Tailwinds and Turbulence: The Rise of Vestas
In current times of upheaval and uncertainty, there’s one thing on which we can be certain: the world must carry on with the transition towards renewable energy sources. It looked like low oil prices resulting from the coronavirus might hamper the surge of renewable energy; however, with prices edging back up, this seems unlikely. The renewable sector is seeking to make a case to the world on why we can rebuild better. Wind is one of the biggest current sources of renewable energy and also has one of the highest rates of potential growth, far outperforming hydropower in the latter.
An illustrative microcosm of this sector is a small company from Denmark, Vestas Wind Systems A/S, that quickly grew to become the largest supplier of wind turbines in the world. In the 1970s, it seemed to be too far ahead for its time, already exploring the possibility of wind energy. Despite almost completely going bust in the 1980s, it persevered. Right now it seems to be doing everything right, enjoying a strong stock price and excellent ESG ratings, leading the pack in terms of wind power companies.
Humble beginnings to a global corporation
Vestas currently sits atop the wind energy market and is eyeing the global market for major expansion efforts in countries such as China and the US. (Source: Vestas)
Vestas was started in 1898 by the Hansens, a family of blacksmiths in Denmark. The company made progress quickly, and three decades later, business was booming, and they moved onto making steel window frames for industrial buildings until the outbreak of World War II.
In its form, the company was born in 1945, making household appliances like mixers and kitchen scales. By 1968, the company was exporting hydraulic cranes to 65 countries. The oil crises of the 1970s spurred them into starting to experiment with alternative energy sources, and in 1978, they started to carry out wind turbine experiments in secret to avoid ridicule from customers. In the 1970s, the idea of using wind to generate substantial amounts of energy was practically unheard of, and it’s understandable that the company did not want to be seen as being in an impossible pursuit.
Fast forward to the 21st Century and they’ve managed to yank themselves right to the very top, being the world leader in supplying wind turbines with a market cap of US$16.8 billion. In 2003, Vestas merged with NEG Micron, another Danish wind turbine manufacturer, to create the largest wind turbine manufacturer in the world. As of 2019, the company continues to rank number one, but challengers are closing in, with second-place Siemens Gamesa producing 8.79GW of wind capacity compared to Vestas’ 9.60GW.
Was it too far ahead of its time?
While one might think that its tumultuous early years with wind turbine technology was down to the fact that there was no market demand, the facts beg to differ. The second oil crisis from 1978 to 1979 gave full show to the fragility of oil supply systems globally and inspired the company to look beyond fossil fuels. After 18 months of experiments, the first wind turbines were delivered to Danish customers in 1979. Even though it was an industrial product, they were delivered in a business-to-consumer market, usually with wealthy individuals enthusiastic to invest in an environmentally benign form of power production.
Earlier models of turbines in the 1970s (Source: LM Wind Power)
This was when the industry’s first boom occurred. Government incentives in Denmark and the United States drove this and created a business-to-government market for Vestas. By the end of 1985, the company had sold 2,500 wind turbines to the US and the number of employees rose to over 800.
The company’s dependency on its exposure in the US was brutally exposed in 1986 when the California tax credit legislation expired and wind turbines suddenly became less attractive to companies and consumers there. This lesson on over-dependence in a single market was very harsh; large parts of the company had to be sold off in order for it to stay afloat, leaving behind only a team of 60 employees and a skeleton operation, turning it into a pure wind energy player.
The company was forced to learn from this and start diversifying. For the next ten years the technology matured, and it stepped up international expansion and technological innovation. The company set itself a goal under then-CEO Johannes Poulsen to be the largest modern energy company in the world, and this ambition showed. Subsidiaries were set up in India, Germany, Sweden, and the US. Its customer group has also diversified. Whereas they mostly relied on wealthy individuals earlier on, today they mainly supply to major utility companies, power plant/energy developers, and independent power providers for community, national, and on-grid solutions.
With its ability to innovate and keep itself ahead of the curve, the company was able to set itself apart from the competition. Technologies like OptiSlip® enabled the turbines to supply the grid with an even electrical output, the first time wind power was able to achieve this. All their efforts on this front, coupled with factors such as Denmark providing overseas aid for building renewable energy infrastructure in developing nations, helped orders and sales to flow towards Vestas.
Seeing how the idea of wind energy was inspired through the very real need for alternative energy sources, made evident through the oil crisis, it’s difficult to fault Vestas as being too far ahead of its time.
Why everything seems to be going right now and for the future
The coronavirus has coincided with a meteoric rise in calls from citizens and their governments to transition towards renewable energy and more sustainable practices, with the EU seeming to be spearheading this movement. The International Monetary Fund recommended that the European Central Bank should phase out fossil fuel investments and opt for green bonds, and the World Bank also issued a statement on why green energy opportunities should be seized to contribute to post COVID-19 recovery. The company issued a confident statement saying how it presents them with a great opportunity to do just that. While it posted a 1st Quarter loss of $87 million and had to cut 400 jobs as an immediate response to cut cost, other metrics remain rosy. Orders continued to pour in, more than 3.3GW worth, and quarterly revenue rose 29% to about $2.4 billion. The quarterly loss was largely attributable to the indirect impact of the pandemic, and for now the company has no real need to change its marketing strategy. Preparing for a pivot to renewables and the idea of a green recovery, current CEO Henrik Andersen said, “We have not met a country where it's not on the agenda,”
The stock price reflects this optimism, sitting at an all-time high. It also has an excellent ESG rating, ranking in the top 5th percentile of companies. This begs the question, does being a renewable energy company automatically mean it scores high on ESG?
Today’s wind farms have turbines with up to 8000 components each (Source: Jardine Lloyd Thompson)
It is unsurprising that it scores highly on the environmental aspect, but the fact that the company is headquartered in Denmark contributes to the social aspect as well, staying true to Scandinavian values of workplace diversity and placing emphasis on human rights and corporate social responsibility. It prides itself on being a structurally lean organization with offices in 24 countries and their values of accountability, collaboration, simplicity, and passion guides the company in being transparent and well-governed. Just because Vestas’ products are inherently environmentally friendly, it does not automatically mean it scores high on ESG; the company also put in great effort on the social and governance aspects to achieve this.
The future looks very promising for Vestas and the renewable industry in general. While projections from the International Energy Agency maintain that the capacity for growth between 2019 and 2024 is still the highest for solar, onshore wind (which is Vestas’ forte) comes second. The regions with the most capacity for increase are China, the US, the EU, and India. Onshore wind itself is projected to increase by over 300GW. and in the accelerated case up to almost 400GW, leaving the company is a great position to capitalize on this. It seems like Vestas can do no wrong, and after nearly 50 years, it looks as if the world is finally catching up.
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