Vestas: victim of its own propaganda

“… Vestas should have seen which way the wind was blowing after 2008. With world demand for new turbines set to weaken after 2008, it made little sense for Vestas to persist with heavy investments in manufacturing capacity and R&D personnel. Yet this is exactly what Vestas did. Why?

To my mind, the answer lies mostly in the eternal human weaknesses of self-delusion and surrender to temptation.”

Vestas a victim of its own propaganda

By Tony Barber, Financial Times

For a world-beating renewable energy company to lose its chief financial officer may be regarded as a misfortune. For the company also to lose its chairman and two other board members, not to mention the heads of its divisions for research and development, offshore operations, control systems and investor relations, looks like carelessness.
If Oscar Wilde were alive today writing boardroom rather than drawing room comedies, he would find rich material in the comings and goings at Vestas, the Danish company that is the world’s leading supplier of wind turbines. Understandably, investors nursing a 90 per cent nosedive in the company’s share price since its August 2008 peak are less amused.
Vestas stated in January that deteriorating market conditions would force it to shed more than 2,300 jobs, or 10 per cent of its global workforce. This was the third round of job cuts in three years. Then in early February Vestasdisclosed a €60m operating loss for 2011, an outcome markedly worse than its guidance just a month earlier. It was during all this turbulence that one Vestas executive after another parachuted out.
Surveying his fast emptying boardroom, Ditlev Engel, an embattled chief executive if ever there was one, chose to put on two additional hats as CFO and chief operating officer. Like a naked man in a blizzard, Mr Engel is sure to want this to be a temporary arrangement.
Events at Vestas pose the familiar questions about any company that runs into trouble as it expands beyond its homeland and seeks to conquer world markets. To what extent are its difficulties self-inflicted? And to what extent do they reflect unstoppable structural changes in its sector?
Since the onset in 2008 of the financial crisis, the international environment for turbine makers has come to resemble a Darwinian struggle for existence. Only those in complete self-denial would dispute that the wind power industry suffers from overcapacity, a legacy of the pre-crisis turbine construction boom when oil and gas prices were at near-record levels and few had yet appreciated the competitive challenge of shale gas.
In the fat years, wind and solar power companies were tempted into extravagant investments that exploited their soaring equity prices. Buoyant turbine demand from wind farm developers complemented a then fashionable view of renewable sources as mankind’s entry ticket to a carbon-free paradise.
All this skipped over the obvious point that wind power is no less subject to market forces than other industries. In today’s lean years, turbine manufacturers are no longer able to charge premium prices for their products. Some are certain to fade from the scene.
True, margins remain – for the moment – relatively high in offshore wind power. But this is small comfort for Vestas: offshore wind is not one of its strong points. Even if it were, Vestas will never be as diversified as General Electric and Siemens, its far larger rivals. Unlike these worldly-wise conglomerates, Vestas lacks a range of alternative product lines that might help it sustain cash flow when the going gets rough.
All the same, Vestas should have seen which way the wind was blowing after 2008. With world demand for new turbines set to weaken after 2008, it made little sense for Vestas to persist with heavy investments in manufacturing capacity and R&D personnel. Yet this is exactly what Vestas did. Why?
To my mind, the answer lies mostly in the eternal human weaknesses of self-delusion and surrender to temptation. Vestas swallowed its own propaganda to the effect that someone, somewhere in the world, would always pay top dollar, or close enough to it, for a wind turbine.
Vestas also could not resist taking advantage of its temporarily stratospheric share price. In April 2009 Vestas raised €792m in a 10 per cent capital increase. The funds went into building more capacity. For Vestas, as for Chuck Prince of Citigroup, the music was still playing – so what else was there to do but dance?
Now the skies over Vestas are darkening with the sight of chickens coming home to roost. Its European markets are unsettled. Its US business is hostage to debilitating uncertainty about whether Congress will extend a production tax credit for renewable energy, which is due to expire in December.
To his credit, Mr Engel is not afraid to acknowledge that he has made mistakes. But the global wind power industry looks ripe for consolidation. As a plucky independent that has fallen on hard times, Vestas may one day pay a high price for his errors.
Tony Barber is the FT’s Europe Editor
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