Introduction
Vestas is a Danish wind power company that manufactures wind turbines. The company’s value proposition is the reduction of CO2 emission and contribution to a reversal of climate change. It holds the reputation of being able to deliverer more than 51,000 turbines around the world thanks to its extensive business coverage that consists of operations in 73 countries and it employs about 16,000 people (Vestas 2014, para. 3).
Vestas started serving the Brazilian market in 2000 without having a physical presence in the country. The company established in Sao Paulo later in the decade. Later, it launched its manufacturing facility in the state of Ceara, Brazil in 2011. Presently, the firm is looking at unconditional orders to almost double its capacity of 1000 MW, which will rely on its new V112-3.0 MW turbines.
Interests of Vestas in Brazil comes from the company’s realization that the country has one of the most competitive markets worldwide for wind energy, which is also fast growing; it is one of the new frontiers of wind energy development. This paper looks at the international business strategy for Vestas in Brazil, as well as country and industry specific conditions that influence the strategy.
Main Findings
Currently, there are 21 wind energy operators in Brazil and they all source services and inputs from the wind energy manufacturers. Among the manufacturers, Vestas has a market share of 12 per cent, which puts it behind Wobbe that has a market share of 20 per cent.
Other competitors of Vestas are GE, IMPSA and Suzlon, each with a 16 per cent share. The others include Alstom, Sinovel, Acciona, Gamesa, and Siemens (Aura 2013, para. 4).
Attractive points for wind energy in Brazil
This section of the report examines several factors that make Brazil and attractive location for wind energy investments. First, Brazil intends to generate 16 per cent of its electricity from renewable, excluding large hydro, sources. The country plans to have 11.5 GW of wind capacity by 2020.
There are 37 wind power projects in the country, generating 1050 MW and an additional 635 projects are planned to produce about 20,500 MW (IRENA 2011, para. 1).
Secondly, the Brazilian government awards licenses for wind farms at public auctions (Porrua et al. 2010, p. 3). These auctions happen annually and the Brazilian government plans to have them throughout the next decade. By definition, through the contract auction system, firms are able to use long term contracts for provision of wind energy, which in return lowers restrictions on project financing (Aura 2013, para. 2).
The auctions lure foreign companies into the country and the country benefits by having experienced and knowledgeable firms building its wind energy sector. On their part, the companies use the auction as market entry opportunity, with access to unpopulated areas and other incentives from the Brazilian energy regulator (Dutra & Szklo 2008, p. 2508).
Even then, the companies operating in wind energy or wind equipment manufacturers have to grapple with challenges of noise pollution, unpredictability, and costs (Lunn 2014, p. 12).
In regards to the auction system and overall implantation policies for wind energy, the government factors in a 3-year construction period between the auction date and the energy delivery date when awarding licenses.
As highlighted by Porter (2011, p. 71), every country that attracts foreign direct investments (FDI) must have alluring competitive advantages. In the case of Brazil, a key attraction for wind energy manufacturers in Brazil is the commercial opportunity of selling key components to the wind mill original equipment manufacturers (OEMs).
The presence of a number of wind energy firms enables Brazil to rapidly move towards the achievement of its goal to have a diversified energy mix and reduce risks of energy shortages (Pao & Fu 2013, p. 383).
Apart from government incentives, Brazil’s wind energy sector is experiencing growth because of the country’s untapped potential, which experts put at about 350 GW. In fact, the wind capacity when fully exploited would be higher than that of hydroelectric sources (Global Wind Energy Council 2011, para. 2).
In addition, the Brazilian government’s goal of energy sources diversification also rides on the renewed global focus on climate change where renewable energy production is one of the mitigation efforts.
According to a 2012 report by Ernst & Young, the growth of renewable energy in emerging markets is due to the shifting focus toward the energy sector as an avenue of enhancing entrepreneurial markets and workforce. In Brazil, the demand for renewable wind energy grows at a rate of 2 GW per year. The Brazilian Development Bank (BNDES) is the main financier of wind energy projects in the country (Larive International 2014, para. 2).
