Missing Out Siemens Unplugged

Germany’s flagship engineering and electronics company is struggling to catch up with the burgeoning market for smaller gas and steam engines.
Has Siemens been resting on its big-turbine laurels?

The town of Rosenheim in Bavaria is taking a new approach to its power supply. It has built a small gas-power plant to burn the waste from the 60,000-strong town – just enough to balance out possible power shortages from the grid.

“We feed the power into the network, preferably at times when the price for power at the exchange is highest,” said Götz Brühl, the head of Rosenheim’s public utility.

Rosenheim is just one of many towns and communities in Germany that have built themselves small-scale power plants to guarantee power supply in times of shortages or high prices.

Following the country’s decision to exit nuclear power after Japan’s 2011 Fukushima disaster, Germany started to subsidize renewable energies and has seen a trend in decentralizing power supply from large utilities to smaller local operations.

This is a trend, however, that Siemens, Germany's engineering and electronics giant, seems to have overlooked.

Decentralization and small structured power supply is the main trend. Marco Deckert, Researcher, Frauenhofer Institute

That the company failed to get in front of this trend is highlighted by the fact that Mr. Brühl decided to go to Austria to buy the gas engines for Rosenheim's small plant – from Jenbach, a company owned by Siemens' largest competitor, General Electric.

Siemens chief executive Joe Kaeser is aware of the company’s slow response to changes in Germany’s power industry. To tackle the lag, he has hired former Shell manager Lisa Davis as a new board member to help get Siemens future-ready.

“Ms. Davis is the first step to get our profit margin and business where it belongs,” Mr. Kaeser said last November.

She must push the small gas turbines business, which Siemens bought from Rolls-Royce for €1.18 billion last year, to catch up with the field of micro power plants.

The 51-year-old American is also tasked with integrating Dresser Rand, an oil products and service company from the United States that Siemens is planning to buy for €6.9 billion ($7.6 billion).

But experts are not sure whether Siemens will be able to turn things around any time soon.

“This is a transition time,” said analyst Wolfgang Donie of Nord LB, adding that nobody expects a rapid improvement in the power area at Siemens.

In the first quarter of the current fiscal year, earnings from the power and gas department at Siemens fell to €325 million from €536 during the same quarter the previous year. Revenue went down three percent to €2.9 billion.

“There is no other section at Siemens that requires the same need for action,” said Mr. Kaeser in January.

Experts believe that the second fiscal quarter, which ended in March, will reveal even worse results than the previous one.

“Decentralization and small-structured power supply is the main trend,” said Marco Deckert, energy expert at the Frauenhofer research institute.

Companies are expected to adjust to Germany’s ambitious target of generating 80 percent of electricity from renewables by 2050. General Electrics invested €140 million in the Jenbach location since it acquired it in 2003. It is GE's largest facility in Europe, with high-profile customers like public utilities, hospitals and industrial plants, such as German auto maker BMW. Experts believe utilities that produce engines for small plants are the future.

Other companies make even smaller gas engines than GE. Entrade in the German city of Düsseldorf, developed a mini-power plant together with the Frauenhofer Institute, RWTH Aachen university and Germany’s aerospace center. The small-biomass plant can supply power to up to 20 households.

 

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Entrade chief executive Julien Uhlig collected €50 million from private investors and public funding to build these new plants. The company, which was founded in 2009, will sell these small plants to a series of clients, including to the U.S. city of San Jose in California, which plans to use it to cool its server location.

At Siemens, the focus was mostly on large-scale machines. Michael Süss was responsible for power supply until last year at Siemens, and expanded the large gas and steam turbines section. At one of their facilities in Western Germany, near the river Ruhr, Siemens expanded its staff to 4,800 employees, up from 3,000.

As a response to the trend for decentralization of power sources in Europe, Mr. Kaeser wants to transfer the business to the Asian and North-American market, where such large-scale machines are still in demand.

“Siemens is still a market leader (in technology),” said Manfred Wirsum, expert for power plant technology at the RWTH Aachen university.

Competitor General Electric is closing in on Siemens. The global market for gas turbines and Siemens market share have decreased over the years. Yet, General Electric's market share is expanding.

Siemens is still strong in the offshore wind turbine market but lacking behind when it comes to the quality of weakwind onshore turbines, people familiar with the company's thinking told WirtschaftsWoche.

One of Siemen’s toughest challenges will be to cut jobs. Mr. Kaeser’s predecessor, Peter Löscher, signed a location and job guarantee for employees at the plant in Ruhr. Up until now, Siemens has managed to lay off people with large compensation packages.

 

This story first appeared in Wirtschaftswoche. To contact the author: [email protected]