Pune billionaire chases GE with wind turning on cracked blades 

The lights snap off in the five-story, gray-concrete building in Pune, India, where Suzlon Energy Ltd. – the fastest growing of the world’s top five wind turbine makers – has its headquarters. After 30 seconds of darkness, the fluorescent bulbs flicker on as backup generators kick in.

“For us, it’s routine,” says Tulsi Tanti, Suzlon’s billionaire founder. “You have to understand the country’s limitation and, within that, develop your business.”

Tanti, 50, made his fortune in a decade by supplying wind power to Indian companies struggling with blackouts and soaring energy costs. The entrepreneur got his start in 1993, when he bought two turbines to reduce the electricity bills at his textile company in the western state of Gujarat.

Tanti’s employees dug the foundations, installed the towers and connected the turbines to India’s overburdened power grid – taking advantage of government incentives that let the firm swap the wind power it generated for the electricity it used.

“Within two years, we understood the economics and dynamics of the industry and realized wind is a good source,” Tanti says. “Why not focus on that industry?”

Suzlon Energy started in 1995 and now ranks as the No. 5 turbine maker worldwide. These are heady days for wind power producers. Companies can’t keep pace with demand. With oil soaring above $147 a barrel in July and concern mounting about global warming, governments are enacting mandates to promote the use of alternatives like solar and wind.

Last year, utilities and other companies installed a record 20,000 megawatts of wind power, and the renewable energy source will make up 3 percent of the world’s electricity production in 2012, up from 1 percent in 2007, according to the Brussels-based industry group Global Wind Energy Council.

Suzlon Stumbles

Suzlon began stumbling over its own rapid expansion last year. The company has been hit by management upheaval and the sale of faulty equipment, driving its shares down to 216 rupees yesterday from 387 rupees on Dec. 31, 2007.

The company’s rotor blades shipped to customers in the U.S., Europe and Brazil developed cracks, prompting Edison International, California’s largest utility owner, to cancel a large order. “Suzlon came out of nowhere,” says Daniel McClure, who manages $3.5 billion at I.G. Investment Management Ltd. in Toronto. “They’ve executed very well under Tanti. The concerns I have for the company are management of their growth.”

The company’s rapid ascent and recent setbacks present a cautionary tale for investors eager to clamber aboard the alternative energy bandwagon.

Volatile Stocks

“Volatility is high for the entire renewable energy sector, and you get a lot of headline news that can make or break a stock in a single day,” says Brian Yerger, a renewable energy analyst at Jesup & Lamont Capital Markets in Wilmington, Delaware.

I.G. Investment sold its more than 7 million Suzlon shares in June following the departure of two of Suzlon’s top executives: Chief Executive Officer Andre Horbach and Chief Financial Officer Patrick Krahenbuhl.

Like the entire wind industry, Suzlon is hooked on a growing number of incentives pushed by governments around the globe. In 1997, Massachusetts was the first of 21 U.S. states to begin mandating that utilities buy as much as 20 percent of their power from renewable sources. U.S. wind energy companies also get a 2- cent federal tax credit for each kilowatt-hour of power they produce.

Starting in 2004, Indian states enacted similar mandates as high as 10 percent for utilities, and companies can claim 80 percent depreciation on equipment costs in the first year.

China’s Plan

China rolled out a plan last year requiring that 15 percent of the country’s energy consumption be met with power from renewable sources by 2020. And in January, the European Union agreed that the region would get 20 percent of its power consumption from carbon- free sources by 2020 compared with about 6 percent in 2005.

To meet these clean energy rules, utilities are mostly buying wind power because it’s cheaper than other renewable sources such as solar. Power from turbines costs about 8 cents per kilowatt-hour in the U.S., according to Energy Department data. That compares with 15 cents for solar energy and 4 cents for coal-fueled electricity.

“The main driver for wind energy is regulation coming in place in Europe and North America to obtain a greater amount of energy from clean sources,” says Philippe De Weck, who manages the $1 billion Clean Energy Fund, which includes Suzlon shares, at Geneva- based Pictet & Cie. “Solar is still very expensive today. Wind is really left as the only option to fulfill that goal.”

Farmer’s Son

Tanti, the son of a wheat and peanut farmer, has little in common with other, flashier Indian billionaires such as Vijay Mallya, chairman of UB Group, which sells liquor and owns an airline.

