Strategic risk assessment is part of the strategic planning process within the Group. At Wärtsilä, a risk is defined as strategic if it has the potential for imposing a long-term impact on the business.
Business environment risks
Business cycles in the global economy, and in customer industries, influence the demand for Wärtsilä's products, as well as its financial condition and operating result. The flexible manufacturing model based on capacity outsourcing, together with a stable business mix and a large share of sales deriving from service activities, provides Wärtsilä with a certain level of stability in a cyclical market. Important economic matters that indirectly affect Wärtsilä, its clients, and suppliers include inter alia, the liquidity and solvency of financial institutions, and thus not only their capability but also their willingness to extend credit, the counter cyclical stimulus programmes adopted by governments – especially in the power and infrastructure sectors, the enhanced activities of multilateral institutions, such as the International Finance Corporation, the availability of export credit schemes and guarantees, and other such factors. Wärtsilä’s relatively large order book gives the company time to adapt to changes in market conditions.
The implementation of more stringent environmental regulations is important for Wärtsilä’s future growth potential, since the company’s comprehensive portfolio of products and services allows customers to meet such stricter requirements. A delay in legislation implementation may present a risk to Wärtsilä, and possible changes in the legislation timeline and scope are, therefore, actively monitored.
Energy storage is emerging as a disruptive technology that changes the paradigm of power systems, and Wärtsilä is strongly participating in these new market developments. Rapid deployment of new technologies can create new risks related to managing complex hybrid installations in an optimal way. Wärtsilä’s Greensmith Energy Management System (GEMS) is proven to be an efficient and stable software to control and operate complex systems, which gives Wärtsilä a competitive advantage in managing the related risks.
Market and customer risks
Wärtsilä’s mid- and long-term service activities are expected to grow in line with the development of the existing installed base and general global economic developments. Therefore, a slowdown in global growth represents the primary risk for the development of service demand. Wärtsilä has more than 12,000 individual customers engaging in service and spare part sales annually, and the current active base of installed Wärtsilä engines has a combined output of approximately 180,000 MW. Thus, dependency on any single customer or customer segment is limited.
In the energy markets, there is a global shift towards more sustainable energy sources. The rapidly changing market environment has impacted the speed of customers’ decision-making, as the changes require the updating of their future portfolio strategies. Electricity demand is increasing in emerging markets, while fragile economic growth in developed countries represents a risk for demand development. Geopolitical tensions and significant currency fluctuations can result in investment decisions being postponed in certain countries. Low oil prices have a similar impact in the oil and gas producing countries. Price pressure resulting from the challenging competitive environment remains a risk. Orders have been received from all geographic regions, thus limiting the risk of dependence on one particular market. Wärtsilä’s three customer segments, namely industrial customers, IPPs (independent power producers) and utilities, were also all represented in the order intake.
Wärtsilä is well represented in all the major shipbuilding markets, and is active in all the main vessel segments. This, along with the large product portfolio, mitigates both geographical and single customer risks. Conditions in the marine markets improved in 2018. However, challenges resulting from the uncertainty in the shipping and shipbuilding business environment continued to affect markets. Consolidation in the market continued during the year, leading to a decreasing number of major shipbuilding customers. The shipbuilding market continued to be dominated by Asian yards, notably China and South Korea, but activity in Europe was also healthy thanks to developments in the cruise and special vessel segments.
Order book levels improved Wärtsilä’s marine business during 2018, supported by the extensive product mix and broad segment exposure which compensated for the slow pace of recovery in worldwide marine order activity. The importance of fuel efficiency and environmental regulations are clearly visible, driving interest in environmental solutions, gas as a marine fuel, as well as electric/hybrid solutions. Contracting activities for exhaust gas cleaning solutions offered by Wärtsilä increased significantly during the year. This created both an opportunity for a steep increase in the volume of delivered exhaust gas cleaning systems, and a recognised risk to manage and deliver the demanded orders on time and with the required quality.
Digitalisation has become increasingly important for the shipping industry’s business and operating models. Wärtsilä, with its Smart Marine strategy, took further steps to become an important and leading player in the digital transformation of future shipping markets with internal digital development programmes, and with the acquisition of Transas.
Competitive situation and price risks
In services, Wärtsilä has no direct competitors capable of offering a similar portfolio of services from a single source. Excluding the networks of other engine manufacturers, there are few global players in the service market. The continued focus of customers on optimising operating expenditures can lead to an increase in competition for services where price is more important than quality. The main action for mitigating this risk is to promote the value-based offering.
