Spain No Longer Battling the WindmillsPublished: January 03, 2012 in Knowledge@Wharton
Comparing Spain's current market grasp on wind energy with the quintessential Spanish literary symbol -- Don Quixote battling the windmill in La Mancha -- offers a certain irony. If Don Quixote is the representation par excellence of Spanish culture, today he would no longer be battling windmills, but rather trying to figure out how to manufacture them most efficiently and then exporting his business model all over the world.
Were this newly imagined persona to drive around in his car and explore the expansion of Spanish multinationals that specialize in wind energy, he would find one company's logo etched on some of the most sophisticated turbines on every continent. Gamesa Corporación Tecnológica's rapid and ambitious expansion story has been anything but a quixotic dream. The Zamudio-based multinational has risen to international prominence thanks, in large part, to certain strategic initiatives.
Spain became a global hub for wind energy innovation due primarily to government subsidies and the use of feed-in tariffs (FITs). According to Cynthia Graber, a journalist who has covered Spanish renewable energy, the growth of wind energy in Spain arose out of local needs to reduce dependence on foreign oil and to lower carbon dioxide emissions. As a result of the oil crises of the 1970s and 1980s, Spain passed a series of laws, beginning with Royal Decree 82/1980, mandating the development of local energy sources. In 1994, Spain joined many other European countries in instituting the use of FITs as a mechanism to advance renewable energy development.
FITs provide market certainty for energy companies through government-set prices for certain sources of energy, allowing producers to sell directly to producers at a highly subsidized rate. For example, Royal Decree 661/2007 set a price of €7.32 (US$9.74) per kWh for the first 20 years. As a result of this government intervention, Spanish wind-energy companies such as Iberdrola, Gamesa and former wind-giant Ecotecnia could confidently invest in technologies that at the time would not have been profitable.
Today, Spain produces 20,676 MW of solar power annually, with a goal of reaching 35,000 MW by 2020. At first glance, this goal may appear to be insurmountable. However, in 2000, the country produced a mere 2,358 MW from wind energy. Spain is the fourth-largest producer of installed wind energy power, behind China, the U.S. and Germany, but its multinational wind-energy companies compete all over the world, including these top three markets. In the Spanish context, Iberdrola is the major operator of wind farms, Acciona is the leading developer of wind farms and Gamesa is the main manufacturer of wind technologies.
Gamesa exemplifies the market prominence of Spanish wind-energy multinationals. Not only is the company a leader in wind-turbine manufacturing, but it also develops and operates wind farms around the world, differing from competitors such as Siemens that only manufacture turbines. According to BTM Consult, Gamesa is the eighth-largest wind-turbine producer in the world (all market shares henceforth refer to MW installed base capacity). The company has remained a key global player over the past 35 years for three reasons: a willingness to go global, an ability to refocus the company and adapt to market needs, and, most recently, an emphasis on developing innovative new technologies through a wide variety of sources. If Gamesa is to remain competitive in today's grim hypercompetitive market, it will need to continue to build on these traits.
Going global has played, and no doubt will continue to play, a fundamental role in Gamesa's history and future expansion. According to CEO Jorge Calvet, who spoke at the Forum Europa Tribuna Euskadi conference held in February 2011 in Bilbao, "the economic model is changing at a global level, and Gamesa must play its hand on an international stage. Gamesa has had no choice but to be a global corporation."
Going global has allowed companies like Gamesa to hedge their risks and compensate for slow growth in certain regions while achieving fast growth in others. Much of this was spurred by a management change in the aftermath of the 2008 financial meltdown, when Gamesa suffered from mass order cancellations. In 2009, the company appointed Calvet as CEO. "At the end of 2009, 35% of [the company's] sales were in Spain," he said. "Today ... sales in Spain are exactly zero. [We] do not sell anything there." This strategy has proven to be very fruitful. During the first half of 2011, the company increased sales of wind-turbine generators by 26%, despite no domestic sales. Recognizing that its home market was tepid at best, Gamesa was able to increase profits by focusing on other markets.
Beginning in 1999, the company began moving outward, first in nearby countries such as Portugal (1999), Italy (2001), Greece (2001) and France (2002). Not only were these countries geographically close, but they were also all in the eurozone and, therefore, shared a currency and common cultural and historical traits. Gamesa simultaneously expanded to the Americas, setting up operations in the Dominican Republic (2000), Mexico (2001) and Brazil (2001). This expansion was logical because of the shared colonial ties stemming from Gamesa being a Spanish company already installed in Portugal. In 2002, the company entered the U.S. market through acquisition of the Minneapolis-based Navitas Energy. Gamesa then moved to more distant markets such as Australia (2003), the U.K. (2003), Germany (2003), China (2005) and India (2009).
