Siemens’ choice on Brexit Island

The UK’s decision to leave the European Union threatens its clean energy plans. Siemens, the largest UK wind turbine manufacturer, faces a difficult decision: to what extent should it de-link its European and UK wind supply chains?

Siemens has built more wind turbines for the UK than any other company. 50% of wind energy in the UK is generated from Siemens turbines[i]. Its wind supply chain spans the UK and mainland Europe, with blades built in Hull[ii] and other components built in Europe. The UK vote to leave the European Union threatens Siemens’ integrated supply chain. Its management must decide: as Britain leaves the EU, should it press on with an integrated European supply chain or build a separate one in the UK?

Brexit impacts on Siemens’ wind supply chain

  1. Higher input costs. The pound has weakened significantly since the Brexit vote, falling 11% against the dollar and 15% against the euro. The UK looks likely to leave the European free trade area. This will likely drive steel cost up. 80% of turbine material is steel[iii], and 35% of UK steel imports currently come from the EU[iv].
  2. Lower manufacturing profits. The weaker pound will also drive down sales and income results as pounds are converted to euros at the Siemens Group level.
  3. Less access to staff and skills. The end of free movement across the EU and UK will limit Siemens’ European staff working on projects in the UK.
  4. Greater opposition to foreign-owned companies and high level of political risk. The UK may favor British companies over European ones. Political instability is high – businesses have little clarity on the final Brexit settlement and the UK government is weak.

Siemens’ response

Siemens is proceeding with caution in the short term. It will continue to supply wind turbines for projects in the UK. It has enough orders for the next three years[v]. But it has put plans for the Hull facility to export turbines on hold[vi]. The company’s management is watching developments on trade and trade tariffs closely. It is working on public relations too. Jürgen Maier, Siemens UK CEO, recently reaffirmed the company’s commitment to the UK[vii]. At its Hull plant, it focused on local labor, hiring 96% of staff from within 30 miles[viii].

Further out, Siemens is keeping its plans close to its chest. The level of uncertainty means that it has not announced concrete plans beyond the next two years. It continues advocating for tariff-free trade[ix] and is pursuing aggressive cost reductions to ensure that its turbines are competitive in the UK[x].

Recommendations

Siemens management must decide how much to separate EU & UK supply chains. In the short term, it should focus on understanding the different scenarios, which are a ‘soft’ Brexit where free trade arrangements stay in place and a ‘hard’ Brexit where a trade deal breaks down and movement is effectively frozen. The harder the Brexit, the greater a need for a separated supply chain. The most important factors in Siemens’ planning will be import tariffs, foreign exchange rates and sourcing of steel.

In the medium-term, Siemens should prepare for the worst. Its plans should include training new workers from the UK, signing agreements with steel suppliers outside Europe, preparing to build new facilities and locking in long-term materials contracts to hedge against price risk. It should also seek opportunities in Brexit. A lower exchange rate will make UK-built turbines more attractive for buyers overseas. Siemens should reverse its position on export and start active outreach to new clients.

Question for classmates

How can a company reach a good decision in situations with high political and economic uncertainty? Is it better to act on the most likely scenario, to plan for the worst or to wait for greater clarity?

Sources

[i] Business to Society report, Siemens UK corporate brochure (Camberley, UK, 2016), p. 6, http://www.siemens.co.uk/pool/about_us/publications/siemens_uk_business_to_society_report.pdf, accessed November 2017.

[ii] Andrew Bounds, “Siemens opens £310m turbine blade plant in Hull,” Financial Times, December 1, 2016, https://www.ft.com/content/69b68b16-b7da-11e6-ba85-95d1533d9a62, accessed November 2017.

[iii] Steel solutions in wind power, The Steel Wire, January 26, 2016, http://globalblog.posco.com/steel-solutions-in-wind-power/, accessed November 2017.

[iv] Steel Imports Report: United Kingdom, US Department of Commerce, International Trade Administration report (Washington D.C., May 2017), https://www.trade.gov/steel/countries/pdfs/2016/annual/imports-uk.pdf, accessed November 2017.