In larger gas-fired projects, Wärtsilä faces competition from gas turbine manufacturers, such as GE and Siemens. In smaller gas power plant projects, and in the liquid fuel power plant market, the competitors are mainly other combustion engine suppliers, such as MAN Energy Solutions, INNIO (previously GE Jenbacher), Caterpillar (MAK), and Rolls-Royce. Price pressure resulting from the prevailing competitive environment remains a risk. In Wärtsilä’s addressable market, i.e. the market for installations of up to 500 MW, orders for natural gas and liquid fuel power plants totalled 20.8 GW during the twelve months ending in September. Wärtsilä’s market share was 13%. Wärtsilä’s success in the market can be attributed to its flexible power generation solution, which can be used in a wide range of different applications and power plant sizes.
In the marine equipment markets the competitive landscape remained largely unchanged in 2018. The most significant competitors in the main engine markets are MAN Energy Solutions and Caterpillar (MAK). Wärtsilä has a strong position in medium-speed main engines with a 48% market share in 2018. In auxiliary engines, Wärtsilä’s market share was 14%. In propulsion equipment, the competition is more fragmented and varies by product category. One of the main competitors for these products is Rolls-Royce. In environmental solutions, as well as in gas products, the markets are very fragmented. Alfa Laval and Evac are two of the main competitors in environmental solutions, while in the Electrical and Automation segment Wärtsilä faces competition from companies such as Kongsberg, GE and Siemens. Price competition has continued to be intense in the marine markets. The strategic move of becoming a systems integrator with automation and ship design capability has proven to be an important factor in the competition for new projects with larger and more value-added scopes. The concept of selling packaged solutions reduces price volatility.
Political and legislative risks
Wärtsilä is present in over 200 locations in more than 80 countries and has delivered power plants to 177 countries. Political developments and changes in legislation can have a significant impact on Wärtsilä’s business. Wärtsilä actively monitors political and legal developments in its markets, and engages in dialogue with various official bodies on projects of importance to its operations and intellectual property rights. Much of this engagement takes place through interest groups and trade organisations. The company monitors political and legislative changes at both the corporate and subsidiary levels. Trade related tensions seen during 2018 have not had a significant impact on Wärtsilä.
In recent years, there has been increased regulatory activity by different governments worldwide, which has led to the need for emphasising due internal processes to ensure compliance. As an example, the continuing and changing trade sanctions were complied with and closely monitored during 2018. This has required increased internal efforts to ensure that adequate procedures are in place.
Climate change and sustainability risks
Wärtsilä has assessed its sustainability risks, including climate change risks, in both its strategic and operative risk assessments. However, the risks were not found to be significant. The potential business risks related to sustainability, climate change, and Wärtsilä's products are in the areas of regulatory emission restrictions and changes in customer attitudes to using combustion engines and fossil fuels. The risks in environmental legislation changes are related to the complexity of the overall field of different emissions, the balance between commercially available fuels and their resulting emissions, available abatement technologies, the impact on overall energy efficiency, and the resulting financial feasibility of the various alternative ways to meet regulatory demands.
Being at the forefront of technological developments mitigates sustainability risks and gives Wärtsilä many opportunities arising from tightening environmental regulations. Over the years, Wärtsilä has worked continuously to improve the efficiency of its products, while at the same time seeking ways to reduce emissions. The fuel flexibility of Wärtsilä's products enables the utilisation of various fuels, including gas and those from renewable sources, while their operational flexibility enables the installation of large capacity based wind and solar energy systems without hampering the reliability of the electricity grid. Wärtsilä has entered both the hybrid energy and energy storage businesses, representing a further step in providing customers with sustainable innovations that reduce carbon emissions. Wärtsilä's technology also enables energy to be generated with a minimum use of water. The lack of fresh water is expected to be one of the major challenges facing the world in the future. In shipping, Wärtsilä can reduce the carbon footprint of vessels through optimised ship design, and with optimal propulsion solutions. Environmental solutions offer, among others, alternative technologies to reduce sulphur oxide (SOx) emissions and to treat waste and ballast water. In the energy markets, Wärtsilä's Smart Power Generation concept supports the increase in low carbon power generation, including wind, solar, and natural gas fired plants. Wärtsilä offers several retrofit solutions for the after-sales market to reduce emissions and to increase fuel efficiency.
For more information, please see the Sustainability section in the annual report.
Wärtsilä aims to increase the competitiveness of its solutions and manage technology risks and opportunities through solid R&D efforts and innovation. The development of new products is based on the strategic view of optimising lifecycle value for customers, and on reducing the lifecycle impact of developed technologies and products on the environment. This is achieved with modern and sustainable power solutions through, for example, gas solutions, environmental technologies, ship design, and electrical & automation solutions. As a technology leader, Wärtsilä places strong emphasis on emissions control, enhancing efficiency, and maintaining the cost competitiveness of its products. Connectivity and the utilisation of data to further optimise efficiency and unlock new customer values is becoming an increasingly important element of Wärtsilä’s development roadmap.