It has been a difficult few weeks for Vestas. The turbine giant was forced to ditch its "triple 15" plan to increase its 2015 quarterly earnings before interest and taxes (ebit) margin by 15% and announced a restructure and jobs cuts for early 2012 last month. On top of this, turbine delivery delays caused by a major manufacturing headache triggered a 2011 profit warning.
The delays have been caused by problems at Vestas' new generator factory in Lübeck-Travemünde, Germany. The facility was due to start producing permanent-magnet generators for the company's new 2MW and 3MW Gridstreamer turbines in late summer. Vestas said the plant was operating but admitted it was below capacity. A company spokesman blamed "issues relating to the new design of the production setup and the transition to a new factory".
Vestas denied the delays were caused by sourcing issues regarding rare-earth materials. Bilfinger Berger Hochbau, one
of the companies involved in construction, said the building itself was completed on schedule, so the problems appear to be down to Vestas.
The delays have put back the completion dates of a number of wind projects. As a result, Vestas reduced its group revenue forecast from €7 billion to €6.4 billion and the Ebit margin from 7% to just 4% for 2011. Taking out the €35 million costs due to the factory delays — almost as much as the €40 million investment in the factory itself — the firm lost €565 million of the revenue it had expected in 2011.
Vestas' original plan was to wind down production at its existing Lübeck generator factory in Hafenstrasse as the new plant got up to speed. However, Vestas admitted the old factory is now operating around the clock. "We are currently producing several types of generators, including permanent magnet generators, at the Hafenstrasse factory until the end of the year to catch up on customer demand," a spokesman said.
The generators are shipped to Vestas assembly factories across the globe where the whole nacelle is assembled and later shipped to the project sites. At present, the factories in Lübeck are the only factories producing Vestas' Gridstreamer permanent magnet generators. The generators are being built there to meet global demand.
The Travemünde issue comes as Vestas prepares to outsource a greater proportion of its manufacturing production. Giving a glimpse of its future plans, the Danish company said greater outsourcing of components will enable it to manufacture to order and reduce its inventories. Vestas would also place a greater share of wind turbine manufacture with selected partner companies. For example, it aims to produce turbines for the Brazilian market "primarily with local collaboration partners". It has also signed a deal with US company Caterpillar to remanufacture old components (see story below).
Change of focus
In terms of revenue, more emphasis will be placed on turbine service, currently by far the more profitable sector at Vestas. The company plans to step up activities in this field, even including servicing non-Vestas turbines. Revenue in the service business in 2011 will amount to €700 million, nearly 10% of the total €6.4 billion expected by Vestas for the year. But with an Ebit margin of 15%, earnings from servicing will be nearly four times as high as the company average of 4% expected for the year.
Despite the new focus, a number of ongoing challenges remain. The stricter conditions applied by banks is clearly to the benefit of financially strong blue-chip providers such as Siemens and GE. Other risk factors include warranty provisions due to potential quality issues, transport costs, disruptions in production and turbine installations, and potential patent disputes. While the sovereign debt crisis and rising equity requirements on banks are already having a negative effect on project finance.
TURBINE MAKER SIGNS MILESTONE REMANUFACTURING DEAL By James Quilter
Vestas’ plan to maximise revenues from its spares and repairs division could have taken a major step forward with its deal with US industrial giant Caterpillar.
Under the arrangement, Caterpillar will remanufacture and resupply minor components for older Vestas’ turbines. The service will begin in the US, with Europe and Asia to follow.
The move is big news both for the companies and the wind industry. For Caterpillar it signals its first serious move into the wind industry since losing out to GE in its attempt to acquire Enron Wind in 2002. Meanwhile, Vestas aims to increase its revenue from servicing, which this year will provide the Danish company with earnings before interest and tax of 15%, four times as high as the company average.
Phil Jones, Vestas’ Spare Parts and Repair president, described the deal as a "win-win" for both companies. "Caterpillar will remanufacture minor components," he said. "This is the process of returning a product that is nearing the end of its life to a ‘new’ condition. What that means is we disassemble used components and reassemble them using qualified salvaged sub-components."
Jones said the agreement would bring cost savings, while the recycling aspect was another attraction as the vast majority of components could be reused.
Another potential bonus of the arrangement could be Caterpillar’s ability to improve component design.
Model for the future
Ross Walker, head of wind-farm engineering at consultancy GL Garrad Hassan said: "Through analysis of the component failures, Caterpillar could make an improvement on the design. That may be where the re-engineering comes in; they could go a bit beyond refurbishment."
As turbine prices come down, this type of deal could become the norm for wind manufacturers. The ability of conglomerates such as Siemens and GE to re-engineer their own products meant Vestas had no choice but to bring in a company like Caterpillar, said Walker.
"I think more organisations similar to Caterpillar will be getting involved, maybe along the same lines or independently," Walker said. "To some extent Caterpillar could do it without Vestas, but it is easier with them as Vestas will be providing the parts. They don’t have to go out there to turbine owners."