Today, Gamesa has 32 production facilities all over the world and supplies generators to every habitable continent. During the first half of 2011, Latin America accounted for 19% of sales, China for 20% and Europe for 27% (mostly in Eastern Europe). The U.S. accounted for 15% of sales with about 1,000 employees in the country and manufacturing facilities based just outside Philadelphia. On a visit to one of the U.S. plants, President Barack Obama noted: "I think that what you do here is a glimpse of the future...." Gamesa is a multinational today, spreading its risks and profits all over the globe.
Developing a Competitive Edge
In looking at a timeline of the company, it would be difficult to identify a single core competency. Instead, Gamesa's core competitive advantage is its ability to redefine itself and develop new market niches.
Gamesa began in 1976 as a metallurgical producer of industrial equipment in the automotive sector during a boom in Spanish automobile manufacturing. Recognizing that it was attracting top engineers and gaining market position, the company diversified into fields such as robotics, microelectronics, composite materials and environmental protection. However, as many of these industries were lost to more competitive markets overseas, Gamesa needed to find a new focus. In 1993, the company entered the aeronautics market through a government-subsidized program and began supplying airplane and helicopter body components, entering into valuable contracts with Brazilian company Embraer, among others. However, this focus was short-lived and was phased out 10 years later.
Such prior industrial acumen helped Gamesa develop a competitive edge. For instance, the company gained know-how from navigating through the Spanish government and learning how to take advantage of subsidized industries, as it did with the aeronautical industry. Yet it is Gamesa's ongoing experience of being a leading innovator in all the fields that it enters that unifies its diverse and often unpredictable trajectory.
For example,Gamesa has weathered global competition in the wind-energy sector through an ideal innovation strategy. Recognizing the need to become a major player in the development of wind turbines, in 1994 the company established a joint venture, Gamesa Eólica, with Denmark's Vestas and the government of Navarra. This partnership allowed the company to enter the wind turbine market with lower risks and to gain industrial know-how through access to Vestas' technology. By 1997, Gamesa Eólica controlled 70% of Spain's wind-turbine market. In 2001, reaping the benefits of a market advantage, Gamesa purchased Vestas' 40% stake in the venture. Perhaps most importantly, Gamesa was able to retain intellectual property rights and to leverage the knowledge it had already gained from Vestas.
Between 2003 and 2008, Gamesa began to develop its own technology, blazing a path distinct from Vestas'. Today, the company is a global leader in wind turbine innovation. According to Antonio José de la Torre Quiralte, product development director of the technology division, his company's recent innovations will allow Gamesa to continue to prosper globally. He cited Gamesa's dedication to product development, noting that the company had logged 1.5 million hours of engineering and testing to ensure that it was producing the best turbines possible.
An aeronautics engineer by training, de la Torre described the G10X generator system, referring to the impressive size of the rotor blades, doubled from the previous model and, therefore, allowing for a large increase in power generation per unit. The project required the work of about 150 engineers worldwide for six years. According to a Gamesa press release, each turbine is capable of supplying power for 3,169 households per year. To underscore the importance of these turbines, one turbine would be able to replace approximately 1,000 tons of petroleum and eliminate 6,750 tons of carbon dioxide emissions annually.
De la Torre explained that Gamesa's G10X generator is centered on the company's six new technologies: the Innoblade, the MultiSmart set of control strategies, the CompactTrain, the GridMate, the ConcreTower and the Flexifit. The advent of the Innoblade solved one of Gamesa's major problems with developing products that required export to countries all over the world: the transportation of massive structures. With increasingly high oil prices and country-specific regulations concerning the transport of heavy 62-meter-long metallic blades, Gamesa developed a segmented blade divided into 30- and 32-meter parts. This unique technology allows the company to export blades for 5MW and larger generators with transportation costs equivalent to those associated with blades used for 2MW generators, giving Gamesa a strong competitive advantage.
At the same time, the MultiSmart set of control strategies involves software that constantly monitors and minimizes the vibrations of each blade, reducing resistance and improving efficiency by 30%. The CompactTrain technology addresses the problem of complex gear technology with too many parts by creating a medium-speed two-stage system that involves fewer parts and is more compact. The GridMate facilitates optimum connection to grids and allows for higher voltage dips, responding to increased global energy demand and the complexity of modern grid systems. The ConcreTower ensures stability, lowers costs associated with transport of the tower parts through the use of new concrete-and-steel-based technology, and is simple to assemble on site. Finally, the Flexifit is a self-assembly and lifting apparatus that eliminates the need for large external cranes, thereby reducing maintenance and installation costs. In combination, these technologies have produced a highly efficient, low-cost turbine.
