Wind energy production and technology

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1.Executive summary

This report has been written to take a look at the internationalization strategies adopted by Sukon Energy, an Indian based wind power company, moving to Europe to develop its research and development (R&D) and product development facility. The country chosen for the shift is Denmark after analysing various facts.

The foremost reason being that Denmark is one global leader in wind energy production and technology. Then PEST analysis is done in order to analyse the political, economic, social and technological aspects of Denmark so that it can be foresighted that how useful is to setup the R&D facility. Afterwards the cultural differences are looked upon using Prof. Hofstede model to deal with the possible problems that could arise from cross culture. Third culture is suggested as a solution which enables the Indian-Danish business culture to work in harmony.

Acquisition is selected as the entry mode so as to exercise control over technology which is primary objective of Sukon Energy. This report also analyses staffing policies, organizational structure management, control strategies and expatriate policies used by Sukon. The four basic strategies are analyzed and among them Global standardization strategy along with geocentric staffing approach has been recommended for better and smoother control over technology transfer.

2. Introduction

Sukon Energy is an Indian based wind power company which manufactures wind turbines, it manufactures blades, generators, panels, and towers in-house, as well as gearboxes. It is Asia's largest wind turbine manufacturer but globally it has still to prove itself. The major setback of Sukon Energy is the technology issue. Their production capacity is quiet large but their technology is not so advance to meet the industry challenges globally. The only solution to meet these challenges is to develop Research and Development (R&D) facility. R&D can help in bridging the gap and leads to more quality products, efficient outputs, increased productivity etc.

Many experts see wind power as the renewable source of energy with the greatest potential for growth and investment. As in the near future, wind energy is going be the most cost effective alternative of fossil fuel for electrical power. In fact, it won't be an exaggeration saying that it already has achieved this status. European Wind Energy Association stated that wind energy is the largest single form of new power capacity in Europe. (Oxford Energy Forum, Oxford: Aug 2009) If talking about installed capacity for power generation, wind energy is growing faster than any other source of energy.( Source: EWEA and Platts Power Vision).

This bright future of wind power will bring in more competition for Sukon Energy which moves it to Denmark for setting up its R&D facility. This is not the first time Sukon is moving aboard it has a Joint Venture with a German wind turbine manufacturing MNC(multinational company) but it was not allowed to transfer technology back home. So it decided to move Europe once again with new strategy. There are various factors for choosing Denmark like advanced technology, economic stability, political stability, cost, location, ease to start the set up etc. these are the factors which have driven Sukon Energy to come to Denmark. Denmark has been and is known for its technological advancements, highly skilled and flexible labour market and is one of the best places to acquire core competency to obtain better knowledge so that Sukon can develop technical and production abilities and will be capable of exporting its products in United States and Europe.

3.PEST ANALYSIS

(Kotler, 1998) states that PEST analysing is a very useful strategic tool for understanding the nature of market growth or declination, business positions, potentials and directions for operations.

3.1) POLITICAL ANALYSIS

Denmark has a very stable and ambitious political climate. The United States     renowned business magazine Forbes has placed Denmark top out of 120 leading countries that were ranked according to the best climate for business. (Forbes Magazine: www.forbes.com/2008/06/26/denmark-ireland-finland-biz-cz_jg_bizcountries08_0626bizcountries_bestcountries.html).

This ranked is achieved because of high level of personal and financial freedom, very low level of  bureaucracy and corruption, public participation in free and very fair elections, great opportunities for protection of minority shareholders and appropriate conditions for entrepreneurs and high-tech firms.  Enterprise and market competition is freely favored to a greater extent than many other European countries. Judicial system is excellent and is very well equipped to sort out disputes and legal system ensures that sufficient protection of property rights, intellectual rights. (Source: EIU ViewsWire 2010, www.copcap.com, 2009)

Foreign direct investment has a major part in the process of globalization today. (Patterson et al, 2004). The Foreign Direct Investment scenario of Denmark has been very encouraging for the businessmen and investors. Allan N. Gjerding after observing Denmark's FDI process for various years states that generally Denmark experiences an outward capital flow being more than the inward capital flow. He also added that Denmark's around 70% of the inward and outward FDI tends to be in the form of equity capital. (Allan N. Gjerding, Considering foreign direct investment in Denmark,Mimeo, June 2005).

On the other side the total FDI experienced a appreciating increase in 2007. The political factors which are supportive are increased purchasing power, political stability, skilled labour force, easy entry regulations and great infrastructures. The process of establishing a new operation in a foreign country is known as Greenfield investment which is warmly accepted in Denmark. The preceding table will throw light on the Foreign Investments, potential and performance index along with Greenfield investments in Denmark for 2005 -07.  

