Global market leader Vestas had been suffering from over-hyped ambition and significantly falling customer satisfaction, despite continued strong growth. The growth came without profit and, according to owners, Vestas has significant warranty exposure. In the spring of 2005, Ditlev Engel was brought in as the new CEO, tasked with turning the Titanic around. His first annual report (and the succeeding first quarter report) show the kind of leadership vision lacking in this utility-oriented industry.
Never have I seen such a bold renewal of a company's standing, coupled with a coherent business plan which will affect the strategies and fortunes of most other companies in the industry -- particularly the majors. Only time will tell if Engel's measures will prove successful: both the engineering and global business challenges Vestas faces are serious. But looking deeper into Vestas' changing business culture reveals strategies which may return Vestas to its former reputation and force the competition to up its game. The most significant change is transparency. Ask any old-timer, and they'll say the industry isn't known for its communication of true costs and performance. The status of Vestas was rife with rumour, mostly from investment analysts with little understanding of the business and engineering issues. So Engel adapts a policy of open communication and transparency, knowing he'll be held to that standard.
But can Engel walk the walk? Near the end of 2005, he announced that Vestas must restate its forecast operating margin from +4% to -3%, a huge drop. After a serious engineering review, the company significantly increased its warranty provision. Vestas' stock plummeted. Engel had to know that would happen. Perhaps he was sleepless the night before, but he stood on his transparency rock. How did Vestas understand it could be hit by higher than expected warranty costs? Because Engel had established an engineering team to review the entire spectrum of product liability and performance: a Continuous Improvement Management (CIM) team of no less than 80 engineers. This team reported to him only hours before the announcement what many of us already knew: there were serious holes in Vestas' performance. Transparency and communication ruled the day, a rarity in the wind industry. Engel borrowed CIM from Toyota's "Kaizen" strategy, literally "continued improvement." The Kaizen program led Toyota from the first clunky hybrids to the successful Prius in one year less than planned. CIM gives the engineering side of a company a stronger hand than usual against the sales staff and bean counters.
Vestas is not alone with serious engineering and supply problems, but without transparency we don't hear as much from the others. Customer satisfaction among the competition has also been falling. Engel seized upon Vestas' falling customer satisfaction (from 96% five years ago to 60% last year) by forming an advisory board consisting of customers and other stakeholders empowered to recommend changes and charged to meet regularly. Some of us in the industry have long advocated a slower pace in developing the new multi-megawatt super-rotors. Vestas is the first major manufacturer to publicly slow down its product development. The postponement of the V120 offshore and V100 turbines are signs that Vestas recognises the challenges. A company executive stated that Vestas was stepping back from "designing close to the edge," putting the emphasis back on performance and reliability. Engel's Kaizen hand.
Return of commonsense
Perhaps Vestas' most courageous move is bringing turbine prices back into the real world. Competition with artificially low-cost natural gas plants, particularly in the days of wind industry bidding wars in the US market, drove expectations of low cost turbines to unreal levels. By significantly raising its margins, Vestas shows that commonsense is returning to the wind business. The end of cheap fossil fuels helped the process, but that the other manufacturers followed suit shows the wisdom of Vestas'/Engel's courage.
There are other signs that the Vestas turnaround is serious and ongoing. Engel's establishment of safe conduct for whistleblowers, new management risk analysis and reporting tools, and a serious Contract Review Board show Vestas' long-term commitment to quality.
Cynics smirk at Vestas' "Will to Win" plan where "failure is not an option," but the management tools Engel is using to build this new business culture validate his vision. His surprising new program of strengthening Vestas' government relations worldwide shows the company adapting to both the realities of modern energy policy-making and to his multi-national competitors perceived lobbying strength.
If Engel is not successful in bringing a renewed spirit to the Vestas team, with the appropriate results he envisions, then I'll eat a 20 year old Howden tip brake.