Energy Musings - November 18, 2024
Further revelations about the ongoing Vineyard Wind blade incident raise questions about what has gone on with the investigation and what problems remain. The problems resemble issues Boeing has.
Does GE Vernova Have A Boeing Problem?
The story of the offshore wind turbine blade breaking apart off the coast of Massachusetts on the night of July 13 continues to play out with new revelations. The story is being covered credibly by reporters for the Nantucket Current and New Bedford Light, aided by information unearthed by Canadian local media. Unfortunately, these reporters are not financial reporters, so some of the reported details raise questions about the scope of the investigation into the incident and the root-cause analysis reported by GE Vernova, the manufacturer of the blade.
As we read the news stories of the past couple of weeks, along with the comments from the GE Vernova management during earnings calls with financial analysts in late July and October, we began to see issues emerging similar to the problems Boeing has been dealing with for years.
This article is based on our 50-year experience as a Wall Street financial analyst and after serving on the boards of directors of several public companies that experienced employee performance issues. We would like to think we know the questions that need to be asked but know they will not be answered. We will only learn the truth sometime in the future.
Let us briefly outline the Boeing issues. While 2024 has been a tumultuous year, the problems of Boeing go back about two decades when the company moved its corporate headquarters halfway across the country from Seattle to Chicago. In recent years, executives relocated corporate headquarters to Arlington, Virginia to be closer to the government officials in Washington, D.C., which is important to the company’s financial success.
A recent Forbes article by Senior Contributor Jim Osman was titled “What Can Be Learned From Boeing’s Downfall?” It highlighted problems Boeing, its management, employees, and shareholders have dealt with for the past five and a half years since the 737 Max airplane crashes of late 2018 and early 2019. This span has been marked by a Boeing stock price drop of nearly 70% from an all-time high near $430 in February 2019 to $140 a share today. The company’s market capitalization shrank 57% from $240 billion to $105 billion. Boeing’s financial deterioration, which forced the company to raise $21 billion by selling shares to shore up its balance sheet, reflects reputational damage done to Boeing.
This year saw a string of bad news. The following are 2024 Boeing news headlines compiled by NPR in late March.
Jan. 5: Door plug failure cuts Alaska Airlines flight short.
Jan. 8: Airlines find more loose parts, while a lawsuit alleges "excessive amount of defects" at key Boeing supplier.
Jan. 12: FAA says it will audit Boeing production, hints at a major shift.
Jan. 16: Apparent Boeing insider blames company for door plug.
Jan. 24: FAA clears path for 737 Max 9 to resume flying.
Jan. 26: The 737 Max 9 flies again, but some customers balk.
Feb. 6: In preliminary report, NTSB says bolts were missing.
Feb. 21: Head of 737 Max program departs in shakeup.
Feb. 28: FAA gives Boeing 90 days to come up with a plan.
March 4: FAA audit slams Boeing and Spirit.
March 6: NTSB says Boeing isn't sharing basic details.
March 8: Boeing says it can't locate documents related to door plug.
March 9: A Boeing whistleblower is found dead.
March 12: NTSB sets date for investigative hearing; Boeing replies to FAA audit findings.
Boeing disagreed with the claims of the FAA and NTSB. The most interesting headline was the death of John Barnett, a former Boeing quality control manager who became a whistleblower in 2017. He worked in Boeing’s large 787 plant in Charleston, S.C. The medical examiner ruled the death a suicide. Barnett was in a yearslong legal battle with Boeing over his complaint filed in early 2017, in which he accused his former employer of retaliating against him for raising safety concerns in the company's commercial airplanes. The safety issue created significant headwinds for Boeing’s Dreamliner sales in the late 1990s and early 2000s.
While not part of the March 24 NPR story, the following news was announced the following day by Boeing.
“Dave Calhoun announces intent to step down as CEO at the end of 2024; Calhoun will continue to lead Boeing through year-end.”
“Independent Board Chair Larry Kellner announces his decision not to stand for re-election at annual meeting; Steve Mollenkopf appointed new chair.”
“Stan Deal to retire; Stephanie Pope named Commercial Airplanes CEO.”
In January 2020, Calhoun, a 26-year GE veteran, replaced Boeing CEO Dennis Muilenburg, fired following the Lion Air and Ethiopian Airlines 737 Max plane crashes that killed a total of 346 people. Just over a year later, Boeing ousted the 737 program’s production chief.
