Reference no: EM131283972
Suzlon Energy: The Assignment Product problems initially made headlines in 2008 after a turbine blade manufactured by Suzlon and financed by John Deere Wind Energy cracked and broke off a tower in Illinois. Although this was the sole reported incident of a blade actually falling, the incident raised concerns about the quality of Suzlon's products. The company attempted to address the quality problem. It announced a program to strengthen or replace 1,251 blades-almost the entire number it had sold in the United States-after cracks were found on more than 60 blades on turbines run by Deere and Edison International's Edison Mission Energy. Despite Suzlon's efforts to address the quality issue, problems continued. Edison claimed that blades were splitting and announced plans to delay its wind-generation development. Edison refused to make further purchases and announced it would consider switching to one of Suzlon's competitors. In response, Suzlon spokesperson Vivek Kher claimed the cracks were not due to faulty blades.
Instead, he blamed the Midwest's unexpectedly violent changes in wind direction. However, these problems are not limited to the U.S. market. Suzlon's products in India appear to have similar flaws. One of Suzlon's largest Indian customers claimed that Suzlon's products "are not fit to handle the wind." While battling product reliability and durability problems, other product development issues arose. The turbines manufactured by Suzlon failed to create as much energy as originally promised due to differences in the U.S. electrical grid and the power grid in India.
To address the problem, Suzlon quickly converted turbines to work in the United States. In addition, some turbines installed in Minnesota broke down during the winter due to the region's extremely cold winter temperatures. Electric heaters were installed to keep the control panels from freezing; however, the placement of the heaters created electrical problems for the turbines. The fact that doubts have been raised about the reliability and durability of Suzlon's products suggests that the company's research and technology-update programs have not kept pace with customer needs.
One member of Suzlon's management team acknowledged as much; Ashish Dhawan, an independent director on Suzlon's board stated: "It's not that their technology is bad [ . . . ] but they've been a laggard." In an interview in April 2008, Tulsi Tanti, Suzlon's chairman and managing director, was asked about the concerns with the economy and the product. He responded with confidence, saying, "There are no companies growing the way we are growing. Within 4 years we will feed product technology to the whole world." He was confident that Suzlon would double its annual production capacity by 2010, insisting that the cracked-blade problem did not stem from any fundamental design flaw. However, some question whether Tanti's optimism was well founded.
Take, for example, Suzlon's problems with a Chinese windenergy project. Suzlon successfully bid on a proposal from Germany's REpower Systems, a company in which it holds a 74 percent stake. The contract called for Suzlon to supply an initial shipment of 75 blades for installation in China's Shandong Province. There was a possibility of a second order for an additional 75 blades. However, REpower rejected Suzlon's prototype and sourced the blades from other suppliers. It ended up costing REpower an extra €6 million ($8.4 million) to ship the substitute blades from Europe. Sumant Sinha, Suzlon's chief operating officer, insisted the canceled order was due to delivery delays, not quality issues. "New blades for any new customer take time," he said.
"Our products are good and reliable." Meanwhile, Suzlon faces a cash crunch. Prior to the economic downturn, the company took on a great deal of debt. Management borrowed heavily to expand factories in the United States, China and India. In addition, Suzlon spent $1.7 billion to purchase its majority stake in REpower in 2007. It has already spent more than $100 million to perform repairs on cracked blades. Although sales jumped 70 percent, to $2.7 billion, in 2008, its backlog of orders for export is down. Lower growth rates in the wake of the economic crisis have forced Suzlon to search for additional sources of financing.
In 2010, it began laying off workers at its plant in Minnesota. Other problems loom. Policymakers in many parts of the world realize the importance of reducing dependence on imported oil and cutting greenhouse gas emissions. According to the International Energy Agency, wind currently accounts for only about 1 percent of the world's electricity. However, the collapse in prices for oil and natural gas and the global economic downturn mean that it is difficult for Suzlon's customers to obtain financing for wind-energy generation projects. So, what does the future hold for Suzlon? Will a company that once prided itself on rapid innovation and design changes be able to stay ahead of competitors? Or, will it fall victim to unfavorable publicity and changing times?
Discussion Questions
1. Assess the global market opportunity for sustainable energy sources such as wind turbines.
2. Do you think Suzlon can address the quality control issue before the company's brand image is damaged?
3. What impact do you think the global economic downturn and credit crunch will have on a company like Suzlon?