It is not a risk he is likely to run into in his new job as managing director for NEG Micon, a post he was not due to take up until the new year. But like so much else, reality has not been as expected for the Randers-based maker of wind turbines. The time for unpleasant surprises, however, should now be over, hopes Bjerre-Madsen.
"When the financial problems piled up in such a short time it was vital for us that first and foremost the company should not be forced to suspend payments, or even worse. But it was also important for us to send a clear signal to the market, so that nobody was left with the impression that we were reducing our losses with a capital injection, but we were not going to do anything about the gear problem," he says. "For this reason there was a pressing need to make it clear that we were intending to do something serious with the gear problem, not least for those who were backing us in this situation. Clear signals were needed.
"It was also important for Flender [German supplier of NEG Micon gear boxes], even though the problem was not so visible in Germany. I think we've had gear problems on one or two turbines in Germany, and that's just a single per cent. Later there were indications that although changing the gear oil and other technical changes (which I'm not an expert in) were helping, there was still concern among our customers and also among some of our own technicians who feared these initiatives were not enough. So we began to look at using heavier duty bearings. We can see that turbines made before 1996 with the old Flender gear boxes run without complaint. For this reason we've taken them as the start point for developing our retrofit program. And we've chosen to say to ourselves that it's better to retrofit 20 too many than two too few. In that way we remove the uncertainty. It is this we have set aside a large sum of money for. We will, of course, start with the turbines at greatest risk-those which have produced most-and thereafter conduct the retrofits when it is least troublesome for the customer.
"We are forming a special group which will ensure that the retrofit progresses smoothly. The rotor will be taken down along with the old gear box-and a renovated gear box will immediately replace the old one, which will be sent to Flender for refurbishing. So we do not retrofit a customer's old gear box. He gets another one, which is renovated and strengthened, with a two year guarantee on the replaced parts."
Torgny Møller: What about gear boxes that are already damaged?
"They will be repaired so they are damaged no longer."
That means the gear boxes will get a new shaft, new gear teeth and be repolished?
"Now you're getting too technical for me, but we will do what is necessary for the customer and us to be satisfied that the gear box is in good order. That's what we'll do."
You have used DKK 55 million already and have made provision for a further DKK 195 million to solve the gear problem. Is NEG Micon going to have to use more money on problems in the coming financial year?
"We have made the monetary provisions necessary for all the gear boxes to be replaced with retrofitted gear boxes with improved bearings, and we can do this proactively or retroactively. Until now only 150 of the 1250 turbines have actually had gear box problems, and the uncertainty around the sum depends on the extent we can undertake replacements without the gear box breaking down, or being delayed by windy weather, for example. The uncertainty is about whether we can retrofit proactively. It can be said that we haven't been very proactive to date-some could accuse us of sticking our heads in the sand. Friends of the house have said: you have a problem. We have replied: no we haven't. We admit now that we were wrong. We had a problem. We could well have reacted before now, but it's now we are doing so. If it's too late and a gear box breaks down before we have replaced it, the job will be more expensive than if we can do it on a quiet day without it having broken down. Other damage as the result of a breakdown can cost extra. But we have tried as best as we are able to pin down the price and risk, which is included in the sum set aside."
What is the gear box retrofit costing Flender?
"That's for Flender to tell you."
Was it NEG Micon that elected to use gear boxes that were too small for the job, or Flender gear boxes that were not properly made?
"As you can see from our stock exchange report this is an issue we have not taken a position on. Our conclusion is that there are indications that the bearings, in specific conditions, are not robust enough. But from that you cannot draw the conclusion that the gear box is not strong enough. As I said, we have only had one or two problems in Germany. And this gear box model is also used by other manufacturers on wind turbines of the same size, as far as I understand."
Will these problems come to affect NEG Micon's international projects?
"There is no doubt they have already done so-you can see that from the figures-so for this reason is has been very important for us to provide as clear a signal as possible that we are intending to clear up the mess and will try to be proactive. That signal has been sent to our joint venture partners in both Denmark, Germany and North America, who have expressed broad satisfaction with it."
