Wind Industry Feeling Tight Squeeze On Supply Chain

Wind Industry Feeling Tight Squeeze On Supply Chain
The wind energy market is growing fast but many turbine and component suppliers face negative profits in the face of serious supply chain challenges, Wood Mackenzie said.

The wind energy market is growing fast, doubling in size in the last five years. Nonetheless, many turbine and component suppliers face negative profits in the face of serious supply chain challenges, Wood Mackenzie said.

Woodmac said that, as global markets grapple with both post-Covid recovery and geopolitical tensions, supply chains have been fundamentally restructured. The availability and cost of raw materials and parts have been significantly affected and flexibility has been drastically reduced.

It is, in many ways, a perfect storm for profit margins. Energy price inflation, skyrocketing costs for specialized logistics, rising skilled labor rates, and lingering Covid-related delays now combine with downstream cost pressure from aggressive power pricing tenders. As a result, western original equipment manufacturers (OEMs) have recorded over $3.4 billion in losses in the last two years, including nearly $1.5 billion in the first quarter of 2022 alone.

The squeeze is not being felt evenly across the industry. Cost pressure originates within the competitive power markets and long-standing expectations for sustained levelized cost of energy reduction for wind energy. These capex reduction expectations are then passed upstream to the supply chain, including wind turbine manufacturers and their component vendors.

OEMs have limited options to pass inflation-related costs off to customers, due to the long timeline between order placement and equipment delivery. They have therefore begun to increase the average selling price and implement cost-based indexing on new supply contracts. Also, many OEMs are performing comprehensive product portfolio reviews, while re-valuating their existing order portfolio to prioritize profitability and long-term policy certainty over market share in many global markets.

Woodmac claimed that the lone bright spot for OEMs’ profitability was in the aftermarket, as the services business regularly delivers double-digit EBIT margins. The global installed capacity of wind energy has now eclipsed 800 GW, with the next decade expected to add nearly another 100 GW per year, on average. This massive fleet – and potential for repeatable high-margin revenue – provides the primary source of profit growth for wind turbine OEMs.

Asset owners experience the highest average EBIT margins across the value chain, driven by the sale of electricity and project investment. Many of the largest global asset owners are also focusing on margin expansion within the O&M segment, as they vertically integrate the servicing of their growing fleets.

While western turbine OEMs are facing negative profitability and increasing prices, Chinese OEMs achieved significantly better results and continue to reduce turbine pricing. This is driven by the economies of scale within the massive Chinese wind energy market, which represents over 50 percent of 2021 installations and over 48 percent of our 10-year cumulative forecast. This dominance is driven by the long-term renewable energy policy roadmap defined by the Chinese government.

Chinese wind turbine and component supply is highly localized, as China has positioned itself as the global supply hub for the lowest cost specialized wind turbine components. This localized supply chain presents low logistics costs, as many manufacturing factories are near major wind bases in-country. In addition, the Chinese OEM scope of supply does not include the wind turbine tower, which has been subject to significant steel material price escalation and high specialized shipping costs.

However, despite Chinese OEMs’ advantaged financial performance, they have also seen profit erosion in the past five years, with 2021 EBIT margins 32 percent lower than in 2016. Risks remain for future profit erosion of even the Chinese OEMs. Intense competition among local OEMs and oversupply of critical components has driven down turbine pricing by more than 30 percent, and the Chinese supply chain is not wholly isolated from material escalations that are affecting global markets.

Additionally, trade tension and new geopolitical reality may limit the potential to fully utilize Chinese factories for export to western markets and limits the options for overseas expansion for Chinese OEMs.

To contact the author, email

What do you think? We’d love to hear from you, join the conversation on the Rigzone Energy Network.

The Rigzone Energy Network is a new social experience created for you and all energy professionals to Speak Up about our industry, share knowledge, connect with peers and industry insiders and engage in a professional community that will empower your career in energy.