Low Tech Wind

Being the biggest isn’t of much economic value if others can do what you do just as well.


Vestas, the Danish company that can proudly claim to be the world’s largest wind turbine manufacturer, is struggling. It announced 2335 job cuts earlier in the year and it has just announced another 1400, from its 20,000 plus global workforce. It also had two profit warnings, in November and January, and lost a few sacrificial management heads along the way. Its share price has fallen by three-quarters in the past twelve months too.

It seems that governments are no longer quite as keen to provide subsidies for his sort of thing and the competition is pretty hot. With deliveries down it seems to have breached its debt covenants, although won’t admit it. Hardly surprising, with a €338M negative cash burn in the last quarter, so no wonder then that it is doing all it can to get cash flowing in the other direction.

So, how can the leader in this fledgling green industry be in a position that a debt restructuring, or even a takeover, is a possibility? Well, there has been talk of late deliveries and cost overruns but, to my mind, it is trying to pull off far too difficult a conjuring trick here. Running, let alone growing, a global business is hard enough, particularly during an economic downturn; to do it in a highly politicised industry, with immature demand, and it is even harder. But, the main problem is that, in spite of how clever they look, this is not high technology and as Siemens in Europe, GE in the United States, and Goldwin and Sinovel in China, have all shown, it is pretty easy to copy, so where then is the competitive advantage? Surely, it can’t be scale, as the minimum efficient scale size is probably quite small for this business.

Simply put, whilst Nokia may have been able to dominate the globe from its Scandinavian base for a while, with its consumer products, you can’t do the same with capital projects. Government funding is always more likely these days to favour home grown suppliers, not foreigners. Any work Vestas win will have to be at least shared with the locals. On top of that, if provenance is the only difference between the suppliers, how is Vestas going to charge a premium for its products and so ensure it achieves a superior return on capital? With stonking great revenues and almost no profit, it proves my point: it won’t.

Wind turbines are and will probably continue to be big business, but too big and too low tech for it to be other than a pretty boring one, and one that will need to be managed very tightly if we aren’t going to see Vestas in this sort of mess again. There just isn’t the margin in all this to take any risk at all. Also, as a pure-play wind turbine business, it is in competition with portfolio players like Siemens and GE, who have much more diversified balance sheets.  I’m inclined to think that Vestas is unlikely to survive on its own and a smaller much more tightly managed business, on a scale with predictable core demand, and part of a more diversified concern, would make a lot more sense.

Anyway, let’s see which way the wind blows!


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