After high school, Tanti attended small regional colleges, earning a business degree from the P.D. Malaviya Commerce College and electrical and mechanical engineering diplomas from a government polytechnic institute. Although Tanti and his family’s net worth rocketed to $2.2 billion after Suzlon’s initial public offering in 2005, he shuns the luxurious lifestyle.

The Suzlon chairman lives in a four-bedroom apartment with his wife in Pune’s Koregaon Park neighborhood, where 4,000-square-foot (370-square-meter) units sell for about $1.3 million. His three younger brothers, also senior executives at Suzlon, live in apartments in the same building.

When globe-trotting on business, the chairman flies commercial, leaving the private jets, yachts and vintage car collections to high rollers like Mallya.

Connects With Workers

“Tanti is not looking to go out there and hobnob and be part of the scene,” says Ashish Dhawan, a senior managing director at ChrysCapital Investment Advisors India, a private equity fund that had invested in Suzlon for four years, starting in 2004.

Dhawan remembers attending an annual gathering of Suzlon’s managers and workers at the InterContinental hotel in the state of Goa by the Arabian Sea back in October 2004. The 5-foot-8-inch (1.7- meter), casually dressed Tanti mingled and laughed easily with a few hundred of his employees, Dhawan recalls.

“He’s got that earthly feel to him that enables him to connect with factory floor workers,” Dhawan says. As the workers who won performance awards approached Tanti to receive them, they bent and touched the top of his shoes, a way of showing respect for elders.

“It was incredible, the way this company celebrates its achievements,” Dhawan says. “There is this real cohesive culture. This is a guy who gets out there in the field, talks to his people.”

No Carbon Footprint

From his small office in Pune, Tanti says he’s pushing his company to grow faster partly to reduce the threat of global warming. Suzlon – which has 13,000 employees worldwide and markets its products in North and South America, Europe, Australia and China – — aims to control 25 percent of the market by 2013, making it the No. 3 wind turbine company.

Denmark’s Vestas Wind Systems A/S is No. 1 globally, followed by the GE Energy unit of Fairfield, Connecticut-based General Electric Co.

“With the climate change crisis looming, we have to work faster against it,” says Tanti, sitting in front of an oil portrait of his father, Ranchhodbhai Tanti, that hangs on a wall. “That is why high growth is the priority, not just the bottom line.”

As the company expands, it adds turbines to India’s grid that produce more power than Suzlon uses to make the machines, which eliminates its carbon footprint, Tanti says.

First Producer

Suzlon’s new, 11-acre (4.5-hectare) campus located 10 kilometers (6 miles) from its headquarters will be lit mostly by sunlight to reduce power consumption. The campus will also collect rainwater for use on lawns among the low-rise buildings.

Wind power’s main drawback – turbines don’t work without a strong breeze – has kept it from becoming a major source of energy for more than a century.

In 1887, American Charles F. Brush became the first person to produce power from wind, according to the Danish Wind Industry Association, a trade group. Brush built a windmill and used it for 20 years to charge batteries in the cellar of his mansion in Cleveland.

For decades, use of the renewable energy source remained limited because even in the best locations such as southeastern Wyoming, where winds consistently blow at speeds greater than 7 meters per second, turbines operate at only 30-40 percent of their capacity.

“The issue with wind power is that it’s a variable source of electricity,” says Keith Hays, a Barcelona, Spain-based research director at Emerging Energy Research. “You just can’t turn it off and on.”

Tanti’s Textile Company

Tanti’s interest in wind power was first nurtured at a business owned by his father. Tulsi was born in the small town of Rajkot in Gujarat in 1958, 11 years after India got its independence from British rule.

His father quit farming and started a business to distribute potatoes that required a freezer to store them. Tulsi returned from college in 1978 and joined his father’s company, which was burdened with high energy costs.

He installed fins on cooling coils inside the freezer to increase efficiency and moved the condenser to the top of the building, where natural wind flow helped cool it. Within a year, he’d cut energy consumption by 30 percent.

In 1982, Tanti moved to Surat in Gujarat, a center for textile manufacturing, and, three years later, started his own company to make polyester filament yarn for clothing. Dhirubhai Ambani, the late billionaire founder of the Reliance group of companies, now one of India’s biggest conglomerates, also got his start in textiles in Gujarat.

Hands-on Experience

Tanti named his company Suzlon Synthetics, using a combination of suz from the Hindi term soojh-boojh, which means intelligence, and lon from the word loan – the two things he says are needed to be successful in business.

