Global Economics

Breeze Falters for Wind Turbine Maker


When increased competition depressed Vestas Wind Systems' market share, investors balked. Still, the forecast looks fair for the Danish company

Chalk one up to the rising power of renewable energy. On Feb. 27, Denmark's Vestas Wind Systems (VWS.CO)—the world's largest wind turbine manufacturer—posted a 120% rise in its annual operating profit, to $664 million, on the back of strong demand from Europe, the U.S., and China.

The 2007 results slightly beat market expectations, but shares in the Copenhagen-based company plummeted 8.6% as a five percentage point drop in the firm's global market share, to 23%, took many analysts by surprise. (Shares ended the day down 5%.) Despite the Feb. 27 slump, Vestas shares are up 90% over the past 12 months due to growing demand for wind energy (BusinessWeek.com, 9/21/07) that could drive 20% annual growth for the industry from now until 2020.

Fending Off New Players

In an interview with BusinessWeek, Vestas Chief Executive Officer Ditlev Engel played down the market share drop, saying an additional $750 million of projects expected to come online in the first half of 2008 would help to counteract the slip. "We've been surprised by how fast new entrants have entered the market. Yet since 2006, we have invested more than €1 billion ($1.5 billion) in organic growth," he says.

The main challenge has come in China where local firms, such as Sinovel and Goldwind, have taken advantage of a Chinese government push to increase renewable generation from 7% of total energy production to 15% by 2020. That has led to an explosion of activity from both local and international players, such as General Electric (GE) and Siemens (SI). Vestas, for example, increased the number of wind farms delivered to Chinese clients by 20% last year, compared to 2006. But Chinese firms have increased their local orders, taking a bite out of Vestas' share of the market.

Despite the slip, analysts reacted favorably to the Danish company's results, which included a 26% increase in annual revenues, to $7.3 billion, and operating margins that grew almost four percentage points year-over-year, to 9.1% in 2007. According to forecasts from Vestas, revenue should hit $8.5 billion in 2008, while operating profit is expected to increase 10% to 12% by yearend.

Cashing in on Industry Growth

Such bullishness is mirrored by market watchers, who say double-digit growth predicted for the entire industry should help the Danish firm meet its upcoming financial targets. Alastair Bishop, an analyst at Dresdner Kleinwort (AZ) in London who holds a buy rating on the stock, reckons the company's strong balance sheet and 20% increase in order backlog, to $7.2 billion by the end of 2007, has left it in a strong position.

Indeed, a push toward renewable energy by governments across Europe, Asia, and North America means companies like Vestas are cashing in on the growing concern over reducing carbon dioxide emissions. The European Union last month announced plans to produce a fifth of its energy (BusinessWeek.com, 1/23/08) from renewable sources by 2020, while over half of U.S. states have enacted legislation to promote green technology.

According to Vestas' Engel, this government backing is central to maintaining wind power's move into the mainstream. "A long-term, detailed plan is necessary so investments in the [electricity] grid system and other important infrastructure can take place," he says.

Potential Risks

To be sure, there are still many obstacles that could trip up high-flying Vestas. Regulatory uncertainty, particularly in the U.S., has created a boom-and-bust cycle that makes it hard for companies to lay out long-term plans. Similarly, rising component prices—due to insatiable global demand for wind turbines—could leave the firm open to spiraling prices from suppliers.

Such problems remain underlying worries for the entire wind power industry. Yet as more people embrace the need for renewable energy, the future for Vestas looks increasingly breezy.

Scott is a reporter in BusinessWeek's London bureau .

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