Factory to close in Denmark as Vestas expands globally

DENMARK: Vestas dropped a Danish bombshell in its latest earnings report when it outlined plans for factory closures, leading to the loss of 3,000 jobs in Scandinavia - or 13% of the company's international workforce. But with profits exceeding market expectations, the company also shows signs of shaking off the effects of the financial crisis as it continues to expand its global reach.

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Analysts agree that a dip in European orders left Vestas with little option but to wield the axe, but observers were caught off guard by the timing of the lay-offs. "Vestas told stockholders and the press, close to this announcement, that things were going very well - in general and production-wise - so everyone expected them to maintain this production capacity within Denmark for a period of time," says professor Poul Houman Andersen from Aarhus School of Business.

The decision to close Danish plants was a pure cost issue, says Vestas CEO Ditlev Engel, citing high production costs in Danish factories working well below capacity as European markets underperformed.

He acknowledged that the company may have been too optimistic for too long, but defended its actions, saying that it was only right to maintain factory capacity while considering such a tough decision.

Jacob Pedersen, senior analyst at Danish bank Sydbank, was surprised that jobs had not been slashed earlier in factories with very little to do over several quarters. He echoes concerns in the Danish press that more lay-offs could be expected.

"The argument from Vestas that it's actually cheaper to ship turbines from Spain to Sweden than from Denmark to Sweden is a major worry," says Pedersen.

Share drop

Following the release of Vestas' third-quarter report, the share price fell to 167 Danish kroner (EUR22) on November 2, the company's lowest market valuation in four years, despite having presented an operating profit of EUR185 million. The figure was down from EUR244 million in the same period last year but was considerably higher than the EUR114 million predicted by analysts.

"There was too much uncertainty," says Pedersen, explaining market misgivings. "Everybody expected to see earnings targets for 2011 and those weren't given. Vestas' order intake over the last year demonstrates that the company is getting a lot stronger, but we haven't got very clear guidance."

Vestas says that 6.6GW of firm and conditional orders in the first three quarters was the highest level it ever recorded. Orders for 2011 were expected to reach 7-8GW.

Despite Vestas shedding industrial jobs in Denmark, Houman Andersen pointed to the launch of new research-and-development facilities in China and the US as indications that a global wind power breakthrough would continue to fuel the firm's future.

"This is really a good story, as wind energy is becoming more influential and important in a number of countries where it is now seen as a realistic alternative," says Houman Andersen. "In the longer term, that will of course also benefit Vestas. Even though their market share is diminishing, it's diminishing in a growing market."

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