Vestas CEO dumped but legacy to stay

Vestas has dumped its long-serving chief executive Ditlev Engel. Anti-wind groups may think this a cause for celebration, but his dedication to growing wind power will live on.

Ditlev Engel, chief executive since 2005 of leading wind turbine manufacturer Vestas, has been dumped. He has been replaced by Anders Runevad, a regional boss for Swedish telecoms equipment maker Ericsson.

No doubt the anti-wind movement will try to construe this as a sign of the inevitable death of wind power and Vestas. But our charts of the week, from Swedish Merchant Bank SEB, illustrate that any decline is more the result of a switch in the wind power market from dramatic growth to maturity, a lifecycle common to many products.

Firstly, the reality was that Vestas was caught unprepared and exposed when the Global Financial Crisis hit. Its shares plummeted 96 per cent from 2008-2012 as it struggled to switch from a company accustomed to double digit annual market growth, to one where sales more closely tracked the overall economy.  

Yet in the past 12 months Vestas shares have staged a significant rally, as illustrated below. In addition Vestas has not been the only wind turbine manufacturer whose share price has risen. In combination with Vestas the share prices of specialist wind turbine producers Nordex and Gamesa have risen an average of 220 per cent in 2013. So the market appears to have some faith in wind power’s prospects.

Share price performance of Vestas over 12 months to July 2013.

Graph for Vestas CEO dumped but legacy to stay

Source: Daniel Patterson (2013) Vestas – Turnaround Underway, demand up next, SEB Equity Research

A large part of this rally in share prices comes down to wind turbine manufacturers undertaking some painful restructuring as part of a shift in focus to profit margin rather than sales and revenue growth. In the years prior to the Global Financial Crisis wind turbines producers were all about growth and market share. With annual growth in turbine installations of around 20 per cent, it was all about keeping up with demand rather than keeping costs down. But as illustrated in the chart below this rapid growth came to an abrupt end in 2010 as the GFC bit on turbine orders.

Graph for Vestas CEO dumped but legacy to stay

Source: Daniel Patterson (2013) Vestas – Turnaround Underway, demand up next, SEB Equity Research

This was even worse for Western turbine producers such as Vestas, who had few sales into an increasingly important Chinese market (the light blue segment in the chart), which has been dominated by domestic producers. There was some relief in 2012 with a surge in installations in the US before the expiry of the wind tax credit. But the US market subsequently dropped off a cliff in 2013, taking the global market with it.

Vestas wasn’t prepared for the slowdown. Heading into 2008, Vestas had 15,305 workers. But by 2010, in spite of the market contraction, it had lifted to 23,252. What’s more it pushed ahead with production expansions, opening its first US factory in 2008 and in 2009 announcing plans to hire 5000 new workers in the US and China.

The company consequently hit serious financial difficulties in spite of maintaining a dominant position in the market. Progressively, those overseeing the company were pushed out, including the chairman and deputy chairman as well as two financial officers. And now is the turn of the long-serving chief executive.  

According to the current Vestas’ chairman, Bert Nordberg: “We feel that after 8½ years [with Engel] we are looking for a tweak of the culture and more focus on profitability, and a future without surprises.”

In the end Ditlev Engel and his company, Vestas, have transformed wind power from something mocked as a token green gesture into a serious player in the power generation sector. Last year wind power was the No.1 source of new power generation capacity installed in the US; greater than gas, despite the excitement surrounding the shale gas boom.  

Wind has achieved similar levels of dominance in Europe. Provided the Australian Renewable Energy Target isn’t neutered it will also dominate new power generation in Australia, too.

While Ditlev Engel may be gone from Vestas, the legacy of his company is here to stay.

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