New standalone company may need to shutter some operations to meet financial goals
Siemens Energy will debut as a standalone company later this month as it is spun-off from parent Siemens AG and enters the German stock market. The publicly listed Siemens Energy will include operations spanning the entire energy value chain, including the service business.
The new Siemens Energy will have about 91,000 employees worldwide. Its products will include, among other things, combined cycle turbines, generators, transformers and compressors, and through Siemens Gamesa, wind turbines. In fiscal 2019, Siemens Energy generated revenue of about €29 billion.
Incoming CEO Christian Bruch, who served as CEO of German industrial gas and engineering company Linde, held a virtual media roundtable discussion before the company’s Capital Markets Day on Sept. 1.
Here are some of his comments, edited for clarity.
On the reason for spinning off the power division:
The question I get is ‘why is it good to be spinning off from Siemens?’, because it gives us definitely the opportunity to achieve a step-change in the operational performance.
We have a great portfolio. I’m not satisfied with the financial performance our business had. We come from a reasonably good margin but deteriorated over the past years also because the market is transforming, and some measures simply have not been taken fast enough.
And obviously a lot of things which we’re currently executing have been started in the old structure, but what is different? I think the difference is, really the rigor and the speed in which you need to do things. And in this regard, sometimes, it’s honestly helpful to feel the full pressure of the financial markets and having no ambiguity in how fast you need to implement certain things.
So it’s about how you do things, how fast you change your footprint, how rigorously you stop the things you’re doing where you lose money. And in this regard, I appreciate the tougher wind on the financial market… (the company) had a comfortable setup like Siemens which has all these areas, obviously, which could cover bumps in the profitability. This room is not going to be there. And this makes changes, I believe, a lot easier.
I think it’s always important to explore why is it actually good to have a couple of divisions in Siemens energy, which cuts across the energy market. Why not just having an energy pure play, a renewable pure play company that’s just wind. It’s about generating value at the interfaces of the divisions.
The importance of service to the company’s bottom line:
What one always has to be aware if you talk about Siemens Energy as a business, this big chunk of the business, around 40% of our revenue today is a service business. And I always say at the end, we are a product-led service business.
It’s great to bring compressors and turbines into industries like oil and gas like process industries or like generation. What we are trying to do is convert this really into long-term service contracts. And this is also what drives the resilience of the company also in times like COVID, which is also what we have seen this year.
We do sell products and solutions to drive services. We are a product-led service business. So it’s really getting into the circle from getting a unit in the market, selling a long-term service contract with it. Going through the enhancement period with modernization upgrades. And then obviously getting into the circle of replacing with new units again and making sure that we can really harvest all services.
On the demand for electricity:
Why are we relevant, actually, to the world? We are now in a situation with a growing population with more need for electrification and there is a huge change in the energy market and the electricity market particular. And there is obviously the big question, how do we serve a growing demand for energy and electricity, with the challenges of climate change and how can we at the same time have an affordable and reliable energy system while also keeping sustainability in focus?
What we do obviously see is in the next 20 years an increase of 50% in global electricity generation, simply by growing population, growing access to electricity, but also by increasing use cases like data centers, e-mobility, and so forth, and the further electrification of the industries also the process industries. So this is honestly the question, how can we meet this growing demand for electricity while protecting our climate? This is exactly where we come into play, having an offering really from conventional to renewables, understanding the energy market as a whole and where we obviously want to energize society.
One-sixth of the world’s electricity generation is based on our technologies today. This is around 100 000 assets, which we have out there in the field, which we obviously want to serve as one to renew one, to work on new solutions. We have a presence in 90 countries. So this is obviously close to our customers, and this is what we want to bank on.
On the future of natural gas:
We are helping our customers on this journey from transitioning to a more sustainable world based on the products and projects we provide. And this also means that sometimes an interim solution is a good one. And I believe also, we will need for decades to come natural gas as a key pillar of our energy system. This is where obviously we try with our customers to define the solutions and at the same time also monetizing on the great portfolio that we have.
First of all, I’m a strong believer that natural gas is going to remain a pillar of the energy industry over the next decades to come. There’s no question around it. With all the transformation ongoing, the growth ongoing, there will be no way around natural gas. And I believe in terms also of the units in the market, we see it stabilizing and we believe that is also level from which we will not further go on down. The question is OK, where exactly are we going to land? But I’m quite confident that we can on this level really provide some business, which is nice for us.
