The shared fate of Suzlon and Senvion after 2015 split

Turbine makers Suzlon and Senvion went their different ways at the start of 2015. The former sold the latter to private equity firm Centerbridge Partners for €1bn.

But they went the same way last year as they dropped out of the top ten ranking of onshore turbine makers by total installations in 2018. And, in many ways, the fortunes of the two companies mirror each other. They struck out on their own four years ago – and each suffered after their home nation adopted competitive auctions.

Let’s look at Suzlon first. Few people would claim the Indian manufacturer was problem-free before disposing of its German subsidiary. It has been laden with debt for years and saw the sale of Senvion as a way to fix its financial problems, and then expand in India and overseas in Brazil, China, Mexico, South Africa, Turkey and the US.

But it hasn’t worked like that. The introduction of tenders in India has squeezed profit margins across the industry, and contributed to a reduction in activity from 4.1GW of completions in 2017 to 2.2GW in 2018. That drop in Indian installations has reduced activity in Suzlon’s core market.

The company also failed to make good on those overseas plans – and, if anything, it withdrew further from them with the sale of its Brazillian operations in mid-2017. Now Vestas is reportedly in talks to buy a controlling stake in Suzlon to accelerate its own growth strategy. If Suzlon still wants to be part of a group with a global footprint then this may well be its best chance.

There are parallels with Senvion. The company was sold by Suzlon two years before competitive auctions were introduced in Germany. Back in 2015, Senvion and new owner Centerbridge said the split gave it the opportunity to grow internationally, and it has certainly been more successful than Suzlon in growing outside its home market.

For example, Senvion said in its 2018 results that it had “successfully entered new dynamic markets such as India and Latin America”, and would now focus its growth on these areas, in addition to its operations in Europe, North America and Asia. It does have that overseas footprint.

But let’s not get too excited. The results announced this week also said the firm has underperformed in “challenging market conditions” and made “operational mistakes”. Its CEO Yves Rannou said Senvion needed to streamline its portfolio of products, increase modularisation to reduce costs and “focus on execution”; and it has failed to make any inroads in the offshore market. Senvion is struggling too.

Both Senvion and Suzlon show how tough it is for players that are heavily exposed to one market to maintain their position when that market experiences a downturn.

So does this show Siemens board member Michael Sen was right to tell the German newspaper Suddeutsche Zeitung last month that “only the big and the strong [turbine makers] will survive” the market’s “Darwinian cutthroat competition”? A tentative yes.

Growth in wind globally is very patchy. Global Wind Energy Council figures this week showed that only two markets exceeded 2.5GW of onshore wind installations in 2018 – China (21.2GW) and the US (7.6GW) – and WindEurope said last week that the onshore market in Europe has just been through its worst year for installations in ten years. It doesn’t make sense to be over-exposed to one market.

However, we would challenge the notion that in Darwinism it’s the strongest, fastest or most intelligent that survives. In fact, evolution favours the most adaptable. That’s why the world still has worms!

So when Sen says that the large turbine makers will either buy or kill their smaller rivals, we don’t think it's a foregone conclusion for all OEMs – and that’s why we still see potential for Senvion and Suzlon if they can adapt to the conditions.

And where will each be at the end of 2019?

Well let's take a bold punt and say we think neither will change hands. Yes, they both have established names and strength in major markets. No denying that. But Vestas is already making strong inroads in India and we don’t think Suzlon will prove tempting enough.

Meanwhile, Senvion appears to have the backing of Centerbridge and so, while we’ve tipped it as a buyout target before, it doesn’t feel to us like an exit is imminent. We think there's a way to go in that strategy yet and we'd expect Centerbridge will try to turn it around to add value ahead of any sale.

And as we're nailing our colours to the mast, let's make one more prediction. Not a controversial one this. Whatever happens, we don't expect Suzlon and Senvion to come together again!