Siemens Restructuring Is the Latest Earthquake in Power Systems

It’s been a busy 12 months for power industry restructuring. ABB sold its Power Grids business to Hitachi, while General Electric (GE) exited its ServiceMax investment and restructured GE Digital into a standalone business that looks ripe for divestment. Siemens followed suit on May 7, 2019, announcing that it will carve out its Siemens Gas and Power generation business into a new entity that will list in 2020. As part of the deal, it will include its 59% stake in wind turbine manufacturer Siemens Gamesa. With 80,000 staff and €30 billion ($33.6 billion) in revenue, the new company (which Siemens will retain a controlling stake in, at least in the short term) is anticipated to be a major player in power generation.

While surprising, the timing of the announcement is curious. In April, the company announced the completion of a restructure that reaffirmed Siemens’ commitment to Gas and Power. Siemens stated that the divestment will help the company meet its ambitious growth and profit targets by "focusing its portfolio on dynamic growth markets and efficiency gains.”

Deconglomeration or Focus On Higher Profits and Growth?

While some commentators believe this is all part of a breakup of traditional conglomerates—and it should be noted that, like its peers, Siemens’ shares trade at a conglomerate discount—I am not so sure. Siemens’ chief executive Joe Kaeser stated that some competitors had “experienced what happens when you run out of options.” Kaeser is taking a proactive stance to avoid such a scenario. However, without the Gas and Power business and Siemens Gamesa the company will remain a conglomerate, covering a lot of industries. It is unlikely to lose the conglomerate discount just yet.

Siemens’ focus on growth and profitability could have a more important underlying cause. Performance at Gas and Power has suffered in an environment where the underlying requirements for generation have shifted to renewables and smaller gas peaking plants. Between 2017 and 2018, revenue and profits fell 19% and 76%, respectively. Even the recent announcement of a deal to help Iraq rebuild its electricity infrastructure, with an overall value of $15 billion (Siemens’ win was a fraction of this total figure), this was not enough to make the company retain the division.

While Siemens Gas and Power underperformed in terms of revenue, Siemens Gamesa’s weakness is on the bottom line. Of Siemens’ divisions, Gamesa operated at the lowest margins: just over 5% in 2018. The wind turbine market is fiercely competitive and continuing price pressure will mean margins remain low for the foreseeable future.

Other Divisions Are Healthier

With poor growth in one section and low profits in another, it is not surprising where Kaeser focused his crosshairs when looking to divest. Looking at what he has retained, profits and margins are higher. The Smart Infrastructure division includes electric mobility infrastructure, distributed energy systems, smart buildings, and energy storage. Its Mindsphere IoT platform is starting to secure large-scale clients, such as VW. Perhaps Siemens sees little profitable growth in power generation, with more value in distributed energy and associated data-driven business models. These businesses are higher margin, more robust to changing trends in power generation requirements, and sheltered from technological obsolescence.

Only time will tell if it was the right choice to make. There could be unexpected consequences to a strategy that cedes partial operational control from large chunks of the business: Healthineers, Gamesa, and Mobility are all existing strategic companies that are not wholly owned by Siemens. Adding Gas and Power to that mix is an interesting strategy, leaving only Smart Infrastructure and Digital Industries. What is certain is that the industry is inexorably changing and that once it is stable and reliable, companies are expected to make significant bets on their futures.