Companies - King Vestas fights to cling to its crown

DENMARK: Vestas' crown is slipping. Last year, the Danish manufacturer posted record results, but increasingly tough competition from large industrial companies and smaller new entrants saw the company's lead at the top of the market-share table slashed to just one percentage point - with US rival GE snapping close at its heels (see chart below). Could 2009 mark the end of its 20-year reign as the wind industry market leader?

Turbine manufacturer share chart

In recent years, Vestas has lost significant market share, but it insists its technological and marketing prowess will give it continued leadership in the sector. Some analysts are confident that Vestas has the experience to pull ahead of the game and continue to lead developments in the global wind industry. But others believe that, without a radical change of attitude, Vestas could see itself dropping down the rankings as rivals such as Siemens and GE, not to mention the powerhouses of China, take over.

Vestas reported a 12.9% profit margin for 2009 before interest and tax on a turnover of EUR6.6 billion. But in 2010 it faces stiff challenges. First, despite the disappointing result of the UN's Copenhagen climate change summit in December, several large, experienced and financially strong multinational suppliers, including Germany's Siemens, GE of the US, Japan's Mitsubishi and Korea's Samsung, have recognised the true potential of the wind turbine sector, challenging Vestas' dominance of the market. Vestas board chairman Bent Carlsen claims this is all part of the company's current strategy to prioritise profit over sales volumes. This has caused Vestas to lose market share in recent years, dropping from 20% in 2008 to 13% in 2009, according to its annual report, and its order book looks rather slender when compared with that of arch rival Siemens Wind Power. Vestas reported orders for EUR2.2 billion, while in comparison the then-head of Siemens Wind Power, Andreas Nauen, announced a bulging order book of EUR7 billion in February.

Mortimer Menzel, head of the renewable energy practice at the independent merchant bank Augusta & Co, agrees that the size of Vestas' order book is indicative of its likely further fall in market share and that, while the company is still the global number one, this is based on its performance in 2009, which "was spent delivering mainly on its backlog and there have been fewer new orders".

One apparent advantage for rival Siemens is its balance sheet. Nauen - replaced in March by Jens-Peter Saul - said the weakened state of the global financial industry has encouraged some customers to ask Siemens to co-finance projects. The conglomerate's ability to offer financing looks set to work to its advantage - as indeed it will for another giant manufacturer, GE. Vestas, on the other hand, has no such luxury and, according to Michael Holm, communications director at Vestas, it has no intention of setting up a financing arm to help it to compete: "We only do turbines," Holm says. "We will not start acting as a bank."

Analysts also seem relatively unconcerned about Vestas' inability to co-finance. "It is not clear that GE or Siemens do a lot of vendor financing," says Menzel. "Wind projects have to be economically and financially viable in their own right and neither company would invest in projects just to help out other parts of their business."

He comments that GE Capital and Siemens Financial Services are "extremely picky" about their investments, and suggests that while "the companies' turbine sales people may emphasise the financial arms of their companies, it is unlikely that the financial sides tell the same story".

Additional services

More worryingly, perhaps, Vestas has been criticised for its lack of aftercare service. The global financial crisis has increased customer demand for delivery of fully complete and ready-to-go projects. But several years ago, Vestas chose a strategy focused on increasing the number of orders for delivery of turbine hardware alone, without ancillary services.

Analysts agree this was a mistake and that for customers. Suppliers can no longer be satisfied with simply "sticking up a turbine", says one UK-based analyst. "Vestas may have to change its strategy in this area." The company does not necessarily have to take on all the responsibility for after-sales care, but rather be able to manage relationships so it can supply customers with the right care, the analyst adds.

A Barcelona-based wind analyst adds: "Vestas is moving in the right direction of offering the whole package, not just the turbine," but suggests radical change is "difficult when you have been the market leader".

But Vestas' Holm says "services are becoming a key part of our business" and draws attention to its services, spare parts and repair business, whose 15% margin made it the most profitable activity in 2009.

Holm says Vestas is the company best positioned both to serve utilities at a global level and to provide local solutions with factories in the US, China and the EU. "We have a 30-year track record of proven experience," he says. "We are the only wind turbine manufacturer with a global set-up - we have offices in 24 countries and have put up turbines in 65 countries - while lots of our competitors are only strong in their home markets. We think globally, but act locally."

