Energy

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

In case you were under the misapprehension executives in the wind energy industry are bunch of cuddly, Birkenstock-wearing tree-huggers, look at Siemens Gamesa Renewable Energy SA.

Late Monday, the turbine maker announced thousands of job cuts. The reductions are a response to slowing demand as well this year's merger of Siemens and Gamesa's wind operations.

A presentation accompanying the announcement said the "restructuring of up to 6,000 headcounts" would create a leaner and more agile structure. There are kinder ways to put the loss of almost a quarter of the workforce. 

There's no question some turbine companies are struggling, but their hard-nosed focus on cost-cutting actually offers hope for the future -- for the planet at least.

Hitting Turbulence
Siemens Gamesa's shares have tumbled since the merger took effect in April
Source: Bloomberg
April 6 was the cut-off for shareholders to receive a 3.6 euros extraordinary dividend

By lowering the price at which wind turbines can generate electricity, demand for wind power should increase over time, particularly in emerging markets, where budgets are tightest. Wind is expected to account for 17 percent of global energy generation by 2040, compared with 4 percent today, according to Bloomberg New Energy Finance.

Global Ambitions
The merger gave Siemens and Gamesa a more balanced international footprint
Source: Siemens Gamesa
Data reflect proforma order intake in 12 months to March 2016. Since then the company has experienced a slowdown in India.

In that context, the merger of Siemens (strong in developed markets like the U.S. and U.K. and the leader in offshore wind) and Gamesa (strong in emerging markets and in onshore wind) still makes sense. But Siemens's decision to pay a 1 billion-euro special dividend to Gamesa shareholders in return for control of the combined business looks increasingly overly generous.

The industrial logic is still there. Larger companies can afford the investments needed to develop bigger, more efficient turbines and they are able to operate more efficiently. Siemens Gamesa is targeting 230 million euros in annual synergies. As one Siemens executive put it recently: "There are three things that are decisive to win in this market. First, it's cost. Second, it's cost, and third it's cost." 

Several management changes in recent months, including the departure of the well-respected CEO Ignacio Martin and the replacement of the CFO, suggest that governance is an issue: Siemens holds a 59 percent stake and Ibderola SA has 8 percent. 

The stock has fallen by half since the two companies joined forces in April, a much steeper decline than rival Vestas Wind Systems A/S. Having already warned on profits twice, Siemens Gamesa posted a 150 million-euro loss in its fiscal fourth quarter and said sales for the following fiscal year could fall by almost a fifth.

The chief problem is one beyond the company's control: demand and pricing. 

The wind industry is having to grow up, fast. As I explained in August, feed-in tariffs, which guaranteed a fixed electricity price for new wind installations, are being replaced by auction-based contract awards, which encourage projects that deliver the cheapest electricity. In India, the switch has triggered a sales slump. Pressure on margins is increasing as companies scrap to win available contracts.

Meanwhile, Siemens Gamesa expects U.S. demand to slow due to uncertainty related to the production tax credit. The PTC was due to be phased out in 2020, but if tax changes proposed last week by Republicans are implemented, the value of wind subsidies could fall by more than a third by then, estimates HSBC. Even if the proposals are watered down (and there are plenty of wind jobs in Republican-held states), Trump's support for coal isn't helpful for turbine manufacturers.  

But painful as the paring of subsidies is in the short term, Siemens Gamesa's wares are increasingly competitive with other forms of electricity. If 6,000 jobs cuts help speed the transition to clean energy, so much the better for the rest of us.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Berlin at cbryant32@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net