Once in a while risk becomes real

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The world leader in wind is feeling the pressure. Vestas' projections for its US sales were off, its new turbine is troubled, its competitors are getting more aggressive and many customers are getting frustrated by its culture of secrecy. Yet boss Svend Sigaard still has a vision of the future with Vestas as market leader, though in a radically changed industry

For the first time in ten years, the wind power industry's leading company, Vestas Wind Systems A/S, has downsized its Danish workforce, firing 533 workers last month, or nearly 10% of its 5,800 employees. Previously when order rates slowed, Vestas has used job-sharing and training programs to retain staff in the expectation that business would pick up again. This time job-saving is not an option. "I don't think we can hold on to all of them," says managing director Svend Sigaard. The downsizing came just days after Vestas reduced its revenue and profit expectations for the second time in less than four months, causing the stock market to wipe a third off the company's share value; recovery since has been weak.

Sigaard puts the blame for Vestas' troubles -- forecast turnover is down from EUR 1.4-1.5 billion to EUR 1.3 billion for the 2002-2003 fiscal year and profit from 9% to 5-6% -- squarely on the shoulders of American politicians. Their failure to pass a national energy bill means that wind's all important production tax credit (PTC) has not been secured beyond 2003. As a result, says Sigaard, American customers for Vestas turbines are not placing orders.

He strongly denies, however, that Vestas is adjusting to a lower level of activity. "It's obvious that the American market has not developed in the way we hoped it would. That gives a lower level in 2002 and 2003. But in the longer term I remain convinced that a support mechanism will be introduced." Sigaard is echoing his words from August when Vestas last reduced its expectations (Windpower Monthly, September 2002).

What changed between August and November to require a second warning to the Copenhagen exchange? Other manufacturers, such as Vestas' former subsidiary and now arch rival, Gamesa of Spain, have after all intensified their focus on the US. "The first revision was about 2002, the second about 2002 and 2003. The first was based on the expectation that the American market would get going in 2003, but the uncertainty and delays have made us react and forecast a lower growth than earlier." Sigaard brushes off suggestions that investors have lost confidence in the leadership, pointing out that energy markets are politically unstable. "Once in a while the risk becomes real and it's then we have to downgrade forecasts."

Sigaard agrees that unlike previous times of PTC uncertainty, it is not so much a matter of "if" but "when" the tax credit is extended. But the endless energy bill debate in Congress means that customers have adopted wait-and-see tactics. This is not because the market is necessarily dead without the PTC, but because customers are unwilling to waste time and money on project development when new conditions could suddenly require a whole new approach.

Market share

Despite the dashing of Vestas' expectations for the US, the American market has a record amount of wind development lined up for this year -- 2000-2600 MW compared with 1700 MW installed in the previous US boom year of 2001. Then some 650 MW of Vestas turbines went up, nearly 40% of the annual total, suggesting the company should secure at least the same 650 MW in 2003 -- and as much as 1000 MW if it retains its market share. Sigaard declines to comment on the numbers, other than to state that Vestas' global goal is for 25-30% of the world market. "For us it's incoming orders and what we can manage to deliver that counts," he says of the US. "This is very project oriented and some projects could perhaps come through before the end of 2003. Here we could have an advantage because we still have a small overcapacity in production. If more projects should turn up, I believe we're in a very good position."

A major US customer for Vestas turbines is FPL Energy, which has bought more than 1000 of the V47-660 kW workhorse. In June, however, FPL clinched a framework agreement with NEG Micon for 600 MW, picking that company's 1.5 MW turbine. Sigaard comments: "We first launched the 1.8 MW after the summer and it's been bid into several projects, but until now we've only sold a small number in the US and primarily in Canada." The V80-1.8 MW is a North American version of the Vestas 2 MW unit, hundreds of which have been sold in Europe, though not without problematic teething troubles adding to Vestas' woes (Windpower Monthly, December 2002).

Vestas finally broke into the US market with the V80 last month with what it describes as "the first major order" for the unit, again from FPL. The turbines will go directly to FPL's Highwinds Energy Center in California (Windpower Monthly, November 2002), though permitting approval is pending. The number of turbines Vestas will send is cloaked in secrecy. FPL, bound by an apparent secrecy clause in its contract with Vestas, declines to confirm the order is for about 80 machines.

