Cast Iron Guarantees

The news that Vestas is to seek compensation from a supplier following a gearbox bearings fault might not at first turn heads.

However, it adds another twist to what has been a tough twelve months for the Danish manufacturer. And once set in context, points towards a growing trend.

As we’ve previously discussed, Vestas has recently posted some grim financial results and as the Q1 2012 figures show, they’re not (yet) getting better.

Thankfully for Vestas, revenue was in fact up (by 4%) based on the same period in 2011 and the battles in the boardroom have started to subside.

And these are all changes that, for many within the business, can’t come soon enough. Particularly with all that torrid talk of takeovers back in April.

For the wider market though, it’s this gearbox saga – and the news that Vestas has already set aside €40 million in warranty provisions – that’s worthy of note.

That’s no small cheque to write (particularly when you’re already making a loss) and it’s all a direct result of bearing failures that have afflicted about 15% of its V90 -3.0MW machines.

Naturally, Vestas has been quick to shift the problem to one that’s shared with the equipment supplier, who delivered the kit a couple of years back. And according to both ZF Friedrichshafen (formerly Hansen Transmissions) and Vestas, discussions between manufacturer and supplier continue.

For the market though, it’s this issue of warranties – and in particular, understanding where responsibilities begin and end – that’s now up for debate.

Quite understandably, developers and investors have been quick to recognise the benefits of manufacturer warranties and service agreements – believing them to be a cast iron fail safe to hedge against and fall back on, if and when things go wrong.

And with a pressure to sell more and more units, manufacturers haven’t exactly been quick to educate the market on the difference between service agreements and warranties, versus the long-term operational implications of wear and tear.

However, if left unchecked these can become dangerous assumptions to make. And as the grey area between warranties, service agreements and operations and maintenance contracts grows, the boundaries get blurred and the basics all too often get overlooked.

Now, to be clear, in this instance it would appear that the issue is in fact a genuine problem associated with defective parts. Naturally, the finger pointing will continue but ultimately it won’t be the developer that’s picking up the tab.

However, as turbine technology evolves and as new investors and developers enter the fray, there are lessons to be learnt.

As good as they are, the simple reality is that operation and maintenance contracts, warranties and service agreements are never perfect.

Even with the best due diligence in place, machinery and moving parts can and will always go wrong and no level of assurance – no matter how good - can offer a genuine cast iron guarantee.

For all manufacturers, investors and developers alike, that’s not necessarily a bad thing. But it is something that needs to be understood, right from the outset.