Strategic risks

Updated 23.2.2023

Wärtsilä’s strategic target positioning is focused at shaping the decarbonisation of the marine and energy industries and the company is well-positioned to support this transformation. Strategic risk assessment is an essential part of the strategic planning process and enterprise risk management in the Group. A risk with potential for a long-term impact on the business of Wärtsilä is considered as a strategic risk.

Business environment risks

Business cycles and megatrends in the global economy, and in customer industries, influence the demand for Wärtsilä’s products, as well as its financial condition and operating result. Wärtsilä enjoys a certain level of stability in a cyclical market thanks to its flexible manufacturing model based on capacity outsourcing, its customer base in two separate end markets with different demand drivers, and a large share of sales deriving from service activities. Wärtsilä, along with its customers and suppliers, is indirectly affected by various important economic matters. These include environmental regulation, liquidity and solvency of financial institutions including their capability and willingness to extend credit, cost of capital, and the counter cyclical stimulus programmes adopted by governments – especially in the power and infrastructure sectors. Among other influencing factors are the activities of multilateral institutions, such as the International Finance Corporation, and the availability of export credit and guarantee schemes.

Decarbonisation will transform the world and creates new business opportunities both in marine and energy. In marine, the shipping and shipbuilding markets are faced with increasing regulatory, financial, and end-customer pressure to decarbonise their operations. The importance of fuel efficiency and fuel flexibility is clearly visible, driving interest in environmental solutions, alternative fuels, as well as electric and hybrid solutions. In energy, electricity generation is expected to grow threefold by 2050, but use of renewables would increase as much as eightfold in the same period. Amplified by accelerating integration of intermittent renewable energy sources in the electrical systems, the balancing power market is expected to grow tenfold by 2030. Increasing need to mitigate climate change impact is an opportunity and an important driver for Wärtsilä’s future growth potential. The company has a comprehensive portfolio of products and services to support the customers with their efforts to improve environmental performance of their assets and their transition plans towards increasing adaptation of renewables and the use of future fuels.

A material delay or an unpredictable change in the implementation of environmental policies and legislation may however, directly or indirectly, impact customers’ decision making.

In the marine sector, uncertainties around the development and deployment of suitable future technologies coupled with a lack of sufficient regulatory and financial incentives or mechanisms to support the transition may affect the investment appetite of ship owners and operators, both in newbuilding programmes as well as in the existing fleet. At the same time, the limited development of alternative fuel infrastructures, the substantial price gap between conventional and alternative fuels, uncertainties concerning the regulatory environment, and the uptake of new technology may raise barriers for the green transition. A clear and foreseeable development of the regulatory environment is a fundamental condition for the decarbonisation of shipping.

In the energy sector, the energy crisis has brought out a clear need and ambition for a structural change. The global markets for liquified natural gas (LNG) are being transformed as the plummeted pipeline gas flows from Russia to Europe place new constraints and demands on gas trade. Beyond some short-term setbacks (such as slow permitting of renewables), the energy transition outlook has never been stronger, advancing renewable energy build-up while simultaneously strengthening the security of supply by reducing the dependency on imported fossil fuels. Energy and climate policies around the world continue to evolve towards more ambitious decarbonisation targets. Utilities continue to update their investment strategies accordingly, which can cause delays in investment decisions. A notable step forward in climate policy was the Inflation Reduction Act in the U.S., which allocates substantial incentives for renewables, battery energy storage, and other clean energy technologies. Going forward, the increasing levels of intermittent renewable energy in power systems are expected to further accelerate the need for various flexible balancing solutions, such as energy storage and grid- balancing power plants.

Market and customer risks

The ongoing war in Ukraine has resulted in various risks to both the demand and supply environment of various commodities globally, contributing to an increased uncertainty over the macroeconomic outlook. Business operations globally are being impacted by the increased inflationary pressure, changing trade flows and volumes, altered financial conditions, the volatility of the geopolitical environment including risk of trade wars, and the sanctions in place and planned against Russia. These are all contributing to a slowdown in global economic growth. The increased probability of a global recession poses a risk for top-line growth if economies stagnate. Uncertainty over inflation typically increases the cost of capital and complicates investment decisions.

In 2022, the Covid-19 pandemic continued to have a negative impact on the investment and spending appetite of Wärtsilä’s customers in both the marine and energy markets. Several countries are still struggling with the pandemic, which limits their ability to implement new infrastructure projects, causes disturbances in global supply chains, and may temporarily limit the speed of the energy transition. Business operations continued to suffer from restrictions on mobility, customer site access constraints, and efforts by customers to limit their cash expenditure. Towards the end of 2022, the Covid-19 related uncertainty has eased with the notable exception of China, where the recent lifting of the restrictions resulted in accelerating rate of new infections. This may amplify disruption in supply chains, in general, and may potentially hamper the critical shipyard operations applicable to both marine new build and retrofit activity.

