Wind Giant Vestas Cuts Back

Source: FLEMMING EMIL HANSEN And JAMES HERRON • Wall Street Journal • Posted: Friday, January 13, 2012


Associated PressWind-turbine maker Vestas is laying off more than 2,300 workers,. Above, a wind farm off Denmark’s coast.

COPENHAGEN—Vestas Wind Systems A/S said Thursday it will shed more than 2,300 jobs, or 10% of its work force, close one of its 26 factories and reshuffle management in a cost-cutting plan as it grapples with industry overcapacity.

The world’s largest wind-turbine manufacturer also warned that if U.S. lawmakers fail to extend a renewable-energy subsidy, known as the production tax credit, which expires by the end of 2012, it could lead to the layoff of an additional 1,600 workers in the U.S. Vestas will start preparing for a possible scale-down of U.S. operations later this year, it said.

Vestas is grappling with a deteriorating market for wind turbines as extra supply and looming competition from Chinese makers have put downward pressure on prices, while pressure on government finances has put wind-energy subsidies at risk in Europe and the U.S.

“The whole [renewable energy] industry is going to struggle for a few years because of overcapacity,” said Tom Murley, head of the renewable energy team at HG Capital, which manages €845 million ($1.07 billion) in renewable energy equity. “There will be more supply than demand probably for another five years in the wind sector.”

During the first half of the last decade, Germany, Spain and the U.S. were responsible for the majority of the increase in wind power capacity, according to the International Energy Agency. Now, “the center of gravity for wind energy markets has begun to shift to Asia, namely to China,” the IEA said in a November report. In 2010, half of all new wind-power capacity was installed in China, it said.

The rise of China has also meant the rise of Chinese renewable companies—both wind and solar-power firms—and more potential competitors for incumbents. A recent report by Bernstein Research cited recent contract wins by Chinese wind-turbine makers in Ireland, Greece and the U.S. The tough environment “will continue to depress mature market turbine pricing,” Bernstein said.

Vestas Chief Executive Ditlev Engel said Chinese wind suppliers weren’t yet a major factor in Europe. “Until now we haven’t seen the Chinese producers yet, but that can change in coming years,” he said.

To be sure, renewable energy remains a strong political priority throughout Europe. France, Germany and the U.K., among others, have unveiled significant targets to boost renewable energy, especially in the offshore wind sector. Also, turbine makers are seen as more insulated than solar-panel makers from new competition due to the logistical and regulatory complexities involved in installing the massive windmills.

Altogether, the IEA forecasts the amount of electricity generated from wind will grow more than fourfold between 2009 and 2020 to 1,282 terawatt hours. Energy produced from solar photovoltaic panels is forecast to grow more than tenfold to 230 terawatt hours.

In its update Thursday, Vestas reiterated a target of €150 million in cost savings by the end of 2012 and said it has started to lay off an expected 2,335 employees, mainly administrative staff, from its global work force of 22,362. The job cuts include some 1,300 redundancies in home-market Denmark, Vestas said.

“Green investments will generate new growth and jobs for Europe in coming years,” Danish Prime Minister Helle Thorning-Schmidt said Thursday after the Vestas announcement. “It made me very sad to hear about Vestas’s change of strategy and job cuts. But it does not change my view that our approach to green energy is correct.”

Denmark assumed the rotating European Union presidency on Jan. 1 and has placed green investments and energy at the top of its agenda for the six-month term.

The company’s management shake-up includes the departure of its head of research and development and the reassignment of its chief financial officer after cost overruns in the fourth quarter contributed to two profit warnings in less than three months.

“The challenges we have faced in the fourth quarter of 2011 have given us a credibility problem,” Vestas’s Mr. Engel said. “It is not undeserved. We have to work our way out of this situation and the only way we can do that is by proving that we will come out stronger after the elimination race which is currently taking place within the renewable energy sector.”

Since late October, Vestas has lowered its 2011 sales guidance to €6 billion from €7 billion, and its margin target on earnings before interest and tax to zero from 7%. It also scrapped its medium-term target for sales to reach €15 billion by 2015.

Market reaction to Vestas’s revamp plans was harsh. Vestas shares fell 7.1% to 58.5 Danish kroner in trading Thursday. Some analysts expressed disappointment that more steps weren’t announced.

“We believe the quantification of potential U.S. savings [1,600 employees] is positive, but did not include timing,” said Martin Prozesky, an analyst at Sanford C. Bernstein. “This lack of a U.S. action is disappointing. The company needs to restructure there, irrespective of the [production tax] outcome, and has missed an important chance to do so,” Mr. Prozesky said in a research note.

In the changes at its head office, Vestas said it is expanding its executive board to six members from two, with managers responsible for manufacturing, sales, turbines and services reporting directly to the CEO. Deputy CEO Henrik Noerremark will be responsible for manufacturing, while the company will start looking for his replacement externally in his other role as finance chief.

Four senior managers have lost their jobs in the reshuffle, including technology chief Finn Stroem Madsen.


The Jan. 3 profit warning stemmed in part from €100 million in extra costs, of which €70 million related to budget overruns in the development of Vestas’s new V112-3MW turbine. Vestas Chairman Bent Carlsen said last week the board was disappointed that Vestas’s accounting department had taken so long to recognize the budget overruns and inform top management.