Saving Suzlon

It is a company under siege. The coffers are running thin at Suzlon Energy, India’s largest and the world’s fifth largest wind energy company. This entrepreneurial showcase of yesterday is squeezed today in a mountain of debt, dwindling order book and a pile of inventory and receivables. Precious cash is being sucked into repair work for its blades that cracked at customer premises in the West.
A rights share issue to raise the much-needed money for a protracted acquisition has proved a non-starter, while payment obligations are nearing. By end of May alone, Suzlon needs Rs. 1,200 crore and its options are drying up. Its founder Tulsi Tanti, until recently the poster boy of India’s globalisation drive, is thus staring down the barrel of a gun.

Tanti and his A-team have spent the past five months fire-fighting to save the company. What keeps the engine chugging for now is a pipeline of orders worth nearly 1,200 megawatts (MW). Even as the orders are executed, Tanti’s next big challenge will be to collect the money from customers. Thanks to the credit crunch, customers in traditional markets like the United States and Europe have battened down their hatches. A team of sales executives has fanned out to new markets like Australia, South Africa and China to hunt for new customers, but except for some odd pickings, no major breakthrough has been made.

The investment cash flows are in no better shape. At a whopping Rs. 11,000 crore, Suzlon has much more debt than is prudent for its net worth. Ironically, that is just more than the amount locked up in inventory and receivables.

The logjam makes it difficult to raise money for acquiring further 15 percent in Germany’s REpower, which has a superior technology that Suzlon could benefit from. The actual cost of acquisition is going to be much higher than the initial price because of high-cost debt funding it. Devoid of better options, the founders even resorted to selling a 2 percent stake — a piece of the family silver, if you will — to raise Rs. 234 crore.

But Suzlon’s frustration with REpower will not end with making the payment for the residual stake it still needs to buy. Unless it can fund REpower’s own expansion plans, expected to cost Rs. 2,700 crore, full control will elude Suzlon. The banks that have lent to the German firm will not allow domination by the Indian owner for three years. So, despite a 76 percent stake, Tanti is nowhere near becoming an insider at the German firm. In sum, the globalisation dreams of this Surat-based entrepreneur are all but put on the backburner.

Suzlon has had to endure a punishing stock market too. Its share price fell from a high of Rs. 460 on the Bombay Stock Exchange (BSE) on January 9, 2008 to about Rs. 35 in a matter of 14 months. The recent rally has indeed doubled the price from that low, but the company is nowhere near being able to raise capital at will. Yet, if he tries hard, Tanti may have a couple of options to raise money. He has sold a 10 percent stake in one of his crown jewels: Belgian gear-box maker Hansen. There’s talk of selling more.

Beyond financial matters, though, Suzlon is undergoing a fundamental change. Tanti is going back to his roots — the domestic market which first gave him the recognition and riches. He has put on hold his ambitions to sell larger, more powerful turbines and started pushing sales of the smaller varieties popular in the Indian market. But, so far, such organic efforts have made only a dent into the cage he has trapped himself in.

In less than one year, the Suzlon story has unraveled in extraordinary ways. Through 2006 and 2007, Tulsi Tanti was known as the man who had catapulted his relatively unknown company into a global player in a little over a decade.
Till he hit the Forbes List of 40 Richest Indians in 2005, not too many folks back home had even heard of Tanti. His share offer had, of course, just been oversubscribed 40 times. With an overwhelming 50 percent share of the Indian market, Tanti set his sights on the global stage, gobbling up two major acquisitions: Hansen and REpower. Tanti’s business and fame grew across three continents: North America, Europe and Asia. In fact, Tanti believed he could hit the top three wind energy makers in the world by 2010. That meant challenging the likes of Vestas, General Electric (GE) and Gamesa. With his chutzpah and aggression, Tanti was well on his way to glory. Or so, it seemed.

Today, for a host of Indian companies waiting in the wings, Suzlon is a cautionary tale of an entrepreneur who allowed his ambitions to get ahead of himself — someone who took the plunge into global markets without building adequate management and technological capabilities.
And like the company’s blades, cracks in Tanti’s craftily built wind empire over 13 years are now glaringly visible. One can trace them back to where it all began: Tanti’s  global ambitions and his impatience to get there in the shortest possible time.

A Blow-out Strategy
By 2005, Suzlon Energy had come to dominate the Indian wind energy scene. The company’s smaller turbines, specifically those with 600 kilowatts (KW), 1,000 KW and 1.25 MW capacity, were selling like pan-cakes. To Suzlon’s advantage, the government allowed a tax break for investments in renewable energy sources like wind turbines. Companies rushed to set up windmills in order to benefit from this concession.