For multinational companies moving into the wind sector of Brazil, the opportunities for investment lie in wind energy research and development, wind turbine design, wind turbine production, design and engineering, construction and installation, operation and maintenance, and wind farm development and exploitation.
Among the these available opportunities, Vestas gains more by pursuing the operations and maintenance, as well as serve clients in wind farm development and exploitations (Hitt, Ireland & Hoskisson 2013, p. 64). Still, the company can gain from research and development, but the opportunities at that level as low (Larive International 2014, para. 3).
Under operation and maintenance, wind farms are no longer experimental projects; the Brazilian wind energy sector is now mature with opportunities that Vestas or any other rival company would obtain from other emerging markets.
The main challenge has moved from setting up wind farms to the running farms smoothly and production of energy efficiently (Lowson 2002, p. 54). Preferably, production should be at level A-3 and A-5 auctions (Larive International 2014, para. 5). Therefore, the human resource needs for Vestas continue to increase in terms of skills levels demand.
In the past, Brazil only required wind farm operators and manufacturers to consider the needs of the farm and not the grid, but that changed with the regulatory requirement for operators to also handle grid connections (Larive International 2014, para. 5).
The requirement not only increases the complexities of projects and need for extensive partnerships, but it also significantly affects the cost and forces manufacturers of turbines and other equipment to focus more on low-cost solutions (Larsen et al. 2010, p. 67).
Brazil does not have enough local expertise on the operational and maintenance aspects of wind farms. In this aspect, it relies on multinational companies that move in their investments in the country (Luthans & Doh 2012, p. 87). Most of the rivals and partners to Vestas are working on operation and maintenance, condition monitoring, wind turbine, and wind power performance (Juárez et al. 2014, p. 829).
There are still opportunities in these areas as the wind energy sector is yet to reach saturation. These opportunities arise because of the following relationship. As firms like Vestas come up with newer technologies on their turbines and other related equipment, they also present a challenge for maintenance that needs training of personnel.
Going forward, Brazil will continue being a primary receiver for international technical expertise until the country is able to develop its own capacity to train personnel in the area. This brings out the innovation opportunity for Vestas to embrace.
Other than merely providing turbines and improving the specific technologies of a turbine, the company can also look at equipment manufacturing to cover the demands for wind farm connection to the grid. Wind farm developers continue to act as the biggest customers to Vestas.
The company can increase its relevance and subsequent market share by offering a compressive range of solutions to cover all the operational aspects of wind farm development and operation (Larive International 2014, para. 7).
Another factor worth considering is the fact that Brazil has a unique climate condition that requires the manufacturing of equipment that suits the different conditions of the country.
The climatic distinctiveness is in the fact that the country has relatively strong winds that are stable compared to many other markets where Vestas operates. As a result, Vestas will have to continue looking into cost-effectiveness of engine blade, special turbine types, and metal parts used in the assembly.
The unfortunate thing for the Brazilian wind energy market is that most of the equipment manufacturers are offering the market second to the last generation equipment that was already adapted to other markets.
Due to the inadequacies of the main equipment, the sector has a high demand for generators, automation, and monitoring systems to enable the system operate at part with the capabilities of the latest equipment (Larive International 2014, para. 8).
As for competition in the wind energy sector, Vestas continues to face the threat of new rivals entering its market given that, the net metering system of April 2012 lowered the barriers of entry for small scale operators and manufacturers (Porter 2004, p. 28). The net metering system offers credits on electricity bills for small and micro plants together with individual use (Larive International 2014, para. 8).
As a result, it has allowed small companies to build services and technologies for micro wind farms. The small farms are helping meet the employment targets for Brazil’s government and contribute to the diversification of energy sources. These small wind energy firms are mostly operated by small businesses and farmers who are taking an active role in diversifying their income sources.
