Vestas bets on geared turbines to propel it to margin goal

FRANKFURT: Vestas is betting on geared wind turbine technology to meet the ambitious profit-margin target it promised when it reported quarterly results.

The world’s biggest turbine maker said it targeted a operating profit margin of 9-11 per cent in 2018.

While this represented a modest decline it was far higher than expected by analysts who forecast about 7-8 per cent due to cost pressures in a wind power sector facing a drop in the government subsidies that have cradled it since the early 1990s.

One of the main reasons Vestas expects to hit that goal, two sources close to the Danish company told Reuters, is its exclusive focus on manufacturing turbines that use a gearbox to amplify the energy transmitted from the rotor to the generator, and its rejection of rival direct-drive technology.

This strategy diverges from its major competitors who either manufacture both or focus solely on direct-drive turbines, where the rotor directly drives the generator.

They include Siemens Gamesa, General Electric, Xinjiang Goldwind Science and Technology and Enercon.

Each technology has its advantages; direct-drive turbines are more expensive to produce as they require large amounts of raw materials, including copper, steel, and rare earths, but have lower maintenance costs over their lifetimes.

No turbine maker publicly discloses its prices, but three sources at top industry players told Reuters that selling prices of direct-drive turbines are, in some instances, more than 10 per cent higher than those of geared turbines.

Two of the sources said that Vestas’ business model was more resilient in the face of the cost pressures squeezing wind farm developers and their turbine suppliers.

Last year, auction systems to award farm contracts were introduced which involved lower government handouts and favoured the lowest bidders.

Asked about Vestas’s focus on geared turbines, CEO Anders Runevad told Reuters: “I wouldn’t say it’s religion, but we have no reason to change the strategic way that we have taken, which is about gearboxes.” He did not elaborate further. However there are also clear risks in Vestas’s strategy of shunning a direct-drive technology that has been steadily growing in popularity.

Direct-drive turbines raised their share in the global market to 27 per cent in 2017, up from just a fifth in 2010, according to consultancy MAKE.

This is expected to rise to about a third in 2021, according to research firm GlobalData.

The weakness of geared turbines, according to Navigant Research, is that their gearboxes need to be replaced every 7-10 years, incurring costs of US$300,000-400,000 each time – around a tenth of the costs of the turbine itself. The lifespan of a wind farm is at least 20 years.

A spokeswoman for Xinjiang Goldwind, which exclusively makes direct-drive turbines, said the technology had a competitive advantage over geared rivals because of factors including reliability and the elimination of over 1,000 components in the transmission systems needed by gearbox turbines.