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 exposure to two separate end markets with different demand drivers 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 activities of multilateral institutions, such as the International Finance Corporation, the availability of export credit schemes and guarantees, and other such factors. Wärtsilä’s 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. Possible changes in the legislation timeline and scope are, therefore, actively monitored.
Market and customer risks
In the energy markets, there is a global shift towards more sustainable energy sources. The penetration of renewables is increasing, and energy storage is emerging as a technology that changes the paradigm of power systems. 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 a proven, efficient, and stable software for controlling and operating complex systems, which gives Wärtsilä a competitive advantage in managing the related risks.
The rapidly changing market environment has impacted the speed of customer decision-making, as the changes require updating their future portfolio strategies. Electricity demand is increasing, but fragile economic growth represents a risk for demand development. Geopolitical tensions and the implications of trade barriers create notable challenges to the demand environment. 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. Orders are 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, are also all 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 providing 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 a possible slowdown in the global economy are affecting investment decisions in the shipping industry. While slow 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 have resulted in challenges to securing financing for newbuilds. Consolidation among the major shipyards is a potential risk that might result in lower capture rates in equipment sales due to changed relationships with the shipyards.
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 and hybrid solutions. While concerns related to climate change require increasing efforts to reduce emissions within the shipping industry, uncertainties concerning developments in the regulatory environment may slow newbuild activity. Uncertainty concerning bunker fuel pricing and availability has delayed decision-making among customers for scrubber technology investments, despite supportive initial price indications. The deliveries of exhaust gas cleaning solutions, on the other hand, increased significantly, creating a recognised risk, namely to manage and deliver the demanded orders on time and with the required quality. The shortage of available shipyard capacity to install and commission scrubber retrofits is a risk in the form of delays in project deliveries.
Digitalisation has become increasingly important for both the shipping and energy industries’ business and operating models. In accordance with its Smart Marine strategy, Wärtsilä continued to work towards the digital transformation of future shipping markets with the development of a digital strategy and by introducing new market offerings. These include initiatives such as Operim, which enables improvements in operational performance by means of continuous monitoring and the reporting of key performance indicators through enhanced use of data. In the power generation markets, energy management systems gain importance as renewable penetration grows. Wärtsilä’s advanced energy management software platform GEMS enables customers to remotely monitor individual systems or entire fleets, identifying and diagnosing equipment issues in real time, and extending system lifetime.
Competitive situation and price risks
In 2019, competition on those markets where Wärtsilä operates has increased. In large 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. 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 11.6 GW during the twelve-month period ending in September. Wärtsilä’s market share was 17%. Wärtsilä’s success in the market can be attributed to its flexible power generation solution, which can be used in a broad range of different applications and power plant sizes. Price pressure resulting from the prevailing competitive environment remains a risk.
When it comes to servicing the energy markets, in line with the value-based offering concept, Wärtsilä continues to develop and offer a range of lifecycle services and asset management solutions aimed at optimising its customers’ power plants over their lifecycle. Such long-term service agreements not only ensure the power plant’s performance and protect the customer’s investment but bring stability to Wärtsilä as a service provider. Competition for energy services is fragmented, consisting mainly of individual local players.
In the marine equipment markets, the competitive landscape became more consolidated in 2019 as a result of Kongsberg’s acquisition of Rolls-Royce’s Commercial Marine unit. 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 45% market share in 2019. In auxiliary engines, Wärtsilä’s market share was 15%. In propulsion equipment, the competition is more fragmented and varies by product category. One of the main competitors for these products is Kongsberg. 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. In marine services, Wärtsilä has no direct competitors capable of offering a similar portfolio of services from a single source.
Price competition has intensified in the marine newbuild markets, partly due to lower vessel contracting volumes. The strategic move of becoming a systems integrator with automation and ship design capability has proven to be an important differentiator in the competition for new projects with larger and more value-adding 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 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 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 have increased globally in 2019, and the uncertainty related to trade relations is now a more noteworthy risk on the marketplace than before. The impact on Wärtsilä has materialized mainly in the form of delayed contract decisions and reduced demand for new vessels caused by the expected reduction in trade volumes between the USA and China.
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 ongoing and changing trade sanctions were complied with and closely monitored during 2019. This continues to require 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. The potential business risks related to sustainability, climate change, and Wärtsilä's products are in the areas of regulatory emission restrictions and changes in 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, optimal propulsion solutions, and voyage management. Environmental solutions offer, among others, alternative technologies to reduce sulphur oxide (SOx) emissions and to treat waste and ballast water. 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.
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 is based on the strategic view of optimising lifecycle value for customers and on reducing the lifecycle impact on the environment of developed technologies and products. This is achieved with modern and sustainable power solutions through, for example, gas solutions, environmental technologies, ship design, as well as electrical and 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 value is becoming an increasingly important element of Wärtsilä’s development roadmap.