Vestas' Wind Outlook: Turbine Maker's Challenges Go Beyond the Credit Crunch

The wind industry -- long dominated by a handful of U.S. and European-based companies -- took a beating, along with the rest of the economy, when the financial crisis dried up credit, putting projects on hold and delaying orders for turbines. Even though the credit dam is starting to give way, the industry and specifically, Western companies, face several additional challenges, including a cut in renewable energy subsidies and increased competition from China that could dim their profit picture.

Take Vestas Wind Systems (VWS), for instance. The Danish company, the largest turbine maker in the world in terms of market share, blamed its larger-than-expected quarterly loss on a delay in orders caused by the credit crunch, but insists its sales future looks bright. Vestas' problems in 2010 stem from a 50 percent decrease in orders from 2008 to 2009 as the credit crunch impacted the ability of wind-farm developers to buy turbines. In short, the financial crisis had a delayed effect on the company. And the pain isn't over. Vestas cut is sales forecast this year, not due to the poor first half of 2010, CEO Ditlev Engel told investors this week, but because orders it expects to receive, predominantly from Spain, Germany and the U.S. are delayed and will not be recognized as income this year.

Engel insists the sales tide is turning back to its favor, noting Vestas secured as many orders in the second quarter as it did in the entire year of 2009. But there are several other factors working against Vestas and the wind industry in general.

• Chinese competition: It's not just mainstream rivals General Electric (GE) and Siemens (SI) that are taking more of the wind turbine market share. Chinese companies also are increasingly in the mix. Sinoval had the third-largest share of the wind turbine market behind Vestas and GE, according to BTM Consult data used in a Financial Times report. Xinjiang Goldwind and Dongfang, two other Chinese firms, are in top 10, in terms of market share. China, which recently bumped Japan to become the second-largest economy in the world, has allocated $218 billion to be spent on renewable energy projects in the next five years, including adding wind power capacity. While there is some opportunity for European and U.S.-based firms, much of that market share will be snagged by Chinese companies.
• Spain and cuts to renewable energy subsidies: Spain is one of Vestas bigger markets, but growth there will likely slow now that the government has cut subsidies to wind farms (as well as solar plants).
• Natural gas prices: Fossil fuel costs can either boost or bludgeon the wind industry. These days, pay attention to natural gas prices, and even coal because both directly compete with wind as a power source. With increased drilling in North America, there's a reasonable concern that natural gas prices will remain low. Natural gas prices are low -- around $4.25/mcf -- and yet drilling continues to expand. In fact, as Dan Pickering of Tudor Pickering noted today, exploration and production companies seem to be hell bent on maintaining their capital budgets on drilling. Sure, a decent chunk of these projects are aimed finding oil, but there are enough gas projects out there to keep prices low.
• Vestas' solution? To strengthen its presence in its two big markets: Europe and the U.S. and specifically, make in roads into EU countries that have little wind capacity, but lots of potential. As Engel noted during the earnings Webcast the expected growth in some European countries that already have substantial installed wind capacity, such as Denmark, is fairly low. And with Spain's recent subsidy cut, we can expect a slowdown in wind installations as well.

There's some promise in Asia as well despite the competition. Vestas expects 20 percent of its orders to come from the region. And while the competition is building, Vestas has managed in the past month to secure two turbine orders from China, and its largest ever in the U.S. and Australia.

Photo from Stephen Uhlmann, CC