Even as groups of teenagers routinely protested against climate change in the streets below his Munich office, Christian Bruch struck a defiant tone.
“Everybody is looking for a silver bullet which . . . makes [energy] sustainable overnight,” Bruch told the Financial Times in the summer of 2020, as he prepared to take charge of Siemens Energy. “[But] over the next decades we’re going to need natural gas.”
His unfashionable stance failed to cut through to investors. Weeks later, against the backdrop of a resurgent Green party, Siemens Energy slumped on its stock market debut in Frankfurt after becoming Germany’s largest ever spin-off. Those who did invest in the fossil fuels company were more attracted to its sole clean energy business — the rapidly growing Spanish manufacturer of wind turbines, Siemens Gamesa, or SGRE.
Yet it is this renewables unit — rather than the gas and coal contracts that make up the bulk of Siemens Energy’s balance sheet — that now threatens the company’s future and is causing headaches for its largest shareholder, Siemens.
Eighteen months and four profit warnings later, SGRE has wiped billions of euros off its majority owner’s market value. Siemens Energy’s 67 per cent stake in the wind unit has made it “uninvestable”, according to Nicholas Green, an analyst at Bernstein.
On Thursday, Bruch and the rest of Siemens Energy’s management team faced furious investors at the group’s annual meeting. The shareholders had a long charge sheet.
Despite adding €1.4bn in onshore wind orders as demand for renewable energy surged after the COP 26 climate conference, SGRE booked a €289mn loss on its order backlog in the first three months of this fiscal year.
Higher raw material costs and expensive last-minute changes to the 5. X turbine — designed to handle large rotors and maximise energy production in all wind conditions — has left SGRE with what it calls “onerous contracts”. The green energy business, which operates in more than 90 countries, is more than €1bn in debt.
“At the moment, we don’t put any more stock in your forecasts,” Ingo Speich, a portfolio manager at Deka, a Siemens Energy shareholder, told the company’s top brass at the meeting, after Bruch insisted that “the wind market is intact” and that “all parameters are positive”.
Speich added: “The capital market’s confidence has been destroyed and must now be painstakingly regained.”
SGRE’s problems reverberate beyond Siemens Energy’s boardroom. They have raised doubts among executives as to whether European and American companies can compete in the wind energy sector, or whether, as with solar, they will eventually be undercut by cheaper Asian imports.
“There is no profit pool today,” said one person close to Siemens Energy, referring to the wind sector. Indeed, a week after SGRE’s most recent profit warning, competitor Vestas warned of further turbulence after disappointing earnings, while GE said its wind division booked a $312mn loss in the last quarter of 2021.
“If the market [remains] like this,” the person added, “we will have no western company going into [wind energy]. The Chinese will eventually come through with their Belt and Road Initiative, and the next thing they will do is export onshore wind [turbines], at no matter what price.”
Many of the issues at SGRE are being blamed on chaotic management. Since Joe Kaeser, former chief executive of Siemens, led the merger with SGRE in 2017, the business has had four chief executives and five chief financial officers, five heads of onshore, five heads of offshore, and two heads of service, according to analysis by JPMorgan
There was “no integration” and a “lack of visibility” of problems, said another person close to Siemens Energy.
Christian Bruch, Siemens Energy chief executive, cautions that turning a consistent profit from wind energy will, as with fossil fuels, take time and patient management © Thorsten Wagner/Bloomberg
Some missteps were almost comical in nature. In January 2020, for example, SGRE had to adjust its profit target after it incurred more than €100mn of costs as projects in Norway were delayed because of “adverse road conditions and the unusually early onset of winter weather”. The company failed to foresee that snow would fall in the Nordics, one person quipped.
Supply chain chaos also played a part. Per kilowatt, there are 10 times more raw materials in a wind installation than a fossil fuel one — and roughly 400 tonnes of steel in a single turbine. Wind contracts are signed two or three years ahead of delivery, leaving suppliers such as SGRE vulnerable to recent fluctuations in raw material prices.
Such pressures show little sign of abating, and Siemens Energy is still weighing up the commercial prospects of SGRE.
The German group is targeting a profit margin of 8-10 per cent for all its businesses, and the future of SGRE hinges on its ability to deliver a similar return, according to people familiar with the matter.
Kaeser, now chair of Siemens Energy, told the FT that although Siemens “deliberately chose” not to spend money on buying SGRE outright in 2017, when the future of the nascent wind industry was still uncertain, the plan was for Siemens and SGRE to “shape the market” and he was “still convinced that renewable energy will be the energy source of the future”.
While SGRE’s onshore business has struggled, it does have a profitable and growing offshore unit, which investors hope is a blueprint for a turnround.
“It probably wouldn’t take a lot to stabilise the business,” said Vera Diehl, a portfolio manager at Union, one of Siemens Energy’s top five shareholders. “Everybody is desperate for investments in renewables,” she added, “so expectations are very, very low.”
Getting rid of SGRE entirely would be a backwards step, Diehl added, leaving Siemens Energy with the “bad bank” of its fossil fuel business. “The problem is . . . can a fund manager afford to be a loyal Siemens Energy shareholder?”
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Bruch pointed out that despite projections that the market would grow by 250 per cent over the next 30 years, turning a consistent profit from wind energy would, as with fossil fuels, take time and patient management.
“I think at one point in time [wind] was more seen as a tech stock,” he said, but with on-site blade assembly for each installation, turbines are “still a product, project and service business.”
His message, as in the summer of 2020, may not be one that the market, or society, wants to hear, especially after Germany effectively stalled the development of the Nord Stream 2 gas pipeline from Russia this week.
“If we believe it is easy to achieve energy supply overnight that will be sustainable and cheaper, we fool ourselves,” Bruch told the FT.
“It would be a great story. But it’s not true.”