Culture of secrecy

Accusations that Vestas is operating a "culture of secrecy" are being made by customers in Europe, particularly in Germany and Ireland where Vestas has been conducting retrofit work on the troubled 2 MW turbine. They complain their turbines are stopped without explanation and they are not told when they will be back online. "That doesn't sound good and it's definitely not Vestas' style," responds Sigaard, who stresses that Vestas strives hard to retain the openness of the past. Difficulty with identification of different problems with individual machines has made it hard to provide instant answers, he says.

He does not agree that competitive pressures forced Vestas to launch its 2 MW machine before it was ready. "That's not my opinion. We have launched it and sold it well on the German market, so a very large number of turbines have come out very early in the turbine's life. And when faults appear the problems are bigger because so many turbines have been sold at once." In the 660 kW, Vestas has had extremely competitive turbines, adds Sigaard. "We have not felt any pressure."

Retrofit of the 2 MW turbines will be completed by spring at a cost of EUR 16-17 million. Fines for late commissioning of the 80, 2 MW turbines in the Horns Rev offshore wind farm in Denmark, plus extra grid connection and monitoring work, is costing Vestas a further EUR 15-17 million. The wind farm came online in December, a month later than scheduled. The extra Horns Rev costs are included in Vestas' explanation for its dwindling expectations, along with a 10% decline in the dollar exchange rate and "more difficult financing opportunities" on the American energy market due to the series of financial scandals, says Sigaard.

Factories overseas

Vestas has definitively shelved any immediate plans for a factory in North America after announcing, with great fanfare last May, that it would build a facility in Portland, Oregon. It is continuing to build a manufacturing plant in Tasmania, however, even though the Australian market right now appears more insecure than the US market. "I don't think Australia is more uncertain; there is the start of stability. But the set-up we have in Australia is much smaller -- and there transport plays a big role. That's why we chose to focus on Australia."

Vestas has also had its eye on another commonwealth country for its North American factory -- Canada. Here Sigaard admits to having had more success with selling its newest technology than in the US. "Canada has been considered in connection with a factory in the US. But at the moment everything is on hold. We want to be certain of a stable market in the US before we start production." Canada, on the other hand, is introducing a series of regulations and policies for promotion of renewables, both at national and provincial level.

Looking forward

In last month's stock exchange announcement, Vestas reduced its growth forecast for this fiscal year from 50% to about 30%. In the US, Sigaard believes a growth of 20-30% is still realistic, though postponed. Overall, Sigaard expects Vestas to increase its market share until it reaches its 25-30% goal. "That means we are market leader. To defend a market share much higher than that puts our other goal at risk: to be economically sound. Our third goal is to be a trustworthy partner -- and that takes us back to communication, which is an integral part of our strategy." Sigaard firmly believes the goals are in reach, despite the flattening of Vestas' growth curve. "I don't actually believe you can call it a flattening. A growth of 30% is still high."

Sigaard stresses that Vestas' long term growth curve remains steep. "The big picture has not changed and the market is still there. I believe that later, perhaps already later this year, we will need some of our employees again."

Vestas can make ever cheaper turbines, he says. "Each turbine we develop and make must be able to produce a kilowatt hour cheaper than its predecessor. This places demands on our development and production and all the other factors, such as road infrastructure, transport and the electrical work that is part of a wind power project," he says. "We must be able to do it better each year."

Whether the stock market chooses to believe him remains an open question. For his part, Sigaard says he would be happy to buy back the company at today's share price of DKK 70. That price is a quarter of what it was when he took over the top job six months ago. "That's correct and it's definitely thought provoking."

Share prices

He points out, however, that Vestas' shares dropped from their high of just over 500 two years ago, to 160 last summer, without any negative announcements by Vestas -- it was a market reaction. "The drop from 160 to 120 came after our half-yearly report, which was negative. And the drop to 70 has happened after the latest reduction. And that's the company's responsibility and we take it very seriously, but you also have be aware of market reaction."

As the largest wind company, what Vestas does has spin-off effects throughout the industry. NEG Micon got caught in the flack last month and its share price dropped 12% on the Copenhagen bourse after Vestas' late November bombshell. "It's clear we have a big responsibility. But so have our colleagues. But I'm well aware of the focus on Vestas and that we take seriously," says Sigaard.

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