[v] Andrew Bounds, “Siemens opens £310m turbine blade plant in Hull,” Financial Times, December 1, 2016, https://www.ft.com/content/69b68b16-b7da-11e6-ba85-95d1533d9a62, accessed November 2017.

[vi] Arthur Nelson, “Siemens freezes new UK wind power investment following Brexit vote,” The Guardian, June 28, 2016, https://www.theguardian.com/environment/2016/jun/28/siemens-freezes-new-uk-wind-power-investment-following-brexit-vote, accessed November 2017.

[vii] Oliver Sachgau and Aaron Ricardela, “Siemens Pledges Commitment to U.K. Despite ‘Unclear’ Brexit,” Bloomberg News, March 27, 2017, https://www.bloomberg.com/news/articles/2017-03-27/siemens-pledges-commitment-to-u-k-despite-unclear-brexit, accessed November 2017.

[viii] Andrew Bounds, “Siemens opens £310m turbine blade plant in Hull,” Financial Times, December 1, 2016, https://www.ft.com/content/69b68b16-b7da-11e6-ba85-95d1533d9a62, accessed November 2017.

[ix] Pilita Clark, “Siemens backs away from Brexit warnings,” Financial Times, July 11, 2016, https://www.ft.com/content/4529f98c-4786-11e6-8d68-72e9211e86ab, accessed November 2017.

[x]  Execution according to plan, Siemens Wind Power & Renewables Capital Market Day presentation (Houston, USA, June 29, 2016), pg. 11, https://www.siemens.com/investor/pool/en/investor_relations/financial_publications/speeches_and_presentations/cmd-energy-oil-gas/05-cmd-energy-and-oil-gas-wp-divison-tacke.pdf, accessed November 2017.

Previous:

Chile: A Challenging Climate for a Global Winemaker

Next:

Blockchain Technology: Walmart’s Holy Grail of Food Supply Chain Management?

10 thoughts on “Siemens’ choice on Brexit Island

  1. Although Siemens is a dominant player in the U.K., they’re publicly listed in Germany and recently acquired the Spanish firm Gamesa, which “is primarily active in the supply of onshore wind turbines but also in the sale of offshore wind turbines through its wholly owned subsidiary, Adwen Offshore SL.” [1] With a bigger percentage of its business in the E.U. than in the U.K., plus the recent acquisition of Gamesa, combined with “balance-sheet headroom and a presence in a wide range of countries” [2], Siemens bottom line wouldn’t be impacted as harshly by a “hard” Brexit as their U.K. market share might suggest. Given this, it is likely that Siemens will take a wait-and-see approach to Brexit, as opposed to a riskier proactive strategy.

    1. European union: Mergers – commission clears acquisition of gamesa by siemens. (2017, Mar 15). Asia News Monitor Retrieved from http://search.proquest.com.ezp-prod1.hul.harvard.edu/docview/1876807749?accountid=11311
    2. Trentmann, N. (2017, Mar 13). Smaller german firms rethink foreign investments; ‘mittelstand’ companies see challenges with political and economic instability in core markets. Wall Street Journal (Online) Retrieved from http://search.proquest.com.ezp-prod1.hul.harvard.edu/docview/1876440734?accountid=11311

  2. This will certainly not be the last of this type of situation. While organizations facing such uncertainly must engage in early-stage scenario planning as a responsibility to stakeholders, I don’t think Siemens has any choice but to “wait and see” in this case. The Brexit negotiations are unprecedented, and making any wide-scale changes to Siemens’ supply chain prior to gaining a better understanding of the separation’s outcome could be dangerous and perhaps unnecessary. Even under a hard Brexit, there is no guarantee that individual agreements cannot be brokered between the UK and Germany, for instance, that would allow the Siemens supply chain to survive. Of course, the worst case is also possible, and one can only hope that the boards of these firms are taking the risks seriously.

  3. Graham, I completely agree: the difficulty here is that we’re planning not only for the unknown, but for the unprecedented, and so it’s difficult to know exactly which scenario to focus on. Of course, there are analysts out there who can make much more accurate predictions that I can from this side of my laptop; and so, my recommendation would be to try (to the best of their ability) to plan through Brexit, rather than putting business operations on hold until we “see” what happens.