(Source: United Nations Conference on Trade and Development, www.unctad.org)

A Foreign Direct Investment fact sheet for years 1990-2008 along with mergers and acquisitions overview for years 1990-2008 has also been attached in appendices for further referral.

3.2) ECONOMIC ANALYSIS:

The economic stability of Denmark is quiet stable with GDP grossing to around 341 billion USD (United States dollars) and per capita income around 62,000 USD which is currently world rank 5th. Cause of factors like GDP per capita, good welfare benefits and political stability the living standards in Denmark are amongst the finest in the world. Denmark is known for its foods, beverages and energy exports with sufficient balance of payments surplus.Industrial competitiveness is promoted through several reforms, more emphasis on industry-specific research and development funds, and more improved welfare for the deserved mean while increasing public sector efficiency by cutting the "red tape".

Real GDP growth according to Global Finance magazine survey


			2001                  0.7%

			2002                  0.5%

			2003                  0.4%

			2004                  2.3%

			2005                  2.4%

			2006                  3.3%

			2007                  1.6%

			2008                 -1.2%

			

2009: -1.4% (estimate) 2010: 0.9% (forecast)

Though there is a shown downfall in the GDP percentage in 2008 and 2009 but taking Global Recession in account during this period that can be avoided as 2010 forecast again points towards growth.

3.2.1) TAXATION ANALYSIS:

The tax rates in Denmark are attractive for business. It has basic corporate tax rate of 25% which is quiet relaxing in context to 30% in paid by Sukon in India. Expatriates also enjoy a special tax regime. This rate is somewhere below the average in rate Europe. Various other attractive features are such as no capital duty and wealth taxes, no added social security contributions for employers, dividends that are received are distributed without any tax, group taxation is unique and transfer pricing legislation goes with OECD (Organization for economic co-operation and development) guidelines.

Denmark is one of the few countries to have moved into various tax treaties and has achieved around double taxation relief. Denmark has specific rules in case of double taxation happening with non-tax countries, here a tax credit may be granted according to rules of Denmark. Though income tax for Danish people is highest in the world but here we are focusing on corporate strategies and relieves first.

Foreign shareholders are not counted under Denmark's capital gain tax on shares. Taxes are exempted for financial gains on shares if they are held over a period of three years. The joint taxation rule of Denmark is imposed in such a way that a local Danish company pays tax jointly with its 100% owned Danish and foreign subsidiaries. If Research and Development expenses, are used to expand the market, then they are deductible in the incurring year and gets depreciated over a five year period.

3.3) TECHNOLOGICAL ANALYSIS:

Though Denmark has global recognition in various technologies, here we will analyze the technology we wish to invest in that is the wind turbine. Danish wind turbines are exported all over the world and are known for their quality and technological superiority. The Danish wind turbine industry is the largest wind turbine industry in the world. Denmark exports approximately ninety percent of the national production, and Danish companies capture around 45% of the world turbine market. The biggest wind turbine manufacturers in Denmark with also production facilities in Denmark are Vestas and Siemens.

They are so successful because of their highly advanced technology. The first thing they emphasize on is light parts. The lighter will be the turbine; the lower will be the cost of production, materials, transport and installation. Because of these reasons weight reduction has high priority in turbine development in Danish companies.

(Source: Technology, www.vestas.com)

Weight reductions are achieved by using advanced materials such as lightweight carbon fibre in blades, strengthening the tower with a better type of steel, and by substituting extra steel with magnets that reduce the overall amount of steel required.

One more technological marvel is using Computational Fluid Dynamics. Danish turbines use Computational Fluid Dynamics (CFD) both when setting the position of turbines on-site and when developing the blade design. CFD is a setup of theories and software which helps Danish turbine specialists to carefully design the best layout for the wind turbines based on airflows, this ensures the least degree of wear and tear for wind turbine owners and the optimum energy production. This provides the best return on the investment that is efficient, cost effective and pollution free power generation. CFD is an excellent process for simulating the movements of air around the blade prototype, often giving very accurate results. This program creates a sort of virtual wind flows for simulating the blades, this helps in getting the best energy output from the turbines.

One other technology used in Danish turbines is a microprocessor-controlled pitch regulation system. This system constantly adjusts the angle of the turbine blades so that they are always in optimal position in relation to the prevailing winds. Then we have Perfect grid integration technology which designed for smooth integration with any kind of grid or plant configuration in any part of world. This integration also save the cost of setting up expensive substations.

