Oliver Wyman study Wind Power 2020: Boom-Market Service The underestimated profit machine

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1 You can receive print-ready photos by . Please submit your request to P R E S S R E L E A S E Oliver Wyman study Wind Power 2020: Boom-Market Service The underestimated profit machine Global onshore wind-power capacity will quadruple in the next 10 years The service business is growing worldwide nearly twice as fast as the sale of new wind turbines Competition is intensifying among providers of services for wind turbines Manufacturers need focused service strategies and dedicated business models Munich, November 8, 2010 Wind power is and will remain a strong source of renewable energy worldwide. Despite a weak start in 2010, the mid-range growth trend remains intact. At the same time, manufacturers of wind-power stations are going through a fastpaced maturing process. In the years ahead, they will have to wage a battle on all fronts. The strategic challenges are enormous. Global growth in new business alone will be unable to ensure these companies long-range success. The reason for this is clear: Intense competition is increasing the pressure on prices and, as a result, profitability. The significance of the service business is markedly rising. But the majority of manufacturers are not adequately prepared for this change. If they want to sustainably profit from the lucrative services related to the operation and maintenance of windpower stations, they must develop clear service strategies with the appropriate business models. These are the findings of the Oliver Wyman study Wind Power 2020: Boom- Market Service. Wind turbines will generate rapid growth worldwide in years to come. In spite of the major, longrange significance of the offshore segment, more than 90 percent of the newly installed capacity will be added on land in the next 10 years. As a result of this trend, the onshore capacity will quadruple through 2020, generating growth rates of nearly 16 percent annually from today s approximate level of 192 gigawatts to about 825 gigawatts. With annual increases of more than 18 percent, the Asian region is primarily driving growth and is on track to become the world s biggest market for onshore wind power over the next three years. Projections show that in 2020 the region will have an installed capacity of 290 gigawatts, placing it well ahead of the United States with 211 gigawatts and Europe with 207 gigawatts. In Germany last year, more than 21,300 wind turbines generated about 38 billion kilowatt hours of electricity. Statistically speaking, this is enough to supply more than 10 million households with electricity and avoid the emission of 30 million tons of CO 2. At the same time, wind power was by far the leading source of electricity produced by renewable energy in 2009 with a share 1

2 of 6.6 percent. By contrast, hydropower had a share of 3.3 percent, biomass 3.2 percent and photovoltaics 1.1 percent. Fast-paced maturity process This year, the wind industry, a sector so accustomed to success, has found itself battling the fallout of the financial and economic crisis. Worldwide demand has abated. But because production capacity was expanded, overcapacities of 20 percent to 25 percent have arisen. The intensity of competition has tremendously increased, driving down prices in new business and negatively impacting profitability. Small manufacturers that have only a relatively small installed base are having more and more trouble finding customers and project financers for their wind turbines. As a result, consolidation will occur among producers of wind turbines. Oliver Wyman s wind index reflects the industry s situation. Since the beginning of the year, European wind shares have performed much worse than the 50 stocks in the European bluechip index EURO STOXX 50. The wind-power industry is late cyclical. It is not only battling economy-related problems, but is also going through a structural maturing process, says Wolfgang Krenz, Partner at Oliver Wyman. And this is occurring at a rapid pace. While the mechanical-engineering industry had decades to shape and develop itself, this process is happening over a period of a few years in the relatively new wind-power industry. Manufacturers must quickly do their homework, Krenz adds. After all, the mid-range growth trend remains firmly in place, particularly in Europe. The strategic challenges facing European manufacturers are multi-faceted. On the one hand, they must continue to expand new business and professionalize business processes. The steps that must be taken to accomplish this are continued internationalization, improved performance by sales and, in particular, reduction of manufacturing costs. This requires an improvement of the product structure, the optimization of the supply chain and automation of production. On the other hand, they must rethink their business models. The high value creation depth of some European producers and the high value-added share in Europe must be reconsidered. The time-to-market requirements for new products will also become more challenging. The builders of wind-power stations should consider making strategic investments in windparks or initiating related partnerships. In doing so, they will shorten the time it takes until the general marketing of new systems begins and accelerate return on investment. Service needs rapidly growing The biggest challenge facing manufacturers is the service business. The new Oliver Wyman study shows that, parallel to the rising number of installed onshore wind-power stations, demand for such services as inspections, maintenance, repair work and spare parts is growing at above-average rates. As a result, the world market for operations and maintenance will quintuple over the next 10 years, reaching a total of 27 billion. This means that the service business will grow nearly two times as fast as the rapidly growing business with new installations. In Europe, the service volume will nearly triple, rising from today s total of under 3 billion to about 8 billion in As a result, it will make up about 40 percent of the overall business. Last year, the wind-power industry generated profits of about 2.5 billion. More than 80 percent of these profits were produced by new business, in which EBIT margins averaging 7 percent are generated. But a shift will occur in the future, driven by the rapid growth of newly installed wind turbines and the aging of the existing base, along with the professionalization of the service business. The Oliver Wyman study shows that, by 2020, about 75 percent of profits in Europe will be generated by the service business. At the same time, the EBIT margin will be 15 2

