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Growth Blowback for Wind Turbines

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Wind-turbine manufacturers have big plans to supply the booming green-energy market. But burgeoning demand doesn’t guarantee continued profitability in the near term.

Late Wednesday night,

Siemens Gamesa Renewable Energy,

GCTAY -14.38%

the leading manufacturer of offshore wind turbines, issued a profit warning. On Friday morning, shares were down 16% since the announcement. Management said group earnings margins would be flat or slightly negative and revenues would be at the low end of forecasts. Only last quarter, recently appointed chief executive

Andreas Nauen

outlined his turnaround plan for the offshore division where the problems are centered.

There are three main problems. Ramp-up costs for the group’s new “5.X” onshore wind-turbine platform are higher than expected. Raw material costs are up too: Copper, resin, steel and logistics are all more expensive. The pandemic has also created supply-chain bottlenecks and project execution delays, particularly in Brazil.

These aren’t uncommon problems for many global manufacturers these days. But investors seem particularly concerned about the wind-turbine industry: By Friday morning, rival Vestas shares had fallen 7% since the profit warning. Both companies have significantly outperformed the Stoxx Europe 600 index over the past three years, though as with other green-energy stocks, optimism has started to wane recently.

Ambitious global decarbonization plans mean demand for wind turbines is forecast to explode. While that growth is welcome news, Thursday’s warning highlights there could be downsides too. Raw-material prices are likely to be volatile as new sources are discovered and developed to meet the growing demand. Supply-chain bottlenecks are also possible: Investment bank Jefferies predicts a shortage in offshore wind-turbine installation vessels in 2023.

Competition is growing and could reignite the margin squeeze that was only tempered in 2018 by industry consolidation. Customers are accustomed to falling prices, which have come from the better efficiency of larger turbines, scaling up manufacturing and industrializing installation. Those trends will continue, but the pace may slow as the industry matures.

Raw-material costs and supply-chain bottlenecks are adding to challenges in the green-energy market.



Photo:

bing guan/Reuters

The profit warning also highlights the industry’s risk of long-term contracts. New turbines take years to bring to market, building wind farms are often multiyear projects and service agreements can be very long. Siemens Gamesa seems to have been caught out by recent events, which isn’t unreasonable given the massive and unpredictable changes of the past year. Its new contracts are being adjusted but existing ones could still hold some nasty surprises.

It is some comfort that the problems center on its onshore division. Mr. Nauen has a turnaround plan and his experience leading the group’s offshore wind-turbine business, which is the world leader, lends him credibility.

Siemens Gamesa has provided a timely reminder for green investors that industry growth can be a mixed blessing for profitability.

Write to Rochelle Toplensky at rochelle.toplensky@wsj.com

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