Vestas-Mitsubishi in pole position

The usual cultural awkwardness was on show at joint press conferences in Copenhagen and Tokyo, but the sense of excitement was apparent on the executives’ faces.

After more than a year of negotiations and constant speculation, Vestas and Mitsubishi Heavy Industries (MHI) finally announced their long-awaited joint venture (JV) for the offshore market.

“We have a clear strategic intent to become a global leader in the offshore wind industry,” declared Vestas’ buoyant chief executive, Anders Runevad. The new company is in “pole position” to win the race for market share, added MHI wind boss Jin Kato.

The deal should propel both companies into the big time of the fast-growing offshore sector, creating a heavyweight competitor to undisputed market leader Siemens. However, questions remain over the future direction of the JV and how it will impact on the two partners and their potential customers.

The agreement between MHI and Vestas revolves around the latter’s highly anticipated V164-8.0MW turbine. The development of this groundbreaking model will be transferred to the new company — along with Vestas’ order book for its V112-3.0MW offshore turbines; its existing offshore service contracts; and about 300 employees. In return, MHI will inject €100m ($135m) in cash and another €200m later, based on milestone achievements as the V164 is tested and brought to market. MHI will also bring considerable financial muscle and significant industrial expertise to the enterprise.

“Vestas needed a solid financial partner to compete with Siemens, Areva and Alstom on receiving future offshore turbine orders,” says Patrik Setterberg, a senior analyst at Nordea, one of three financial companies advising Vestas on the deal. “We argue that [the] Vestas/MHI JV will be a very strong alternative to Siemens if they successfully introduce the V164 turbine to market.”

Mixed in with the partners’ excitement is a palpable sense of relief that the deal had finally been signed.

The talks, which were first confirmed by Vestas on 27 August 2012, have taken place during the most difficult period in the Danish company’s history — a time when it faced a monumental financial hangover from rapid expansion, cost overruns, a cash-flow crunch and a major management upheaval. In late 2012, it seemed that creditors and banks were pushing the MHI deal as virtually the only way out for Vestas, while the disparity between the two companies’ financial positions seemed to put the Danes at a huge disadvantage.

Industry sources say that the talks came close to being derailed over a number of issues — such as the value of Vestas’ technology, who would control the JV, and, according to some, MHI’s attempts to gain access to Vestas technology for its own onshore business, which has all but been destroyed by a series of patent disputes with GE.

At times, there was intense scepticism over whether negotiations were even continuing. Vestas officials always maintained their hope that the MHI talks would succeed, while simultaneously trying to assure investors that there was a “plan B”.

Vestas chairman Bert Nordberg — no stranger to Japanese companies after running Sony Mobile Communications — told Recharge in March: “I was CEO of a Swedish-Japanese JV so I learned the same patience as the Japanese. This is a marriage, not an engagement or a love affair. I am stubborn and I don’t want to sign something that isn’t good for Vestas.”

He added that the delayed V164 would be developed with or without the MHI deal. “We are not so weak that we have to force it,” he said.

This is not to say that there was not considerable anxiety within the group. A month earlier in Tokyo, Kato seemed to deliberately ruffle feathers by telling Recharge that the company was set to deliver 700 of its 7MW SeaAngel turbines — a clear rival to the V164 — to Scottish utility SSE for deployment in UK Round 3 projects. Kato and then Vestas boss Ditlev Engel seemed at pains to avoid contact during the same Tokyo event.

MHI’s enormous fiscal resources are a huge asset for the new JV. With annual revenues of Y2.8trn ($207.6bn) in its 2013 fiscal year, MHI will almost certainly have the financial muscle to be able to extend guarantees to large-scale projects using the JV’s turbines, giving it a potential edge over many of its rivals.

MHI also brings a wealth of expertise — in areas such as industrial outsourcing and aerospace — not to mention the capacity to build and supply offshore wind installation vessels. The Japanese giant is also well placed to leverage the growing political and industrial momentum behind offshore wind in Japan, as part of the key Fukushima project consortium.

In terms of the immediate financial impact on Vestas, the deal is “marginal”, says the company. But the announcement had an immediate effect in dispelling doubts about the sustainability of Vestas’ existing offshore business. The new JV’s chief executive, current Vestas Asia Pacific & China president Jens Tommerup, said at the Copenhagen press conference: “The JV will give us a strong business case to get some projects for the V112 before the V164 is ready, so we will also be stronger in the short term.” Later that same day, Vestas received confirmation of a sale for 43 V112s to Dutch utility Eneco — a relief after a long period without a single offshore order.

The deal also has key positive elements for Vestas as a Danish company. The JV will, like Vestas, be based in Aarhus, to where about 20 MHI executives and their families are currently preparing to relocate. Plus, the boss is Danish. “It’s important that we keep all the knowledge-based jobs in Denmark, keep the HQ and add more jobs,” says Tommerup.

But MHI also brings some large uncertainties into the deal — it has an option to take majority control of the JV in April 2016, and it is also continuing with the development of its 7MW SeaAngel offshore turbine.

Runevad says he is “confident” that “the governance will not change if MHI decides to take 51%”. He did not go into detail, but there will no doubt be worries in Denmark about what happens when MHI becomes the majority owner, while commentators have also questioned the logic of handing over majority ownership at a time when the JV should be starting to reap the benefits of a huge ramp-up in offshore deployment.

Another key question is how much the JV will be able to take advantage of existing relationships with major potential customers. On Vestas’ side, Danish utility Dong, the world’s largest offshore wind operator, is involved in early testing of the V164, and Tommerup says this will remain the case. Dong has been Siemens’ biggest offshore customer, and has been eagerly waiting for Vestas to provide competition. Vestas has also worked closely offshore with German utility E.ON and Swedish utility Vattenfall.

On the other side, MHI has a technology development and framework supply agreement with SSE, a major player in UK offshore projects, including in the consortium that will develop the massive 9GW Dogger Bank Round 3 zone.

MHI’s SeaAngel is being developed through the Efficient Offshore Wind Programme (EOWP), a £33m ($52.2m) project launched in 2012 by a consortium comprising MHI, SSE and contractors Technip and Wood Group, in a deal that was brokered at the highest levels by Scotland’s hands-on and pro-renewables government.

The EOWP also involves a framework agreement that envisaged MHI supplying large numbers of SeaAngels to projects in which SSE is a partner.

So does the Vestas-MHI JV get to take over this deal? Tommerup says that “in principle” the two companies will both transfer their offshore businesses to the new company, but claims he is unable to comment on the specifics of the SSE deal.

How these issues play out will determine whether the joint venture truly gels and becomes the giant it has  the potential to be. In the meantime, all eyes are once again on Aarhus.

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