Alstom’s Power-Grid Sales to Struggle on Deferred Contracts

Alstom SA (ALO), the French maker of turbines and trains, will struggle to lift revenue at its power- transmission unit this year as some customers defer projects and turn to low-cost Asian competitors.

“We’re expecting 2013 to continue to be tight in terms of transforming the order book into sales,” Gregoire Poux- Guillaume, the head of Alstom’s power-transmission division, said in an interview. A rebound in revenue, hurt in recent quarters by a jump in unpaid work in India, will come at a later stage, he said.

Chinese and Korean manufacturers including Hyundai Heavy Industries and Hyosung Corp. (004800) have increased capacity, and Alstom is shutting plants, switching to cheaper designs and streamlining its supplier base to adapt. The French company is budgeting for flat to slightly lower prices for alternating current products over the next two to three years after a drop of about 20 percent from 2009 to 2011, Poux-Guillaume said.

Poux-Guillaume has been given the task of raising grid- equipment margins to 8 percent from 6.2 percent at the end of Alstom’s last fiscal year, though no deadline is in place because of the pricing outlook. Closures have affected sites in Mexico, Australia and China, with additional jobs going at some German plants and at Alstom’s headquarters near Paris.

Some savings are being passed directly to customers, the executive said, declining to be specific. Sales from April through December fell 4 percent even as orders jumped 8 percent. At 4 billion euros ($5.1 billion), the division’s turnover accounts for about one-fifth of Alstom’s overall sales.

Adapting

The company, based in Levallois-Perret, joins rivals ABB Ltd. (ABBN) and Siemens AG (SIE) in overhauling operations to adapt to overcapacity in switchgears and transformers. Alstom’s deadline for meeting the 8 percent margin target “will largely be linked to healthier price dynamics, which we hardly see in the next two to three years,” Poux-Guillaume said.

Delays in completing projects in India have been a further challenge. The nation accounts for 15 percent of business and some “near-bankrupt” independent power producers have stopped work at sites as India’s economy slowed and power prices dropped, he said.

“We’ve had a very clear jump in unpaid bills over the past 12 months in India,” in the tens of million euros, according to the executive. The company will be paid when projects resume with existing or new operators, he said, adding that elections in 2014 may help spur progress.

Alstom shares, little changed at 35.04 euros at 10:13 a.m. in Paris, have advanced 16 percent this year, matching ABB’s performance. Siemens has gained 2 percent .

Growth Areas

Within the 40 billion-euro global power-transmission market, remaining growth areas are high voltage direct current, or HVDC, typically used for long-distance connections, and for so-called smart-grid management systems to improve network efficiency and integrate intermittent renewable power supplies, remain growth areas, he said.

The HVDC market alone may triple to 9 billion euros per year at the end of the decade amid increased demand for interconnections in Europe, the Middle East and North America, offshore wind farms in Europe, and a race for higher voltage links in China and India, the French company said on Feb. 28.

Alstom, which is building the longest DC line in the world in Brazil, aims to book about 2.5 billion euros of orders in HVDC over the next three years. It recently won such contracts in Sweden, India, and for German offshore wind farms.

Alstom also wants to grow by more than 10 percent a year in grid services, where it’s under-represented, and aims to increase sales to the oil, gas and mining industries, which need to secure power reliability with equipment, Poux-Guillaume said. Partnerships are being discussed in Russia and Korea that will help tap local HVDC projects, he said.

Clean Energy

Future opportunities include a tender for a link between France and Italy to be launched by the end of the year, connections for offshore wind farms in the U.K., and between Turkey and neighboring countries, Poux-Guillaume said. Germany also plans to build five HVDC landlines to connect the south of the country to its wind farms in the Northern and Baltic seas as it’s investing in clean energy and planning to phase out nuclear power by 2022, he said.

“These are significant budgets, so operators tend to explore both alternative solutions and financing possibilities before launching them,” Poux-Guillaume said. “That sometimes delay projects, but the market is there.”

To contact the reporter on this story: Francois de Beaupuy in Paris at fdebeaupuy@bloomberg.net

To contact the editor responsible for this story: Simon Thiel at sthiel1@bloomberg.net

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