Affected market: Manufacture and supply of wind turbines
The OFT's decision on reference under section 22 of the Enterprise Act
2002 given on 8 April 2004
Vestas Wind Systems A/S (Vestas) and NEG Micon A/S (NEG Micon)
are Danish companies active in the global manufacture and supply of wind
turbines and related services. In the year ending 31 December 2002, NEG
Micon's UK turnover was £630k.
Vestas has acquired NEG Micon. The parties notified this transaction to
the OFT on 23 February 2004; the administrative deadline is therefore 19
April. The statutory deadline is 22 June.
As a result of this transaction Vestas and NEG Micon have ceased to be
distinct. The parties overlap in the supply of wind turbines and the
share of supply test in section 23 of the Enterprise Act 2002 (the Act)
is met. A relevant merger situation has been created.
The parties are both active in the manufacture and supply of wind
turbines and the supply of after-sales servicing. Wind turbines convert
wind into electricity and vary in size. The main customers for wind
turbines are large utilities, large-scale land developers and
multinational petrochemical companies.
In terms of after sales servicing, third parties have indicated that
they take the life time costs into account at the tender process and
this can involve potential suppliers submitting performance records for
existing wind turbines they have installed. The contract can also
include penalty clauses for failure to reach a certain level of
performance. The warranty typically lasts for three years at which point
the customer can re-tender the maintenance contract (to the original
supplier or third party maintenance companies). In addition, one
customer is developing its own expertise to take this element in-house.
Overall it would appear that the after-sales servicing is fully
considered at the tender stage and consequently, the competitive
constraints occur at the tender stage and need not be considered
separately. In terms of competition for servicing contracts after expiry
of warranties, the parties have informed us that because after-sales
support requires detailed access to technological information, they
refuse to allow competitors to service their turbines, although they do
allow third party maintenance companies to do so. Consequently the
merger does not lessen competition between manufacturers in this
respect, and this issue is not considered further.
The parties have informed us that Government targets require electricity
suppliers in the UK to purchase a percentage of their electricity from
specified renewable sources or face a fine. Given government policy it
would not seem sensible to rely on gas and coal fired power stations to
act as a constraint on the capital cost of wind turbines. Alternative
renewable energy sources do exist, but no evidence has been offered as
to their potential substitutability for wind turbines.
From a supply perspective the trend is to increase the size of turbine
in order to gain greater efficiency in cost per megawatts (MW) per hour.
This trend is likely to face some constraints from planning permission,
which may promote the development of off-shore sites. Installation of
off-shore wind turbines can be carried out by the manufacturer
themselves, or subcontractors using stronger materials and salt
Overall there is a credible case that the appropriate frame of reference
should be the supply of wind turbines generally, on the basis that all
wind turbine producers represent immediate competitive constraints on
the parties; however, given the potential importance of the size of
turbine, the effects of the merger have also been considered in relation
to broad turbine power output categories and, given the particular
demand and supply factors, in relation to the offshore segment.
The parties consider that competition occurs worldwide for a number of
reasons: service facilities are quick to set up; some customers have
framework agreements covering several countries; transport costs are no
more than 5 per cent of total project costs; many components can be
subcontracted locally; and the majority of international wind turbine
suppliers outsource the manufacture of rotor blades to two companies: LM
Glasfiber (which is establishing a manufacturing base in the UK) and NOI
Scotland (which manufactures in Fife). They have also noted tenders
where a company located outside the UK has won.
Third party responses indicate that suppliers with UK manufacturing
facilities are preferred. In particular it was suggested planning
permission is easier if the wind power plant contributes to employment,
and that after-sales servicing is quicker from the UK. It is noticeable
that the majority of main suppliers within the UK have, or plan to have,
manufacturing facilities in the UK. Whilst it seems plausible that
manufacturers within Europe can supply the UK (and have done so in the
past), given these considerations a cautious approach has been taken and
supply on a UK and EU basis is considered.
The parties aggregated shares of supply of wind turbines as a whole over
recent years are approximately as follows (percentage figures have been
excised at the request of the parties):
Worldwide 1998-2002 — Vestas [ per cent], NEG Micon [ per cent],
combined [ per cent]
EU 1998-2002 — Vestas [ per cent], NEG Micon [ per cent], combined
[ per cent]
UK 1998-2003 — Vestas [ per cent], NEG Micon [ per cent], combined
[ per cent]
The parties consider the wind turbine sector in the UK to be in its
infancy, and believe growth is being driven by UK government incentives.
Contracts for wind turbines follow bidding competitions, and in this
respect competition during tenders is likely to be more important than
who won the most tenders, although shares may reflect the
competitiveness of companies within the UK. The parties have provided
the OFT with a list of tender competitions within the UK between
November 2001 and April 2004, showing that in addition to the parties,
seven other suppliers – Nordex, Bonus, GE Wind, Gamesa and recently
DeWind, REpower and Enercon – have been competing in UK tenders. Third
parties have indicated that they seek five bidders which are
short-listed to three. Information from the bids indicates that
typically five companies bid which are short listed to two. On this
basis only two competitors appear not to have been successful in any
bidding competitions so far. The three new suppliers all have a
substantial presence outside the UK — Enercon is the largest supplier in
Germany, which has the largest installed base of wind turbines in the
world. Comments from third parties suggest that they are considered
The parties' success rates are not particularly similar, but vary by
power category. In particular, in the lower power categories Vestas
represents a large proportion of installed capacity; in these categories
NEG Micon has won no tenders within the UK, although it has bid in a
high percentage of competitions.
Offshore wind turbines
The parties believe that thus far, in addition to themselves, Bonus,
Nordex and GE Wind have all competed for UK offshore projects, and that
DeWind has recently announced its intention to pursue UK offshore
projects building on its experience in Germany. Following the merger the
number of competitors that have bid for off-shore wind farm contracts in
the UK will decrease from five to four. Nevertheless, third parties have
indicated that they are unconcerned and that sufficient credible bidders
remain. Given the importance of the offshore segment to future demand
(recent government approval has been given for a further 15 offshore
wind farms), it would seem likely that further companies will enter this
segment. In addition, the projects involved are large and infrequent
(one recent project was worth £93 million). Together, the above factors
suggest that the off-shore segment will remain competitive.
Barriers to entry
It appears that suppliers within Europe who do not currently compete in
the UK are the most likely new entrants. A significant barrier for de
novo entrants may be the need for a track record — several customers
mentioned that they require suppliers to provide performance records for
existing wind turbines and one mentioned a preference for an established
Purchasers are primarily a few large companies that have experience in
large capital investment projects. One customer believed that the
suppliers of wind turbines have had to grow rapidly from a cottage
industry and have suffered from dealing with much stronger customers in
the form of the power utilities.
No significant vertical issues appear to arise from this merger.
THIRD PARTY VIEWS
Third parties were largely unconcerned. One respondent expressed some
concern despite identifying seven potential suppliers.
Even if the immediate competitive constraint is considered to be limited
to those companies currently competing within the UK, there appear to be
several credible suppliers of wind turbines post-merger. The merged
entity is currently the UK's largest supplier, but given customers'
infrequent demand and large contracts this could change rapidly, and it
appears that strong competitive constraints remain post merger.
Consequently, the OFT does not believe that it is or may be the case
that the merger has resulted in a substantial lessening of competition
within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission
under section 22(1) of the Act.