Is NEG Micon going to change its strategy of being both a wind project developer and a supplier of machines to those projects around the world?
"We've no plans to do that. Now it's necessary for me to say that I'm still new and only recently thrown into all this, so to speak. If our comprehensive strategy is to be corrected, I am not ready to do so yet. But our vision is not to say no to involvement in large projects in the US. But some of the contract conditions there have been risky, and if that is to be acceptable, we must be very certain that the whole house is prepared to live up to them. So we will be more meticulous than we have apparently been previously."
Is there not a risk that you will compete with your customers by bidding as a developer for large projects?
"It is important that our joint venture partners know where they stand in relation to us, and as far as I know there hasn't been a problem to date."
Will the company's current problems affect your working relationship with partners in India, Spain, the US, South America and China?
"We must see where we think the markets will be in the years ahead. With what we have just gone through, we must look at whether we are using our resources sensibly at the same time as consolidating the company. But those markets you mentioned are particularly interesting and our strong presence there should be developed further."
You've said that projects in Europe have suffered as a result of NEG Micon's problems. How have they suffered and in which countries?
"We've noticed, a slackening of demand at the tail end of the summer, not just in Denmark. But we haven't got a full overview yet. It could be a reflection of uncertainty among customers. They need to be gathered up and I'm sure we can do it, even though we've noticed we've got some clever competitors who have spotted an opportunity. But that's the name of the game."
Flender has competitors too. Have you considered using another gear box supplier?
"Yes, we have. To a limited extent we do use others, because it has been important for us to be able to supply some turbines with gear boxes that we were quite certain of.
But in the agreement we have just struck with Flender, we've given each other the status of preferred customer and supplier. That's because Flender is the world's largest gear box supplier and with the joint effort we are now making and the things we have on the drawing board, we have decided that the right course is to continue our very close co-operation with them. But it is also clear that if there are other types of gear box on the market, we will evaluate them case by case. In principle I do not believe in putting all our eggs in one basket."
Flender's owner, the Babcock concern, is also the main shareholder of a competitor, wind turbine manufacturer Nordex. Is this an influencing factor?
"We have their assurance that we will not suffer from any preferential treatment, but will be treated as the major customer we are."
What is your reaction to the statement by Vestas' Johannes Poulsen that they will drop their prices next year if the competition gets tougher?
"Our competitors' price policy is not something we can or shall influence. We have our prices and in Denmark a strong market platform. We must ensure that NEG Micon turbines are a really good investment for our customers. I am certain that Vestas has the same thoughts. Once that is said, there can be no doubt that a price war is not in anybody's interest, and that is certainly not one of my
ambitions."
You expect to turn this year's loss into a small profit already by next year. Is it realistic to expect that confidence in NEG Micon will have returned by then?
"You can easily create a horror scenario, but we've put aside quarter of a billion [Danish crowns] to take care of the gear box problems, have injected half a billion into the company, and will get an additional two hundred million. All this to make it clear to all that they have no reason for concern. The signal we have sent out is as strong as it can possibly be. And with the capital base we now have in NEG Micon, where else are we going to go but forward?"
Why do you think you can achieve something that your two predecessors could not?
"I won't deny that my two predecessors could have done what I am now going to do. But they apparently focused on other things, I've heard. Now I am going to try to consolidate the company. First we need to get our own house sorted out; that means be better at following up on projects and be more proactive towards our customers. I've taken on this task twice before, at Danisco and with Crisplant. And it's never as easy as you think in the first place. So it is with great humility that I approach the job, but I've also seen it succeed. I can feel a readiness in this organisation to make it succeed. So I'm sure we can do it."
Where is NEG Micon in two or three years' time?
"Fundamentally we have a growth market, which despite some lurches every now and then will continue to grow strongly for many years. So in two or three years we will occupy a position as one of the world's leading and preferred suppliers of wind power plant, based on a sensible profit level and a growth curve which at least follows the market's. We will be even more international than we are today, but we will have a strong base in Randers," concludes Torben Bjerre-Madsen.
