Analysts said Siemens Energy AG's only option is to carry on with financial support of Siemens Gamesa Renewable Energy SA, Siemens Energy's beleaguered wind turbine subsidiary that has uncovered €1 billion of new component failures to compound multiple quarters of struggles.

The June 22 news, coming just days after Siemens Energy finalized a takeover of Siemens Gamesa intended to turn around the company's fortunes, led the German energy group to withdraw its 2023 profit guidance and sent its share price down more than 30% in early morning trading June 23.

The mood on an ad-hoc analyst call the same day was almost incredulous as executives tried to explain the new problems in Siemens Gamesa's onshore wind turbine fleet uncovered after a technical review.

"The reason for this call is very unpleasant," said Siemens Energy CEO Christian Bruch. "These quality problems go beyond what we were previously aware of and they are directly linked to selected components and a few but important suppliers."

Bruch and Jochen Eickholt, CEO of Siemens Gamesa, said the true extent of the problem is still being assessed. Based on current modeling, between 15% and 30% of the installed onshore fleet could be affected, according to Eickholt.

Bruch also pointed to systemic company culture problems where issues were being "swept under the carpet," and vowed to use the powers gained in the takeover to clean up the house.

'Still figuring this out'

Siemens Energy's plummeting stock price made clear what investors thought of the latest setback at Siemens Gamesa, while analysts were also unimpressed.

"The conference [call] this morning didn't bring comfort, answers were lacking, they are still figuring this out and so it might not be the end of it," Lucas Ferhani, an analyst at Jefferies, said in an email.

Shashi Barla, director and head of research for renewable energy at consultancy Brinckmann, added that the news will delay Siemens Gamesa's turnaround.

"The €1 billion cash out is spread across multiple years and probably through the operating life," Barla said. "Part of that could be shared with the suppliers, and [Siemens Gamesa] would certainly tap into those options."

Part of Siemens Gamesa's woes also stem from ramp-up challenges in its offshore business, Siemens Energy said, a division seen as the company's strong suit.

Siemens Gamesa is expanding its offshore wind facilities in Denmark, Germany, the UK, France and Taiwan, along with their suppliers expanding their respective facilities, Barla noted.

"Expanding multiple facilities parallelly exerts enormous pressure on any company in a heavy manufacturing-intensive industry," the analyst added.

Still, the "silver lining" for the wind-turbine maker is that it is the largest offshore turbine supplier globally and has a technology track record that is "second to none," Barla said.

Siemens Gamesa has introduced six generations of new offshore turbine platforms in the past decade, compared to two delivered by rival Vestas Wind Systems A/S, according to Barla.

The race for new models is partly to blame for the sector's troubles, Vestas CFO Hans Martin Smith said in a recent interview with S&P Global Commodity Insights.

Sale 'close to impossible'

Asked whether Siemens Energy is considering selling the wind business, Bruch pointed to the importance of wind in the energy transition but said that the company "will review all assumptions" triggered by the latest setback.

Yet analysts are skeptical that a sale is even theoretically achievable.

"It is close to impossible for them to sell it, in my opinion. They wouldn't get close to the valuation they themselves paid for it very recently given the issues currently seen," Ferhani said, adding that shareholders would not welcome the move after Siemens Energy raised debt and equity to buy the remaining share of Siemens Gamesa it did not already own.

Aside from that, none of Siemens Gamesa's direct competitors can buy the company due to antitrust laws and a lack of capital, the analyst said.

"Any new owner would therefore likely be a financial buyer but they generally have low interest in this industry given it is hard for these businesses to support a lot of debt and you have a history of bankruptcies," Ferhani said, using the example of ill-fated turbine-maker Senvion SA.

Barla echoed the view that an industry player will not be able to conduct such a deal, adding that a nationalization by the German government could be a possible outcome.

"It has to come from outside the industry, such as a large industrial company, or a large oil and gas company intending to secure supply chain. If it is a large industrial company, then [Asia-Pacific] companies could be likely candidates, but again, cultural integration would become an issue, similar to what we already have seen with Siemens Wind Power and Gamesa," Barla said. "History might repeat itself."

In the end, the most likely scenario is that Siemens Energy continues to fund its wind turbine unit given the strong long-term prospects for the wind sector, according to analysts.

"The only path for Siemens Energy is to financially support the business near term and make a successful turnaround," Ferhani said.

Brinckmann projects that offshore wind demand will grow from 60 GW of cumulative capacity by the end of 2022 to more than 500 GW by 2033, translating into more than 33,000 additional turbine installations.

Siemens Gamesa will maintain a market-leading position through the next decade, Barla said, with more than 150 GW of additional installed capacity compared to 22 GW now.

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