In an energy-intensive business like textile manufacturing, Tanti’s profits also depended on controlling costs. In the early 1990s, Tanti learned that the state government of Gujarat, in trying to reduce blackouts that could last two days, was beginning to buy wind power and give producers tax breaks.

The incentives spurred Tanti to join an early wave of manufacturers in Gujarat that experimented with turbines. His employees had to install them because the maker, Vestas, didn’t have enough manpower in Gujarat to do the job, Tanti says. His hands-on experience with the turbines was fortuitous, deepening his knowledge of a nascent industry in India that was about to boom.

“The same way we wanted to hedge our power cost by using wind, we thought others would be interested in freezing their cost as well,” says Kirti Vagadia, Suzlon’s acting CFO.

One-Stop Shop

With only about 1 percent of India’s power generation coming from wind energy, Tanti visited installations and talked with equipment makers and potential customers to figure out the products and services he might sell. In addition to building turbines, Tanti decided to also install and operate them, since buyers in India included manufacturers that didn’t have the capacity to put up the turbines.

“The one thing unique about India is that the company that produces the components and turbines also develops the wind farm site,” Hays says.

While holding on to his textile company, Tanti started Suzlon Energy with 20 employees in the basement of an office building in the western city of Ahmedabad. The firm had $1 million, mostly from bank loans, and a licensing agreement to use German technology.

Early on, sales trickled in: In 1996, Suzlon installed 10 turbines producing a total of 3 megawatts of power in Gujarat for Indian Petrochemicals Corp., the nation’s second-biggest chemicals maker.

Power for Tata

Suzlon’s sales didn’t take off until about 1999, when it began developing and operating large wind farms for companies such as Tata Finance Ltd., a part of India’s Tata Group, a $55 billion conglomerate, and Bajaj Auto Ltd., the nation’s second-biggest motorcycle maker. Tanti sold his textile firm to a partner for an undisclosed amount a year later.

To build the wind farm in Supa, 90 kilometers west of Pune, Suzlon had to do more than erect 60-meter-tall steel towers and install 65-metric-ton (72-U.S.-ton) turbines on top of them. The firm had to carve a single-lane winding road over undulating brush to a curved ridge where the towers would stand. It also built a control center to monitor the farm’s performance and offices and dorms for the site’s managers and workers.

In 2001, Suzlon’s one-stop-shop service made it India’s No. 1 turbine maker, capturing about 50 percent of the market for new installations. By March 2004, the firm had installed a total of 600 megawatts of wind power.

Soaring IPO

At that point, Suzlon had only dipped its toe into much larger overseas markets, working with DanMar & Associates on a wind farm in Minnesota, starting a rotor blade research center in the Netherlands and opening a turbine design firm in Germany, the world leader in installations.

To compete with global heavyweights such as Vestas, Suzlon needed money and brand exposure.

“We were a small company and weren’t publicly listed,” Tanti says. “That’s when we decided to do an IPO.”

The initial public offering in 2005 in India raised $338 million. The shares were oversubscribed almost 46 times and rose 94 percent on the Bombay Stock Exchange in the first year of trading. Tanti and his family own 66 percent of the company.

Armed with IPO riches, Tanti began expanding through acquisitions to tap the world’s largest wind power markets in Europe, the U.S. and China. In 2006, Suzlon bought Belgium’s Hansen Transmissions International NV, a maker of gearboxes that magnify the motion of the blades to generate more power, for $566 million.

The move put Tanti in control of a key turbine component that was in short supply.

`Smart Move’

“Hansen was up for grabs,” ChrysCapital’s Dhawan says. “While others were asleep at the switch, Tanti pounced. Later, it was the talk of the industry, saying ‘very smart move.”’

Suzlon also invested in manufacturing, opening nine plants in India, China and the U.S. to support soaring global sales. By March 2007, it had installed 3,768 megawatts of wind power, a sixfold increase over 2004.

Vagadia says lower labor and material costs have given the company the ability to undercut the prices of rivals and still make a profit. Suzlon’s revenue has almost doubled each year since 2004, topping out at $3.4 billion in the 12 months ended on March 31. That’s when the company hit some turbulence.

Suzlon’s V2 blades supplied to John Deere Wind Energy, a part of Moline, Illinois-based Deere & Co., and customers worldwide began to crack under the stress of certain wind conditions. In June, Edison International, one of Suzlon’s biggest customers, canceled an order for 150 turbines after discovering the flaw.

