Clearing up from the merger last year with NEG Micon also continues. About 625 out of 10,500 employees will lose their jobs, 245 of these in "duplicated administrative functions." Most of the remaining jobs will be shorn from nacelle production at the company's Danish headquarters and from tower assembly at four facilities in Denmark, to be reduced to three. At the same time, 100 vacant positions will not be filled. Redundancies were higher than expected and received a deal of media attention in Denmark.
The world's largest turbine manufacturer has paid a high price for faults and delays in delivered turbines. Of the EUR 70 million deficit, EUR 31 million is set aside for use "in connection with ongoing projects in the USA" and EUR 11 million "in connection with delay of components from sub suppliers." Reducing the cost of warranty obligations is described as "essential" if Vestas is to achieve its budgeted profit.
In its half year report, the company issues a thinly veiled warning to its suppliers of gear boxes, bearings and generators. "So far, Vestas has to a too high degree paid the costs in connection with quality problems with sourced materials and components," it states. Quality improvements to existing products will bring down warranty costs and improve the competitive standing of Vestas wind turbines, states the company.
Earnings on several projects have been too low, among those were orders inherited from NEG Micon. A new "contract review board" will in future "evaluate and approve terms and supply conditions in all large wind power projects before the group enters into a final delivery agreement." Orders are already being rejected because they contain "unacceptable business risk, burdensome sub-supplier conditions and/or inadequate profitability."
Last but not least, Vestas will set up manufacturing facilities in countries where it can be sure of a market and where local production is often a condition of a sale, but also where employment costs are relatively low. Plans for a factory in the US are shelved following the refusal of the administration to introduce mandatory targets for electricity from renewable sources of energy.
"To eliminate currency exposure in connection with sales in US dollars, Vestas will instead establish production facilities in Asia as the basic costs in Asia are considerably lower than in the USA," says Vestas. The company is building a blade factory in China and has opened a sourcing office in Shanghai, which will work closely with a research and development centre based in Asia. A similar R&D centre is being built in Denmark (Windpower Monthly, June 2005).
Vestas reports turnover in the first half of 2005 at EUR 1387 million, compared with EUR 946 million for the merged company in the same period in 2004. Vestas' share price has risen nearly 60% since Ditlev Engel took over the helm from Svend Sigaard on May 1 this year. It dropped slightly on news of a deficit for the first half of 2005.
Despite significant redundancies, by the end of September Vestas' states it will have 375 more staff than the 9594 it employed at the end of 2004. About half of the around 1000 new staff taken on this year are employed overseas, says human resources manager Roald Jakobsen.
The company has raised it sales forecast for the year by 14% to EUR 3.2-EUR 3.4 billion and maintains its expectations for a profit margin of around 4%, but warns that "defects and/or delays of important component deliveries and project execution may have a significantly negative influence on the group's turnover and result for 2005." Order books are virtually full for the next six months.
In the eyes of at least one equity analyst, Axel Funhoff of Bear Stearns, "Vestas remains a very high-risk investment in the short to medium term." The long term is dependent on management's ability to turn a profit, he adds. "Given the associated execution risks, we would invest elsewhere in the sector," says Funhoff.