Despite Demand, Wind Turbine Makers Struggle

Profitability Eludes Wind Turbine Makers

General Electric (GE), Siemens Gamesa Renewable Energy (GCTAY), and Vestas Wind Systems (VWDRY) are pouring billions of dollars into manufacturing wind turbines, but the efforts are not translating into the profits they hoped for—even with outsized demand for green energy. Both Siemens Gamesa and Vesta Winds, the two biggest global wind turbine manufacturers, cut their profit targets for the rest of 2021. Meanwhile GE, which showed annual growth in turbine sales, has not been able to achieve profitability in that unit.

The main culprits for their woes are rising raw materials and shipping costs, which are eating away at their margins. It also doesn’t help that the fate of US subsidies is constantly up in the air, which leads to uncertainty, and causes some investors to feel skittish.

Demand Surges But Profit Limited by Costs

The headwinds the wind turbine industry is facing come as demand for their products and services explodes around the globe. Orders for wind turbines this decade are projected to be two times what they were in the previous 10 years. Nonetheless, the sheer size of wind turbines is making manufacturing difficult and costly. Add skyrocketing transportation and rising prices for steel, aluminum, carbon fiber, and copper to the mix, and it is not surprising profitability eludes these players. The cost to produce a wind turbine is expected to jump 10% in the next two years as a result of all the moving parts.

While price increases for raw materials could persist for some time, the companies are optimistic that shipping costs will decline as COVID-19-related bottlenecks are ironed out. But they do acknowledge that as the turbines get larger, transporting them will become even more complex.

Industry Looks to US Subsidies

Also hurting the manufacturers’ path to profitability is the state of US subsidies. A federal tax credit on wind turbines is slated to expire this year, and it is not clear if the White House will extend it or what an extension would entail. The topic is making the rounds as part of the Democrats’ $3.5 trillion budget-reconciliation bill. A lack of clarity is prompting some customers to postpone ordering new turbines as they see what happens on the legislative front.

All the near-term pain for wind turbines has weighed on the share prices. Siemens Gamesa’s stock is down about 25% this year. However, that is not stopping the company from expressing optimism about the long-term future. It points to a world that is moving toward greener energy, with wind being a major driver. It will be interesting to see how long it takes for these wind turbine leaders to generate a profit.

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