India keeps Asian market moving

The Asian financial crisis has taken its toll on the region`s stationary engine market, yet India continues to see rapid growth in this market. Just what has caused this `blip`, and for how long can it continue?

Jonathan Adkins

MarketLine International

London, United Kingdom

The full impact of the Asian crisis on the global stationary power engine market is likely to be worse than initially thought, and sales outside the region will need to rise considerably in order for manufacturers to equal last year`s performance.

However, growth in Europe and the CIS is unlikely to compensate for losses in Asia. Eastern Europe in particular is suffering from low volume figures, and even western Europe cannot be relied upon to prop up sales because electricity deregulation is still holding back major growth – as customers adopt a `wait and see` philosophy.

Asia covers a wide area with large variations in power needs and in the quality of public utilities. Although demand for power has increased significantly over the past five years, and will rise still further in the future, growth of the power generation market is heavily dependent on an economic recovery which in many parts of Asia seems a distant prospect.

Despite a huge requirement for electricity, the financial means to provide it has been curtailed by the turmoil caused by currency crashes, and a number of large projects have now been cancelled.

Hardest hit by the current financial crisis will be the southeast Asian region, although the power generation market will be one of the first markets to recover as economies begin to stabilise. MarketLine projects negative growth for this year, although steady growth will return from 1999 onwards. The volume levels of 1997 will not, however, be reached until the turn of the century.

In Thailand, utility power is very reliable as the country has one of the best networks in Asia. However, the economy is suffering from severe currency problems, and the depreciation in the Baht has led to negative growth in the market.

Electricity demand growth rates in Malaysia have hit the floor as a result of the economic downturn.

In Indonesia, utility power is unreliable and in short supply, and the economy has suffered badly from political unrest. It will take some time for stability to return to the stationary power engine market here.

The Chinese market is enormous. There is potential for growth as the public utilities fail to meet the ever growing electricity demand. It is a common belief that in the coming future in China the power supply will never catch up with the demand for power. The quality of utility power is dependent on where one is located in China. In Shanghai, for example, the reliability of power is very high, however, this reduces the further south one goes. Here factories will normally generate their own power.

The market has grown by around 16 per cent per annum over the last five years. The rate of growth will reduce, however, due to the uncertain economic conditions that have swept across Asia. There is a serious shortfall in power in China and means of generating power such as the Three Gorges Project and the setting up of new nuclear power plants will be hot topics in the coming years.

The power shortage situation is unlikely to be improved in its entirety in the near future as only 1.24 per cent of GDP is directly invested in the electricity supply sector, whereas the World Bank feels this figure should be over two per cent.

The Chinese government is also very concerned with environmental protection especially with regards to emissions levels.

There are therefore obstacles preventing entry into the market in the future for heavy fuel diesel engines, whereas there will be increased opportunity for gas engines. The Asian crisis, however, has really started to take its toll on large stationary engine sales, and the prospect looks pretty bleak for the foreseeable future.

Bucking the trend

Due to its status as one of the world`s largest energy consumers and producers, India is highly important to the world`s energy markets, and in contrast to the general trend in Asia, prospects in India are good.

Since 1992, the Indian engine market has expanded rapidly because of escalating demand and utilities` difficulties in providing a reliable source of power. Because of this, businesses and individuals have been buying large numbers of generator sets in an attempt to stem the frequent power shortages.

The overall Indian stationary power engine market has been growing at 18 per cent per annum over the past five years, with the 1-2 MW range achieving year-on-year growth of 28 per cent.

The 2 to 5 MW market in India has performed strongly over the same period, maintaining growth levels in excess of 21 per cent. Growth has fallen slightly over the past couple of years, and the market should level at around this mark over the next five years.

In this power output range engines and gensets are normally imported in their entirety. Local manufacturing is expected to increase as the market expands over the next few years to help reduce import costs.

Although since late 1996 the market has been held back by an unstable political situation and a cash flow problem as the economy stagnated slightly and investment fell, power generation growth is expected to be 10-12 per cent over the next five years across the whole range of power outputs to 6 MW. Diesel prices have increased recently while heavy fuel prices have fallen, thus a move towards the use of this fuel is likely.

Wärtsilä Diesel India is the market leader over 5 MW up to about 10 MW. Over this threshold the market is catered for by gas turbines. Wärtsilä commands about a 70 per cent share of the continuous power market and is reliant on the cement, fertiliser, chemicals and textiles industries. For continued growth it is therefore dependent on investment in these industries.

