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
- 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].
- 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.
- 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.
- 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 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].
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?
[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.