Joe Kaiser, chief executive of Siemens, had a provocative question for reporters on Thursday. Did they know how many large gas turbines have been ordered in Germany over the past three years? He said to them: “I will tell you, the total reaches two!”. Along with its American rival, General Electric, Siemens was one of the most distinguished companies in the industrial age. Both companies were founded in the 19th century, Siemens in 1847 and General Electric in 1892. They both took their roots in the electricity industry to become giants in the 20th century.
However, as Kaiser’s striking question suggests, both companies in need for business development as they face similar threats in the 21st century, most notably threats from the renewable energy revolution that threatens to transform their centuries-old power supply into the electricity industry to no use.
With the low costs of electricity generated by solar and wind power, making it cheaper than generating fossil fuels in many parts of the world, the traditional model of the industry has changed. Capital spending on new technologies has risen to high levels. Battery storage is also becoming a cost-effective solution to support and support the network, challenging the market for gas turbines used when demand is at its highest.
However, both companies have taken centers in renewable energy, but they have stalled.
The result is that both companies are forced to dramatically lower costs in their core energy business. Siemens is looking to reduce thousands of jobs in its own gas and power unit. John Flanery, GE’s new chief executive, is expected to outline his plans to dramatically improve the company’s situation, whose financial position has become so risky that it has decided to cut its previously guaranteed dividends. However, although both companies face a turbulent environment, immediate forecasts look brighter for Siemens, which seems to be in a better position to cope with the disruption in the energy industry.
As rivals with fierce competition in markets around the world, General Electric and Siemens are usually cool. But last week, Kaiser allowed himself to smack his opponent a little. “The other blocs were less active in shaping their strategic shift, and this can also be seen in the share price of these companies,” he said, presenting the company’s full annual results. For the past 12 months, General Electric shares have fallen 28 percent, while Siemens has gained 8 percent.
2017 was a disaster for General Electric. The questions accumulated in June when the company announced the departure of its CEO Jeff Immelt since 2001. The answers came in October when General Electric announced a third-quarter profit decline and sharply reduced its guidance for the full year. Flanery, who took office in August, described the results as “unacceptable, at least” and said the company needed to “make some fundamental changes urgently”.
He has long taken action to signal his intentions: cutting off many senior executives, shutting down the company’s jets, stopping delivery of top managers, shrinking the network of global research centers, and promising to sell $ 20 billion.
At a time when Siemens was warning of risks to electricity generation using hydrocarbons, Emelt, an enthusiast who tended to look at the bright side, chose to bet on fossil fuel industries.
In an interview with The Financial Times, Kaiser was candid about the apparent failure of General Electric in recognizing its problems due to not know exactly how to develop the business. “Nothing has ever improved by ignoring reality,” he said. He added that Emile seemed to be trying to do some right things, including his decision in 2015 to sell most of GE’s financial services business, but his optimistic talk was not in line with reality. “I never heard him say,” I’m sorry, I was wrong. “There was always an explanation of why someone else made a mistake, sometimes the customer.”
Siemens and GE have expanded their work to include areas such as medical equipment, but are still subject to their power infrastructure. Their traditional energy business, which accounts for about one-third of GE’s industrial revenues and five Siemens revenues, is causing the biggest problems. Siemens’ profit in the energy and gas division fell 15 percent in 2016-2017 and orders fell 30 percent. Is expected soon to announce the reduction of thousands of jobs in the section of 47 thousand employees, in order to address the huge excess of the company’s operational capacity in the gas turbine market.
GE’s electricity department was even worse. Jeff Bornstein, the chief financial officer who will leave the company at the end of the year, told analysts last month that company leaders were “very disappointed” by the performance of the division, which posted a 51 percent drop in third-quarter profit due to the lack of sufficient business development. “The business has undergone changes in the market, and our change has not been fast enough to keep up,” he said.
The management’s expectations for the third quarter proved overwhelmingly optimistic. Sales of gas and air gas turbines, used to support networks at peak load times, were half the planned figures, while sales of packages aimed at improving the performance of gas-fired plants accounted for only one-third of forecasts.
In 2010, market forecasters assumed there would be about 300 large gas turbines sold each year, but in 2013 only 212 turbines were requested around the world. This year the number of requests was 122.
