Friday, February 19, 2016

DSTN Closes, We Shouldn't Be Surprised

DSTN Trenton
DSTN Wind Tower Painting Facility
No one should be the least bit surprised that DSTN, the Trenton wind tower manufacturer that could never quite get business going, is closing. The writing has been on the wall almost since the day provincial government contributed $56 million to the project, promising 300-500 jobs.

The money was split between a combination of forgivable loans (grants for meeting job targets that were never met), repayable loans (they never were repaid), and an 49% ownership stake in the company which cost almost $20 million.

It only took about a year before then Minister Percy Paris stopped speaking as glowingly about the investment saying: "I don't know if disappointment is the right word,” Paris said. “I remain optimistic." He noted that a downturn in the wind turbine business had changed the economics.

There was never really a downturn. There are more wind farms being built today then there were in 2010. What appears to have occurred is the market analysis was faulty, not identifying risks such as trade issues, cost competitiveness, and the geographic nature of demand.

Unlike payroll rebates which, while still controversial, are paid  based on jobs created, DSTN received $56 million of provincial money and another $7 million from ACOA with only the promise jobs would be created. (Note: Some reports have put the ACOA contribution at over $10 million)

They never were.

At the time of Paris's comments 66 people were employed at the facility, a number which may very well have been the high water mark.

I have no doubt the Dexter government sincerely believed in the investment they were making and thought it would make sense. I have no reason to think otherwise. Nonetheless, the investment raised eyebrows from the very beginning. Wind towers are very expensive to ship, so unless you can build them really inexpensively, the geographic market was always going to be small. It also takes some pretty large orders to bring production cost down, so even competing for projects in Nova Scotia (where many wind farms had already been built or had contracts arranged) was bound to be difficult.

DSME Shipyard
DSME Korea Shipyard

During my time as Nova Scotia's Energy Minister in 2014 I went to Korea for meetings with potential investors and players in the energy sector. As part of the visit I was asked to visit the Daewoo Shipbuilding and Marine Engineering (DSME) shipyard in Okpo-dong. We discussed their plans for the DSTN facility. They were already well into trying to figure out what to do with Trenton by that point. It had very little work, and was hugely expensive to keep open. There was also very little work from other DSME facilities which could be transferred to DSTN.

They spoke of ideas they had from building parts for ships, to building offshore platforms for the Shell or BP projects in Korea and then finishing them up in Nova Scotia. All the ideas were for speculative projects many years off. None involved start to finish construction in Nova Scotia. Many proposals really amounted to competing for work against existing Nova Scotia businesses.
DSTN Trenton
GE certified towers under construction at DSTN

There always seemed to be hurdles. As Minister I noticed there was considerable angst among some to ensure one of the province's COMFIT projects was approved quickly. The project ultimately met the COMFIT requirements, but the pressure to get it approved was because they had committed to buy DSTN towers, the Department of Economic and Rural Development and Tourism had a stake in DSTN, and DSTN would use the project to get GE tower certifications.Using this certification they hoped to get new business and start repaying the provincial loans.

To the best of my knowledge they achieved the certification, but when I toured the facility in late 2014 it was clear that few or no additional orders ever came of the GE certification. At meetings with company executives, they were still talking about future offshore work, building pressure vessels, or even returning the building to its original function - building rail cars to meet the growing demand for newly designed oil carrying rail cars (a story that would make the news a year later).

What struck me in all the discussions I had at DMSE and DSTN was there never seemed to be a real business direction. Every time there was a discussion they seemed to be chasing completely new lines of business. As someone who ran a successful business for many years, the lack of focus made no sense to me.

The closure of DSTN is a sad day for the many highly skilled workers at the facility. The company never made money on the work it did. This was an investment which always made me wonder why DSME was even involved. They're a huge company. Trenton is small facility by their standards. It would be interesting to know whether it was the province or DSME which most wanted this to move forward back in 2010.

There are probably few people, even at the plant, who didn't see this day coming. As sad as it is for the town and those at the plant, from what I saw it's amazing it didn't happen sooner.