Siemens Gamesa takes tested route to €2bn savings

It's still less than a year since Siemens and Gamesa completed their merger, and last week the combined company set out plans every bit as ambitious as that initial tie-up: it's looking to cut €2bn costs in the next three years.

This move doesn’t come as any great surprise. In November, the wind giant set out plans to cut 6,000 jobs from its global workforce of 27,000 people. And, like other turbine makers, it faces pressure on its profit margins as auction-based procurement systems drive down the returns from wind farms. Cutting costs is crucial.

Even so, this plan – which is clunkily called L3AD2020 – could drastically change the shape of Siemens Gamesa over the next three years. So how does the firm plan to make €2bn savings
while also achieving a target profit margin of 8%-10%?

Now, the first thing to say is that we don’t think Siemens Gamesa would have made a commitment like this lightly. Its management team is thoughtful about what it says publicly about its strategy, so it must believe €2bn is possible. And, looking through its plans, all of the main cost-cutting measures here are tried and tested.

First, it's looking to save more through post-merger ‘synergies’.
It's easy to forget that Siemens Wind and Gamesa only officially merged last April. Back then, management said it could achieve
€230m of post-merger savings by 2021.

In this new plan, the firm has almost doubled the target to €400m and plans to do it a year before it previously said. This includes changes to procurement and streamlining the product portfolio.

We can see the sense in making these cuts faster. In 2017, we saw rapid change in the wind sector as competitive tenders drove down the cost of wind energy, both onshore and offshore. Siemens Gamesa is trying to keep up with global changes. Even so, these post-merger ‘synergies’ only account for one-fifth of that €2bn.

The second way Siemens Gamesa is looking to cut costs is by closing some of its factories in Canada, Denmark, Germany and Spain; and growing production in cheaper countries such as China and Morocco. Moving production to lower-cost countries is a well-worn approach from manufacturers looking to reduce costs, and should also give the firm a greater foothold in emerging markets in Africa and the Middle East.

The third way it is seeking to drive down the cost of its products is by bundling its orders more, so it can achieve economies of scale in production. The plan to pursue a slimmed-down product portfolio should also help it to achieve this goal.

And fourth, the company is looking to cut 20% from the amount it pays third parties – so, if you supply Siemens Gamesa, get ready. The company is looking to increase the competition between its commodity suppliers in order to achieve lower costs.

But the plan is not simply about squeezing suppliers. The firm also said it would be looking to use more modular parts; and to work with key suppliers at an early stage of the product development cycle so it can identify savings. Again, there is no magic here. It is a pretty well-worn way of reducing costs in a tough market.

Will it succeed? Well, the great unknown in the plan is that it relies on continued growth in the global market, and on rising activity in its key markets. And, like it or not, the wind sector does still rely to an extent on political support, even if this is less likely to be as subsidies, and so it is tough to predict what will happen and when.

What we do think, though, is that this plan should put Siemens Gamesa in a stronger position to cope with the cost pressures we will see in wind in the next three years. In that respect, re-shaping the company is about more than just hitting targets.