The energy markets are transitioning towards more sustainable energy sources. The penetration of renewable energy is increasing, not only because of the promotion of more environmentally sound sources of energy and regulatory pressure, but also because those forms of energy generation are the most economical to use. However, the energy output of renewables is intermittent, resulting in an increased need for balancing power, for which Wärtsilä’s flexible engine technology is advantageous. Furthermore, there is increasing demand for the energy storage and system integration capabilities that Wärtsilä offers. Changes in climate policies and regulations cause uncertainty in the markets, as they may impact technology choices for customers. Geopolitical tensions and the implications of trade barriers create notable challenges to the demand environment. Nevertheless, Wärtsilä receives orders from all geographic regions, thus limiting the risk of a single market dependency. Finally, all Wärtsilä’s customer segments in the energy market are represented in the order intake.

In marine, decarbonisation remains the main underlying trend within the shipping and shipbuilding markets. The transition to cleaner fuels has continued to gather pace, with 466 orders placed globally for alternative fuel capable vessels, representing 30% of all contracted vessels and 60% of vessel capacity in the review period January–December. Despite the currently high price, LNG continues to represent over 80% of all alternative fuel capable vessel orders, although shipowners’ interest in other alternative fuels like methanol has clearly emerged in 2022. The market sentiment continued to improve in the key vessel segments for Wärtsilä, despite growing concerns on the macroeconomic outlook. The improvement was mostly due to increasing demand for liquified natural gas (LNG), high fleet utilisation in the cruise segment and continued reactivation of offshore assets. Trade tensions, geopolitical uncertainty, and any prospects of a possible slowdown in the global economy affect investment decisions in the shipping industry. While slower economic growth is also a risk to demand development in the service markets, the capital-intensive newbuilding market is more sensitive to changes in the economic outlook. Simultaneously, the investment appetite for new ship capacity moderated due to many shipyards, especially those in China and South Korea having their orderbooks close to full, forcing owners to wait longer and pay a substantially higher price for their new ships. Wärtsilä is well represented in all the major shipbuilding markets and is active in all the main vessel segments. This, along with the company’s large product portfolio and global service network, which provides lifecycle support to a wide range of vessels and customers globally, mitigates both geographical and single customer risks.

Digitalisation has become increasingly important for both the shipping and energy industries’ businesses and operating models. Wärtsilä continues to work towards the digital transformation of future shipping markets by developing and offering solutions that address customer needs for safety and optimised efficiency. In the power generation markets, the growth of renewable energy sources and the deployment of new technologies have increased the complexity of energy systems. Wärtsilä’s GEMS Digital Energy Management System, a propriety power system optimisation software, is a proven, efficient, and stable software platform, which enables customers to optimise utilisation of all the assets in their energy system. It also offers capabilities for the remote monitoring of individual assets or complete systems, identifying and diagnosing equipment issues in real time, and extending system lifetime

Competitive situation and price risks

In 2022, price competition in the markets where Wärtsilä operates continued to be intense.

In energy installations, Wärtsilä’s market share in the up to 500 MW market segment increased to 8%, as global orders for natural gas and liquid-fuelled power plants increased by 13% to 26.7 GW during the twelve-month period ending in September 2022. Global orders include gas turbine and Wärtsilä orders with prime movers over 5 MW in size. The data is gathered from the McCoy Power Report. In the fast-growing energy storage market, Wärtsilä is a leading player with a 3GW+/6GWh+ global portfolio of hardware, software and services.

In the marine equipment markets, Wärtsilä has a strong position in 4-stroke medium-speed main engines with a 44% market share in 2022. In auxiliary engines, Wärtsilä’s market share was 12%. With its wide offering of solutions for vessel and transport efficiency Wärtsilä provides unique customer value to the ship owners that are considering several options to meet the tightening environmental requirements. These include slow steaming, energy saving devices, voyage optimisation solutions, hybrid and fullelectric power systems, carbon capture and storage, exhaust gas scrubbers, and alternative fuels.

With respect to servicing the marine and energy markets, in line with the value-based offering concept, Wärtsilä continues to develop its range of lifecycle services and asset management solutions aimed at optimising customer assets over their lifespan. Such long-term service agreements do not only ensure asset performance and protection of customer investment value but also bring stability to Wärtsilä as a service provider. In energy, demand for services continued at a good level, and customers are showing interest in long-term agreements, thus providing stability to the business. The Sustainable Technology Hub in Vaasa, Finland is the home to one of our advanced remote-control centres. In energy, the installed base covered by long-term service agreements is continuously increasing.

