Was The Rise Of Siemens Gamesa Beyond Expectations?

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In April of 2017, Spanish wind energy giant Gamesa merged with German manufacturing megalith Siemens’ own wind business to create Siemens Gamesa, a company that boasts to be “a global technological leader in the design, manufacturing, installation and maintenance of wind turbines.” What is important to note, however, is that hyperbole aside, Siemens Gamesa may simply be the leading global wind energy company in the near future — and I don’t know if we expected that or not.

More than the Sum of their Parts

When Siemens and Gamesa announced in June of 2016 that they would merge their wind energy businesses, the news dropped out of nowhere with nothing to warn us that this was their intended path. Less than a year later, European authorities granted antitrust approval for the merger to proceed and under a month later the two had become one.

A merger does not necessarily yield immediate results, and companies are often hesitant to get investors’ hopes up. For Siemens and Gamesa, recent history was promising.

For Gamesa, the previous five years (shown below) were represented by nearly yearly growth — marred only by restructuring in 2013.

As for Siemens, it’s a little harder to tell, considering that its wind business was wrapped up inside the larger Siemens juggernaut and it only provided vague information for leasing and licenses. That being said, however, Siemens was regularly a leading wind turbine original equipment manufacturer (OEM) according to yearly wind turbine statistics published by industry experts such as MAKE Consulting, Navigant Research, and Bloomberg New Energy Finance. Specifically, MAKE had Siemens as the leading wind turbine OEM for 2014, fourth in 2015, and fifth in 2016. Conversely, Gamesa was seventh in 2014, fifth in 2015, and fourth in 2016.

Bloomberg New Energy Finance (BNEF), looking only at 2015 and 2016, revealed that in 2015 Siemens and Gamesa both installed 3.1 gigawatts (GW) for a combined 6.2 GW — though Siemens also installed a further 2.6 GW of offshore wind, according to figures from BNEF — and in 2016 Siemens installed 2.1 GW (and 0.15 GW of offshore wind) and Gamesa installed 3.7 GW for a combined 5.8 GW. (Variation between Gamesa’s figures above and BNEF’s figures are the variation between sales and installations, as well as not including offshore wind turbines.)

Top 10 onshore turbine manufacturers, 2015 (GW)

Top 10 onshore turbine manufacturers, 2016 (GW)

To be sure, when you add two leading wind energy businesses together you expect that they will step up a few notches on the leaderboard. But when Bloomberg New Energy Finance published its annual Global Wind Turbine Market Shares report in late February, it revealed that Siemens Gamesa had increased its share of the global onshore wind turbine market from the 11% its two predecessors boasted in 2016, to a share of 15% in 2017, commissioning 6.8 GW worth of onshore wind turbines.

When you combine that with the 2.7 GW BNEF concluded Siemens Gamesa commissioned in 2017, the company walks away having commissioned 9.5 GW in 2017. Vestas, which commissioned 7.7 GW of onshore capacity in 2017, can’t top that figure. Its offshore wind business is its joint offering MHI Vestas (along with Mitsubishi Heavy Industries), and according to Tom Harries, senior wind analyst at BNEF and lead author of the report, the company only commissioned “around half a gigawatt” in 2017.

2017 Yields Strong Sales, if Topsy Turvy Revenue

When Siemens and Gamesa merged, they transitioned to a financial year which runs from October to September, so it will be a little bit longer before we find out exactly what the company concludes it commissioned across its first 12 months in action, and then its first financial year. But we can make some educated guesses when we look at its quarterly reports.

In its final quarter as an independent company, Gamesa reported that for the first three months of 2017 it recorded sales of 1,490 megawatts. That’s already impressive, and it also boasted a 45% increase in revenue (as compared to the same quarter a year earlier). The next time we heard from them the company was Siemens Gamesa, and it reported that sales had fallen by 25% (as compared to April-June of 2016) and revenue had fallen by 7% — as compared to a combination of Siemens and Gamesa’s previous quarter’s results. But between April and September — the first six months for the nascent company, and the end of its first full “year” — it recorded revenues down 12.3% (against the same six months for both companies a year earlier) but in its fourth quarter it recorded a “sharp increase” in its order intake (sales — terms change between reports so you have to keep your eyes open) of 40%, increasing to 3 GW. A quarter later — the company’s “first quarter” for its new financial year 2018 — it took in an order intake of 2.8 GW.

So, between April and December of 2017, Siemens Gamesa took in orders/made sales of 7,750 MW (and, for the sheer fun of it, make that 9,240 MW if you also include Gamesa’s last quarter as an independent company). Not bad for a full year’s work. (Again, the variation between the 9.5 GW commissioned in 2017 and the 7.75 GW sold in 2017 is the difference between a turbine being “commissioned” — turned on, so to speak — and being “sold” — it will, therefore, be commissioned in the future.)

As a note, any company coming out of a merger such as this will not necessarily yield strong revenue, which can be seen in the first few quarters of Siemens Gamesa’s life. Siemens Gamesa commenced restructuring in the last few months of 2017, announcing that 6,000 employees would be laid off over 24 countries, in an effort to begin solidifying its new direction and begin strengthening its revenue generation.

Outside Confirmation

During the writing of this article, as happens, enough time passed for Siemens Gamesa and others to publish information and analysis which confirmed the company’s impressive year.

First, in late April, Wood Mackenzie’s MAKE Consulting and GlobalData both published reports on the wind energy industry’s original equipment manufacturers, which confirmed that the successful merger to create Siemens Gamesa resulted in an industry-leading company.

Specifically, MAKE Consulting, which published its Global Wind Turbine OEM Market Share report, found that Siemens Gamesa set a single-year record for new capacity globally, installing 8.8 GW (followed by Vestas, Goldwind, and GE).

