Strategic risks

Strategic risk assessment is part of the strategic planning process within the Group.

Business environment risks

The business cycles in the global economy and in our customer’s industries influence the demand for our products, as well as our financial condition and operating result. The flexible multiproduct manufacturing model based on capacity outsourcing, together with a stable business mix with a large share of sales deriving from Services, brings Wärtsilä certain stability in a cyclical market. Important economic matters that indirectly affect Wärtsilä, its clients, and suppliers include inter alia, the liquidity and solvency of the 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 IFC, the availability of export credit schemes and guarantees, and other such factors. However, the relatively large order book gives Wärtsilä time to adapt to market conditions.

The implementation of environmental regulations is important for the future growth potential in specific business segments. It has, however, had a limited effect on Wärtsilä’s business during 2011. Wärtsilä monitors possible changes in the legislation timeline and scope.

Market and customer risks

In the Power Plants business, there was positive development in ordering activity, and several large power plant orders were closed during the year. In general, the non-OECD markets remained very active, but in the OECD countries slow growth delayed investments in power generation. Wärtsilä has four types of customers: Industrial customers, IPPs, utilities, and oil & gas sector customers. All customer types were represented in the order intake profile, and orders were received from all geographic markets.

The uneven development between various Ship Power segments has continued throughout the year 2011. The merchant shipping sector continues to suffer from overcapacity, whereas various areas of specialised tonnage, and especially the offshore industry, are continuing to make investments at a relatively steady pace. The shipbuilding market is dominated by Asian yards in South Korea, China and Japan. Wärtsilä is well represented in all the major shipbuilding areas and is active in all the main vessel segments. This mitigates both single customer related and geography related risks.

The Ship Power market continues to bear some consequences of the recent financial crisis, and overcapacity in the shipping markets is currently one of the major obstacles to a full recovery. The ongoing turbulence in the European economies has not had a significant impact on Wärtsilä’s Ship Power business.

The Services business remained stable, and its long-term business is still expected to grow in line with the development of the existing installed base, as well as with general economic development. Wärtsilä has more than 14,000 customers and an active engine base of approximately 180,000 MW, which means that its dependency on any single customer or customer segment is minor.

During the last few years, Wärtsilä has increased its focus on credit management processes to better manage the increasing risks resulting from higher leverage and decreasing profitability in certain customer segments. Exposure to individual customers is limited, but an industrywide impact might also affect the profitability of Wärtsilä’s Services business.

Competitive situation and price risk

In the liquid fuels based power plant market, Wärtsilä’s main competitors are the MAN Diesel, Caterpillar (MAK), and Rolls-Royce. In natural gas based power generation, the main competitors are gas turbine manufacturers, such as GE and Siemens. In 2011, Wärtsilä’s overall market share was reduced due to very large dedicated baseload power plant orders in selected markets, such as China, Saudi-Arabia and Japan. However, Wärtsilä maintained its position in the markets focusing on flexible power generation.

For Ship Power, price competition has continued to be intense throughout the year. For main engines, the most significant competitors are MAN Diesel, Caterpillar (MAK), and Hyundai Heavy Industries (HiMSEN). No significant changes to the competitive situation or market shares occurred during 2011. In propulsion equipment, the competition is more fragmented and varies by product category. One of the main competitors in these products is Rolls-Royce. The concept of selling packaged solutions rather than only single products reduces price volatility. The strategic move to becoming a systems integrator with automation and ship design capability has proven to be very important in the competition for new projects.

In the Services business, Wärtsilä has no direct competitors that would offer a similar portfolio of services from a single source. Excluding the service networks of other engine manufacturers, there are few global players in the service market. Increased pressure on profitability, especially in the marine merchant sector, can lead to a further increase in competition for service in that particular customer segment. There has always been price competition, especially among certain customer groups and application types. The size of this group has, however, not changed to any larger degree.

Political and legislative risks

Wärtsilä is present in nearly 170 locations in more than 70 countries and has delivered power plants to more than 165 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 Wärtsilä’s operations. Much of this engagement takes place through interest groups and trade organisations. The company monitors political and legislative changes at both corporate and subsidiary levels.

Climate change and sustainability risks

Wärtsilä has assessed its sustainability risks, including climate change risks, in both strategic and operative risk assessments. However, these 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 resulting emissions, available abatement technologies, the impact on overall energy efficiency, and the resulting financial feasibility. Being at the forefront of technological developments 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 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’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.

The International Maritime Organization (IMO) regulates emissions of nitrogen oxides from ship engines, as well as the sulphur content of the fuel. Stricter requirements are expected to enter into force in several phases by 2020. Wärtsilä has already introduced secondary technologies to help customers comply with these sulphur oxide (SOx) and nitrogen oxide (NOx) emission regulations. Wärtsilä engines are designed to be operated on fuels regardless of the sulphur content. Additionally, Wärtsilä has a multifaceted gas engine strategy and can provide gas engines to vessels, thus enabling compliance with regulations.

The Thermal Power Plants’ EHS (Environmental Health and Safety) Guidelines, published by the World Bank/International Finance Corporation (IFC), are technical reference documents with general and industry-specific examples of Good International Industry Practices. Leading international banks have reached an agreement with the IFC to follow the guidelines based on the IFC’s environmental and social standards and have thus adopted the Equator Principles. Many other financial institutions, such as Export Credit Agencies, are also using the World Bank Group Guidelines in addition to national norms in their projects. Consequently, the World Bank/IFC EHS Guidelines are today the minimum environmental standard in global power plant projects. It is estimated that more than 70% of the finance activities for projects in emerging markets are now carried out in accordance with the Equator Principles.

The EU Industrial Emissions Directive has been approved by the European Parliament and entered into force at the beginning of 2011. An intensive interaction between the various stakeholders is currently taking place. Wärtsilä has been and remains actively engaged in the dialogue between the different authorities, associations, industry and customers, in order to ascertain the optimal solution for meeting market needs.

Wärtsilä’s strong focus on R&D and solutions development gives it many opportunities in the field of sustainability. Wärtsilä’s Product Center Ecotech focuses on environmental technologies that are related to products other than engines in order to quickly respond to market and customer needs with fully integrated and validated solutions. In shipping, Wärtsilä can reduce the carbon footprint of ships through ship design, efficient engines, and optimal propulsion solutions. In Power Plants, Wärtsilä can offer further improvements, such as more efficient engines, fuel flexibility (including bio fuels and natural gas) and combined heat and power (CHP) applications, with very high overall efficiencies. Wärtsilä also offers several retrofit solutions for the after-sales market to reduce emissions and to increase fuel efficiency. In addition, Wärtsilä provides environmentally sound solutions for the treatment of bilge and ballast water in seagoing vessels.

For more information, please see the separate Sustainability report included in this annual report.

Technology risks

As a technology leader, Wärtsilä needs to maintain the cost competitiveness of its products and consequently places high emphasis on product efficiency and emissions control. New products are developed based on Wärtsilä’s strategic view of lifecycle service and efficiency through, for example, utilising ship design, electrical & automation, and environmental technologies. Wärtsilä aims to increase the competitiveness of its solutions through solid R&D work and innovation.

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