Siemens AG is an engineering and manufacturing multinational conglomerate headquartered in Munich, Germany. Siemens classify their core activity areas into electrification, automation and digitalization with the reportable sectors (till 2014 end) being Energy, Healthcare, Industry and Infrastructure & Cities . From 2015 onwards, the major business divisions of the company has been classified into Power and Gas, Wind Power and Renewables, Power Generation Services, Energy Management, Building Technologies, Mobility, Digital Factory, Process Industries and Drives, Financial Services and Healthcare. Other than these core areas, Siemens is also involved in Equity investments and Real Estate. Siemens AG was founded in the year 1847 and has grown into a company that employs 343,000 people worldwide (as of September 30, 2014) with the total revenue of $ 74.11 B . This article will focus on the energy sector and specifically on the future global strategies of the company in wind power and renewables domain. The areas of focus include the strategies, geographies, strategy implementation, results and projections and market share analysis.
Wind Power and Renewables is one among the three major divisions under the energy sector of Siemens. Formerly known as Wind Power division, it manufactures wind turbines for onshore and offshore applications, including both geared turbine and direct drive machines. The division was renamed as the Wind Power and Renewables at the beginning of 2015 and is now combined with the solar and hydro activities. For Siemens, the wind power and renewables division witnessed strongest growth (both onshore and offshore) compared to the other two divisions in the energy sector.
Wind Power and Renewables- Siemens’ Strategy
Siemens has a clear cut strategy in all their divisions including wind power and renewables to leverage the opportunities with customer and business focus, streamlined governance and an integrated management model . This section will focus on the strategies adopted for the wind power and renewables area.
Strategy 1- Offshore wind power: Siemens is committed to build their focus on offshore wind power as the offshore wind turbines are believed to deliver high yields with minimal fluctuation, when compared with the onsite wind turbines. Siemens is one of the leading companies in this area and the company wants to cement its position as the market leader with double digit growth in the medium term .
Strategy 2- Platform Strategy: Standardization and Modularization are the fundamentals to this approach. This allows Siemens to streamline their entire manufacturing and installation process and enabling standardized modules like rotors, generators, towers and hubs to be used with different productions. This in turn helps the company to keep the different components to a minimum thereby reducing the infrastructure, installation and servicing costs.
Strategy 3: Onshore Wind Market: Siemens is aiming at consolidation of the fragmented onshore market and is targeting to address the needs of the small onshore customers, including providing complete service packages. They are planning to expand their onshore presence organically and not through any mergers and acquisitions
Strategies and Countries in Focus
Strategy 1- Offshore wind power: The focus area for Siemens here is the European market with United Kingdom and Germany in the forefront, which were the major contributor towards the growth of revenue from wind power for Siemens in 2014 . In fact, Europe is the most mature market for Siemens when it comes to offshore wind power and has almost all offshore installations located there. The major factors contributing to the prominence of Europe are the increased affinity towards making the energy sources nature friendly, increased resistance to traditional power generation methods like thermal and nuclear power plants, favorable geographical conditions as well as political and public support .
Strategy 2- Platform Strategy: The platform strategy has enabled Siemens to streamline their entire manufacturing and installation process. Through Platform Strategy, the company has been able to minimize the number of components for wind turbines of varying sizes and capacities. The target market for this strategy has been primarily Europe and North America, as the major bulk of the business is derived out of these two geographies.
Strategy 3: Onshore Wind Market: There has been an increased focus from Siemens on their offshore wind power division, with the onshore wind market taking a back seat. However, in geographies, such as North America and China, the focus is still on the onshore wind market as these nations are not yet open to offshore installations as is the case with Europe. Moreover, ideal onshore locations for wind power generation are ideal in both the US and China, making them more suitable for onshore wind energy production .
For Siemens, wind power is a key sector which has to drive the revenue in the long term. The enhanced focus on offshore wind turbines is due to their advantage of delivering high yields with least fluctuation when compared to other renewables. Currently, Siemens is the market leader in offshore wind power generation and is expecting double digit market growth in the medium term. The wind power production witnessed a sharp growth in the year 2014 for Siemens owing to the strong demand in Europe, which is considered as the most mature geography for wind power generation, both onshore and offshore. The growth in Europe was triggered by favorable Government policies including tax incentives and regulatory frameworks, public support and favorable geographical conditions. In US, the growth was driven by the onshore wind projects as a result of the Production Tax Credit (PTC) extension for renewable energy. In countries like China, the domestic players dominate the market and the competition is tough. Moreover, the entry of foreign players to the onshore wind generation power sector is challenging and limited .