The March 25 management and board changes set in motion the search for Boeing’s third CEO within five years. Former Rockwell Collins CEO Robert K. "Kelly" Ortberg was hired in July. A mechanical engineer, he began his career at Texas Instruments before jumping to Rockwell Collins where he progressed up the management ranks, ultimately becoming its president and CEO in 2013. After five years leading Rockwell Collins, he oversaw the company's integration with United Technologies until his retirement in 2021.
Ortberg’s first decision was to office in Seattle, 2,300 miles away from corporate headquarters, and close to the company’s key assembly plants. He is already beginning to phase out long-time executives and streamline the company business. He has a challenging future in attempting to restore Boeing’s culture and focus, shifts that started with the company’s merger with competitor McDonald Douglas in 1997.
The combined company’s emphasis shifted from technical excellence to reaching financial goals. That shift came at the expense of quality and safety. Importantly, the shift disheartened staff, especially engineers, who felt free to give safety and innovation top priority over budgetary concerns. Engineering successes and problem-solving skills were devalued in favor of financial successes. This was when Boeing competed aggressively against Europe’s Airbus for leadership in the airplane industry.
Financial directives drove management to shift its focus from long-term investments in vital research, development, and innovation to short-term steps to boost the share price by spending on stock buybacks. Immediate financial returns were more valued than reinvesting in developing new technologies or strengthening existing product lines.
The recent 737 Max problems highlight what may happen when a company sacrifices product quality and safety in favor of cost-cutting and haste in delivering its product. Important design and testing concessions were made in developing the newest versions of the 737 Max because of competition with Airbus over market supremacy. Problems with its MCAS software also contributed to the fatal crashes, although pilot-error issues were also involved.
What we have is a record of management, aided by its board of directors’ lack of critical oversight, moving away from its historical strategy and culture. When problems emerged, few were held accountable, and covering up mistakes, and punishing low-level employees was embraced. Only recently have those shortcomings surfaced to the point that they demanded strong corrective actions.
The damaged Vineyard Wind turbine in September.
Source: Nantucket Current. Photo by Dan LeMaitre
How does the Boeing situation compare to GE Vernova’s offshore wind division’s problems? The latest revelations of the blade failure at Vineyard Wind came from the local radio and newspaper – Radio-Gaspésie and Gaspésie Nouvelles – in Gaspé, Quebec, Canada, where LM Wind Power operates a plant manufacturing the blades for the project.
According to Canadian media reports, there may have been a scheme at the LM Wind Power plant to falsify quality control data. The revelation came from an investigation led by GE Vernova’s lawyers. The scheme let well-made blade data be associated with poorly made ones, which is reportedly why the Vineyard Wind blade broke apart.
Radio-Gaspé reported, based on unidentified sources, that senior management at the Gaspé plant allegedly maintained a points system that “encouraged employees to skip verification steps” to improve “production quantity over quality.” The sources told the radio station that the points system allegedly led to such tight management of the process that it could be considered intimidation of employees.
Reportedly 20 employees – nine with managerial responsibility (directors, managers, and supervisors) and 11 floor workers – were suspended for a few days to a few months. The union representing the floor workers intends to file grievances to contest these suspensions. It is expected that the case will be heard later in arbitration.
"We do not agree and we will defend the employees as we should. The employer has reasons that we contest and the legal process will begin. This is unacceptable to us," said Christian Beaulieu, the union spokesperson. He clarified that the floor workers were not fired but only suspended, but the management employees were reportedly fired including the plant manager.
Gaspésie Nouvelles reported that GE Vernova officials were at the Gaspé plant in the days before its October earnings call to speak to employees about the situation and assure them that the plant’s future was not in jeopardy. We suspect the suspensions and firings occurred shortly before the meeting with employees.
GE Vernova needed time to conduct its investigation, but we wonder what its scope was, which lawyers performed it, and why it was not mentioned on the October earnings call. What was the responsibility of more senior offshore wind division executives in overseeing the plant where the scheme was ongoing? Did they not know of or suspect anything about the falsification of data? Did the scheme stop at the plant manager level?
If the manufacturing defect was known within 10 days of the July blade failure, how quickly did GE Vernova management act to correct problems? Did outside lawyers lead the investigation or was it done by internal lawyers? That issue relates to the true independence of the investigation in uncovering the scope and responsibilities of the falsification scheme. Internal lawyers report to senior management making them susceptible to influence even when they say they are not. The choice of lawyers - internal or outside - goes to the role of the board of directors in overseeing the management and direction of the company.
We would further note that during the July 24 earnings call, GE Vernova CFO Ken Parks commented, “We continue our work at both Onshore and Offshore to drive incremental cost leverage.” This was part of the company’s efforts to improve earnings and to help deal with the $3 billion Offshore backlog that is financially challenged. Did this drive for improved profitability factor into bonuses for the executives and shape the culture that might condone shortcuts and a lack of curiosity about operating improvements, i.e., falsification of test data?
