siemens, 2013). What is special about their new offshore technology is the fact that they are able to build the turbine with 50% less parts than before. By that they are able to reduce maintenance time and cost, while additionally reducing the overall weight of the turbine
(Siemens, 2013). 8.2.2 WEAKNESSES Now we are going to look at the weaknesses that Siemens Wind Power contemporary faces. What has shown to be a problem is the fact that manufacturers are often dependent on developers, which could be changed by pursuing a forward vertical integration. The next level of the supply chain is usually the wind developer. Although they are not buying the turbines themselves, they are the part where the decision is made what turbine to choose for a given project. What however is interesting is the fact that many turbine manufacturers usually are not involved in this decision process, although some are providing you with assistance as soon as you decide that you are going with their turbines. The fact that developers are independent makes it hard for manufacturers to ensure that they are capturing some of the projects that are going to be developed or already are under development. This is due to the fact that developers usually keep the option of switching to another supplier when discovering that another turbine might be more profitable for a given project. In Europe Siemens already 56 eliminated this risk to some degree by going into a joint venture with utility companies. Another factor that has shown to be a strength, but a weakness on the other hand, is the fact that still some of the very important parts are supplied by third parties. As we know, manufacturers generally starting to pursue a more flexible structure with more suppliers external to the organization. On the other hand external supply is also facing Siemens with more uncertainty about the products e.g. quality, logistics, etc. (Siemens, 2013). Especially their American suppliers, in regard to their onshore turbines, were facing Siemens with problems to deliver on time (Siemens, 2013). 8.2.3 OPPORTUNITIES Because the industry of wind energy is still relatively young, we can expect a lot of development during the next decades. This of course also results in manufacturers facing many opportunities. In the following we are going to discuss some of them. As already mentioned above, Siemens still lacks behind on relations with developers. Especially small developers are increasingly able to develop wind farms of an enormous size. The reason for that is the fact that wind developers do not need a huge amount of employees but rather employees with the right knowledge and capability (Komperda, 2014). Having a small company, that is playing an influential rule in the supply chain, should make big manufacturers think about how they could make sure that they are the chosen supplier. One way would to be to bind both parties with a contract, which is saying that all projects that are going to be developed are equipped with the manufacturers turbine. Another way manufacturers you ensure that the developers are using their turbine is to make an acquisition. Since the companies usually a small, the needed investment would be so as well, at least when the developer is willing to be acquired. Another opportunity to decrease the risk of the very vague political situation for wind energy is to switch extensive from an internal to an external 57 supply. However, as we already have discussed, this opportunity is not only increasing the company’s strengths but additionally its weaknesses. Nonetheless, since the market is extremely unpredictable at its contemporary point, the company should try to be more flexible to adjust to changing conditions faster. The demand situation would then decrease its influence on the company’s profitability since all the fixed costs, which are connected to the production of components, would be affecting the suppliers only. 8.2.4 THREATS The most noteworthy threats are lying inside political decisions in regard to wind energy. As we have discovered in the “Threat of Substitutes” turbine manufacturers are holding a good standpoint since wind, at least at its contemporary point, is the most profitable renewable energy source with one of the biggest potential development of capacity. The big influence that the political system has is not only connected to if support is granted or not, but also the fact that nobody is able to predict what is going to happen. If the government, hypothetically, would announce that support for wind energy is not going to be granted from now on, investors are ensured. The problem right now is that nobody wants to build a project since they are waiting for the potential support. However, that does not mean that a wind project would be unprofitable without the support, but having a potential 20% increase of profitability by waiting a year, makes most investors letting the time pass which results in many manufactures facing a huge decline in demand. Another potential threat is related to patents. Since the industry is still characterized as investing a lot in research & development, new and better ways of capturing wind energy might be discovered. Already today there are technologies, although in their starting stage, that are extremely efficient and on the other hand are able to eliminate noise and shadow flickers nearly totally. Having a company that is holding a patent on a technology, which is way better than the technology used by manufacturers today, might result in a market with a company having monopolistic control. If this company decides to market the 58 new technology themselves, without giving other companies the possibility to license, the market for wind energy would change dramatically. 9. CONCLUSION This paper has by the use of different analytical tools shown what factors are having an impact on Siemens Wind Power´s business in the United States. Furthermore we have learned how environmental scanning tools are able to provide information that is essential for the strategic decision process. However, it is important to note that different analytical tools are providing different information. Our impression of market characteristics and factors that are of importance might tremendously change when using other tools that are found within the management and marketing literature. Furthermore we should acknowledge that the research design simultaneously was taking an impact on our results. Also here a different approach would have accredited different factors. But what can we conclude from our research design and our use of PESTEL, Porters 5 Forces, and SWOT? First of all we have learned that governmental support has a tremendous impact on the industry’s success. However, governmental support can only be granted when the economy is doing well and at its current stage this is not the case since it is mainly a stock market bubble growing because the is FED is supplying cheap money. What is important is that the industry learns how to grow without governmental support, which already might be possible, but for investors easier and well more profitable with granted subsidies. Also the fact that wind generally is favored by the biggest part of the community should be acknowledged and the causes for the phenomena of NIMBY should by tried to tackle through new turbine technology. Especially wind developers should take this into account and plan projects were the highest favorability is placed while additionally involving the local community from start on. Furthermore, the industry should start seeing the governmental investment into the energy infrastructure as another, although indirect, grant for the industry while additionally making potential investors aware of that. As we have 59 discovered the costs of installing the grid is extremely influential in its impact and might decrease tremendously when the government extends it for the taxpayers costs. Also turbine manufacturers should start to involve themselves more into the developers tasks and especially focus on the legal issues that can arise, since there not only are many and extreme in their potential impact but on the other hand developing to acknowledge new problems. However, Siemens Wind Power also has to develop their own internal business. Although we found out that the threat of new entrants generally is low, since the needed investment is way too high for most companies, GE and Vestas are still major players and are able, through their bigger product portfolio, to supply areas where Siemens does not have the right turbine. Especially when the market starts to saturate, secondary areas are going to be utilized where different turbine characteristics might be needed. Additionally the company should start to rely on outside suppliers to higher degree, although we have learned that the backward vertical integration was able to offer many benefits, the situation on the American market is too unpredictable to have all the costs internally and the risk would decline tremendously when passing it to suppliers. What however might be worth a try, although it decreases flexibility, is a forward vertical integration. 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