The industry characteristics also differ widely in onshore and offshore wind power generation. There is more number of players in the onshore wind farm market and the competition is intense. However, owing to the technological complexities, the offshore wind farm market has only a handful of players. Cost reduction measures such as platform optimization has worked well for Siemens in reducing the overall costs and enabling restructuring. Consolidation is happening at a rapid pace in the industry in both the on- and offshore wind power through the market exit of smaller players, and especially in offshore through joint ventures between established players and new market entrants . The key drivers for consolidation are technology and market access challenges, which increase development costs and the importance of risk sharing in offshore wind power .
In 2014, Siemens implemented organizational restructure as well, which came into effect on October 1, 2014. Starting 2015, the sector classification was eliminated and seven reportable divisions were newly formed- Power and Gas, Wind Power and Renewables, Energy Management, Building Technologies, Mobility; Digital Factory, and Process Industries and Drives.
Strategy Results and Projections
The costs associated with each strategic recommendation will be discussed in this section of the article.
Strategy 1- Offshore wind power: The offshore wind power strategy is paying off well to Siemens from the revenue perspective as well as the market share perspective. Siemens is currently the dominating player in offshore wind power, enjoying majority of market share in multiple areas. Offshore wind power generation may require higher initial investment, but it also returns significantly higher yields per turbine. It is also highly sustainable and reliable, with 97% availability and better . Yet another advantage is the full load hours. Offshore power generation has potentially more than 4000 operating hours annually at full-load compared with onshore wind power installations . At the end of FY 2014, Siemens had orders worth $ 8.65 billion for wind power and revenue of $ 6.14 B, which is an increase of over 6% over 2013 . However, in spite of strong revenue growth the wind power reported a loss of $16.75 M in 2014, owing to increased production costs due to a large number of multiple offshore installations.
Strategy 2- Platform Strategy: Siemens platform strategy deploys four major platforms- G2, D4, G4 and D6 with 12 products between them with turbines ranging from 2.3 MW to 6 MW . Siemens has taken a cue from the automobile companies of the world who have mastered the art of optimizing the vehicle components in order to make them cheaper and more efficient. Siemens have implemented this concept to the production of giant rotor blades for wind turbines through their platform strategy. As mentioned above, platform strategy enables Siemens to rely on common components for many of their products, thereby achieving efficiencies of scale and minimization of the number of components for wind turbines of varying sizes and capacities. Through automation, Siemens was able to save over $ 33.5 M per year in blade production costs. This concept also helps them in achieving significant savings on logistics .
Strategy 3: Onshore Wind Market: Onshore wind power production witnessed the maximum growth in North American region. The overall growth projections for onshore wind market has been estimated at 0.7% per annum for the period 2012-2018, which is significantly lower than the offshore wind power production. The overall revenue from onshore wind power generation increased 6% y-o-y, driven primarily by the North American market. The order intake for onshore power also witnessed a sharp increase, again from North America. One of the prominent orders includes the order from Pattern Energy Group, Inc. in California for a total output of over 930 MW over a period of 10 years .
Market Share Analysis
The principal competitors in the onshore market are Enercon, Gamesa, General Electric,
Goldwind, REpower and Vestas. In the offshore market the principal competitors are Alstom, Areva and REpower. Siemens have a clear cut lead among the competitors, in the offshore wind power generation area. However, it is not the case with the onshore side.
In the wind turbine manufacturing- annual installations area, Siemens has a significant lead over the competition with 1,278 MW of new capacity connected, which forms a whopping 86.2% of the overall market. The next major player, MHI Vestas is at a distant second with just 9.5% market share .
Similarly in terms of the units connected, Siemens maintains a significant lead over the competition with 349 wind turbines connected which forms 85.5% of the overall market .
Also, Siemens is the leading offshore wind turbine supplier in Europe with 65.2% of total installed capacity. MHI Vestas (20.5%) is the second biggest turbine supplier, followed by Senvion (6.6%), BARD (5%), Areva (0.9%), WinWind (0.7%) and GE (0.4%). Other suppliers including Samsung, Alstom and Gamesa together account for 0.8% of the market .
In terms of the total number of turbines installed at the end of 2014, Siemens remains the top supplier with 1,598 turbines accounting for 64.2% of the overall market. MHI Vestas came second with 25% and Senvion came third with 3.8% market share .
In Europe, Siemens lead the pack with 65.2% of total installed capacity. The second and third positions are held by MHI Vestas and Senvion respectively, with 20.5% and 6.6% market shares respectively .
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