To maintain its position as a leading innovator in wind technologies, in 2010 Gamesa invested approximately 2% of its revenue in R&D. In addition, in May 2011, the company announced it will diversify into new renewable technologies by starting a corporate venture capital fund which will invest up to €50 million (US$66.75 million) over the next five years to become a minority shareholder in a large number of renewable-energy-related start-ups. It will focus primarily on wave and tidal, next-generation photovoltaic energy, energy storage, electric vehicles, energy efficiency and off-grid technologies. Gamesa's goal is to be at the forefront of renewable-energy technologies and to develop innovative strategies to match these technologies.
Today, Gamesa faces challenges both in its home country and abroad to maintain its position as a global leader in the design, manufacture, installation and maintenance of wind turbines and the construction of wind farms.
One of the primary challenges to the company's success is on its home front. According to a business manager at one of the largest renewable-energy companies in Spain, who works closely with lobbying groups in the country's wind-energy sector, government subsidies may no longer be available to the extent they have been in the past. In February 2010, the Spanish government announced it would cut spending to reduce its budget deficit to 3% of its gross domestic product by 2013. Prior to that announcement, in May 2009, Spain had already cut subsidies, reportedly because the government had predicted it was already on track to meet long-term goals.
Coupled with the current uncertainty of Spain's national debt, these announcements indicate the business manager's fears may come true. According to him and to a strategy-specialist at the same company, government subsidies are still essential for maintaining profitability in Spain. Gamesa may encounter challenges within this context, facing possible drastic reductions in local revenues. Moreover, any market uncertainty in Spain and the possibility of a nationwide collapse of the economy would undoubtedly create risks for the company due to the fact that its main office and R&D facilities are located in Spain.
The second major challenge is the rise of multinationals in the wind energy sector from emerging economies such as China and India. According to BTM Consult, China currently dominates the global market of wind turbine suppliers with seven companies among the top 15 worldwide suppliers in 2010, controlling nearly half the US$45 billion global market. In addition, China currently leads the world in wind energy supply at home, recently surpassing the U.S., and has adopted protectionist regulations to disadvantage foreign players.
For example, in China, Gamesa is obligated to buy components for its generators from local suppliers, forcing the company to invest in understanding unfamiliar distribution channels and detracting from some of the competitive advantages it has developed in turbine production. Moreover, these same local suppliers sell parts to Chinese competitors, which enjoy low-interest loans and low-cost land from the government. Regulations such as these have changed Gamesa's status in the Chinese market. Six years ago, the company had a third of this market; today, Chinese companies control 85% of the market, leaving Gamesa with a mere 3% market share. To make matters worse, these Chinese companies are starting to expand abroad.
Given this situation, Gamesa will need to leverage even more of its resources and intangibles to succeed and sustain its revenues to maintain its competitiveness. While there is room to grow -- wind energy is expected to triple its worldwide energy share to 9.1% in 2020 -- the company will have to make even more difficult strategic decisions.
Gamesa's most recent developments have been a series of ups and downs. The downs have been due mostly to a widespread economic collapse in Spain, with the blue-chip IBEX-35 nose-diving since early August 2011 due to concerns about the Spanish debt. The ups, on the other hand, seem to be promising and suggest that Gamesa will be a global competitor for a long time, despite the rise of Chinese multinational wind-energy companies. With its 29% growth in the first half of 2011 and 26% sales growth, Gamesa noted in a press release that "the internationalization of our sales and seasonality in Asian markets allowed us to cover 77% of our 2011 sales target at the end of June."
Gamesa's entrance into the Indian market has been highly successful, gaining about 10% market share in just 18 months. Harking back to the Chinese threat, Gamesa has adopted an "if you can't beat them, join them" mindset, entering into strategic cooperation pacts and dealing with various Chinese renewable energy groups in April 2011. Gamesa was one of a few Spanish multinationals that spearheaded a recent Spanish push for a corporate presence abroad, spurring Spanish Prime Minister José Luis Rodríguez Zapatero to proclaim, "China should be the priority of our economic diplomacy, which is a more and more important element."
Meanwhile, on the innovation front, Gamesa has unveiled ambitious plans to build an offshore wind technology facility in Glasgow, Scotland, where it hopes to implement the technology it develops. The €50 million (US $66.75 million) investment is a good strategic move, according to de la Torre, who sees offshore wind technology as the future of the company.
With its successful expansion across the globe, increased revenues to invest in R&D and innovation, and its managerial ability to redefine itself, Gamesa is poised to remain a key global player. However, unless it continues to leverage what has kept it afloat over the decades, Don Quixote may be battling the windmills once again.
This article was written by Felipe Correia, Kevin Hess, Eduardo Küpper, Leonardo Oliveira and Hugo Yoshinaga, members of the Lauder Class of 2013.