What happened to the wind turbine industry?
The wind turbine industry is going through a tough period. In the years before the pandemic the industry experienced solid growth and reasonable operating margins leading to strong return on invested capital (ROIC) figures. However, the pandemic led to a 275% increase in steel prices which have significantly impact the operating margin and while steel prices are down 52% from their highs they are still around 30% above the long-term average since 2008. Besides higher input costs many of the wind turbine manufacturers have had difficulties ensuring quality and high productivity despite higher volume and revenue sending a worrying signal. Most industrial companies experienced improved unit economics and higher efficiency as the business scales, but in the case of wind turbine manufacturing that has not been the case in recent years. Vestas, the world’s largest wind turbine manufacturer, is a good example of this.
Vestas generated revenue of €14.5bn in 2022 up 138% over 10 years or 9.1% annualised. During this period of rising revenue the company initially improved the EBITA margin from 5.3% in 2013 to a peak of 15.7% in 2016, but since then the EBITA margin has declined every single year to a catastrophic -7.5% in 2022. In 2016, Vestas delivered a ROIC of 36.1%, but by 2020 it had fallen to 13.8% which is still above the cost of capital, but a significant deterioration. For a market leader in a growth industry the ROIC should be above 20%. Siemens Gamesa has had the same issues and their EBITA margin was also -6.8% in 2022, so the entire industry is having major problems.
The long-term outlook is still solid and wind energy is still an energy source that governments are allocating resources to deliver on the green transformation. However, it is clear that production issues and industry manufacturers operating at a loss are a bad recipe for the industry to fulfil its potential. Profitability should recover over the years as the top five ex-China manufacturers are enjoying a market share of around 90% in the ex-China markets, so pricing power should not be a problem. If the wind turbine manufacturers can improve their productivity and quality then margins should recover over time. For more information on the wind turbine industry read Wood Mackenzie’s short summary.