“We thought it was prudent to not purchase more turbines until the analysis for the cracked blades is completed,” says Douglas McFarlan, a spokesman for Edison. “In a business that is growing as rapidly as this, it is not unheard of for these types of problems to occur.”

Bidding War

Vagadia says the faulty blades have affected Suzlon’s reputation and the company is working with customers to limit the damage. Suzlon has set aside $139 million to compensate customers for the cracked blades and now ships a stiffer product called V3, made of fiber-reinforced plastic, that hasn’t broken.

“We have taken our customers into confidence,” Vagadia says. “We are giving the right information to whoever is asking – — the media, analysts or investors.”

Suzlon’s investment in Hamburg-based Repower Systems AG is also a concern for investors.

In May 2007, Suzlon won a bidding war with French nuclear power giant Areva SA with a $1.6 billion offer for Repower, a turbine maker that also produces supersized offshore rigs. Since then, Suzlon has raised its stake in Repower to 66 percent by buying out Areva’s interest in the company even as the offshore wind farm business has been in the doldrums.

Offshore Wind Farms

Projects worth $120 billion are stalled partly because of a shortage of construction ships and the soaring cost of steel used in the turbines. Repower’s 5-megawatt turbine stands on a tower about 90 meters tall, holds blades that are 61.5 meters long and can only be serviced using a helicopter.

Material costs have driven up turbine prices about 20 percent since about July 2007.

In the U.S., public opposition to offshore wind farms that may obstruct panoramic views is such a big obstacle that none have been built. The Cape Wind project in Nantucket Sound off the coast of Massachusetts has been stymied by lawsuits. Democratic Senator Edward Kennedy, whose family owns property within sight of the proposed turbines, has objected to the potential impact on tourism and the fishing industry.

“Two years ago, I wouldn’t have expected an offshore system in the U.S. until 2020 or so,” says Randall Swisher, executive director of the American Wind Energy Association, a Washington-based industry group. “But with surging fuel costs and the cancellation of so many coal plants on carbon concerns, especially in the Northeast we could see developments move forward much quicker than that.”

China Acquisition

Suzlon is also confronting strife within its ranks. In April, CFO Krahenbuhl quit because of disputes with CEO Horbach, says Vagadia, who’s a former director. A month later, the company’s leader left after 16 months on the job to spend more time with his family, Vagadia says. Suzlon responded by naming an insider, international corporate development vice president Toine van Megen, as CEO to try to restore order.

“All is not hunky-dory at Suzlon,” says Ambareesh Baliga, a vice president at Mumbai-based Karvy Stock Broking Ltd. “The departures are a cause for concern.” Krahenbuhl and Horbach couldn’t be reached for comment.

Tanti’s trip-ups haven’t made him more cautious as he pushes further into China, the world’s second-biggest energy consumer, after the U.S. China’s wind power capacity will exceed 30 gigawatts by 2020 compared with 2.6 gigawatts in 2006, according to the government-run Chinese Wind Energy Association.

Not a Family Business

Tanti, who set up a plant in China in 2006 to make components and put together wind turbines, agreed to buy China’s Honiton Energy Holdings Plc with Manama, Bahrain-based investment bank Arcapita Bank BSC for $2 billion in July.

Honiton owns the rights to land in China’s Inner Mongolia region with the potential to generate 1,650 megawatts of wind power. Only 50 megawatts have been developed there so far, Vagadia says.

As Tanti builds his clean energy empire, he stands out from Indian entrepreneurs in another way. When he retires, he’s not going to hand Suzlon to either his son, Pranav, 23, or daughter, Nidhi, 22. Pranav works at Merrill Lynch & Co., and Nidhi works at Credit Suisse Group, both in Hong Kong.

“I have not followed my father and run that business,” Tanti says. “They will not follow me. Suzlon is completely run by a professional team. On the board, there is one family member. It’s run like American or European companies.”

Share Price

Those executives must find a way to lift a stock that had fallen 44 percent since the start of the year. That compared with an 8.7 percent rise for Vestas and a 1 percent fall for the ISE Global Wind Energy Index.

“The most concerning issue for me is not whether they hit their No. 3 market share but how quickly they put this blade issue behind them,” I.G. Investment’s McClure says.

Even with high oil prices, a company that draws on a resource as abundant and ubiquitous as air still has to make a product that customers want to buy at a price they’re willing pay.

By Abhay Singh

Bloomberg

25 July 2008