That's why there is no wonder that Danish turbines are considered as the best in the global market and so joining hands with them will give a technical superiority edge to Sukon Energy.

3.4) SOCIAL ANALYSIS:

Higher Education is required to cater the need for the raise in demand for the skilled workforce in Danish turbine companies. Right from three years bachelor's degree to master's degree several courses are available in various technologies. There are numerous respected universities in Denmark like the University of Copenhagen. Skills are acquired in the fields of turbine production, R&D, quality control and management. Software professionals are also required and hired to deal with complicated processes like CFD or Computational Fluid Dynamics. As being the major industry of Denmark it lures people to join so that they can have a stable career ahead for them.

4. CULTURAL ANALYSIS

Taking Prof. Geert Hofstede's comprehensive study over cultural differences in account, we will now move to analyse cultural differences and their potential impact on Sukon Energy's success in moving Denmark. Below are given Prof. Hofstede's dimensions for India and Denmark, now considering them we shall look into this topic further.

(Source: http://www.geert-hofstede.com/hofstede_denmark.shtml)

PDI- POWER DISTANCE INDEX                            MAS- MASCULINITY

IDV- INDIVIDUALISM                                          UAI- UNCERTAINITY AVOIDANCE

These are the two cultural dimensions model for both the countries by Prof. Hofstede. Now comparing their values we find a huge difference between the two cultures.


			Country            PDI             MAS             IDV                UAI

			India               77              56              48                 40

			Denmark             12              10              70                 19

			

The above data clearly shows the cultural differences between the two countries.

4.1) POWER DISTANCE :

India's high power distance shows that inequality is very high in Indian organizations, whereas Denmark's very low power distance index shows that there is very much equality in their organizations. The bosses are easily approachable and juniors have the right to question seniors which is not there in case of India.

4.2) MASCULINITY:

India's high masculinity index shows that there are vast differences between values of men and women. This shows that organization cultures in India are far more assertive more forceful than Demark organization. Where very low masculine index points toward modest and warm organization culture.

4.3) INDIVIDUALISM:

India's low individualism shows that India has vey collective form organizational culture. Though individual success is important but relations with colleagues also matters a lot. This can be associated with the collective society and joint family culture of Indians. But with Danish people individual success is prior to collective goals. This doesn't mean that they don't care for their colleagues etc. it's just the level of priority.

4.4) UNCERTAINITY AVOIDANCE INDEX:

India's uncertainty avoidance index is quiet low to that of world index. This could be result of not very strict laws and regulations in the Indian organizations. This shows Indian organization culture is not very much worried about uncertainties. Same is shown in Danish index they are even lesser concerned than Indian about uncertainties at work place. This is a favourable index in context of both countries.

As we have discussed above using Hofstede's dimensions the various types of cross cultural dissimilarities between Indian and Danish cultures at organizations. Now as for solution we can go with expatriate training program and train them to work in different culture. This training can be really helpful as they are mentally prepared for the differences they will be going to face.

There is one more concept by Eaton consulting group which is a cross-cultural consulting firm. The concept is called the "third culture" and is regarded by them as the best solution to overcome either-or situations. This concept is neither biased to any one culture nor a low effective compromise. It just advocates a set of norms and systems that enables to make decisions, and to deal with any conflicts and to talk about good management. Many top organizations, operating all over the globe, find this third culture as very effective in bringing out the best skills and helping in achieving superior results. These top organizations have been able to leverage the cultural differences and outperform mono-cultural teams in the long run with the help of this third culture concept.

This ideal "third culture" always takes all the members of the multicultural team into consideration. It proposes them that along being aware of their own cultural practices they should be, at the same time conscious of the cultural practices of the people with whom they are working with. Cultural relativity should be there to balance this cultural difference. These "third culture" workplace solutions are considered as the starting point for sorting these differences rather than as trouble-shooting strategy.

So for Sukon Energy it will be best to merge the high Indian hierarchy and masculinity with the Danish flat structure. But this merging alone cannot do wonders. The solution should be a mix of both training and the "third culture" concept and this should be done on both parts. As because just training the Indian employees in Denmark with the systems and strategies of Danish flat structure and asking them to follow ideal concept will not bring ideal environment at the work place. Danish colleagues should also cast aside some of their traditional notions to make the Indo-Danish business culture work smoothly for both of them.

5. ENTRY MODE

After deciding to move in to a foreign market the next major concern that arises is the mode of entry. There are about six basic modes of entry in a foreign market and each mode has its own advantages and disadvantages. Charles W.L. Hill (2009) after analyzing all these six modes of entry gave a table summarizing them.