It seemed the perfect springboard for Tanti to take his company global.
At the time, the company’s engineers had already developed a prototype of a high powered turbine. Tanti figured he could concentrate on using this to sell 2.1 MW turbines in the world’s largest wind turbine markets: the US and Europe.
Tanti’s journey had begun in 1995 with a technology collaboration agreement with Sudwind GmbH Windkrafttanlagen. When Sudwind went bankrupt in 1997, Suzlon took it over. While Sudwind’s turbines proved a money-spinner for Tanti locally, it was the 2.1 MW technology developed later, which gave him the toehold in the global market.

But in his urgency to expand globally, Tanti short-circuited the due-diligence process. “The demand-supply gap for turbines in the world market was tempting. It still is. But any new product needs a certain hygiene level of testing period. We have never followed that,” said a senior Suzlon Energy official, speaking on condition of anonymity. Tulsi Tanti did not respond to repeated requests for this story.

Consumed with commerical interest, Suzlon by-passed the crucial life cycle and destructive tests on blades. This would prove costly later. “The only way to crack the international market was to be quick on the ground. The biggies like Vestas, GE and Gamesa would take years to execute orders. This had led to a serious demand-supply gap. This is where we came in,” said the Suzlon official. Officials often brag that “in any part of the world, if a customer has to set up a 200 MW wind farm and in a time frame of 24-30 months, it has to call Suzlon Energy to make it happen”.

It was a dangerous game to play.
In India, customers were focused on installations rather than on actual generation, because the tax incentive was on capital expenditure. And so, Suzlon could get away with lower levels of due diligence. “Till now, the markets were driven by depreciation. Quality of projects was not really the highest criteria; quick incentive notion was very clear,” says Madhusudan Khemka, founder, Regent Powertech.
Contrast this with the US. Gabriel Alonso, chief development officer at Horizon Wind Energy, a leading wind farm developer based in Houston, Texas, says: “Wind energy procedures are very rigorous in the USA. The more electricity you produce, the more tax breaks you get. You need to know that once the machine is installed it will be producing that kind of performance for the next 20 years. There is a guarantee/warranty received (from manufacturers). None of the turbine deals are without a design warranty, noise warranty, manufacturing warranty.”

In April 2008, the Wall Street Journal broke the first in a series of seven stories on Tanti’s crumbling wind energy business. It talked of Suzlon-supplied blades that had developed cracks across various installations at Edison Mission Energy and John Deere in the US. This controversy took its toll on Suzlon’s order book. Edison, one of the firm’s first and biggest customers in the US, cancelled orders worth 300 MW. Clients like Iberdrola Renewables and Horizon Wind Energy decided to wait it out till the root cause analysis was complete.
“The problem is there and it has been a cause of great worry. But, the issue is getting resolved now,” said V. Raghuraman, an independent director at Suzlon.

Leadership Flux
As the storm on the blade failure incident raged, Tanti faced the brunt of a senior management exodus. Andre Horbach, the group chief executive officer (CEO) and Patrick Krahenbuhl, the group chief financial officer (CFO) quit within weeks of each other.
While both officials refused to comment on the reasons for their departure, company executives said their exit had a lot to do with the way Tanti went about driving his entrepreneurial venture.
A senior private equity professional who had invested in Suzlon says he noticed a distinct change in Tanti’s leadership style. “He was a hard-charging guy who led from the front. That’s why we chose to invest in the company. But one year after the IPO, I was surprised to find that he became a delegate-and-review leader,” said Ajay Relan, who headed Citigroup’s private equity arm in India until last year.
But then, insiders say that Tanti still retained a streak of micro-management in him, despite his wish to create the image of a professional multinational company.

Take the case of Horbach, who was hired in January 2007 with a mandate to build systems that would help the company move away from its entrepreneurial approach. A respected former GE senior executive, Horbach was very process-oriented. Ironically, that was the reason for his fallout. While Horbach was building processes, Tanti continued to leapfrog. “Andre was overburdened and was not able to keep pace with the way Mr. Tanti wanted to grow his business,” says a senior executive with Suzlon. Within two months of the blade controversy, Horbach left.
Patrick Krahenbuhl, may have just been a bad hire. “Patrick had earlier worked with Asea Brown Boveri, a global power and automation technology company and was elevated to the CFO position by Mr. Tanti. He didn’t match the profile and skill required for the job. That was a wrong call,” says a banker with close ties to Suzlon.
The one thing Tanti did right was to appreciate the technological limits of Suzlon. In 2006, Tanti realised that if he had to make Suzlon a global company he would need better technological expertise and an international presence.
In early 2006, YES Bank, Suzlon Energy’s investment bankers, landed at REpower’s headquarters in Germany, Hamburg. REpower, the third largest wind turbine manufacturing company in Germany, was clueless. “Those guys didn’t know we exist,” says the banker. Soon after exchanging pleasantries, REpower discovered that they were to be the subject of an intense takeover battle between French energy conglomerate Areva and Suzlon Energy.

