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Siemens Gamesa to spend EUR 150m integrating Senvion assets

With an investment of EUR 200 million in cash paid for select Senvion assets, Siemens Gamesa encroaches upon Vestas in an increasingly important segment. This solves one apparent problem in Europe's largest onshore wind market yet raises another, open question elsewhere.

Photo: Vincent West/Reuters/Ritzau Scanpix

On Monday, Siemens Gamesa took the deepest reach into its pockets since its merger. That, however, isn't saying much, as the turbine maker's chief focus since launching its cost-cutting plan in February 2018 has been to reduce costs by EUR 2 billion by 2020. Although the purchase of a sizeable chunk of Senvion assets would seem to point in another direction.

In part, the German-Spanish wind OEM is paying EUR 200 million in cash. Beyond that sum, however, Siemens Gamesa informs in a Spanish stock exchange notice that the transaction will end up costing an additional EUR 150 million in business provisions and one-off payments related to the "carve-out and integration and restructuring related costs." In other words, the manufacturer is paying an approximate total price of EUR 350 million.

Siemens Gamesa was quite candid about the significance of this deal.

"The transaction, when completed, will reinforce our roaring service business with scale in key European markets, it will improve the cost competitiveness of our supply chain in Europe with a very strong facility, reducing dependency on Asian markets, and it will enhance our IP portfolio to support market penetration in key European markets and beyond," said Siemens Gamesa Chief Executive Markus Tacke in a conference call following the announcement.

Suitable service business

Since the negotiations came to public attention around one month ago, the service segment has seemed to be the most suitable area of interest. This is because wind OEMs, despite a slight upturn, are essentially not making any money from current turbine sales, whereas the service segment is an entirely different matter. For instance, Siemens Gamesa's EBIT margin for service during the last four quarters has averaged at 23.4 percent – a level shared with competitors.

This business area is getting a major lift with the purchase of Senvion's 8.9 GW in European service contracts, which Siemens Gamesa informs enlarges its serviceable fleet to almost 69 GW. Despite implying that the company has increased its service portfolio by 1.4 GW in recent months, this also brings the turbine maker closer to its main rival in the increasingly indispensable segment. Vestas holds the lead with a serviceable wind turbine fleet of 86 GW.

Senvion's combined service operation at the time of the May announcement was 14.1 GW - so more could have been acquired by Siemens Gamesa. The small size of the acquisition is partly due to the fact that Gamesa only bought the European service business, although this is the majority of Senvion's service operation. The fact that the whole parcel wasn't purchased is attributed to factors including excessive complexity, as Tacke reiterated several times in a complex answer.

"Given Senvion's insolvency situation, we had the opportunity to optimize the portfolio, reducing risk and complexity in the acquired assets. And that was the key guiding principle to select or deselect assets. That's why we say the majority of the European onshore service business is part of the deal. However, we had the choice to derisk and reduce the complexity of the deal and we used that opportunity to some extend." Tacke said, insinuating that the decision to not buy the remainder was tied to to an alternative, preferred adjustment strategy rather than poor contract quality.

"Certainly, we have an interest to serve our customers and many of the Senvion customers are Siemens Gamesa customers, so there's clearly an interest in serving our customers in a holistic way. The deselection was based on two principles; complexity and risk were the main principles for us not choosing the whole service business in Europe," Tacke added.

Ticklish blade business

The purchase also seems to provide the opportunity to service another segment in a relatively holistic sense, as the take over of Senvion's large turbine blade factory in Vagos, Portugal has created something of a Mare Nostrum for itself in regard to blade production. The company's Mediterranean region already included blade manufacturing in Morocco, in Aoiz and Samozas in Spain as well as in Turkey, where a blade contract with TPI Composites extends up to 2023.

Establishing new production always causes some anxiety for existing setups – not least in consideration of the current sector climate and the still fresh recollection of last year's announcement of terminating up to 6,000 jobs. The most frequently reiterated massage from Siemens Gamesa thus also seems well worded in this context, as the company has pointed out that these redundancies do not pertain dismissals in Europe.

"Vagos is primarily part of the deal as it would give us independence from the Asian markets, giving the current trade tariff challenges. So, it would allow us to move volumes that we currently have with Asian suppliers into Europe," Tacke asserted.

This is a clear reference to the punitive tariffs imposed by the US on imports from both China and, to an increasing degree, other Southeast Asian countries as well as India. These have resulted in logistical nightmares for wind OEMs, concurrent with record-high US wind energy expansion ahead to 2021. This has particular relevance for Siemens Gamesa, which is currently trying to regain lost US market shares.

The purchase also takes Siemens Gamesa one step closer to Siemens' historical preference for making its own blades – even though only the fewest players in the industry can afford to have principles set in stone, not to mention firm geographic guarantees for future production.

"The visibility of our own facilities in Spain is there for the next years to come and also depends, of course, of the development of the Spanish and Southern European markets. But overall, the primary objective is to create independence from Asia," Tacke noted.

The unclarified IP business

Despite all of this, it was no earlier than the start of 2018 that Siemens Gamesa asserted that it would continue to fabricate onshore wind hardware in Denmark and inserted an epilogue saying that the switch to geared onshore wind turbine tech would not lead to further layoffs in the country. Then last month, the company announced plans to shut down Danish onshore wind production and fire up to 600 workers.

Altogether, Northern Europe seems to be suffering from the most severe sector hemorrhage in recent weeks. The Senvion deal, for example, which doesn't include the insolvent firm's Northern German onshore and offshore wind turbine production, entails that only 70 out of 500 Hamburg-based staff will still have a job come next summer, according to German media Abendblatt. For Germany as a whole, more than 900 of the 1,400 personnel can expect to be fired.

The question regarding which staff positions beyond technicians will remain on the payroll still remains. The third part of the deal concerns "all immaterial rights" in Senvion, which also includes all technological patents for both onshore and offshore equipment.

The omitted German plant purchase is just one of many factors making it unlikely that Siemens Gamesa is interested in making Senvion machines. Exactly what purpose the intellectual property rights will serve remains unclear.

One could guess that it's about keeping the patents away from rivals; there has been speculation that Senvion's epic 14-16 MW offshore wind turbine could entice Chinese wind OEMs. Regardless of which considerations motivated the IP purchase, Siemens Gamesa made a crystal clear statement on Monday.

"Senvion has a significant amount of highly valuable IP that has been produced during the company's existence. We value this highly, and it will help support our service of the fleet looking forward and will furthermore help us expand our portfolio. The overall plan is to use the IP to provide service to our customers," Tacke said when asked directly.

English Edit: Daniel Frank Christensen

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