We All Love Wind Power, Unless You Want to Make Money: Gadfly

Climate change will have some very unpleasant consequences, unless we cut our dependence on fossil power. Generating electricity from the wind is clean and increasingly cheap. So it’s ascent looks assured, whatever ornithologists and President Donald Trump might think.

Why then have shares in Germany’s Nordex SE, the sixth-biggest manufacturer of onshore wind turbines, fallen by three-quarters since late 2015? One word: competition.

Crucial markets such as Germany and India are phasing out subsidies that once guaranteed a fixed electricity price for new wind installations. Instead, they’re embracing auction-based systems: bidders who promise the cheapest electricity win. The transition, while good for the market in the long-run, is delaying some orders and has unleashed a margin-squeezing battle for available tenders.

Nordex, which replaced its chief executive last year and cut one in 10 of its workers, eked out just 300,000 euros ($372,000) of net profit in 2017.  With this year’s sales projected to contract by about one-fifth, it will probably make an annual loss this year and possibly in 2019 too, according to new boss Jose Luis Blanco.

Rivals aren’t doing much better. Hamburg-based Senvion SA and Siemens Gamesa Renewable Energy SA have cut lots of jobs too.

In Europe, the upheaval provokes uncomfortable memories. Germany was once dominant in solar technology, but domestic producers collapsed because of competition from Chinese imports. With Xinjiang Goldwind Science & Technology Co looking to expand overseas, are Europe’s wind manufacturers about to suffer the same fate?

Fortunately, that still looks unlikely. China’s turbine companies are almost entirely focused for now on their home market, the world’s largest. And unlike solar panels, wind turbines aren’t a commodity product that China can make at home and ship overseas on the cheap. “You have to manufacture locally,” says James Evans, a clean energy analyst at Bloomberg Intelligence. Some countries insist on it.

Nor are European manufacturers sitting still. They’re consolidating, giving them the scale that makes them harder to dislodge.

Being big lets turbine-makers spread their technology costs across higher sales volumes. That’s crucial to lowering the price of electricity production, and thus winning tenders. Being in more countries helps cushion lulls in demand in individual markets. Nordex merged with Spain’s Acciona Windpower SA last year, while Siemens’s wind unit has joined with Spain’s Gamesa.

Fortunately for Nordex, whose sales are one-third of those of industry leader Vestas Wind Systems A/S, wind isn’t necessarily a biggest-takes-all market. Customers are keen to sustain a spread of manufacturers so they don’t end up beholden to Vestas and Siemens Gamesa, according to Warburg Research analyst Arash Roshan Zamir.

With net debt of about 100 million euros, the Nordex balance sheet looks sturdy enough to ride out a couple of rough years. In the meantime, it hopes to cut costs by sourcing more parts from cheaper countries. A new turbine design should help win back customers.

Still, the Chinese threat can’t be ignored totally. Both Nordex and private equity-owned Senvion have decent technology and customers, yet their values have shrunk to less than $1 billion. Asian competitors might not destroy Europe’s wind companies via cut-throat competition. But, politics permitting, China could just buy one of them.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.