Entry mode is an area of utmost important when moving to a foreign market. The choice of entry mode decides half of the future of your company by itself. For Sukon Energy all the modes are analyzed carefully.

Exporting is of no use as Sukon's main concern is getting the latest technology to expand its possibilities. Next three are also useless in this context so we are left with two other options one is joint venture the other is wholly owned subsidiary. Joint venture has the disadvantage of lacking control over technology know-how again which is the primary concern so it won't be the best mode. The concept of Greenfield venture and acquisition that comes under wholly owned subsidiaries seems to have positive impact. Wholly owned subsidiary can be created by either of these two ways one is Greenfield venture and other is acquisition. (Meyer and Estrin, 1999) states that the Greenfield venture enables the investor to create an entirely new organization with its own specification but very gradually. So the optimum entry mode is Acquisition. Though it involves some high costs and risks but they can be worthy if the foresight is accurate.

For Sukon acquisition strategy will be best as because it will have full control over technology and products of the Danish firm. The high cost factor can be covered by bringing the technology back to home and producing more superior quality products and expanding them to United States and Europe. The products can be exported from Denmark only to minimize the costs at least for Europe. The other less risky part of the deal is the brand value that will also be acquired with the firm. As per previous discussions we know that Danish wind turbines have captured nearly half of the global market.

6. ORGANIZATION STRATEGY & CONTROL

This may not be possible for organizations to obtain full benefits from economies of scale, learning effects and location economies cause of pressures from local responsiveness. It is also very difficult to produce a global standard product to serve the global market from single low-cost reduction. Customizing the product offered for local conditions may work against such a strategy. There are four strategies by Bartlett and Goshal for solving the purpose. Organizations normally choose among these strategies when they compete internationally. The appropriateness tends to defer with the amount of pressures for cost reductions and local responsiveness. The four strategies are:

1. Global standardization strategy

2. Localization strategy

3. Transnational strategy

4. International strategy

Global standardization strategy operates on a goal to move on with a low-cost strategy on a global scale. Their aim is to increase profitability by doing cost reductions. The standardized product is marketed worldwide to obtain maximum benefits from economies of scale and learning effects. Organizations which practice this strategy do not customize their product offering and market strategy for local conditions. The strategy is more useful when there are heavy pressures for cost reductions and minimum demands for local responsiveness. These are prevalent in several industrial goods industries whose products serve universal needs. They are basically focused on controlling costs.  

Localization strategy increases profitability of products by designing organization's products so as to improve their tastes and preferences across national borders. They are beneficial when the designing is done to match the tastes in various national markets. By designing the product according to the demand the value for the product in local market increases. This is a good stategy when the cost pressures are not too high.

Transnational strategy is when the organizations face both heavy cost pressures and strong pressure from local responsiveness. Transnational organizations must concentrate on leveraging the subsidiary skills. This strategy very difficult in implementation as it places conflicting demands on the company. In order to make the product give response to local demands in various geographic markets more costs are incurred which goes against the aim of reducing costs.

International strategy is practiced in organizations when they find themselves with low pressures for local responsiveness and low cost pressures. The goods that are produced domestically are afterwards sold in international market with minimum local customization. Organizations centralize product development activities like R&D at home. For the organizations that go for international strategy the head office retains tight hold over marketing and products strategy.

As discussed above the best strategy for Sukon Energy will be the Global Standardization strategy because there product wind turbine does not requires local customization and also there is very low pressure for local responsiveness. The other point is that as there is heavy pressure of cost reduction due the cost risks involved in the acquisition this strategy will be the best for them to follow.

7. CONCLUSION

After the above analyses there is no doubt in appreciating Sukon Energy to set its R&D facilities at Denmark. In initial stage there may be some dips like cross cultural conflicts, time management issues etc. But it is normal to take time to adapt them according to the changed scenario. There are methods and resources of providing training to the workforces to make them contented in the new environment. As soon as the workforce adapts the environment better production goals can be achieved.

The technology expertise is obtained from the Denmark and the company's production method is changed consequently so as to improve their product lineage. As the technology is acquired for Denmark it can be brought back to India in order to produce superior quality wind turbines to match global quality demand with cheap production costs and export them to Europe and United States.

8. REFRENCES

Hofstede, G. (2002): Kulturer og organisationer. Danmark: Handelshojskolens Forlag.

Hooker, J. (2003): Working across cultures. Stanford University: Press California

Hill W.L., Charles (2007).International Business Competing in the Global Market Place (Seventh edition).University of Washington, Published by Mc Graw Hill Irwin

Philip Kotler (2003) Marketing Insides from A to Z, published by John Wiley & Sons, INC.

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