Europe's engineering giants are fighting for survival

The glory days for traditional gas and electric utility companies in Europe could be over. As subsidies for renewable energy continue to rise, major electrical engineering firms such as Siemens and Alstom are facing an "existential battle" which could see some forced to shut down production in Europe altogether, according to analysts.

"The renewable energy sector has been heavily subsidised by the government, which has impaired the traditional utility business model by removing the profitable peaks," says James Stettler of Barclays Capital. "Western European and especially German utilities, which have invested billions in power infrastructure, are the greatest losers. This is particularly the case for gas-fired plants, which are not profitable any more in the current environment."

Share prices for Germany's E.On and RWE, and France's EDF Suez were all down by more than 35% last year, dealing a double blow to their European suppliers. Not only is demand for commissioning new plants virtually non-existent but many are cutting their losses and closing old ones instead of renovating them.

Europe's engineering firms are also feeling the knock-on effect as demand for their products plummets. German industrial conglomerate Siemens has announced almost 12,000 job cuts since February, while French giant Alstom has been forced to streamline staff and is now the subject of a takeover bid from US-based GE.

"For a company like Siemens it means that if you can't sell turbines or transformers in Europe, then you just can't afford to make them there," says Stettler. "Roughly 18% of sales do not make a profit and Siemens is trying to reverse that. It has a lot of manufacturing activity still based in Germany but its growth is elsewhere.

"It is not just them, everybody has to do the same thing to survive. Large production plants, such as the Siemens turbine factory in Berlin, need to be resized and most redundancies will be in Europe."

Alstom's energy operations are subject to a €12.3bn takeover bid from US company GE after struggling to turn around its falling energy equipment sales. Should the

GE takeover be approved it would deal a hammer blow to Europe's energy equipment makers, leaving Siemens as the last European company manufacturing large gas turbines, with GE controlling 62% of the market share.

GE would be the big benefactor, cementing its dominance of the global market share while opening the door for ambitious Far Eastern investment most notably Mitsubishi and Hitachi.

Mitsubishi and Hitachi recently merged their thermal power business with the aim of creating a global leadership position in energy.

E.On, one of the biggest European utilities companies, is tackling the rise of renewables most dramatically as it plans to focus on renewable energy, while its fossil fuel facilities will be relaunched as a separate smaller company called Uniper.

A spokesman for the company confirms European demand for "classic energy" products such as turbines and transformers has fallen. "The energy world is splitting between the classic and the new energy. This is a challenge we are facing," he says.

Europe's engineering giants are fighting for survival | Business