Opinion: Could modularisation and standardisation restore profitability to OEMs?

The wind industry today has reached sufficient levels of maturity and is ready to embrace modularisation and standardisation (M&S).

Is the wind industry mature enough to embrace modularisation and standardisation, asks Daniel Roman

It’s no secret that wind turbine manufacturers are struggling for profitability, despite the stunningly ambitious wind volume forecasts of both COP27 and RepowerEU.

Several crises currently in the limelight – such as the war in Ukraine and the after-effects of the pandemic - are affecting the global supply chain and are definitively impacting profitability.

However, these recent events should not distract us from the structural problems affecting the sector.

Lengthy and cumbersome permitting, lack of standardisation across the value chain, local content requirements, continuous erosion of the differentiation between ‘Tier One’ OEMs and newcomers, and technical transportation limitations - all present equally difficult challenges.

Is wind ‘mature’ enough for M&S?

Modularisation and standardisation have proved to be the natural answer to similar problems across other industries in their transition to mainstream acceptance - where growing demand meets a sufficiently mature product.

Once the structural problems have been identified and M&S is recognised as a possible solution, the million-dollar question is: Is the wind sector mature enough?

Reaching into the current market trends, it seems that the question now is not “modularity, yes or no?”, or “are we mature enough?” but rather; “is modularity alone enough?”

If modularisation is already in the industry, then perhaps the first point to check off should be: you’d better be mature enough. Many signs point toward the idea that modularisation alone is no longer enough and that every additional benefit we can get from standardisation will be more than welcome.

How modularisation works

The focus of modularisation is to define a modular product architecture that ensures an optimum balance between market coverage, and rationalisation of value chain complexity.

The main exponent of complexity cost is the development and industrial Capex associated to every new product, typically 75% of total development cost.

So, OEMs embracing M&S will be less prone to situations where the revenues of a product do not cover its own development cost, something which is recurrent in the wind industry.

M&S will bring commoditisation of modules considered non-core for OEMs - like gearboxes, and generators that are on the path to being naturally commoditised - or else standardisation of interfaces, which are very often constrained by transport imitations.

These will lead automatically to unprecedented scale economies that will automatically reduce cost. This will occur both directly – in volumes discounts, and higher automation - and indirectly, through more effective stock management and avoiding penalties to be paid to developers.

Big annual savings for OEMs

These benefits can bring yearly savings of three-digit million Euros for a turbine manufacturer, aside from an increase in quality and production capacity.

But also possible is a stunning increase of new product introduction rhythm. A portfolio that takes seven years to introduce through a “platform approach” can take just five years through a “modular approach”, with more than 35% of development hours saved because of the parallel development, or shifting more resources to research and development.

Risks and challenges of M&S

A risk is that this acceleration of product-introduction dynamics might lead to a race between the first two OEMs to embrace M&S in which the rest of the - still non-modular - OEMs will pay an excessive CapEx bill just to avoid being left behind.

The main challenge that M&S brings is that scale economies will come hand-in-hand with consolidation and commoditisation of the supply chain, which might accelerate globalisation.

This could endanger the Western supply chain and could even lead to a similar situation to the one experienced with solar PV, where production moved entirely to Asia.

European content requirements?

In order to secure a true European industrial texture, and energy independence, a good solution might be to establish a “European local content requirement, and standards”, which may have the secondary benefit of faster permitting and reducing the need of project certification.

M&S is a natural step to recover profitability and clearly this will bring European energy transition targets closer to reality but these benefits will not come for free.

We will need to set the right module standardisation forums, in with the OEMs might play the leading role. These will be instrumental in gathering the rest of the supply chain in order to prioritise and orchestrate efforts.

Daniel Roman is head of modularisation at Siemens Gamesa

Thumbnail credit: Getty Images