Many of the farms served by the small operators are in isolated locations that provide few incentives for big wind farm establishments. Still, the small farm operators offer a viable demand for less expensive systems with lead and nickel batteries to store electricity in an environmentally sustainable way (Al‐najjar & Anfimiadou 2012, p. 51).
Local firms have a competitive advantage over Vestas because of their locally-tailored content that would help local firms gain capability of manufacturing (Ramamurti 2012, p. 245). The rules are changing the landscape of the industry that is worth USD 2.75 billion. In fact, international companies like Vestas are facing a stiff decline of their share as companies that meet the mandates increase theirs (Nielsen 2013, para. 3).
Some of the Business Development Strategy that are applied by the Company and how the affected the strategy
Strategic management of the company
For Brazil, the new strategy for Vestas is to make investments that meet local content requirements. As part of the enhancement of local content, in line with the requirements of Brazil, Vestas is transferring knowledge behind its state of the art V11-2.1 MW turbine to its local Brazilian organization.
Local Vestas employees in Brazil learn from the company’s application of world-class expertise when assembling and maintaining its turbines in installed in the country (Vestas 2014, para. 4).
To its benefit as far as harnessing of business opportunity goes, Vestas has been undergoing a turnaround that ended in 2013. According to the company’s annual report, the turnaround only marks the start of a more optimal organization whose new aim is to lower the cost of energy. The company also focuses on increasing value to its shareholders.
Country operations are now elevated to operate autonomously to reflect on the changing needs of the business to grow local partnership and realize a more long-term business. Unfortunately, Vestas still grapples with regulatory challenges that hamper its realization of local market dominance in Brazil (Bensoussan & Fleisher 2013, p. 98).
The country has a policy of setting low price caps at its regulated market auctions for turbines, which curtails the strategic options for Vestas (Spatuzza 2014, para. 1). The company can only work on its differentiation strategy as the remaining options for gaining competitive advantages (Ryans 2009, p. 23).
Due to the turnaround process, Vestas got a new chief executive officer (CEO) in 2013. With the appointment, the company was also able to transform itself into becoming more lean and flexible to allow it to scale at will. This was in preparation for future challenges and an understanding of the dynamic nature of the wind power industry across the world, which is becoming increasingly competitive (Hitt, Ireland & Hoskisson 2013, p. 65).
Organizational development and structure
In Brazil, Vestas targets other international companies that are operating in the country before going to the Brazilian companies. In the past the strategy worked well until Brazil’s authorities came up with local sourcing rules (FINAME regulations) that compel companies like Vestas to have local production capacities.
In this regard, Vestas was instrumental in making a foreign direct investment (FDI) in Brazil by building a local production facility in Fortaleza. The location of the facility is strategic to the northern wind producing locations in Brazil and will allow Vestas to meet its goal of increasing its market share in Brazil (Buist 2014, para. 5; Pimenta, Kempton & Garvine 2008, p. 2376).
Sourcing of parts is now done locally, especially for hubs, nacelles, and generators. Vestas hopes to rely on Aeris, which is a Brazilian local blade producer, to manufacture blades. In the joint partnership, Vestas will provide the Vestas blade mould from Denmark and license Aeris to produce the blades with its local capacity and be in line with the FINAME regulations.
Vestas recognises the price-oriented market of Brazil and relies on the delivery of state-of-the-art turbines, together with differentiated operations and maintenance services, to gain a market leadership position. The company’s Brazil’s country representative is the president of the country’s operations and reports directly to the global CEO.
The new Vestas president of Brazil, Ruben Lazo, is focusing on building a new hub and a nacelle assembly plant and stop relying on local manufacturers of the same. This should allow Vestas to control its costs of production and offer better prices, while it still retains a favourable profit margin (Spatuzza 2014, para. 2).
In addition, the company will also have local factories for building the V112-2.0 turbine that should help it increase its market share. The new locally-built deliveries should begin in 2016 (Spatuzza 2014, para. 2).
