Why is General Electric eliminating 6,500 jobs in Europe? This chart provides part of the answer -- and a note of caution for the industrial giant's shareholders.
In the pre-crisis years, Europe accounted for up to a fifth of global demand for gas turbines. Last year that had shrunk to 0.5 percent, according to McCoy Power Reports data.
The shift from fossil power to renewables in Europe (in particular Germany) has hit incumbent utilities hard -- but is also hurting suppliers of gas and steam turbines. They're not required in wind farms.
A slump in wholesale power prices and electricity demand (in part a function of improved energy efficiency) has created overcapacity in fossil-fueled power stations, and made utilities in Europe reluctant to invest in new plants.
GE's $10.3 billion acquisition of Alstom's energy assets has also created duplications (for example in its service and supply chain functions in Europe) that the combined company now needs to eliminate. GE hopes to achieve $3 billion of cost savings from the deal -- so job cuts were inevitable.
Alstom's energy business was already in need of an overhaul: it had been losing out to Siemens for contracts. New energy orders -- which include turbines for coal and gas-fired plants -- fell 12 per cent in the year through March.
Rival Siemens has also announced thousands of jobs cuts at its power and gas division over the past 18 months, mostly in Germany. The unit was once among Siemens's most profitable but its operating margin slumped from 17.4 per cent to 10.8 per cent last year.
Does that mean buying the Alstom business was a bad idea? Already the world's largest maker of gas turbines, GE was forced to sell Alstom's large gas turbine technology to Italy's Ansaldo Energia to gain permission from Europe's anti-trust regulators.
But with the acquisition of the energy business, GE gains access to Alstom's installed base of turbines, which have lucrative servicing contracts attached. The deal increased the number of installed turbines by 60 percent to 24,000 and will add about $14 billion of revenue.
Even if the European market remains dormant, Alstom has a significant non-European footprint, including projects in India, China and Brazil.
The International Energy Agency projects a need for some 7,200 gigawatts of new power generation capacity by 2040 to keep up with demand and replace old plants that must be retired. A larger GE with a broader power business portfolio can expect to claim a larger share of that pie.
The near-term demand outlook for Europe looks bleak, however. GE shareholders will have to ride it out.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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