Feeling the heat

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A weak dollar, rising steel prices and an uncertain American market. Reasons enough, according to Vestas, to postpone all prospects of growth for the foreseeable future and push the date for reaching its targeted 10% profit margin somewhere over the horizon. Its EBIT (earnings before interest and tax) for 2004 and 2005 is stuck on 4%. "Price competition," whined Vestas in a negative third quarter report that shocked the market, is "very fierce." Coming from a world market and technology leader facing a boom year in a business that major multi-nationals are rushing to get into, the report was anything but good.

The punishment meted out by analysts and shareholders was swift and harsh. Vestas' share price plunged by 14% on the Copenhagen stock exchange as analysts scrambled to downgrade their expectations of the company. "Under perform," "very disappointing," and "very significant downward revisions" were among the telling judgements. Disbelief was visible among the analyst commentaries. Some suggested that Vestas was being tactically negative, both to make life easy for new CEO Ditlev Engel, who will not want to start his job in the spring by issuing more bad news, and to put pressure on customers and suppliers.

Vestas chose to make its third term report a catalogue of the issues and challenges facing the wind sector. In seven pages it tells of prospects of market growth in North America, in new and revived European markets, in Asia and Australia -- and continued strong markets in Germany and Spain. Yet sprinkled throughout are hints and suggestions for why Vestas feels it will not deliver on the great promise ahead. Long explanations and excuses are not what shareholders and customers want to hear. A reality, or perhaps a tragedy, of modern corporate life is that empathy and understanding are in short supply. What counts is high quality turbines and high quality results. Company management is there to ensure that both are delivered. It is their job. Failure means Vestas can watch customers and shareholders walk out the door.

The implication of Vestas' report is that the wind industry's new giants, Siemens and GE Energy, will be taking market share, presumably along with Gamesa, the analysts' most favoured publicly-traded wind turbine maker. The puzzle is why Vestas seems to be admitting that it is less able to cope with market volatility than others. The dollar markets are unlikely to make up more than a quarter of Vestas' business next year, if that, and the market uncertainty in America is the same for all. Much is also being made of rising steel prices that will make wind power less competitive and reduce orders, particularly in the US. But a projected 25% increase in the price of steel will only raise total wind turbine cost by about 1.5% -- for all players. Against a background of turbine costs falling at 3% annually -- and Vestas' much trumpeted cost savings from its merger with NEG Micon -- the rise in steel prices should not have a fundamental impact on sales or profitability, even if management left Vestas fully exposed to them.

Lurking in the shadows, meanwhile, is the spectre of the final cost to Vestas of its retrofit of all 80 offshore turbines at Horns Reef, now nearing completion. Although the company believes the cost is covered, negotiations with suppliers of the failed components are not over and "may have an effect on turnover and result." It also remains to be seen if the ongoing problems with gear box failures inherited from NEG Micon (Windpower Monthly, October 2004) will continue to contribute to Vestas' cash-burning tendencies. As noted from the floor of the European wind industry exhibition in London last month, does a company that makes much of employing 9500 people know what being lean and mean is all about?

Siemens and GE have moved into wind in a big way. They, like everyone else, undoubtedly perceive the compelling market opportunities that global wind presents. Perhaps what they also perceive is the opportunity to profit from their experience in managing conventional turbine businesses, featuring fierce competition, uncertain markets and volatile prices. GE's significant sales success with its workhorse 1.5 MW wind turbine, most recently in Pakistan and Italy, serves to illustrate the point. Maybe the established power industry professionals do not even have to make superior turbines to make superior results.

Out of the kitchen

If you can't stand the heat, get out of the kitchen. While Vestas is merely looking singed, Britain's FKI, an international engineering conglomerate that bought German wind turbine manufacturer DeWind just two years ago, has scampered out (page 21). One look at Siemens' determination to become head cook after its purchase of Bonus was enough for FKI, which has headed back to the cooler world of gas turbine manufacture, leaving Britain without a wind turbine maker once again.

On the project development side of the business, the big news last month was Acciona's purchase of Spain's EHN, one of world's top five owners of wind plant (page 12). Acciona is a major Spanish company focussed on construction and logistics. Its interest in wind power may be driven more by the need to spend cash to avoid capital gains tax this year after selling its stake in Vodafone than a desire to diversify into green energy. But the deal is indicative of a trend. Wind is consolidating. It is big financial business. For better or worse, the sector is less dependent on tenacious new-energy visionaries and increasingly at the mercy of corporate mergers and acquisitions. Vestas may be next.

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