    My gut tells me, as Graham suggests, that even in a “hard” Brexit scenario, a deal might still be brokered between the government and Siemens in a way that would protect the business from falling apart – but again, who’s to say. (After what we’ve seen in the last 24-months, I’d believe almost anything is possible). Given that much of Siemens’ business is outside of the UK (as Matt has described above), and armed with Juergen Maier’s formal statement in support of Siemens UK, I’d say it’s best we move forward with business-as-usual (and then prepare mitigation plans in the case that hell freezes over; it’s happened before, after all).

  4. What I find most interesting about Siemens’ decisions is less about their direct business choices and more about how they are choosing to build their brand- something that will likely impact their future business both in the UK and in the EU. Ahead of the referendum vote, Siemens was one of the multi-national corporations to back a remain vote. However, the company quickly came out to give their support to the UK following the vote. Joe Kaeser, Siemens chief executive, said “the UK matters with or without being a member of the EU. The Brexit vote will not diminish our commitment to your country. Siemens will not leave the next generation behind.” In an age of changing political considerations it seems that the company is trying to walk to middle line and keep both sides happy- though the business decisions may be tricky the company’s image seems to be weathering the political storm well.

  5. While I clearly agree with Graham and Alison that Siemens is facing in Brexit not only an unknown but also unprecedented situation, I would strongly encourage the company’s top management to take a significantly more proactive approach in hedging itself against an uncertain Brexit outcome. Drawing an analogy to Nissan UK’s approach to Brexit, the most effective hedge in a situation like this includes two elements: i) a national instead of a Pan-European supplier base mitigating FX risk and supply chain disruptions and ii) governmental support guarantees to mitigate any fallout from an adversarial Brexit outcome on Siemens. These two elements are also not mutually exclusive, as the government would more than welcome and support a Siemens led build-up of the UK wind power supplier base providing needed employment and domestic investment. In negotiations with the UK government, Siemens should clearly utilize its negotiation leverage as the company is overall employing 15,000 people in Britain (a similar number to Nissan UK which was granted at £100m support fund) and take a hard stand on politicians to recognize its importance [1]. Ironically, exactly the fact that the Brexit outcome is so uncertain should encourage Siemens to do more than business-as-usual and initiate the no-regret moves (i.e. the build-up of a local supplier base) that would help the company to sustain its operations in the UK regardless of the eventual Brexit outcome.

    ________________
    [1] Gordon, S., “Siemens clarifies Brexit position to UK staff,” Financial Times (Apr 13, 2016)

  6. As was mentioned above, I believe that this is an issue that Siemens should be considering very seriously right now, but one where they should follow a wait and see approach as the repercussions of Brexit filter out. In addition to the reasons mentioned above, I believe that part of the reason for this patient response is that there may not be very many other choices for the UK if they wish to continue towards their wind-powered goals. Given that the UK receives 50% of its wind power from Siemens turbines, it is uncertain if another commercial option would be more viable than Siemens, even given the higher costs associated with Brexit. Certainly, if the Siemens turbines become prohibitively expensive, and generating wind power with them becomes uneconomical, this mindset falls apart. Yet even in this situation, if the UK continues to be passionate about pursuing wind power (which is a decision unrelated to the Brexit one), it is not unforeseen that the UK may be able to broker a specific trade rule, given political pressure to pursue renewable energy on both sides of the Brexit divide.

  7. This is an excellent post, and does a great job articulating the key issues Siemens is facing related to Brexit. As many here have pointed out, in many cases of uncertainty I think the best course of action is to “wait and see”. I’ll make the analogy of a car that is spinning out of control. Our gut tells us to over-correct, slamming the wheel from side to side, which ultimately perpetuates the problem and leads us down a more dangerous path. The far better alternative is to keep both hands on the wheel and help guide the car along its existing course towards safety. If Siemens tries to predict the outcome in such uncertain times, it runs the risk of over-correcting or missing entirely. While I agree there are steps they should take to diversify away from the UK as a general business principal, I do not think they should do so as a reaction to the current instability in the region.

  8. I echo the above sentiments of taking a more reactive wait and see approach instead of acting on the worst case scenario for now, given the huge uncertainty on soft vs hard Brexit scenarios and that negotiations are likely to drag on even longer than the 2-year transition period planned.

