Europe’s Electrification Stalwarts Go Digital

All captions and graphics courtesy by the Wall Street Journal

The companies that built last century’s power grid are preparing for a more high-tech build out in the next wave.

By guest author Rochelle Toplensky from the Wall Street Journal

Siemens, SIEGY ABB ABB and Schneider Electric SU were at the heart of electrifying society last century. In the new age of electrification, they have a different focus: digital technology.

With roots stretching back to the 19th century, the trio helped build Europe’s electricity infrastructure, from power plants through to plug sockets. Like General Electric in the U.S., Siemens even made machines that plugged into the wall. However, all three European companies have turned away from high-voltage transmission projects as another electrification wave promises to decarbonize the economy.

Instead, the trio are focusing on the long-mooted industrial internet-of-things: using digital technologies to make buildings, industrial production and local power systems smarter and more efficient. They have “a clear strategy of walking away from project businesses and focusing on product businesses,” says Guillermo Peigneux Lojo, an analyst at UBS. The latter, which include digitization, software and services, tend to come with higher growth and profitability.

All three companies increased their revenue and profit outlooks on reporting quarterly results in recent weeks. Supply chains were stretched as demand recovered and customers built up stock, but they were able to increase prices, improving profits despite higher costs for raw materials, components and transport. Their digitization businesses were generally their most profitable, generating margins of between 17 % and 21 % in earnings before interest, taxes and amortisation.

Siemens has for years been slimming down to focus on digital technology. It sold assets and spun off businesses such as medical equipment maker Heathineers and power producer Siemens Energy, though it retains stakes in both. Siemens’ railway-focused mobility business was once another spinout candidate, but those plans have been shelved for now. Its enduring business units are digital industries, which focus on factory automation, smart infrastructure for buildings and a financing group.

ABB is midway through its own strategic reset. It sold its power-grids business to Hitachi and has more to sell, but is already shopping for bite-sized companies that deepen its offering in its chosen areas of focus: electrification, process automation, robotics and motors. Paris-listed rival Schneider Electric seems to be furthest ahead in the transition to a digital technology company. It is looking for bolt-on acquisitions but has finished its structural work to create two divisions: energy management and industrial automation.

The moves have rewarded investors. Over the past two years shareholder returns from all three stocks have significantly exceeded those from the Stoxx Europe 600 benchmark. Schneider Electric trades at a slightly higher valuation than ABB and Siemens, likely reflecting its strategic head start. By contrast, GE’s returns have been much lower than its benchmark’s over the same period. It still has restructuring work to do.

The sector could be entering something of a sweet spot. The pandemic accelerated existing trends toward digitisation, sustainability and electrification; now Europe’s Green Deal and the American Jobs Plan and U.S. infrastructure plans could give them a further boost. While it is still unclear exactly where the funding will go, the stimulus plans and private-public collaboration will help growth in industries like renewables, energy efficiency and building automation, says Mr. Peigneux Lojo.

Trends to decarbonise, electrify and create an industrial internet-of-things have been discussed for years, with mixed results. Fortunately for Schneider Electric, ABB and Siemens, their moment may finally have come.