Integration of the functional strategies of the business
Many of Vestas customers look at the company’s financial performance to determine its suitability as a long term partner (Vestas 2013, para. 3). In this regard, Vestas continues to pursue financial goals as much as it works on improving other technological aspects of the business to safeguard its reputation.
In recognition of its changing market, the company has continued to shift its focus into emerging opportunities in Latin America and Asia, as well as Africa. This strategic move ensures that the company still continues to grow in Europe and North Africa as it works on making its presence in the emerging market match its capacity in the developed markets.
On the other hand, investments towards technological innovation continue to be an operational focus as governments and other power industry players demand advancement in the competitiveness of wind power (Vestas 2013, para. 4). Therefore, wind power solutions must not only compete with other wind solutions from rival companies, but also with renewable energy solutions that do not necessarily rely on wind.
One of the business strategies for Vestas after its two-year turnaround that ended in 2013 has been the focus on operational excellence. This includes lowering cost and then maintaining low overall cost levels as the key priority throughout the period after the turnaround.
In this regard, the company continues to explore options for outsourcing production of non-core technologies that should enable it become the preferred low cost manufacturer for most wind farm operators. The company’s low cost strategy translated to lowest sourcing, transport, and manufacturing costs across the entire global wind industry.
Vestas has also focused on the service business as a key source of revenue and contributor to its profitability. In the future, the service area will still play a significant part as the company seeks to consolidate its customers.
To qualify as the preferred service provider, Vestas rides on its distinctive advantages that rivals cannot copy easily, such as its installed base of 60 GW in the world and the global nature of its services (Vestas 2013, para. 7).
The company continues to rely on its experiences derived from operations in 50 countries that give it unmatched abilities for examining and predicting wind conditions anywhere in the world (Dechezleprêtre, Glachant & Ménière 2009, p. 704).
It is worth noting that a Vestas turbine produces more than 25 times the energy that it uses in its lifecycle and emits only about one per cent of carbon dioxide (Vestas Global 2014, para. 3). The challenge the company embraces is on the reduction of the carbon footprint for its turbines. One way to achieve the goal has been to embrace recyclability.
Here, Vestas is able to preserve the value and essential properties of materials (Oebels & Pacca 2013, p. 61). Its latest turbine, the Vestas V112.3.0 MW, can be recycled up to 80 per cent. The company’s goal is to have the percentage of recyclability increase to 85 per cent by 2015 (Vestas Global 2014, para. 3).
Unfortunately the above advantages in technologies are absent in Brazil because the company is yet to embark on widespread use of the V112.3.0 MW in Brazil. According to Buist (2014, para. 5), Vestas aims to take on 25 per cent of the Brazilian market in three years by relying on its V110 2MW turbines.
However, Vestas defence is that there are 12,000 similar turbines already in use across the globe and they are the ideal types of coping with the medium wind with no turbulence characteristics of Brazil (Buist 2014, para. 6).
Corporate culture of the business
Vestas sustainability strategy informs its corporate culture. Under safety, the company has a goal of having zero injuries; therefore, it puts safety first to maintain a low incident rate.
Safety’s position in the corporate culture is rooted in leadership and starts with having management staff that is accountable, while employees shoulder their responsibilities alone (Ahlstrom & Bruton 2010, p. 29). Safety is one of the conditions for employment at all Vestas global divisions, including Brazil (Vestas Global 2014, para. 3).
Vestas signed the Partnering against Corruption Imitative (PACI) in 2010 and has since been committed to the elimination of corruption in all its dealings as part of its involvement with the World Economic Forum (WEF) (Vestas Global 2014, para. 5). Using the PACI framework, Vestas is able to prevent, detect, and address corruption.
The PACI guidelines inform employee conduct when dealing with other companies, governments, and civil society in all countries of operation. It is from the PACI framework that the Vestas code of conduct emerges and the code enforces a zero tolerance policy to bribery.
Vestas has a program targeted at fighting corruption. Under the program, Vestas employees must register gifts, entertainment, and hospitality offers they receive as long as they go beyond a specified level (Vestas Global 2014, para. 7).
