This analysis of Siemens Energy says its gas and grid businesses are booming due to decades of underinvestment and rising power demand, but its wind unit Siemens Gamesa is a disaster losing about €2 billion a year. Key points: the gas service business has profit margins over 20% and low capital spending; grid technology orders have tripled to over €30 billion, with deliveries scheduled into the 2030s; if wind turns profitable, the group's profit could swing by €2 billion. The author is bullish on core operations but cautious on wind.
At a Glance This episode of Business Breakdowns features analyst Mark Hiley’s deep dive into Siemens Energy. The report notes that the company, spun off from industrial giant Siemens, covers the full value chain of both conventional and renewable energy, placing it at the forefront of the energy tra
Mark Hiley (Founder and Managing Partner of The Analyst) provides an in-depth analysis of Siemens Energy. Core judgment: Siemens Energy's gas power and grid technology businesses are experiencing a "generational" surge in demand, but the renewable energy division Siemens Gamesa is an "absolute disaster," incurring annual losses of approximately €2 billion, making it the biggest variable in the group's profitability. The company's total market capitalization is around €20 billion, while the potential annual profit from the gas and power business alone exceeds €2 billion — if the wind power business turns profitable, profits would see an inflection point of roughly €2 billion.
Mark Hiley believes that the gas power services business is Siemens Energy's most undervalued high-quality asset, with economic characteristics akin to a "money-printing machine."
The global large gas turbine manufacturing market is highly concentrated, with only four major players: Siemens Energy, Mitsubishi Heavy Industries, GE Vernova, and Baker Hughes, producing a stable 100–110 units annually. Siemens Energy is one of the leaders in this market, having recently streamlined its product line into a more modular offering.
The business generates annual revenue of approximately €11 billion, of which 35–40% comes from new unit sales, but nearly all profits are derived from service contracts. Service contracts exhibit extremely high stickiness — it is a natural choice for Siemens engineers to maintain Siemens turbines, and turbine lifespans span decades. Hiley estimates that service margins have already exceeded 20%.
> "If you can break even on new units, build an installed base, and then attach service contracts with margins above 20%, you have a very attractive business."
The entire Gas and Power business (with approximately €25 billion in revenue) requires annual capital expenditure of only €500–600 million, resulting in a capex-to-sales ratio below 2%. This implies exceptionally high returns on capital.
Five years ago, market consensus held that gas-fired power generation installations in Europe and North America would decline. However, reality has shown otherwise: as the share of renewable energy increases, grids require more peaking capacity (gas-fired peaker plants); countries are gradually phasing out coal power; and data centers are driving a step-change increase in electricity demand. Hiley notes that if electricity demand in North America and Europe grows at an annual rate of 2–3%, substantial new generation capacity will be needed, with gas serving as the primary source to fill the gap.
Hiley views grid technology as Siemens Energy's "best business" at present, with order growth already entering an explosive phase.
| Metric | 2021 | Current |
|---|---|---|
| Annual order intake | <€10 billion | ~€20 billion |
| Order backlog | €10 billion | >€30 billion |
| Revenue growth guidance | Low single digits | >30% in 2024 |
Underinvestment in grid infrastructure has persisted for decades—some parts of the UK grid have not been updated since the 1980s. Multiple forces are converging:
The market is also highly concentrated, with Siemens Energy competing against Hitachi, Mitsubishi, and others. Customers (national grid operators) require partners capable of providing 20-30 years of long-term collaboration. Siemens Energy holds a dominant position in Europe and "is often the only choice." Hiley emphasizes this is not a short-term phenomenon—grid operators' strategic planning already extends into the 2030s, and some of Siemens Energy's orders have delivery timelines in that decade.
This business has historically exhibited a "boom-bust" pattern. Hiley reminds investors to monitor whether management can maintain order selection discipline and avoid overexpanding capacity during peak demand. However, he believes that due to decades of underinvestment in grids, this could be a "truly enduring super cycle."
Hiley is extremely harsh in his assessment of the wind power business: calling it "a bloodbath," with the entire industry suffering hundreds of billions in losses over the past two years, and Siemens Energy posting a €4 billion loss last year.
The wind power industry grew up in a subsidy-driven environment and never established a culture of "subsidy-free profitability." Hiley points to a systemic lack of discipline in the sector:
The business generates annual revenue of approximately €10 billion, but is expected to lose around €2 billion this year (potentially more on a cash basis). Issues include:
Hiley believes that after this round of consolidation, the industry may see a healthier landscape:
Siemens Energy targets breakeven in wind power by 2026-27. Hiley lists the necessary conditions:
1. Work through the existing backlog of loss-making orders
2. Double offshore wind revenue to fill factory capacity
3. Restore profitability in the service business
4. Maintain pricing discipline on new orders and shift risk to project owners
> "When offshore orders start flooding into Europe, the key question is: what price and risk parameters will the management of Vestas and Siemens Energy follow? How disciplined will they be? Will they dare to say no to high-risk orders?"