On the future of hydrogen:
Siemens Energy has a longstanding history and electrolyzers and a longstanding history also in fuel cells. And we are pushing quite some money to further commercialize and develop our hydrogen electrolyzers technology.
Siemens Energy today still delivers the largest operating PEM electrolyzer in the world. I know the technology pretty well and we strongly believe it will in the future be a pillar of the energy world, but it’s a future. It’s nothing where I do see a commercial business in the next years. It will take quite some time and quite some investments to get these use cases and technologies on the ground.
I mentioned the electrolyzers where we particularly look at the moment in terms of on the one hand rolling out our technology to pilot projects to get the scale-up, but at the same time to bid up the fabrication methods, to get to a more automated fabrication and also more design-to-cost because obviously this technology will only be successful if it tremendously can cut the cost down, which I believe is possible, but we will need to scale-up for this.
I’m a big believer in hydrogen. I clearly have to say this, but at the same time, I always have to give some reservations and clearly saying it will take time and you will need a lot of colors of hydrogen. In the meantime, let it be blue, let it be turquoise, whatever. In terms of bringing really a hydrogen economy in place.
On the gas turbine market:
We believe also that in the large gas turbine field, it has bottomed out a little bit and we believe this is going stay relatively stable going forward and we want to monetize on all the developments we have done in the past years. We had spent quite a bit of money to further develop our portfolio. We’ve introduced, obviously, the new HL units now on the market and obviously this is where we want to monetize on.
On the need for change:
First of all, we have to improve the profitability of the company. I’m not satisfied where we are. I believe there is room for improvement and we’re going to accelerate it.
The portfolio we have is very nice. We’re leading, but there are a couple of areas where we lose money and where we are underperforming. And I want to see these be fixed, right? I mean, either being restructured, being partnered or closed down, and this is what you, you see the first things now happening, and you will continue to see certain elements where we change setups into certain portfolio elements, because I think we cannot allow for portfolio elements to lose money and without any really future projection on how to get it profitable.
In the gas turbine area, where we simply clean up the portfolio in terms of the variants of what we have… we simply have products in there where we don’t believe the future market in new units will support that. And where we simply say, OK, we discontinue this, we’re going to service the existing units, but we’re not pushing for new units. That’s one example.
The second piece is, I’m also thinking about areas of really restructuring, getting costs out. We have some examples, but we have certain products where to produce, let’s say one turbine package, we ship the unit between six different sites, which is not a very commercially viable setup where it simply means, OK, reduce fabrication sites, consolidate fabrication and make it, let’s say, more cost-competitive.
How COVID helped drive innovation:
We had the first gas turbines completely remote commissioned because of COVID. But this is a big step forward in the acceptance of this digital products. And we want to increase the value of this offering going forward as a company.
At the same time, you can only make digital happen once you transform yourself and transform your core, which means that you have consistent work processes, make sure that your data is consistent across your work streams to allow yourself also to automate processes. And this is where we want to do more around driving internal digitization, and this is something that we’re tackling.
On hydrogen technology for turbines:
Obviously, we have a lot of developments going around. The SGT 600 and 800 can accept around 60% roughly of hydrogen we have some solutions on the smaller turbines, which go to up to 100%.
I think honestly it’s not so much about the percentage it’s about the flexibility, because one big struggle we have as an industry is that we are used to calculate 20, 30 year-business cases. So this question about flexibility will be key, as long as this long-term investments business case doesn’t change.
I’m not yet sure how many units we’re going to see ever with 100% hydrogen; I have to admit, it would not be my belief. It’s about providing the flexibility because nobody can predict the energy future. What’s going to happen if CO2 is a lot more expensive and I do need a renewable solution? This is where I think this optionality comes into play. And I think this is more key, than just talking about running 100% on hydrogen.
One thing I want to be clear at, I believe for example, conventional technologies like gas turbines, like natural gas will be required going forward. No question.
I think what we need to be clear also in explaining this better to the public opinion. I think the industry—and I think this probably applies to all of us—has not been vocal enough, about what is needed to get through the energy transformation. And in some areas, it’s about the courage to defend interim solutions, because it’s the fastest way to go on something. This is something where I believe we have to educate the public.
Because at the end we need to have a system which works and which is more sustainable. And currently we are more driven by a black and white discussion. What is renewable is good and everything else bad—the world is not as simple as this. It’s obviously a little bit more complex and this is where we educate and I expect other stakeholders like the politicians to listen.