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Difficult times prompt big changes at Vestas

WORLDWIDE: Despite busy factories, multiple product launches and 7.4GW of new orders during 2011, Vestas is facing difficult times. It has announced two profit warnings in three months and has been beset by costly production issues.

Last year’s initial profit warning shocked Vestas into pushing forward a corporate restructure originally planned for mid-February this year. Among the range of changes being made, the one that has attracted most attention is the announcement that overproduction in Europe and the need to cut costs will result in 2,335 redundancies (10% of the workforce). The majority of these are in Denmark where it is losing its Varde tower factory. Also making waves is Vestas’ threat to cut 1,600 workers in the US if the government does not renew the production tax credit (PTC).

Other changes include a restructure of the company’s executive management to "allow greater focus on key parts of the value chain". This includes setting up a Global Solutions Division to handle servicing. But most notable has been the departure of four senior executives including CTO Finn Strom Madsen and offshore chief Anders Soe-Jensen. They have been replaced by vice president of plant operations Anders Vedel and president for Central Europe Hans Jörn Rieks respectively.

It is believed Madsen and SØe-Jensen are paying for Vestas’ poor performance in the offshore market and cost overruns on developing the V112 and Gridstreamer products have cost Vestas around €125,000.
But with a weak global economy and overcapacity in Scandinavia cited as significant factors, industry observers could be forgiven for feeling a sense of deja vu over some the changes. In 2010, the manufacturer made a similar announcement in the face of similar challenges. Then it cut 3,000 jobs, shut three factories in Denmark and one in Sweden.

Given Vestas’ overcapacity problems and few predicting a vibrant 2012, one wonders why the manufacturer did not close more factories two years ago. Vestas CEO Ditlev Engel explained the rationale. "Vestas has been very much a Scandinavian and then EU-based company and looking at the overall development around the world meant we would not be competitive working out of the EU," he said. "So if we would not go in and get plants up and running in the US we would not be competitive." At the same time, he said, Vestas had to close down some of the Scandinavian factories because of EU-specific conditions and costs.

Volatile market

"The paradox is that we are busy right now. The challenge comes when you have a market that has a potential boom-and-bust behaviour. We need to make sure Vestas can absorb these ups and downs," he added.

According to Martin Lykkes, owner of investment broker NPforex, while Vestas’ decision to cut capacity was the right one the company has been over optimistic in its forecasts. "It’s a step in the right direction, but if you overestimate the market then you’re bound to fail. I know it’s hard to predict where the market is going but they have not been very good at it."

Another major issue is the costly failure to launch Vestas’ new generator factory at Lübeck-Travemünde in Germany. The factory was designed to produce generators for its latest products, the V112 3MW and the 2MW Gridstreamer turbines. These products will now be delivered late.

Engel has accepted responsibility for this failure, but Lykkes says it is a sign of endemic problems within the company. "Engel is more like a salesperson. He’s not a man who is good with production and factories and so on," said Lykkes. "They’re more fond of talking to the press and selling the idea of Vestas than of taking care of production."

Despite the bloodletting at the beginning of this year, there could be more job cuts on the horizon if the PTC is not renewed. In this, Vestas has been unequivocal, putting 1,600 jobs on notice if the PTC comes to an end this year. Engel would not be drawn on whether any of its Colorado factories would go, but was clear about the overall message. "It’s not a threat, it’s the truth," he said. "It’s important people make an informed decision and, if they decide not to renew it, to know what the consequences will be."

Looking ahead, Engel said 2012 order levels are good, but the concern is for 2013. Asked whether Vestas will still be number one turbine manufacturer in the world by next year, he said: "Let’s see the scores when we get them. What matters most is the customers and how they rate us."
To keep those customers happy, Vestas will need to avoid further issues such as those at Lübeck-Travemünde and make a success of its latest products

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