Supply chain instability together with the costs of surging raw materials stymied the intake of new orders at the major Western wind-turbine makers in 2021 as the manufacturers raised their prices and prioritized profitability over market share.

The four largest turbine-makers from Europe and the U.S. — Denmark's Vestas Wind Systems A/S, Spain's Siemens Gamesa Renewable Energy SA, U.S.-based General Electric Co. and Germany's Nordex SE — recorded 44.3 GW of new orders in 2021, down 5.2% compared to 2020, according to an analysis by S&P Global Commodity Insights.

The decline is largely attributed to contract renegotiations the companies undertook to account for their higher costs, according to Shashi Barla, principal analyst on global wind supply chain and technology at Wood Mackenzie.

"The [companies] are not in a position to absorb all these cost increases," Barla said in an interview, adding that the companies have mostly struggled to make profits in recent years.

Siemens Gamesa, Nordex and GE's consolidated renewables business all reported negative profit margins in 2021. Even the 2.1% profit margin recorded in 2021 by Vestas, the largest manufacturer globally, is down from 4.7% in 2020 and a far cry from the 12.4% it achieved in 2017.

"[The turbine-makers have] reached the stage where these losses are unacceptable to them," Barla said.

'Know your costing'

Vestas displayed the most striking decline in new orders with intake dropping 19.4% year over year to 13.9 GW, while Siemens Gamesa and GE posted year-over-year declines of 3.9% and 4.7%, respectively.

Nordex was the only major turbine-maker from Europe and the U.S. to record higher order intake in 2021, boosting its total by 32% to 7.9 GW. The company is still "chasing market share" in a bid to join the top table of turbine suppliers, Barla said.

As Vestas reported its full-year earnings for 2021, CEO Henrik Andersen said the company can "live with a lower order intake" if that means its contracts are making money.

"[It] is critical to know your costing, and it's critical also to be able to back off from where projects suddenly become [unprofitable]," Andersen said on the company's Feb. 10 investor call. "And if you haven't done that, it ends badly."

Andreas Nauen, Siemens Gamesa's former CEO, similarly spoke about "prioritizing profits over volume" in its onshore wind division as the company reported its full-year earnings Feb. 3. Nauen was replaced as CEO on March 1 by Jochen Eickholt, who has pledged to turn around the company's fortunes and return it to profit.

GE's renewables unit, GE Renewable Energy, has experienced similar struggles and is expected to post a loss in 2022, owing largely to policy uncertainty in the onshore wind market in the U.S., where it is the market leader.

The company plans to split its energy, healthcare and aviation businesses into three separate listed entities, and with talk of an extension to the U.S. production tax credit for wind projects, it is targeting profitability for its renewables unit by 2024.

Higher prices, contingencies

Siemens Gamesa executives provided evidence of the pain endured by turbine-makers in recent quarters. The company's order backlog includes €2 billion of so-called onerous contracts in Brazil and Sweden on which it expects to make zero margin, CFO Beatriz Puente said on an investor call Jan. 21.

To combat the inflationary pressure, the company, like its peers, raised the price of its turbines in 2021.

"We are confronted with increasing costs, and for these increasing costs, we need to find solutions," Eickholt, Siemens Gamesa's new CEO, said at a March 24 media briefing.

The company's new contracts will include clauses for indexation and price escalation, while logistics are being charged at a cost-plus basis rather than at cost.

"We have higher contingencies embedded" in new contracts, Puente said. "And of course, if this situation comes up in the coming years, we will be more protected."

More broadly, the recent cost pressures highlight what some perceive to be the unfair division of risk in the wind supply chain. Nauen, Siemens Gamesa's former CEO, called in February for a "fundamental change" in the industry around dividing up the risk of cost inflation and logistics delays.

"You can't penalize one section of the industry with these cost increases," Barla said, adding that all future contracts ought to have mechanisms that allow the turbine-makers and their clients to share both the pain and the gain.

Issues are 'transitory'

The turbine-makers continue to grapple with the high cost of raw materials such as steel, which was an enduring theme throughout 2021. The market volatility stemming from Russia's invasion of Ukraine has only exacerbated the issue, according to Nordex.

As for the supply chain bottlenecks and high freight rates, logistics companies point to a gradual improvement starting later this year. The EU is also pushing plans to ramp up renewables generation to reduce exposure to Russian gas, and this focus on energy independence will "further support pricing of turbines," BofA Securities analysts said.

While the situation for the turbine-makers could get worse before it gets better, "we do see these issues as transitory," the analysts said in a March 11 note.

However, the companies' struggles with profitability could spell a consolidation wave in the industry, according to Barla. Siemens Gamesa, itself a combination of Siemens Wind Power and Gamesa, bought out struggling rival Senvion SA's service business in 2020, and Nordex combined with Acciona Windpower in 2016.

"The companies that are not financially strong will become a victim of these transitions and market difficulties," Barla said. "There could be some casualties."

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