The REpower Quick Fix
By April of 2007, Suzlon had won a decisive public victory over Areva, bidding up the price to a substantial premium over REpower’s then valuation of 90 euros per share on the bourses. REpower was Tanti’s quick fix.

REpower’s portfolio neatly complemented Suzlon’s, with almost 66 percent of its business coming from 2 MW turbines. REpower was also the world’s leading company in the off-shore wind energy segment and its flagship product, the 5 MW off-shore wind turbine was the first of its kind in the world. What’s more, REpower had significant presence in two of the world’s most important wind energy markets; Europe and the USA. Yet 20 months after the acquisition, none of the strategic advantages have materialised.

Until Tanti gets a chance to increase his stake to 91 percent, the influence of Suzlon Energy on REpower will be limited. “Till then, REpower would have to operate at an arm’s length from its parent, Suzlon Energy,” said Karsten Mueller Eising, partner, Lovells, a leading German business law firm.
“We knew about the German law that restricts technology transfer,” said the banker who advised Suzlon. But Tanti was in too much of a hurry to pay attention to minute details. After the acquisition, he made matters worse by not taking the time to gain the confidence of the REpower management and its workers.

There were fears in Germany that the moment Tanti got access to the company’s successful, proven products in the on-shore and off-shore segment, he would shut the plants in Germany and manufacture the same products at almost one third the cost in India. Suzlon Energy didn’t do enough to dispel these concerns. Tanti even tried to get blueprints of REpower’s blades, media reports said. This led to more resistance. “The whole story is a tragedy,” says Fritz Varenholt, former chairman of REpower’s executive board.
It seems that Tanti understands resurrecting Suzlon will take nothing short of a miracle. Recent organisation changes sent out a clear message: He was coming back to take charge and was all set to lead from the front. There is a better focus on the domestic market. Orders from abroad are trickling in again. A twin order worth 245 MW from Australia has rekindled hopes. Sources also say ICICI Bank, responding to a desperate plea from Tanti, has agreed to guarantee the final payment for the REpower stake. So, the deal might go through after all. Once that happens, Tanti will get the time to reflect on his flawed globalisation strategy and get to cleaning up the mess.

SCHOOL OF HARD KNOCKS

He Burned
In its eagerness to expand globally and exploit the demand-supply imbalance, Suzlon Energy pushed its heavier turbines without conducting crucial tests. The blades soon cracked.
In its eagerness to expand globally and exploit the demand-supply imbalance, Suzlon Energy pushed its heavier turbines without conducting crucial tests. The blades soon cracked.
Suzlon’s financial metrics — especially the amount of debt it soaked up — assumed that things would be hunky-dory forever. 
Suzlon went into a shell when the blade crisis struck. Instead of being more transparent, it tried to first deflect the criticism. Instead of building bridges, it even suspected Western media of being biased against an Indian company.

We Learned
In developed markets, product performance standards and outcomes matter. Not just a lower price tag. Suzlon Energy’s half-baked technology solutions didn’t stand scrutiny.
Real M&A capability goes far deeper than merely smart buys. Suzlon Energy didn’t put in enough homework on cultural integration at REpower. Being able to anticipate the fears of the acquired company is often half the battle won.
Learn to place bets after factoring in the downsides. Effective scenario planning, risk management and a more calibrated growth strategy are the key.
Don’t panic when crisis strikes. Try to be more communicative and allay the fears of investors, analysts and brokers.

The men Tulsibhai  is banking on

SUMANT SINHA
Son of Yashwant Sinha, India’s former finance minister, Sumant is the new man in the hot seat. As COO, Sumant Sinha has the mandate of keeping investors in good humour and getting new orders which the company needs desperately

Aditya Sanghi
Country head of investment banking at YES Bank, Sanghi played a stellar role in both the Hansen and REpower acquisitions. Later, he managed to rope in IDFC private equity to invest almost Rs. 400 crore in SE Forge, one of Suzlon’s subsidiaries. But, there is still a cash hole at Suzlon and Sanghi has been negotiating with other PE guys for the last six months to fill it

Girish Tanti
The younger brother is a technology specialist. Tulsi Tanti always turns to him for advice. Girish had played a key role in acquiring technology from Sudwind. Fixing the technology problem will be uppermost on his mind now