    Among the key factors you identified, impact on exchange rates is the most certain one so Siemens should prioritize addressing this by looking into alternative steel suppliers from outside the EU and start assessing the feasibility of expanding the Hull production facilities to produce other components and take advantage of lower costs. Since the future of tariffs and trade agreements is still a huge question mark, Siemens should hold off on de-linking supply chains and any drastic actions with major impact on operations until there is more clarity on negotiation outcomes. With its 50% market share in wind turbines in the UK, Siemens is also well-positioned to convene other industry players and lead lobbying efforts with the German and British governments on potential tariff exemptions and try to influence negotiations on trade agreements.

  9. Interesting problem and a tough question. I think Siemens has three (potentially competing) interests in deciding how to set up its supply chain: economic competitiveness, maintaining access to supplies and other key inputs (and thus greater reliability for customers), and better matching of revenues and costs to make profits more predictable (and thus greater reliability for investors).

    What strikes me the most is that what the “ideal” supply chain for Siemens should look like to address these priorities will depend pretty strongly on the outcomes of the Brexit talks. Given that, I would argue that Siemens should use less costly and less permanent measures (e.g., medium-term contracts, hedges) in the near-term to try to reduce the immediate impact of the outcome of the Brexit talks while using a wait-and-see approach for more costly or irreversible decisions, like the locations of plants, until there is greater political clarity.

    Economic competitiveness: As you pointed out, I’m intrigued by the improved export competitiveness of the UK with a weaker pound. That said, the discount on the pound may itself be a product of uncertainty caused by Brexit rather than any real change in macroeconomic fundamentals [1]. Once the terms of Brexit are made clear, regardless of the outcome, uncertainty will subside and the pound may rise. Making costly changes in the supply chain may not be worth it if the pound were to recover. Instead, investigating what a more flexible supply chain might look like – one where Siemens can more nimbly shift production across UK vs European facilities based on macroeconomic opportunities – might be a way to prepare for succeeding in a ‘hard’ Brexit world without yet committing to it.

    Access to supplies and inputs: In the near-term, if a breakdown in trade talks break would create meaningful supply disruptions, Siemens could hedge through greater WIP inventory levels, creating local buffers of key inputs and sub-assemblies which could become blocked from entering the UK. Since Siemens already has good demand visibility from customer orders for the next three years, the company could be fairly precise in the additional holding costs it should be willing to accept.

    Revenue and cost matching: While I was originally intrigued by the idea of using currency hedges in a big way to help mitigate the long-term costs of foreign currency changes, I found an article that made a compelling argument that this can negatively impact expected profits, since the well-hedged firm is less able to take advantage of short-term currency advantages in pricing and costs [2]. Given the commercial opportunities which could be presented in a post-Brexit world, I would look to put in place project-level hedges which lock in FX for the duration of specific customer projects. This would give Siemens the predictability needed to meet the obligations of a particular contract while reserving flexibility to pursue future projects in different ways as the macro environment changes.

    Sources:
    [1] Reason for a Pound fall after Brexit: https://www.economicshelp.org/blog/21011/economics/why-would-pound-sterling-fall-after-brexit/
    [2] Argument against hedging by matching costs and revenues: http://onlinelibrary.wiley.com/doi/10.1111/j.1745-6622.1996.tb00301.x/abstract

  10. Thanks for the article, Kieron. Evidently, Siemens is grappling with an exercise in estimate trade risk, a task that is traditionally very difficult to get right. Lacking certainty on what policy will come of Brexit, whether it is “hard” or “soft”, places the company in a tough situation. If I were in their shoes, I would first be considering which customers are most valuable to them. Though they delivered more wind turbines to the UK than anyone else, by volume, we should investigate how profitable a UK customer is versus an EU customer. For this, we should assume that the company could set up independent supply chains in each segment.

    The next strategy that I would employ would be to stress test the firm by assuming the worst case scenario: high import/export tariffs and a higher cost of labor due to shortages. Here, I would look at a firm like Fuyao glass who took measure to own as much of their supply chain as possible. How would they approach steel smelting for raw materials? Lastly, what R&D improvements can be made to cheapen labor and raw material requirements?

Leave a comment