Vestas Wind Systems
Headquarters: Aarhus, Denmark
Founded: 1945
Vestas, now Vestas Wind Systems, was founded as the Second World War was ending and started out as a general manufacturer of steel goods, from household appliances to cranes and hydraulic equipment. After a quarter of a century, during the energy crises of the 1970s, the company produced its first wind turbine. The company decided to exclusively manufacture wind turbines from the 1980s and today stands as the largest western producer of wind turbines, with a cumulative 177 GW of wind power installed across the world. This is ahead of GE (120 GW), Siemens Gamesa (114 GW), and China’s Goldwind (~113 GW).
“The company decided to exclusively manufacture wind turbines from the 1980s and today stands as the largest western producer of wind turbines.”
Today, wind makes up just 10% of our global electricity mix and just 1.5% of the global energy mix, with almost 1,050 GW of worldwide installed capacity. However, this is growing quickly as we try to decarbonise our energy system. Based on announced pledges by governments, wind capacity will need to grow by 6.8% a year to almost 6,000 GW by 2050, equivalent to adding 187 GW per year over the next 26 years. To get to Net Zero, Vestas estimates that wind capacity will need to grow to 7-8,000 GW by 2050.
One important feature of the wind market is the extent of Chinese isolation thus far. China is building a considerable amount of wind capacity – with two thirds of global new capacity being built in the country – and yet is being built almost exclusively by Chinese companies like Goldwind, Envision and Windey. For context, less than 5% of Vestas’ global installed capacity is built in China.
Vestas is a classic industrial in that it comprises two distinct but related businesses. Firstly, the ‘original equipment’ business, in which Vestas builds, delivers and installs wind turbines for clients around the world. Today, this business makes up the greater part of Vestas’ revenues and accounted for over three quarters of revenues in 2023. The remainder of Vestas’ business is in servicing these wind turbines to ensure they remain in good condition.
However, the ‘original equipment’ business is a difficult one. The production and installation of massive equipment in remote locations across the world can be challenging, and Vestas – like other wind turbine producers – has faced a number of challenges over the last few years. These include exploding costs of steel, logistics services and energy, which the company struggled to immediately pass onto customers. Vestas saw the cost associated with each delivered MW of wind turbine power increase by 35% from the summer of 2021 to the end of 2023, while the average revenue per MW delivered didn’t increase meaningfully until the second half of 2023, when, after almost two years of losing money, the original equipment business became profitable again. If this all sounds like more trouble than it’s worth, it’s important to realise that the real prize for Vestas lies within the long-term contracts it signs to maintain and service those turbines it has installed.
“the real prize for Vestas lies within the long-term contracts it signs to maintain and service those turbines it has installed.”
At present, the servicing business accounts for a minority share of revenues as Vestas focuses on the vast market opportunity in the installations market. However, we expect the payoff in the future to be high, as this business is more profitable, less resource-intensive, and much more stable. If Vestas were to stop growing today – that is, stop installing new equipment – the business would look more like an annuity-like set of recurring revenues with stable and high margins. In our view, this business has great competitive advantages and is where a significant portion of Vestas’ value lies. Vestas has a number of components to its economic moat which has allowed it to generate pre-tax returns on capital of 23% over the last two decades. This includes scale (as the largest non-Chinese developer of turbines) and know-how as a producer with a long history in the business which has invested almost EUR 2 billion in R&D in the last five years alone. As with all heavy industry, there are cyclical factors and other structural worries that long-term owners will have to endure. We will always need to be wary of Chinese competition, but so far western governments have been keen to stop the Chinese entering the market. If Vestas can continue to invest in its products, manage the intricacies of the installation business, and execute on its servicing business, the company should continue to produce attractive economic returns well into the future.
