Siemens to make money out of thin air

“All our actions and decisions are informed by the principle of sustainability,” Siemens said in the introduction to its 2010 report, a few pages after the obligatory photograph of the chief executive, Peter Loscher, and the rest of the management board.

In smaller type on Page 90 is the fact that clean energy is a big moneymaker for Siemens. The renewable energy division, which consists mostly of the wind power business, recorded a bigger sales increase than any other unit in the quarter ended September 30, rising 48 per cent, to 977 million euros ($1.3 billion). New orders rose 85 per cent, to 1.45 billion euros, also a company best.

Still, the unit’s operating profit margin of 10.6 per cent lagged that of more conventional businesses, like providing equipment for fossil-fuel power plants, and fell short of Siemens’s goal of a 12 per cent to 16 per cent margin. The unit made 103 million euros for the quarter, and 368 million euros for the fiscal year.

That was about 5 per cent of the total yearly profit for Siemens, whose array of products includes trains, factory equipment and X-ray machines.

But like any fast-growing business, there is also risk. The North American market has slumped just as Siemens, which does most of its manufacturing in Denmark, is stepping up investments in the US and Canada. On December 3, Siemens opened a factory in Hutchinson, Kansas, to make nacelles — housings the size of a bus that sit atop wind turbine towers and hold the mechanical and generating equipment. Siemens already has a blade factory in Fort Madison, Iowa, which opened in 2007, and is planning a plant in Tillsonburg, Ontario, to supply blades for nearby wind farms. The company’s goal is to become one of the top three suppliers of wind power equipment in the world, up from eighth or ninth now. Danish firm Vestas Wind Systems, focusing solely on wind power, is the market leader. To have any chance, however, requires a foothold in China, the world’s largest market for wind power, and one of the most difficult to enter because of government policies that favor local companies. In November, Siemens opened a factory in Shanghai, chosen in part because it is on the water and a good place from which to ship equipment for offshore wind parks, a niche in which Siemens is the top equipment supplier. The Asian market is the largest and fastest growing for wind power, accounting for an estimated 44 per cent of global capacity, according to IHS Emerging Energy Research. Europe is second, with 34 per cent of global capacity and North America third with 19 per cent.

Siemens is also planning factories in the emerging markets of India and Russia as well as in Britain where, despite an austerity budget, the government is strongly backing the development of offshore wind projects. In the US, makers of wind power equipment have had to contend with fickle government incentives and a plunge in the price of natural gas, which made wind energy less competitive. In addition, the financial crisis has made it harder for smaller operators to get loans to build wind parks.

“The US was supposed to be one of the most attractive markets,” said IHS Emerging Energy Research’s wind power research analyst Eduard Sala de Vedruna, adding, “It’s not going to be as attractive as it used to be.” Like American wind power market leader General Electric, Siemens may have an advantage against upstarts because it has long supplied equipment for conventional power plants and transmission facilities run by big utility companies. Siemens also has a long history in countries like Russia and China, where the company sold telegraph equipment as early as 1872.

“Siemens already had some good relationships,” Sala de Vedruna said. “They understand the business of generating electricity.”

But Siemens will also have to contend with ascendant Chinese companies like Sinovel, Goldwind and Dongfang, which are moving rapidly overseas. The Chinese companies offer lower prices and attractive financing, and could force down prices and profit margins, said London-based UniCredit analyst James Stettler.

“While Siemens appears better placed than Vestas or GE, we think the company will also see its margins compress over time,” Stettler said. In a measure of how wind has become mass market, the Kansas factory will feature a moving assembly line, like an auto factory. In older factories, designed when volumes were lower, the units were assembled in place, a less efficient method. The assembly line cuts the time it takes to build a nacelle to 19 hours from 36, according to Siemens.

Sala de Vedruna said that he thought the long-term prospects for wind power in the United States were still bright.

“America is for us still the single largest market,” said Siemens Renewable chief executive Energy Rene Umlauft. Wind turbine components “are large and heavy and it costs money to move them from one place to another.”

Siemens got into the wind business only in 2004, when it acquired a maker of wind turbines in Brande, Denmark, which remains the headquarters of the wind unit. Watching that business expand seems to have given Siemens an appetite for other investments in renewable energy.