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Denmark

Denmark

Trust me

In his nine months at the helm of Vestas, Ditlev Engel has replaced the company's traditional goals of pushing up market share and driving down the price of wind power with two new aims-making Vestas profitable and producing reliable products (page 29). A turn-around for the troubled company, which recorded an operating loss of more than €100 million in 2005, is on the cards. Vestas has hiked its prices substantially and Engel is confident that no more loss-making contracts are being signed. Whether the company has succeeded in solving the fundamental technology problems that bear much of the responsibility for its financial woes is less certain.

As Engel says, higher prices for its products are not just good for Vestas but good for the entire industry. Selling wind turbines at a loss is no way to secure the future of wind power, let alone the future of Vestas. But neither is selling wind turbines that fall apart. Ten years after the first gearbox failures on larger turbines, Vestas has announced it will improve its internal reporting systems so that managers at the top know what windsmiths in the field are dealing with, and it will talk to its customers in a spirit of open dialogue. Not before time, many will say.

Gearbox failure is still happening and not just on turbines inherited by Vestas after its merger with NEG Micon, but also on relatively new Vestas 2 MW machines equipped with gearboxes from Hansen. Gearboxes from Winergy, Vestas' other main supplier, have also caught the eye of experts: the dimensions of the Winergy gearbox unit Vestas chooses are smaller (cheaper) than the units used by competing wind companies on turbines of similar size. As Vestas has previously admitted, it is treading "the far edge of the technology" (Windpower Monthly, November 2005). Perhaps it is not surprising that Engel says there is no guarantee that Vestas can find solutions to its technology problems fast enough to prevent another year of cash burning. The issue is vital: retrofitting a gearbox under warranty to prevent total failure can cost as little as €16,000; total replacement costs up to €160,000, he says. But if Vestas does implement remedies-and if component suppliers can keep up the required pace of delivery-investors can look forward to a Vestas' profit margin this year of up to 7%.

That potential reward-and Engel's well-turned display of chagrin and promise that Vestas is once again to be trusted-were enough for share prices to leap on release of the company's annual report last month. The secret of keeping the market happy is not to dish-up unpleasant surprises. Vestas' end-year deficit was in line with analyst predictions and the new share issue was less than feared, so diluted shares less. But though the market seems confident that Vestas' can turn a negative operating margin into a positive 4-7%, it was only a year ago that Vestas also targeted 4%, before managing to turn a 50% sales increase into an end-of-year loss. Investors, however, seem to see a relative upside in Vestas' share price compared to that of its listed rival, Spanish Gamesa. Analysts say the ratio of Vestas' market capitalisation to forecast sales is significantly lower than that of Gamesa, so the shares of a turned-around Vestas may become a good buy if the market started to value the company on the same basis as its smaller competitor.

The impression gained from Engel's presentation of Vestas' results is of a company struggling to manage its rapid growth, struggling to trim its working capital to a respectable level, struggling to keep a grip on product quality, and struggling to secure component supplies. The purchase of Hansen, Vestas' main gearbox supplier, by Indian wind turbine competitor Suzlon sent ripples of concern through the market last month. Suppliers of gearboxes to the wind industry are a rare breed. In Winergy, Vestas is already reliant on a company owned by rival Siemens. But Suzlon does not need all the gearboxes Hansen can produce and Engel assures that it is "business as usual," as does Suzlon chairman Tulsi Tanti (page 30). Hansen, which behind closed doors has bitterly complained about Vestas' lack of professionalism in organising production schedules, will be hoping for "better business than usual." Its prayers may be answered-Engel is at pains to stress that relationships with its suppliers are greatly improved and he "hopes" that components will now flow to Vestas in timely fashion.

Delusions of grandeur

Suzlon may have other strategic aims in buying Hansen. It has already picked up a number of former Vestas' workers, staff from NEG Micon who fled the "them and us" rivalry after the merger. It may also have an eye on the precedent set by Gamesa. When Gamesa bought competitor Made's gearbox supplier Echesa, two years later it bought Made too, from right under the nose of Vestas.

The steep rise in Vestas' share price at the end of last month will kill takeover rumours for now. Engel has achieved his aim of steering the company into a patch of calm water. Whether his ship can be made seaworthy enough to reach its destination this year is anybody's guess. "I hope so," is the best bid from Engel. He is asking us to take a lot on trust-especially from somebody whose stated aim is to remain king-pin in a market that the likes of GE and Siemens have serious designs on. Delusions of grandeur can be dangerous for profit.

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