Strategic risks

Updated 14.2.2022

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 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 the liquidity and solvency of financial institutions, meaning not only their capability but also their willingness to extend credit, 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 schemes and guarantees.

The focus on mitigating the impacts of climate change is important for Wärtsilä’s future growth potential, as the company’s comprehensive portfolio of products and services already today supports customers in improving their environmental performance. A delay or an unpredictable change in the implementation of environmental policies and legislation may present a risk to Wärtsilä. Possible changes in their timelines and scopes are, therefore, actively monitored.

Market and customer risks

In 2021, 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. Business operations continued to suffer from restrictions on mobility, power plant site access constraints, and efforts by customers to limit their cash expenditure. Prospects for epidemiological endpoint are increasingly different for each country after the emergence of more transmissible virus variants and differing rates of vaccination, especially in developing countries. The uncertainties regarding the trajectory and duration of the pandemic, and its long-term implications on Wärtsilä’s markets and the global economy have kept the visibility on demand development at a low level.

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 more volatile, resulting in an increased need for balancing power, which is where Wärtsilä’s flexible engine technology is advantageous. Furthermore, there is increasing demand for the energy storage and system integration capabilities that Wärtsilä offers.

In the energy markets, despite globally growing economic activity, the prevailing Covid-19 pandemic, currency fluctuations, and potential financing constraints are likely to postpone investment decisions on new power generation capacity. Many countries are still struggling with the pandemic, which limits their ability to implement new infrastructure projects. 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, orders are received from all geographic regions, thus limiting the risk of a single market dependency. Furthermore, all of Wärtsilä’s customer segments in the energy market are represented in the order intake.

In the shipbuilding industry, Wärtsilä is well represented in all the major 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 the growing installed base of over 50,000 vessels and 10,000 customers, mitigates both geographical and single customer risks.

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. Changes in the financial landscape can result in challenges to securing financing for newbuilds. Surplus capacity can drive further consolidation among shipyards, ship owners, and operators in certain segments, which may result in lower capture rates in services and equipment sales due to changed customer relationships.

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. Uncertainties around the development and deployment of suitable future technologies may affect the investment appetite of ship owners and operators, concerning both newbuilding programmes and the management of existing fleets. At the same time, limited development of alternative fuel infrastructures, the substantial price gap between conventional and alternative fuels, and uncertainties concerning the regulatory environment and the uptake of new technology may slow down the green transition. A clear and foreseeable development of the regulatory environment is a fundamental condition to the decarbonisation of shipping.

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 customers’ 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 Platform, 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 2021, competition in the markets where Wärtsilä operates continued to be intense. In Wärtsilä’s addressable power plant market, i.e. the market for installations of up to 500 MW, orders for natural gas and liquid fuel power plants totalled 19.2 GW during the twelve-month period ending in September. Wärtsilä’s market share was 5%. In the fast-growing energy storage market, Wärtsilä is one of the top-three players alongside Tesla and Fluence. In the marine equipment markets, Wärtsilä has a strong position in 4-stroke medium-speed main engines with a 62% market share in 2021. In auxiliary engines, Wärtsilä’s market share was 5%. Price competition remains intense in both the marine newbuild and power plant markets.

As regards 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 not only ensure asset performance and protection of customer investments, but bring stability to Wärtsilä as a service provider. 

Political and legislative risks

Wärtsilä is present in more than 200 locations in 68 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.

Trade tensions were on the rise globally in 2021, 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 to ensure regulatory compliance or awareness, as appropriate. For example, ongoing and changing trade sanctions are closely monitored and complied with as required.

Climate change and sustainability risks

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. At the beginning of 2021, Wärtsilä updated its sustainability targets which, in addition to carbon neutrality, focus on two long-term themes: 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 storage solutions, together with the GEMS software, 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 field of different emissions in the marine and energy sectors, the balance between commercially available fuels and their resulting emissions, available abatement technologies, and the resulting 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, with the result 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 aims to increase the competitiveness of its solutions and to manage technology risks and opportunities through solid R&D efforts and innovation. 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, such as gas solutions, environmental technologies, hybrid systems, electrical and automation solutions, as well as energy storage and system optimisation solutions. 

In 2021, Wärtsilä launched a major testing programme towards carbon-free solutions with hydrogen and ammonia. Wärtsilä is pioneering the adoption of hydrogen and ammonia as viable engine fuels through advanced testing in its fuel-flexible combustion engines. As a technology leader, Wärtsilä places 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.