Other than anti-corruption, Vestas is also committed to other global initiatives that support its intent for sustainability. They cover human rights, freedom of association, and employee empowerment.
The company runs the EthicsLine whistle blower system established in 2007 that ensures Vestas employees, business partners, and anyone associated with the company have an avenue for reporting inappropriate conduct or practice.
Those who need a reference point for ethical conduct can also use the company’s EthicsLine. The EthicsLine is independently operated and reports remain anonymous subject to the applicable laws of the country of operation (Vestas Global 2014, para. 8).
Conclusions
The following is the conclusion on the challenges that the company would continue to face, based on the review of the Brazilian market environment for wind energy manufacturing companies and the strategies of Vestas. In addition, there is a remark on the ability of Vestas to sustain its competitive advantage in the future.
One problem with relying on experiences in the more than 50 countries of operations is that Vestas might find itself, opting to transfer solutions from one country to another due to similar conditions. The problem with this strategy is the existence of subtle, unique features that render the solution incompatible.
The government regulations, the existence of trade agreements, and other tariff changes regarding renewable energy, especially wind, will continue influencing the success of business strategies for multinational companies like Vestas operations in Brazil.
While Vestas already does partnerships with other global bodies on sustainability and business ethics, it will still have to pay more attention to country specific requirement of Brazil, as they influence demand for its turbines and related operation and maintenance services.
The risk of relying on international statutes and best practices alone is that they may not be identical to local rules and regulations or requirements for Brazil and may, therefore, have no impact on the business in the country.
Another factor worth considering is the reliance on debt financing for wind energy project. Although the funds help in creating demand and allow Brazil to push towards its goal for diversification of energy sources, they put the companies involved in a position that is less powerful in regard to their ability to influence the market.
As a supplier, Vestas loses much of its ability to influence prices and has to contend with authority-approved price ceilings, which limit its profit margin.
Recommendations
The only way for Vestas to remain in the Brazilian market is to build local factories. Establishing a fully owned subsidiary business is costly as it requires significant FDI in Brazil. Nevertheless, the investment must happen fast to sustain early entry competitive advantages for Vestas before other global rival companies set up their local subsidiaries.
Already, smaller companies are growing their market share by increasing investments in remote wind farms through their participation in wind energy auctions; it will only be a matter of time before they become the biggest competitors to Vestas.
For example, while Vestas failed to get any orders in the 2013 auction, Gamesa Corp. Technologica SA of Spain got orders for almost 315 MW of turbines due to the company’s compliance with the financing rules of the development bank of Brazil (Nielsen 2013, para. 5).
Even though smaller firms may not be the actual customers for Vestas, they still offer opportunities for technical knowledge transfer. It’s a fact that their small operations nature limits their research and development capacity, which Vestas is endowed with due to its multinational operations nature.
However, when pursuing such an opportunity, Vestas and other international operators must look into the option of constructing the research and development facilities in Brazil to take advantage of the unique learning experiences and product adaptation that are available on location.
According to Nielsen (2013, para. 6), the ‘buy-local’ rules in Brazil make Vestas a loser against rival companies that already have local production capacities. In retrospect, the entry of Vestas into Brazil’s market was informed of the existence of the state-backed debt that allowed wind energy operator to afford technologies and equipment that resulted in an installation boom.
However, the end of the support of the development bank of Brazil meant that Vestas got no new orders in the 2013 auction for 1.5 GW (Buigues & Sekkat 2011, p. 7).
Another factor to consider is that the cost of setting up wind farms is high and many customers of Vestas rely on financing from the development bank of Brazil. Therefore, in the medium term, Vestas can only focus on internal operators that have access to financing from international sources.
At the same time, the company can only serve client needs for projects that were auctioned before December 2011. This remains as the only viable option for operating in Brazil, until the panned partnerships and additional developments of local capacities become operations (Nielsen 2013, para. 5).
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