Last year gas was still the most popular fuel in the United States in terms of new electricity generation, with limited wind power. But GE’s global sales of large turbines fell from 134 in 2009 to 104 last year.
“All the major vendors have misunderstood the market,” said James Stettler, an analyst at Barclays. “The next big concern is servicing those turbines that used to be a gold mine but are likely to fall as new orders fall. Because turbines are sold at prices without profit margins or sometimes at a loss, competition for contract services is becoming more intense, further reducing margins.
According to Jeff Sprag, an analyst with Fairtec Partners Research, the gas turbine market is likely to remain in an unfavorable position for the foreseeable future. “I do not see a glimmer of hope at the end of the road in 2019. There is no specific reason to believe that things will be better in 2020. The question is whether this is just a cyclical problem, or whether something structural in the industry started to cause Problems Occur. ”
There is a good reason to believe that the problem is structural, given the decline in solar and wind energy costs. “The combination of solar energy on surfaces and storage of batteries can have economic logic in India, African countries and other places where there are no advanced power grids,” says Jonathan Mir, of Lazard Investment Bank, which tracks the costs of renewable energy sources and storage of electricity.
There were investments of $ 316 billion in renewable energy sources around the world last year, almost three times the amount invested in generating fossil fuels, which amounted to $ 117 billion, according to the International Energy Agency.
Both General Electric and Siemens were seeking to develop their business through joining the revolution of renewable energy sources, and in the field of wind energy, they had some successful achievements. General Electric was the world’s second-largest wind turbine manufacturer last year. Siemens acquired Spanish turbine company Jamisa in April and has high hopes of becoming a global leader in renewable energy sources. But Kaiser admits the shift is a stumbling start. Last week, Siemens Gamesa said it would shed 6,000 of its workforce of 27,000 workers while integrating the unit amid intense competition and excess capacity.
In the field of solar energy, neither company has real achievements that can be talked about. GE has some solar technology, but its plan to build the largest solar panel plant in the United States, launched in 2011, has been abandoned. For its part, Siemens put up a big solar energy contest in 2009, but abandoned in 2013 this losing effort; it even could not find a buyer and had to close the business. The large names in the manufacture of photovoltaic panels come primarily from China, including Terena Solar and Genco Solar.
In his last years, Emelt decided to increase his bet on fossil fuels, rather than leaning toward renewable energy sources. In 2015, GE spent $ 10 billion to buy electricity from Alstom, which was particularly strong in the manufacture of coal-fired power plant equipment. In a speech at the 2016 Syracuse Conference, Emilet acknowledged that the current time “is not the best time in the tournament for such a bet,” but he argued that we could make it work.
Later that year, he continued a deal to combine Oilfield Equipment and Services and Baker Hughes and paid $ 7.4 billion to set up a combined company in which General Electric would retain a 62.5 percent stake. For the first nine months of 2017, the profits for that quarter were 41 percent lower, excluding restructuring costs.
Siemens was also hit by fossil fuel stalls. In September 2014, it agreed to pay $ 7.6 billion to Dresser-Rand, which manufactures compressors for the oil and gas industry, just as prices began to fall. But their mistakes were less expensive and successful business in automating factories and medical equipment could make profits sustainable.
Similarly, GE has sections that perform well, such as those that manufacture aircraft engines and medical equipment. It is clear that some of its problems are cyclical, and the recent rise in crude oil prices gives hope that oilfield services, now known as GE’s Baker Hughes, will improve.
The electricity department remains critical to GE’s future, and Flanery needs to repair it to stabilize its financial resources.
“It is going well, but it will take a very long time to get the company back to the right position,” said John Ench, an analyst at Deutsche Bank. Another analyst adds that Flannery inherited a mess.
If Flannery falters, then dismantling GE may seem like the only option for investors. This will not result in a catastrophic dissolution of the company and will be difficult due to the Group’s complex tax position and liabilities, including insurance claims dating back to the period in which GE withdrew from the industry between 2004 and 2006.
To avoid disassembly, GE may follow the model Siemens created in 2014 for a more business development; decentralized structure, or as Kaiser calls it, the “ship fleet” model, where the divisions become semi-independent and listed separately. The largest division of Siemens, the medical equipment unit, is scheduled for next year.
“The time of the old blocs is over, and it certainly will not survive,” he says.