Oil prices in the recent past have hit record levels and the Middle East economies have made the most of this good fortune. The oil rush is rewriting the Middle East economic and investment landscape and ambitious projects are in various stages of planning, design and implementation. The needs of the burgeoning population are dynamically changing and it calls for increased levels of investment in projects across various sectors such as oil and gas, power and electricity generation, telecommunication, water supply and sanitation and tourism.
With brisk development engulfing every sphere of the region’s economy, the power infrastructure of the region is under excessive stress. Diesel gensets have long been the primary solution for stand-by, emergency and continuous power requirements and have taken centre stage in the Middle East, courtesy of the rapid economic and commercial development. The genset market is on a roll in the Middle East and is estimated to have generated nearly $600 million in 2005, and is geared up to witness a steady compound annual growth rate (CAGR) of 5.5 per cent between 2006-2012.
The building boom in the region can be considered to be a major propelling force behind the growth in the genset market in the Middle East. Mega offshore and onshore projects in the United Arab Emirates (UAE) have significantly stimulated the need for temporary power, thereby spurring genset demand. Dubai is considered to be the nucleus of the construction boom, with multi-billion construction projects such as Dubai Marina, Dubailand, The Burj Dubai Complex and Business Bay underway. Construction of the King Abdullah Economic City in Saudi Arabia is another example of this building boom. In a region that is bestowed with abundant hydrocarbon reserves, high oil prices spell increased revenues, intensification of oil and gas exploration activities, and this reflects positively for the genset market. For instance Saudi Aramco is resolute to increase its oil output to 12 million barrels per day by the end of 2009.
The picture, however, is not as rosy as it seems, as one of the major restraints that the Middle East region faces is the lack of political and regional stability. The region has been strife with political turmoil for decades, which has in-turn resulted in high geo-political risk. This has far-reaching consequences on the economic reliability of these nations.
Overdependence on oil and other commodities is expected to be another major restraining factor since a decrease in high oil prices could have an adverse effect on the investments inflow in the region. Hence, many infrastructure projects that are backed by high oil revenues could be affected or shelved thereby considerably reducing the need for gensets. With increasing power demand, projects to add capacity and improve the electricity grids in these countries are either planned or are in progress. The multi-billion dollar GCC Grid Inter-connection Project to interconnect the grids of states of Saudi Arabia, Qatar, Bahrain, Kuwait, Oman and the UAE, is expected to be completed by 2010. These improvements are planned with the aim of providing uninterrupted supply of power that could adversely affect the genset market in this region.
Distribution structure of the genset market
Figure 1 delineates the structure of the genset market and the flow of distribution via direct and indirect channels. The market is headed by the original equipment manufacturer (OEM), which typically manufactures the diesel engines and in turn sells the engines to genset packagers. Examples of typical OEMs would be Aggreko, Caterpillar, Perkins, MTU, Cummins, Iveco, Deutz, Volvo and Scania. Some of the OEMs package and assemble their own genset as well.
Figure 1: Distribution structure of the genset market
Packagers and assemblers are at the next level of the supply chain and are involved at the assembling phase of the diesel gensets. The packagers and assemblers segment of the genset market comprises a combination of Western and local players like FG Wilson, SDMO, Pramac, Himoinsa, Atlas Copco, Aksa, Sakr Power Systems and a few others. Dealers and distributors are a vital link in the supply chain, and with their intricate and sound knowledge of the local needs of the market and proximity to the end users they provide an excellent platform for genset manufacturers to gain a strong foothold in the Middle East region. Dealers and distributors are the direct channel through which genset manufacturers can route their products to the end users, while contractors and installers offer the indirect route.
The typical end users for gensets in the Middle East include industrial, commercial, and public/infrastructure entities. The industrial end users lead the pack and contribute to the maximum demand for gensets,while the commercial sector is expected to witness a rise in demand for gensets, as the construction activity in this landscape becomes increasingly dotted with malls and office spaces. Governments in this region have also directed a substantial portion of their oil revenues into revamping the public infrastructure of the region and this segment is also expected to contribute a significant portion of demand for gensets.
Figure 2 provides an analysis of the five fundamental competitive forces that impact the attractiveness of the genset market in the Middle East.
Figure 2: Competitive forces analysis of the Middle East genset market
The genset market in the region is in a growth phase and holds a lot of promise for genset manufacturers. The UAE is also considered to be a springboard for genset manufacturers, and Dubai is considered to be the trading hub from where most of the re-export to other countries in the Middle East occurs. The market has also witnessed the influx of an increasing number of lower priced Chinese products, which is considered to be a major challenge to the existing Western manufacturers in the region.
The possibility of any other technology replacing diesel gensets as the most preferred form of distributed generation is highly unlikely in the near future. The other options that are available are gas gensets and other forms of renewable energy. Gas gensets are considered to be costly though they are considered to be superior in the longer run and also generate considerably lower exhaust emissions. Solar and wind power generation are the most important competitive substitutes to the diesel gensets. Having reached a stage where power demand could exceed supply, concentrated efforts are being directed towards finding alternative ways of power production.
There is a plethora of products that are available in the market, and buyers have a wide variety of options to choose from, and therefore exert a significant amount of influence in the genset market. Their choice of genset varies depending on the type of application it is going to cater to. For instance, in war torn countries such as Iraq and Lebanon, where power outages occur for extended periods of time, customers purchase high quality prime power gensets, which are capable of running continuously. While, in cases where the customer is more interested in generating power for an extremely short duration, quality might not be the first priority, cheaper products are potentially more in demand. However, it is expected that customers who prefer quality over price will continue to be brand loyal and purchase reputed products from leading manufacturers.
The suppliers in the Middle East region are a mix of Western manufacturers and local packagers. Despite the availability of lower priced products, manufacturers such as Aggreko, Caterpillar, FG Wilson, Cummins and SDMO have been able to build a reputed brand image for their products. Hence it is very important for genset manufacturers to produce high quality products and also develop successful positioning strategies that ensure repeat business. What customers these days are looking for are the added extras of after sales support, availability of spares and parts, technical and maintenance support. These coupled with affordable and competitive prices will provide the basis to make strong in-roads into the Middle East market.
Degree of competition
There is a fairly high degree of competition in the genset market with companies vying with each other to get a strong foothold of the market. The market concentration of the top three companies in the Middle East genset market is around 50 per cent. Competition has also been augmented by the entrance of Chinese companies with lower priced products. Companies are employing various strategies to try to gain a significant market share. These include product innovation, expanding their product line, strengthening the dealer and distributor network so as to enable wide geographic coverage, improving after sales service and ensuring that the customer gets the maximum value for money. With escalating competition, it has become highly essential for companies to continuously update their product portfolio so as to ensure that the products that they offer are reputed, high quality and are in line with the current needs of the end users.
The short and medium term outlook augurs exciting times for the genset market that is primarily driven by the various commercial and industrial activities that the region is witnessing. The Middle East has opened up huge windows of opportunities for OEMs, genset manufacturers and power solution providers, and the market is fast becoming competitive. The need for power has and will continue to exist, while what remains to be seen is how effectively the various players can strategically and comprehensively develop innovations in their product portfolio to address this spiraling demand.