Political and legislative risks

Wärtsilä strongly condemns the war in Ukraine. After Russia’s invasion into Ukraine, the company immediately suspended all deliveries, sales, orders, and bidding activities to and with Russia. In July, following the announcement made in April 2022 to scale down its activities, Wärtsilä announced it has completed its exit from the Russian market. The company has been fully committed to complying with all trade sanctions applicable to its operations from the beginning of the war in Ukraine and has closed all business operations in Russia.

Wärtsilä is present in 242 locations in 79 countries and has delivered power plants to 180 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 a dialogue with various official bodies on projects of importance to its operations. 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.

Geopolitical risks and trade tensions were on the rise globally in 2022, and the increasing uncertainty related to trade relations continues to be a noteworthy risk. There is increased regulatory activity by different governments worldwide. Wärtsilä’s focus is on ensuring regulatory compliance and awareness, as appropriate. For example, ongoing and changing trade sanctions are closely monitored and complied with as required.

Climate change and sustainability risks

Already in October 2021, Wärtsilä announced its “Set for 30” commitment to become carbon neutral in its own operations and to provide a product portfolio ready for zero carbon fuels by 2030. Wärtsilä’s sustainability targets focus on three long-term themes: Towards carbon neutrality, Enhancing safety diversity and wellbeing, as well as being An active and responsible member of society.

Being at the forefront of technological development and decarbonisation efforts in the marine and energy sectors forms a major opportunity for Wärtsilä. Over the years, Wärtsilä has worked continuously to improve the efficiency of its products, while at the same time developing future-proof technologies. Additionally, Wärtsilä offers a variety of retrofittable conversion solutions, allowing customers to follow their own choice of fuel and decarbonisation alternatives. In the energy sector, Wärtsilä’s energy storage and energy management systems enable customers to integrate and optimise the utilisation of renewable energy sources in their energy systems.

Rapidly evolving environmental regulation drives the demand for enablers of decarbonisation. Risks are mainly related to the complexity of the overall landscape of different emissions in the marine and energy sectors, the balance between commercially available fuels and their resulting emissions, available abatement technologies, and the financial feasibility of the various alternative ways to meet regulatory demands for decarbonisation.

Wärtsilä has a vast number of suppliers in its global supply chain. This means that there are potential sustainability and reputational risks related to, for example, non-compliance with human and labour rights obligations, occupational health and safety, and environmental management. Wärtsilä has clear expectations, policies, and procedures for managing these risks.

Technology risks

Wärtsilä as a large corporate can invest in various technologies and thereby reduce the risk of obsolescence. The company is increasing the competitiveness of its solutions and managing technology risks and opportunities through continuous and strong R&D efforts and innovation. The company invested 4.6% of net sales into innovation in 2022. The development of new products and solutions is aimed at optimising the lifecycle value for customers, as well as at reducing the environmental impact of their operations. This is achieved with modern and sustainable power solutions, environmental technologies, hybrid systems, electrical and automation solutions, digital solutions, as well as energy storage and system optimisation solutions.

In 2021, Wärtsilä launched a major R&D programme for carbonfree fuel solutions with hydrogen and ammonia and is pioneering their adoption as viable engine fuels through advanced testing in its fuel-flexible combustion engines. Several milestones on low/zero carbon technologies and products are planned for the upcoming years. In 2022, Wärtsilä introduced to the market its methanol version of the W32 engine with the first deliveries to be made in 2023. The W25 engine, a brand-new multi-fuel platform designed to accelerate and support the maritime sector’s efforts in achieving decarbonised operations, was also introduced. The Sustainable Technology Hub in Vaasa was inaugurated in June 2022, where work on the testing of ammonia and hydrogen concepts is proceeding at a rapid pace.

In the combustion and performance testing of ammonia fuel, optimisation with different engine concepts and different engines platforms have been conducted during 2022, with the aim to have the ammonia concept ready in 2023. Combustion testing on different % blends and up to 100% hydrogen are being carried out. The target here is to have the hydrogen concept ready by 2025. Wärtsilä has entered a number of partnerships and customer collaborations on hydrogen blending and testing.

In November, Wärtsilä and US partners announced the world’s first achievement in the power plant environment supplying power to the grid with an unmodified Wärtsilä 50SG engine operating continuously on a hydrogen fuel blend. This is a clear proof point of the fuel flexibility and versatility of Wärtsilä’s engine technology.

Also in November, Wärtsilä launched its next-generation grid balancing technology. The solution is based on three fully integrated key components: the Wärtsilä 31SG Balancer engine, prefabricated modules for cost-efficient plant construction, and Wärtsilä Lifecycle services. The engine can start and ramp up rapidly even in adverse weather conditions to support intermittent renewable generation.

As a technology leader, Wärtsilä places a strong emphasis on emissions control, enhancing efficiency and fuel flexibility, and maintaining the cost competitiveness of its products. Connectivity, and the utilisation of data to further optimise efficiency and unlock new customer value, is becoming an increasingly important element of Wärtsilä’s development roadmap.