We know of potential problems from earlier reporting about the original testing and certification of the 351-foot prototype blade for Vineyard Wind. In 2020, it was sent to the 300-foot MassCEC Wind Technology Test Center. To fit into the test structure, the blade was cut into two parts. The blade did not undergo a torsion test as in the past. Furthermore, the blade did not undergo a one-year test in a windy area as normally conducted.
With the offshore wind market in the United States taking off, were any of these testing decisions made in response to GE Vernova’s push to “drive incremental cost leverage.”
During GE Vernova’s second-quarter earnings call with financial analysts on July 24, CEO Scott Strazik confirmed that the failure was due to a manufacturing deviation at the Gaspé plant. He said during the call, “While we continue to work to finalize our root cause analysis, our investigation to date indicates that the affected blade experienced a manufacturing deviation.” We guess that conclusion came from a visual assessment of parts of the damaged blade.
In response to an analyst’s question on the July call, Strazik said, “[W]e have no indications of an engineering design flaw - that's important at the beginning. As we said in the prepared remarks, we have identified a material deviation, or a manufacturing deviation, in one of our factories that through the inspection or quality assurance process, we should have identified.” That was an interesting admission given that the blade failure only occurred 10 days earlier. We assume the deviation was determined from a visual inspection of the broken blade. It must have been severe enough to generate doubt about the quality control work.
In discussing the plan to “use our existing data and reinspect all of the blades that we have made for Offshore wind and for context in this factory in Gaspé, Canada where the material deviation existed,” management indicated it had made 150 blades.
That number is important when considering Strazik’s answer to an analyst’s offshore wind question during the third-quarter earnings call in October. He said, “We have been very systematically reviewing all of our blades in Offshore Wind, and we can say today that a very small proportion, low single digit proportion of our manufactured blades in totality also had a manufacturing deviation similar to the blade that we experienced the failure at Vineyard Wind.”
We have learned that the number of Vineyard Wind blades shipped to GE Vernona’s French plant for repair and strengthening has now climbed to 14. The count started at two and then rose to four. We do not know whether any of the blades sent to France had been installed on the offshore wind turbines and removed, or merely from the supply of blades for yet-to-be-installed turbines. As noted above, CEO Strazik said the Gaspé plant had produced 150 blades for the project. We assume it was to supply all 186 blades for the 62 wind turbines destined for Vineyard Wind. Therefore, there should be another 36 still to be manufactured, although we believe several blades may have just arrived in New Bedford from GE Vernona’s French plant.
The 14 blades already shipped to France for repair represent over 9% of the 150 blades supplied or more than a “low single digit proportion” as Strazik stated. Even if he based the figure on the full 186 blades, the damaged blades represent 7.5%. At the time of Strazik’s comment, we only knew about two blades being sent to France.
The number of damaged blades also calls into question a statement by Roger Martella, GE Vernova’s chief sustainability officer at the Nantucket Select Board meeting early in the week following the Saturday night Vineyard Wind blade failure. Martella told the audience that a blade failure such as just experienced "is highly unusual and rare." He admitted that "This is not an acceptable outcome" and "not something we want to see repeated." The growing number of defective blades suggests Nantucket residents might have experienced more blade failures. That fear has prompted a Nantucket non-profit to exit the Good Neighbor Agreement signed with Vineyard Wind.
As the details of the Vineyard Wind blade failure emerge, many questions are raised about how GE Vernova’s management has handled the incident and in answering questions. When the Canadian media began reporting about the testing falsification scheme and the resulting management terminations and employee suspensions, the local Massachusetts press started asking questions and received no answers from the company. Maybe company spokesmen realize that the unraveling of this problem has made numerous earlier claims appear wrong, possibly raising questions about the honesty of the original responses. No comment is often the best strategy during such events.
Just as Boeing’s financial problems and loss of reputation came from a cultural change driven by the desire to drive the share price, GE Vernova’s issues began to look similar. The global power market is in an upswing and GE Vernova is a significant player. Its onshore and offshore wind businesses also appeared to be in the early stages of significant growth driven by the energy transition to renewable energy sources. With revenue growth ahead, pushing for improved profitability was important for boosting earnings and the share price. How did these considerations shape the culture at the company and how were they transmitted throughout the management ranks?
Will the Vineyard Wind blade incident become the albatross around the neck of GE Vernova’s management as the 737 Max has been for Boeing’s management? Time will tell, but we doubt the end of the Vineyard Wind blade story has been written yet.