GlobalData, on the other hand, provided a few more specifics, and in fact pushed Siemens Gamesa 2017 installations up to an impressive 9.43 GW, with Vestas only installing 7.52 GW (although, MHI Vestas also broke into MAKE Consulting’s rankings, making it the first offshore-exclusive company to do so).

“The recent merger of Gamesa and Siemens created a strong position in the industry across the onshore and offshore space,” explained Ankit Mathur, Practice Head for Power at GlobalData. “The competitive advantage of larger size and scale, along with good geographic diversification, provided the necessary push enabling it to claim the top spot.

“As a result of merger synergies, SGRE’s wide product mix, global presence, and strong position in the offshore wind sector should help to safeguard its lead over the closest competitors.”

Inside Confirmation

Unsurprisingly, Siemens Gamesa was chomping at the bit to add its two-cents to the mix, and on May 4 the company published its second-quarter earnings report which helped to fill in the gaps a little, and made way for insiders to speak to me as well.

Firstly, in its second quarter (which ran from January to March), Siemens Gamesa reported sales for the quarter of €2,242 million, down 29% year-over-year, but well in line with the company’s 2018 guidance and pushing its sales for the first half of the year (October-March) up to €4,369 million. The company took in 2.5 GW worth of orders in the first three months of 2018, up 54% year-over-year — and including the exclusive agreement to supply 1,386 MW to the Hornsea Project Two offshore wind farm, the world’s largest offshore wind farm — bringing its order book backlog up to an impressive €22,041 million.

Combining information from Siemens Gamesa’s financial reports, therefore, between April of 2017 and March of 2018 — a full 12 months, even though it doesn’t equate to a full financial year for the company, given when its financial year runs — the company took in orders/made sales worth 8.3 GW.

Did We Expect This?

So the question is, despite Gamesa’s increasing growth trends in the years leading up to its merger with Siemens’ wind business, did we expect the company to so quickly and seemingly-easily solidify its position as the world’s leading wind turbine manufacturer?

As for the disparity between high installed capacity and revenue, that’s somewhat to be expected considering the nature of the market at the moment: As it solidifies, and cost reductions continue, revenue for turbine sales will drop off and, as Tom Harries pointed out to me in an email, the services segment will become a more prominent point of focus for big-name wind energy companies.

“Despite revenue growth in turbine earnings, profitability for the major players (Vestas and SGRE) is hurting, driven by auctions and the price convergence for wind turbines,” Harries said. “You can see it in the EBIT [earnings before interest and taxes] margins for the turbine segment of their earnings. Meanwhile, you can see the shift in focus to the services segment and how that is becoming a focus for value creation.”

As can be seen in the chart below, services is responsible for a significant percentage of the company’s order backlog, which in the second quarter hit an impressive €22,041 million.

In addition to the second quarter order for the Hornsea Project Two offshore wind farm, Siemens Gamesa also secured a 1 GW order in Turkey. Siemens Gamesa announced in February that it had been awarded the contract following the country’s Yeka auction, the country’s first wind auction which was held in August of 2017. Siemens Gamesa was also part of the consortium which won the rights to develop the 1 GW in the first place.

“The Turkish onshore wind deal had a strong impact in 2017 (1 GW order) for SGRE and looking ahead they are raising their earnings expectations off the back of the back some big offshore wind turbine orders,” Harries added.

Is The Future Bright For Siemens Gamesa?

So we can confidently say that the last few years for Siemens Gamesa (and its respective predecessors) left the company feeling relatively confident about its future — even if its revenues did not necessarily meet previous years. As already stated, this was to be expected as the wind energy market matured and cost reductions began impacting the bottom line.

But what does the future look like? Can we expect Siemens Gamesa to continue its dominant role in the industry?

Siemens Gamesa held its Annual General Meeting on March 23, where the company’s Chief Executive Officer, Markus Tacke, addressed the future of the company from his point of view.

“We are definitely on solid ground and the rationale for our merger has been strongly confirmed throughout the integration process,” Markus Tacke said during his speech to the AGM. “This rationale brings us a great competitive advantage, thanks to our size and scale; our unmatched business and geographic diversification; our technological leadership; and the extraordinary synergy and transformation potential resulting from the merger. Now it is time to look forward and to take advantage of our strengths to reap the rewards of our hard work and to seize the opportunities before us. I’m very confident that we have a bright future ahead of us.”

As Tom Harries suggested, the future will be a tough one. Siemens Gamesa may have taken in an impressive level of capacity orders — as measured by GW — but there are financial headwinds which will make it difficult for companies over the next few quarters.

For example, governments around the world are beginning to tighten their fists when it comes to providing subsidies for the wind energy industry (and renewables in general), meaning that developers and suppliers are playing in a market being driven by competitive tenders — tenders which are, more and more, resulting in zero-subsidy winning bids. This puts pressure on the supply chain to also lower its own costs which will automatically affect revenue.

But, conversely, there is growing support for renewable energy in all corners of the globe, and though the financial rewards will not necessarily be easily come by, Siemens Gamesa has set itself in a position from which it can not only benefit from its role in existing markets but from which it can also expand into new markets — such as the burgeoning Taiwanese offshore wind market which has captured the interests of not only Siemens Gamesa, but MHI Vestas and Ørsted as well.

Did we expect that Siemens Gamesa would be able to so quickly cash in all its chips and sit atop the wind energy OEM pile? Not really, given Vestas’ traditional dominance and the natural vagaries of post-merger businesses, but is it a surprise that Siemens Gamesa was able to turn things around so quickly? Again, not really, considering we’re talking about an industry which is in huge demand the world over.

All that’s left to see is what comes next, and only time will tell on that score.