3 percent to 20 percent, markedly better than it is in the new installation business, which will increasingly come under pressure in the long term. Profits will be divided in a new way, says Henning Thormählen, Associate Partner and after-sales-expert at Oliver Wyman. Service will become the profit machine in the wind industry. But the majority of manufacturers are not yet adequately prepared for this change. Develop focused strategies Frequently, companies do not have strategies that are systematically designed to tap the highly profitable service business of the future or their implementation is lacking. One reason is that manufacturers have had virtually no competition in the service market up to now. The industry is new, and the first-generation stations still were teething to some extent. For this reason alone, customers did not want manufacturers to cede responsibility, Thormählen says. This is clearly changing. The products are now more reliable. At the same time, warranties and initial service agreements are expiring an excellent time for new service providers to step in. The manufacturers dominance of the service market will wane. New companies are forming as a result of the tremendous profit potential. In addition to component manufacturers, independent third-party providers of wind-station services are about to join the service-business race against turbine manufacturers. Major operators are also setting up their own operations and maintenance departments. In light of this change, manufacturers are being forced to act. They must develop dedicated business models that will enable them to secure the profit potential offered by the service business. The objectives should include creating an international service organization with standardized processes and systems because the wind industry is becoming increasingly global. Another area is the development of differentiated service products for the different requirements of individual customer groups. In addition to maintaining the turbines efficiency, these service products must increasingly help boost the productivity in the operating phase. At the same time, additional expertise in the areas of calculation and risk management in terms of service agreements must be created. In the past, customers have repeatedly paid too much for service agreements. But manufacturers also have had to pay their dues as a result of hidden risks in existing agreements. One of the most difficult tasks may be recruiting, training and professionally developing service personnel. A shortage of qualified skilled personnel already exists. For example, the specialists needed to perform repairs of wind-power stations, including mechatronic technicians, are in high demand in the mechanical-engineering industry, among others. To avoid unscheduled downtimes at wind turbines in the future, the industry must carry out systematic, sustainable personneldevelopment programs, Krenz stresses. Now is the time to act in every area. Without professional preparation, the service boom will quickly become a no-profit zone. 3

4 Five theses on the market for wind energy 1. Globally installed wind turbine capacities are 20 times higher than those of solar power. As a result, its role is critically important in achieving energy-related political objectives. 2. The latest hype about offshore wind parks is drawing attention from the onshore business, even though the latter area will be considerably larger in the next 10 years, its products are more mature and its systems are much more efficient. 3. The pending consolidation of the wind industry will trigger increased M&A activities among manufacturers. Smaller players will disappear from the market. 4. Manufacturers still control more than 90 percent of the service market. They will be unable to preserve this share during the upcoming boom and amid the intense competition. 5. The service business will become the profit machine in the wind industry. The majority of manufacturers are still not prepared for this shift. Only companies that shift their focus to service today will emerge as tomorrow s winners. 4

5 Media contact Andrea Steverding Manager Corporate Communications Oliver Wyman Marstallstrasse Munich Tel.: Fax: ABOUT OLIVER WYMAN With more than 2,900 professionals in over 40 cities around the globe, Oliver Wyman is an international management consulting firm that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation, and leadership development. The firm helps clients to optimize their businesses, improve their operations, risk profile, and IT as well as accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is part of Marsh & McLennan Companies [NYSE: MMC]. For more information, visit Oliver Wyman is one of the leading strategy consulting firms in the German-speaking world as well, with offices in Munich, Frankfurt, Dusseldorf, Hamburg, Berlin, and Zurich and aboveaverage growth rates. Customers are leading companies from the following industries: automotive, retail, manufacturing, financial services, aerospace, mechanical and plant engineering, media, telecommunications, and transport. They are supported by a worldwide network of experts, allowing us to put together the best possible team for every assignment. 5