From MarketLine`s analysis of the Indian market, it is possible to imply a share of the total Indian stationary engine market by value. Wärtsilä`s large share of the high value 2-5 MW and over 5 MW markets leaves the company in a commanding position in India. When this is combined with Cummins` strength in the lower range sectors, the Wärtsilä/Cummins joint venture is likely to dominate the Indian market for some time.

Demand will remain strong throughout the power ranges over the next five years as companies seek reliable power to help sustain their own growth.

The overall market will grow at an annual rate of 11 per cent until 2002, with the over 5 MW range seeing even higher growth of 14 per cent over the same period. Demand will fall slightly in 1998 in conjunction with a drop in GDP and a wariness about the general economic troubles across Asia. After this, demand will increase and then will grow at a stable rate up to 2002.

Contrasting markets

Pakistan offers a stark contrast to the market outlook in India, as increased power is demanded but financing becomes a problematic issue. Over the past three years, Pakistan has devalued its currency by 20 per cent. Her economic problems are numerous with the country under the burden of heavy loan and inflation problems, and there has been no sign of industrial growth of late.

There is a demand for increased power, but the overriding problem at present is the difficulty that companies have in paying for increased power. Banks are not in a position to lend money as the government is trying to clean up the banking industry.

There is a huge potential for gas engines in Pakistan as the supply system infrastructure to carry furnace fuel around the country has no remaining capacity, and has reached a bottleneck. There have been large supplies of gas in Pakistan in the past, but these have been depleting and the focus has been on crude oil. However, exploration has started to increase in the country and talks are in progress about the installation of gas pipelines between Iran, Turkmenistan and Pakistan.

Thirty-five per cent of utility power in Pakistan is through hydro plants, and in winter with lower water levels, power output is reduced. This leads to a seasonal shortfall in electricity. In certain parts of the country, local grid stations do become overloaded and as utility companies have become so large they are unable to provide the level of service that clients expect. To improve service levels they would have to implement a reduced production programme.

There is a second hand genset market in Pakistan but although the initial cost is cheaper, it is often the case that a lot of new equipment needs to be installed such as purifiers and switchgear. These usually need to be custom-built and this reduces the cost benefits of buying second hand engines.

The industrial baseload power market was growing at about 16 per cent from the late 1980s up until 1996, and the national demand was great because of numerous blackouts experienced. Because of this there was massive investment, no import duties and banks were in a position to finance projects. In mid-1996, import duties were imposed on engines and this pushed up prices at the same time as fuel prices were also beginning to increase. The market has not suffered too badly of late as there still has been a demand for extra power. However, stabilization is expected over the next 18 months even though utility prices are on the increase.

When taken as an average over the last five years, Wärtsilä is the market leader in the over 5 MW market in Pakistan with a market share of 51 per cent. Niigata is second in the market with an average share of 31 per cent over the same period.

There is an opportunity for this market to grow because of poor utility power and increasing electricity costs. Niigata has been increasingly active in many parts of Asia of late and has succeeded where many have failed in edging closer to Wärtsilä. Wärtsilä has been helped recently by the three major projects, Kohinoor Energy, Gul Ahmed Energy and Tapal Energy, and is the only diesel power plant supplier solidly established in Pakistan.

A watchful eye

It is a well known fact that the power generation market in Asia has been rapidly growing because of economic growth, and large two-stroke low speed diesels have played a significant role in the market, filling the gap between the smaller medium speed engines and large gas or steam turbine plants.

The recent financial crisis in the region has certainly taken its toll on the Asian stationary power engine market, however, while markets are seeing falling volume sales across the board there still remains much potential in India.

Manufacturers will be watching current political events closely in the hope that they do not harm any forecast growth both over the short and medium term.

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Reliable power: India`s industrial sector has kept orders for stationary engines moving in Asia

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© Figure 1. Market volume and growth for the 2 to 5 MW Indian stationary engine market, 1992-97 Source: MarketLine

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Figure 2. Forecast volume and growth for the over 5 MW Indian stationary engine market, 1997-2002 Source: MarketLine

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Figure 3. Average market shares for the over 5 MW in Pakistan engine market, 1993-97 Source: MarketLine

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Figure 4. Market volume and growth for the Chinese market Source: MarketLine