Hiley offers a key judgment: the blade radius of current 12-16 MW turbines has already reached approximately 115 meters, and the supply chain can no longer support larger sizes. If the industry stops the arms race for "bigger blades" and instead focuses on monetizing the R&D and capital expenditure already deployed, industry returns could improve. This aligns with the framework he discussed in the Rolls-Royce podcast about "engineering companies over-engineering themselves into destroying industry returns."
Hiley points out that the apparent net cash position requires deeper analysis, as a significant portion of the cash comes from customer prepayments.
Hiley emphasizes that the industrial logic of placing wind power and gas/grid businesses under the same group is sound: the future energy system will generate electricity from Siemens Energy's offshore wind turbines, transmit it through its offshore substations, onshore interconnection equipment, and grid components, ultimately reaching end users. However, to date, "Siemens Energy has not realized this vision."
| Position | Guest's Stance | Key Data |
|---|---|---|
| Siemens Energy | Bullish on core business, cautious on wind | Market cap ~€20 billion; Revenue €35-40 billion; Order backlog >€110 billion |
| GE Vernova | Mentioned as a comparable company | Most direct competitor |
| Vestas | Mentioned as an industry benchmark | 25-year average EBIT margin ~4%; Target 10%+ margin |
| Mitsubishi Heavy | Mentioned as a competitor | Key player in gas turbine and grid technology markets |
| Hitachi | Mentioned as a competitor | Participant in grid technology market |
| Baker Hughes | Mentioned as a competitor | Participant in gas turbine market |
| Ansaldo Energia | Mentioned as a small competitor | Italian company, already acquired |
| Ørsted | Mentioned as an industry problem case | Offshore wind project developer, suffered significant losses |
| BP / Shell | Mentioned as industry problem cases | Incurred losses in wind project development |
| Nell / ITM Power | Mentioned as hydrogen bubble cases | Hydrogen stocks have fallen sharply in recent years |
| Prysmian / NKT / Nexans | Mentioned as comparable companies | HVDC cable suppliers, orders booked into the 2030s |
| National Grid / TenneT / Eon | Mentioned as clients | Capital expenditure plans have doubled/tripled/quadrupled |
1. "The economic characteristics of the gas service business should be extremely attractive—double-digit margins, a capital expenditure-to-sales ratio below 2%, and essentially a very simple long-term service business." (Mark Hiley) — The business generates annual revenue of €11 billion, with capital expenditure of only €500-600 million, and service margins exceeding 20%.
2. "Five years ago, market consensus held that gas-fired power generation was a structurally declining market; now, these companies face capacity constraints. As a large grid operator, if you approach Siemens Energy or GE Vernova, securing delivery slots for the next few years is difficult." (Mark Hiley) — The demand reversal stems from the convergence of three forces: renewable energy peaking, coal power phase-out, and data centers.
3. "The order backlog for grid technology has grown from €10 billion in 2021 to over €30 billion now, with some orders scheduled for delivery in the 2030s. This is not a short-term phenomenon but a generational shift." (Mark Hiley) — Decades of underinvestment in grids, combined with energy transition demand, may form a genuine "super cycle."
4. "The wind power industry has never established subsidy-free profitability. If you look at Vestas' 25-year average EBIT margin, it is only about 4%, and it typically cycles through three years of losses followed by three years of profits." (Mark Hiley) — Systemic discipline is lacking, and the subsidy culture has led to overly optimistic pricing and accounting.
5. "The diameter war may be ending. Current 12-16 MW turbines have blade radii of approximately 115 meters, and the supply chain can no longer support larger sizes. If the industry halts the arms race and instead monetizes the R&D and capital expenditure already deployed, returns could improve." (Mark Hiley) — This aligns with the classic framework of engineering companies "over-engineering and destroying industry returns."
6. "If management maintains discipline on new orders, you could see the wind power business turn profitable within the next two to three years. The gas and power business has annual profit potential exceeding €2 billion, and with a profitable wind business, the group's profit would see an inflection point of around €2 billion—yet the group's market cap is only €20 billion." (Mark Hiley) — Wind power is the biggest variable and also the biggest source of opportunity.
7. "On the surface, it appears net cash, but deeper analysis is needed. Customer prepayments are recorded as cash while corresponding to contract liabilities, with net contract liabilities of approximately €13 billion. The company needs to raise net cash above the level of net negative working capital." (Mark Hiley) — The balance sheet is more complex than it appears, but the investment-grade rating and German government guarantees provide a safety cushion.
8. "The industrial logic of placing wind power and gas/grid under the same group is reasonable—from offshore wind turbine power generation to substations, interconnection equipment, grid components, and ultimately to end users. But to date, Siemens Energy has not realized this vision." (Mark Hiley) — The strategic logic holds, but execution is far from adequate.