June 26, 2023: On Sunday, Siemens Energy shares dropped over 37% after the company scrapped its profit projection and warned that costly problems at its wind turbine unit could last for years.

The company, born from the spinoff of German conglomerate Siemens’ former gas and power division, announced late Thursday that a review of issues at subsidiary Siemens Gamesa had found a “substantial increase in failure rates of wind turbine components.”

The Siemens Gamesa board has initiated an “extended technical review” aimed at improving product quality that the parent company said will incur “significantly higher costs” than previously assumed, now estimated to be more than 1 billion euros ($1.09 billion).

“It is too early to have an exact estimate of the potential fiscal impact of the quality topics and to gauge the impact of the review of our assumptions on our business plans,” Siemens Energy said 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 the fiscal year 2023.”

Siemens Gamesa has been a thorn in the side of its parent company since its complete takeover late last year.

Siemens Energy CEO Christian Bruch told journalists on a call Friday that “too much had been swept under the carpet” at Siemens Gamesa and that the quality issues were “more severe than [he] thought possible,” according to Reuters.

Nicholas Green, head of European capital goods at Alliance Bernstein, said Siemens Energy would likely be able to climb back from the fall, but the scale of the problems had shocked the market.

“There’s a 17 billion euros service order book, and that is delivering service on installed wind farms and in wind turbines for quite several 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 huge liability that you’re taking on,” he said.

Siemens Energy estimates that component failures may occur in between 15% and 30% of its installed fleet of turbines. However, Green noted that there is still a “slight question mark about where that liability ends.”

“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,” he said.