Strategic risks

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 supports customers in improving their 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 2020, the COVID-19 pandemic had a negative impact on the investment appetite of Wärtsilä’s customers in both the marine and energy markets, resulting in depressed vessel contracting and the postponement of decisions on new power plant capacity. Service operations suffered from the restrictions on mobility, as well as from the low vessel utilisation, power plant site access constraints, and efforts by customers to limit their cash expenditure. The uncertainties over the evolvement of the pandemic and its long-term implications on Wärtsilä’s markets and the global economy have lowered the visibility on demand development.

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, 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. This is where Wärtsilä’s flexible engine technology, as well as its energy storage and system integration capabilities, come into play.

The rapidly changing energy 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. Nevertheless, orders are received from all geographic regions, thus limiting the risk of a single market dependency. Furthermore, Wärtsilä’s three customer segments, namely industrial customers, IPPs (independent power producers), and utilities, are 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 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 importance of fuel efficiency and environmental regulations is clearly visible, driving interest in environmental solutions, alternative fuels, 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. 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. In accordance with its Smart Marine strategy, Wärtsilä continued to work towards the digital transformation of future shipping markets by developing and offering solutions that address customers’ needs for safety and optimised efficiency throughout the voyage. In the power generation markets, the growth of renewable energy sources and the deployment of new technologies has increased the complexity of energy systems. Wärtsilä’s Greensmith Energy Management System (GEMS) 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 2020, 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 16.6 GW during the twelve-month period ending in September. Wärtsilä’s market share was 9%. 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.

In the marine equipment markets, Wärtsilä has a strong position in medium-speed main engines with a 57% market share in 2020. In auxiliary engines, Wärtsilä’s market share was 6%. Price competition remains intense in the marine newbuild markets, partly due to lower vessel contracting volumes. The strategic move of becoming a systems integrator 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.

When it comes 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 its customers’ assets over their lifetime. Such long-term service agreements not only ensure asset performance and protect customers’ investment, but bring stability to Wärtsilä as a service provider.

Political and legislative risks

Wärtsilä is present in 258 locations in 73 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 tensions were on the rise globally in 2020, and the increasing uncertainty related to trade relations continues to be a noteworthy risk. The impact on Wärtsilä has materialised 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. This has led to a need to emphasise due internal processes in order 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

Wärtsilä assesses 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 perceptions of different technology solutions and 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 development and decarbonisation efforts in the marine and energy sectors, climate change and tightening environmental regulations form a major opportunity for Wärtsilä. 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. Furthermore, their operational flexibility enables the installation of large capacitybased wind and solar energy systems without weakening the reliability of the electricity grid. Wärtsilä offers hybrid energy and energy storage solutions, providing customers with sustainable solutions that reduce emissions. Wärtsilä’s technology also enables energy to be generated with a minimum use of water. In shipping, Wärtsilä can reduce the carbon footprint of vessels through high efficiency propulsion systems, hybrid solutions, and smart voyage optimisation solutions. Environmental solutions offer, among others, alternative technologies to reduce sulphur oxide (SOx) and nitrogen oxide (NOx) 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.

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 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. 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.

© 2021 Wärtsilä