Holm notes a recent report by wind energy advisers Make Consulting showing that Vestas held its position last year as the world's top manufacturer of wind turbines despite a continued fall in its market share. GE ranked second, while Chinese manufacturer Sinovel made a surprise jump into third place. Perhaps in acknowledgement of the fact his company may not be in the leading spot next year, Holm says it is more important to "have the right share of the right market" rather than an overall lead.

Analysts agree that the fall in Vestas' market share is natural given the growing number of companies entering the wind sector. One UK-based renewables analyst notes that, in the burgeoning Chinese market, "the vast majority (of turbines) are Chinese-made and there are no real opportunities for Western companies". But an energy analyst based in London believes this could be about to change. "The dropping of China's demand that 70% of wind turbines are manufactured in the country could potentially make it easier for Vestas to compete for projects," he says. Vestas is well positioned, having built its largest integrated factory worldwide in China.

While the market in China might open up for Western firms, Chinese firms are targeting the export market. Michael McNamara, clean technology equity analyst for investment banking firm Jefferies International in London, notes, for example, the arrival of Samsung in Ontario. In January, the industrial giant and the Korean Electric Power Corporation signed a deal to invest $7 billion in renewables in the Canadian province over the next six years (Windpower Monthly, March 2010).

The real problem, says a wind analyst based in Barcelona, is that Vestas is trying both to compete with diversified industrial groups such as GE, Mitsubishi and Siemens - which have strong track records in dealing with utilities - as well as smaller new entrants. He believes utilities are more comfortable with large industrial groups because, in addition to wind, they can also discuss other renewable energy technologies and have the industrial know-how to ramp up production where necessary.

He says it is "very difficult" for Vestas to compete with them either onshore or offshore and that the company must "decide with whom they wish to compete".

Sluggish markets

McNamara is more sanguine. He believes the US and EU markets are generally sluggish and that all companies, not just Vestas, are being affected. "Outside of high profile deals there has not been that much movement in the US," he says. "We haven't seen anything dramatic yet from GE and Siemens - business has been ticking along."

He suggests that this is likely to remain the same while energy prices and the demand for energy remains low in the US, meaning investors are looking more to finance smaller power purchase agreements. "While it is pretty easy to find short-term financing, there is a lack of financing of 15 years and up," he says. "A secondary factor holding the market back is a lack of US federal plans regarding renewables."

Some wonder whether Vestas may be losing some of its technical advantage to competitors. McNamara disagrees. "Vestas has very, very good turbines, the best track record with a very good range of products from 1.8-3MW," he says. "The company's high-quality range will stand them in good stead when the market starts to recover." And the UK renewables analyst believes that Vestas' promised 6MW turbine for offshore application suggests the company is ready "to come back to offshore with a vengeance".

Mortimer endorses this view. "Siemens has a stronghold in the offshore market with their 3.6MW turbine because at the moment Vestas can only offer 3MW turbines, but the development of the 6MW for offshore will be a useful and necessary addition," he says. "Onshore, Vestas remains strong with an extensive sales network." He adds that it is much better to have a strong onshore product portfolio, like Vestas, because while offshore is likely to overtake onshore in the next five years in the EU, in much of the rest of the world the preference will remain to build onshore due to the cost and the perceived risk involved with offshore.

Its crown may not sit as firmly, but Vestas will not abdicate its throne without a fight. The company's CEO, Ditlev Engel, remains bullish about the future. "Our first milestone is 2015 when we want to see EUR15 billion in revenue, compared to EUR7 billion in 2009," he says. "What this will mean in terms of market share, we will see."

In the meantime, the pretenders to the throne pose an ever greater challenge. "Siemens has become a bigger player and will clearly play a leading part in offshore," says McNamara (see box). He adds that GE is "very good in the US", but less of a player elsewhere in the world.

This year is likely to be difficult for all renewables companies, given the continuing economic downturn and lack of project finance on offer. It remains to be seen whether Vestas can use its experience to keep ahead of its younger rivals.

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