* Division pits technology ownership against flexibility
* Blade design is key - but pricey and complex
* Vestas, Gamesa, Nordex outsource - Siemens, Enercon don’t
By Christoph Steitz
FRANKFURT, Jan 18 (Reuters) - A wave of deals in the wind power industry, waiting to gauge the impact of Donald Trump’s election and Brexit, has highlighted opposing strategies in the production of the most complicated and sensitive turbine components: blades.
Companies are at odds over whether to go in-house or out to produce the blades, which can be as long as a football pitch, as they ride out a global M&A frenzy in a sector still reliant on fickle state support.
In many ways they face a choice between keeping vital design expertise to themselves, or sharing that design and outsourcing production to react to demand swings. Neither strategy as yet offers a definitive answer on how to reduce costs long-term, although some analysts predict that as in the automobile industry, outsourcing will become the dominant trend.
General Electric and Senvion, two of the top 10 global wind turbine makers, recently announced deals to snap up rotor-blades makers in a bet on integration.
This conflicts with outsourcing strategies at rivals including Denmark’s Vestas, China’s Goldwind and Spain’s Gamesa, which is merging with insourcing stalwart Siemens’ wind business.
“There are some parts that are a source of differentiation, so you want to keep ownership of that,” said Jean-Marc Lechene, chief operating officer at Vestas, the world’s biggest turbine maker, referring to technology behind the blades.
On the other hand, manufacturing can be routine and be shared out which is why these two trends have emerged, he added.
Growing uncertainty over future support for renewables - triggered by Trump’s election victory in the United States and Britain’s decision to leave the EU - could tip the balance in favour of outsourcing.
“Being able to respond to a shift in demand from one country to another is important given that the sector is dependent on political support, which can change quickly,” Macquarie analyst Gurpreet Gujral said.
Blades account for about a fifth of the component costs for wind turbines - which stand at about 3 million euros ($3.2 million) for the most common models - and are key in determining their power output.
As they are constantly exposed to different levels of wind, their design is crucial, yet their construction - which requires adhesives that join different layers of carbon or glass-fibre to dry at exactly the right temperatures - can also be complex.
Accidents related to faulty blades - described as the Achilles’ heel of turbine manufacturing - have hit several equipment makers in the past, making a seamless production process absolutely vital.
Hard-liners including Germany’s Enercon are cagey about their technology and production techniques, hoping that controlling all steps of the process will give them the upper hand in the highly competitive market.
Technology is key to reducing the cost of producing electricity and making wind competitive with fossil fuels.
Vestas, by contrast, has outsourced about a fifth of blade production, helping it to raise the volume of produced and shipped turbines by 30 percent in 2015, while costs only rose by a fifth to 6.9 billion euros.
“Outsourcing can give turbine vendors more flexibility in using globally located independent manufacturers while avoiding the need to build new factories to serve all global markets,” said Jesse Broehl, senior analyst at Navigant Research.
Transporting blades can be expensive and time-consuming. That’s why turbine makers are prepared to pay a small premium to outsourced providers, several industry sources told Reuters.
With margin pressure increasing and prices falling further, the industry is likely to outsource more going forward, said Danny van Doesburg, senior portfolio manager at Dutch APG Asset Management, the seventh-largest shareholder in Vestas.
“It’s a continuing rat-race of lowering costs similar to what we are witnessing in the car industry. In cars, you see a rule of thumb where you will try to outsource as much as possible,” he said.
A source familiar with the matter told Reuters that groups with the highest level of in-house production, Siemens and Enercon, tend to be priced at the upper end of the market range.
But with the industry continuously weaning off state support around the globe, even stalwart opponents of outsourcing are changing their mind, afraid they will be too expensive and too slow to compete in emerging markets.
With a core profit margin of less than 10 percent in its wind power and renewables business, Siemens recently announced it would for the first time ever outsource blade production for its low wind SWT-3.15-142 turbine to LM Wind Power.
Steen Broust Nielsen, partner at renewable consultancy MAKE, says: “Winning the game is not only about technology, it’s also about market access.” ($1 = 0.9348 euros)
Editing by Alexandra Hudson