German manufacturers have lived a charmed life.
While many other countries have been through boom times and busts, that has not really happened in Germany: its leaders committed to renewables in 2000 and have stayed the course.
The nation is still in the midst of a building boom. Wind farms totalling 5.4GW were completed in 2016, following on from 6GW in 2015 and 5.3GW in 2014. This high level of activity has helped the likes of Enercon, Nordex and Senvion to prosper.
But that boom is coming to an end. This year, Germany has introduced competitive auctions, and is restricting the amount of onshore wind farms built to a maximum of 2.8GW each year.
We expect to see a gradual drop in the amount of wind capacity completed in Germany over the next two years as the market adjusts to these new levels. From 2019, it could also end up lower than 2.8GW annually if the auctions for onshore wind have the same teething problems that they did in the solar sector.
That means less demand for German manufacturers’ turbines in their home market, and is already putting pressure on those firms’ strategies and share prices.
For example, Nordex this month announced that it achieved sales of €3.4bn in 2016, and forecast that this would slip to around €3.1bn-€3.3bn in 2017. This is in part due to reduced deal volumes in Germany; more competition; and deals entering India.
That conservative forecast may not represent a major drop, but it has been enough to worry investors: shares in Nordex are now trading one-third lower than before the company published its results. As a result, Lars Bondo Krogsgaard has announced that he is quitting as CEO on 31 March because, even though Nordex is in a strong position financially, its “credibility has suffered as a consequence of the outlook”.
This is also notable because Nordex should be one of the German manufacturers best able to thrive outside Germany, following its €785m takeover of Acciona’s wind operations last year. One of the main goals of that deal was to marry the experience of Nordex in continental Europe with Acciona’s strength in emerging markets.
But Nordex is not the only German manufacturer taking a tough look at its future.
This month, we have seen Senvion reveal plans to cut 780 jobs at its factories in Germany. It also announced in its annual results that it only expected profitable growth from 2019 after spending the next two years in transition, as it expands in new markets while commercialising new machines. Like Nordex, the firm has been seeking to grow in India after its acquisition of Kenersys last year.
And we will keep a close eye on Enercon too. The firm usually publishes its results in April, and we would not be surprised if it is looking at restructuring, like its rivals.
It is the largest manufacturer by sales in Germany with a 37% market share in 2015, but has previously forecast that growth in 2017 will be affected by tough business conditions. Meanwhile, it has been far less conspicuous than rivals when it comes to overseas growth, despite having done deals in 50 countries.
Enercon may be a specialist in Germany, but the slowdown in the market could hit it hard – while the departure of Nicole Fritsch-Nehring as co-MD in late 2016 only adds more intrigue. In January, we picked Enercon as a firm to watch in 2017 for M&A deals, and a tie-up with an emerging markets specialist could still make sense.
German manufacturers may have lived a charmed life until now, but we expect to see more cut the size of their production operations in Germany as the market gets smaller.
On the research side, investment has to continue as they need to reduce turbine costs in a more competitive markets. This will include more buyouts of specialists that can help them to cut turbine costs and find opportunities in areas like storage.
And, internationally, we expect to see them chasing growth harder than ever, either by themselves or by linking up with other players. That won’t be easy, though. This is a highly competitive market and some of them will come unstuck.
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