Investors in the renewable energy sector know it's been a tough year for the industry. All three major players in the West, General Electric's (GE 1.49%) renewable energy business, Siemens Gamesa Renewable Energy, and Vestas Wind Systems, are set to lose money in 2022 and are far away from the high single-digit profit margins that Vestas and Siemens Gamesa generated in 2019. That said, all three are restructuring, and the latest plans from General Electric are good news for investors.
General Electric Renewable Energy's restructuring
The company's plan to cut hundreds of jobs (representing around 20% of the total U.S. onshore-wind workforce) is the latest development in an ongoing restructuring story. It comes in a week when GE Renewable Energy CEO Jérôme Pécresse announced his departure after an eight-year tenure.
NYSE: GE
Key Data Points
His departure possibly signals an even more vital role for GE Vernova's CEO Scott Strazik in leading a turnaround at GE Renewable Energy. As a reminder, GE plans to combine GE Power and GE Renewable Energy into one business, GE Vernova, and then spin it off in early 2024 as part of its break-up plan.
Strazik's involvement is highly relevant because he's credited with turning around GE's problem child, GE Power. Strazik led GE Gas Power in 2018 and then took over as GE Power CEO in 2021.
The GE Power turnaround
So if the GE Power turnaround is anything to go by, things could recover sooner than many expect with GE Renewable Energy. GE Power had a $5 billion profit in 2016, but just a couple of years later, it lost $800 million. In a nutshell, the market for gas turbines (GE Power's core market) started to decline in 2017 and more than halved in the ensuing years. However, despite end markets no more than stabilizing between 2018 and 2022, GE Power made $726 million in 2021 and is set to earn $1 billion to $1.2 billion in 2022. In fact, GE Power has arguably been GE's most consistent business in 2022.
Data source: General Electric.
In a nutshell, GE Power was resized in line with a more conservative view on its end markets. Management focused on improving its services while working through many of the legacy contracts in its backlog and increasing the pricing of new orders.
The difference in restructuring plans
There are similarities and differences between the turnaround at GE Power and the potential turnaround at GE Renewable Energy. The resemblance is the downsizing to a smaller market. But as company CEO Larry Culp noted on the last earnings call: "One key difference in onshore: We aren't sizing ourselves to the market. We're sizing ourselves based on our refocused efforts on select geographies where we believe we can grow, and grow profitably."
Indeed, throughout 2022, management has emphasized its willingness to increase the pricing of new orders. On the last earnings call, Culp also said, "Our pricing has substantially improved in onshore while [we've continued] our focus on deal selectivity."
As such, the recently announced job cuts are part of a deliberate policy to focus on its most profitable geographies. So it might be easier to return GE Renewable Energy to profitability than GE Power because the latter was plagued with declining end demand; being selective wasn't particularly an option.
Another key difference is that a large part of GE Renewable Energy's issues in 2022 is due to supply chain pressures and significant increases in raw material and transportation costs. But at some point, these pressures will ease, and that should help profit margin recovery. Meanwhile, its peer Siemens Gamesa is cutting up to 3,000 jobs as part of its restructuring plans. That's a positive sign for the industry as it indicates all the leading players are taking action to improve pricing and margins.
Looking ahead
Putting it all together, the latest job cuts at GE Renewable Energy are part of an ongoing recovery process at the company and the industry at large. The company has a game plan from GE Power and the same management to carry it out. Furthermore, the end market conditions are possibly more favorable for a turnaround at GE's renewable energy business than at GE Power. It will take time, but GE has plenty of potential to improve its margin and profit here.
