Quality problems at wind turbine manufacturer Siemens Gamesa – one of the world’s largest – have rocked confidence in the wind sector. This followed a surprise statement by Siemens Energy on widespread issues with wind turbines at its subsidiary, knocking nearly €7bn ($7.6bn) in a day off the value of the parent.  

As a result, Siemens Energy scrapped its profit forecast for the year.

Between 15% and 30% of installed Siemens Gamesa turbines may have significant component failures, said executives.

Late on June 22, Germany-based Siemens Energy announced that a review of technical issues at its struggling subsidiary Siemens Gamesa had found a “substantial increase in failure rates of wind turbine components”.

The board of the Madrid-based subsidiary has initiated an “extended technical review” that is expected to incur “significantly higher costs” than had been previously assumed. The costs are now estimated to be more than €1bn ($1.09bn).

“It is too early to have an exact estimate of the potential financial impact of the quality topics and to gauge the impact of the review of our assumptions on our business plans,” said Siemens Energy in a statement.

“However, based on our initial assessment as of today, the potential magnitude of the impact leads us to withdraw the profit assumptions for Siemens Gamesa and consequently the profit guidance for Siemens Energy Group for fiscal year 2023.”

Confidence in the wind industry in Europe and North America had already been dented with cost increases for projects in the last couple of years. The day after Siemens Energy’s statement, the shares of sector leader Vestas dropped by 6%.

In 2022, Siemens Gamesa tied for fifth place in the world rankings of installed wind energy capacity, and in second equal place for offshore wind, according to BloombergNEF.

In mid-June, minority shareholders of Siemens Gamesa had voted for a capital reduction for the remaining 2.21% stake that the company’s parent Siemens Energy did not yet own. That was to allow Siemens Energy to take over Siemens Gamesa, in the hopes of turning it around, and despite the subsidiary’s loss of €386mn ($420mn) in the second quarter (Q2) of its fiscal year.

Quality problems were known to have affected some of Siemens Gamesa’s products, the company had already said in January. But they were not known to be so widespread.

In fact, when Siemens Gamesa announced its Q2 financials, the parent had said that its outlook would improve in the second half of the financial year.

"If there is reason to believe there are more skeletons in the closet than initially thought, I would wait before any takeover," Felix Schroeder of Siemens Energy shareholder Union Investment told Reuters.

"They had time ... but apparently they were not ready. That is disappointing and now costs hard-earned credibility," he told the news service. "You have to ask the question why they didn't realise this earlier and why they didn't wait with the takeover."

Siemens Energy CEO Christian Bruch told reporters on the morning after the statement that “too much had been swept under the carpet” at the subsidiary and that the quality issues were “more severe than [I] thought possible”.

He said the takeover of Siemens Gamesa was not, however, a mistake, saying: “I am still convinced the energy transition can only be managed with the help of wind energy.”

The same day, Siemens Gamesa CEO Jochem Eickholt told journalists: “We do not have a final result today but I can already announce that the result of the current review will be much worse than even what I would have thought as possible. 

“I have stressed on several occasions that [at] Siemens Gamesa there is nothing that I haven't witnessed elsewhere as well, but I will not repeat this today. This is [a] disappointing, bitter setback. 

“The quality problems go well beyond what had been known hitherto, particularly in the onshore area. The failure rates of components affecting certain components look just like previous quality issues, but they also are different because they are new forms of failures.”

He said that vibration had initially been noticed in some components by wind farm operators, a warning of the quality problems. He highlighted problems with rotors and bearings.

Liability is an issue.

Nicholas Green, head of European capital goods at Alliance Bernstein, told CNBC that Siemens Energy would likely recover but that the scale of the problems were a surprise.

“There’s a €17bn service order book and that is delivering service on installed wind farms and in wind turbines for quite a number of years ahead – five years ahead, sometimes 10-year contracts – and to discover that a handful of your components aren’t working as you planned, that maybe you’ll need to go in and replace those components, that is a very large liability that you’re taking on,” he continued.

He added: “With luck, when they report back at the beginning of August, they will have managed to put some sort of brackets around the scale of the cost here and the scale of the obligations ahead of them, but certainly it is an alarmingly large hit and it’s taken the market by surprise.”