Editor’s Note: With this roundtable, it is our goal to provide an overview of the challenges and opportunities facing the marketplace today. Diesel & Gas Turbine Worldwide would like to thank the following executives for their time and insights.
D>W: How has the state of the global economy affected your business prospects?
Shunichi Miyanaga: As with many large multinational corporations, the ups and downs of the global economy have the potential to significantly impact our business. With the economy experiencing a recovery at present, we are optimistic for our business prospects in 2018. That said, risks remain, and we must continue to be acutely aware of geopolitical and economic issues alike that may impact our business.
Ongoing themes such as globalization (and the emergent anti-globalization response), disruptive technology, the wealth gap, and aging societies have caused us to question what we know and our expectations for the future.
The manufacturing industry is an interesting example of a sector that is facing an ‘identity crisis.’ In the U.S., manufacturing was once the backbone of the middle class, but today it accounts for just 9% of U.S. employment, a much smaller share than two decades ago.
It is important to acknowledge that, as with all other areas of society, we will never return to the 20th-century era of doing things. For manufacturing, that means digitalization, global supply chains and automation are changing the sector and we must drastically evolve the way we operate in order to be successful.
MHI’s success has traditionally been tied to Japan’s economy, but increasingly we are turning to overseas markets for growth. This means we face different levels of competition and risk, as well as the need for deep understanding of local markets.
To that end I have been working to carry out reforms throughout our organization, spanning management policies, business practices, and working culture.
Driven by our partners and customers, we have grown into a truly global manufacturer, bringing together the best of international innovation.
Karim Amin: The energy markets are moving from thermal-dominated central power to a renewables-driven and decentralized energy environment. The reason for this is that electricity prices for renewables have fallen to a competitive level worldwide, with the result that the proportion of solar and wind power has risen to 40%.
At the same time, the market for gas turbines has declined by about one-third since 2011. In 2015, for the first time, more renewable capacity was added than conventional. The gas turbine market is changing rapidly; gas prices remain at a high level in certain markets with a clear demand for highly efficient gas turbines. Furthermore, power plants must be capable of stabilizing the grid if renewables are fluctuating. As a result of the race for efficiency, more than 35% of orders awarded were for H Class turbines, so-called “Jumbo frames”, in 2016. That’s why we have added the HL Class to our portfolio. We are convinced that gas remains the best partner to renewable energy; and gas-fired power plants are also flexible, stable, safe, secure and can be installed quickly. So the HL Class meets all market requirements.
Jatila Ranasinghe: There continue to be challenges in the power market worldwide, but there are two areas where we see growth—in developing nations with a growing middle class and as an ideal energy source to provide reliable baseload with operational flexibility to meet needs driven by renewables growth and the resulting intermittency. Our recent orders reflect these trends.
Christian Strahberger: The drop in oil price and the subsequent cut in spending for oil & gas exploration equipment caused a considerable shift in the product mix we sold. We had to adapt quickly to the new realities and are happy that other segments such as tugs and ferries as well as merchant and navy vessels remained strong for us. They allowed us to offset a major part of the drop. Nevertheless, considerable changes were necessary for everything from our R&D roadmap to production and sales activities. Furthermore, we are seeing increased price pressure and demand for shorter lead times.
Fabrizio Mozzi: The shipbuilding industry has had a tough few years, shrinking by about 40% since the recession started in 2008. In particular, the pleasure craft market was hit hard as disposable income reduced for most individuals. In the professional marine markets, our core business, the demand slowed mainly in the oil & gas industry, fishing and geographically in Russia.
Following the turmoil in the region in 2014 and the subsequent trade restrictions, the marine industry in Russia and the surrounding countries was very depressed and the dramatic swing in the exchange rate of the Russian ruble also contributed to the instability. In general, this made imported products more expensive compared to what they were previously, and it drove many businesses (including ours) to reduce importation of specific products from specific regions, while looking for alternative products from other regions where the exchange rate was more favorable.
We have also seen a slowdown in demand in the European fishing segment as the EU community has begun providing incentives to reduce the number of vessels to protect the environment. As a result, there are less fishing vessels being built and repowered in Europe, and therefore less need for marine propulsion engines.
We have seen positive developments, too. The global population is increasing and people are more mobile and taking holidays further away from their homes. As a result, investors have been more aggressive in expanding their passenger transport fleets with a positive impact on our business.
Sunit Kapur: Key regions of the world, including the U.S., Canada, Europe, China and Japan are actively investing in the energy market and these are the areas where we see the greatest opportunities for growth for our business. In Germany, where we have a strong customer base, we have strengthened our engineering resources and made significant investments that enhance our industrial ignition product range for the stationary and power generation market.
Clean energy regulations continue to serve as the primary driver behind the types of investments these regions of the world are making. We see the continued trend to natural gas/alternative fuel power generation using spark ignition technologies versus the historical nuclear, coal or diesel engine power plants.
By using new innovations within the ignition system as well as advanced spark plug and coil technologies, engine manufacturers are able to improve the overall specific power output and efficiency of their engine in a cleaner way and with less relative fuel consumption, while improving overall engine performance.
D>W: What do you consider to be the key market indicators/emerging trends and how are you mobilizing your business to address them?
Miyanaga: To promote our further growth as a global company, we launched the Marketing & Innovation Headquarters in fiscal 2016.
The Marketing & Innovation Headquarters conducts surveys to ascertain changes in the business environment and technology trends, as well as social trends and technological needs in specific regions around the world, then analyzes market opportunities and risks for MHI Group.
In addition to creating diverse strategies and ideas for expanding and strengthening our businesses in Japan and overseas, the Marketing & Innovation Headquarters will propose business ventures, products and services, and validate their viability in cooperation with customers and business partners.
Amin: We see the “3 Ds”—decarbonization, decentralization and digitalization—as major trends. At the Conference of Parties COP 21 in Paris, most countries agreed to reduce greenhouse gas emissions 55% by 2030. This means that to achieve further decarbonization, the conventional power generation sector—which will also be necessary in the future—has to be reconfigured to use less CO2-intensive technology. Gas-fired power plants can play a key role as a backup and can form the backbone of a clean, safe and affordable power supply. For decentral power generation, we offer a comprehensive portfolio, including aeroderivative and industrial gas turbines, gas engines, small steam turbines and industrial power plant solutions. The installed fleet of our industrial gas turbine SGT-800 alone has currently reached more than 5 million operating hours. With our comprehensive digitalization program, we are addressing the third “D”. Power Generation 4.0 is helping us get our production facilities into shape for digitally-supported production in line with Industry 4.0. With data analytics, we are increasing the capabilities for smart analysis of machine and plant data. Our digital power plant concept creates an integration platform that can be used for the full virtual planning, simulation and operation of power plants. And finally, end-to-end product lifecycle management is resulting in a harmonized data and application landscape for product data.
Ranasinghe: In the developed world, we have seen a rapid shift in the adoption of wind and solar power. GE’s fleet of gas turbines is well positioned to meet the needs of countries which are now dealing with the intermittency and load swings that come from renewable capacity additions. For example, a 2×1 9HA plant can add 175 MW/min to meet those needs while still meeting emissions requirements at 15% turndown. At 64% efficiency, an HA plant can also help those countries meet their emission requirements.
Aeroderivative gas turbine technologies can support renewables growth as well. We currently have trailer-mounted TM2500s providing over 276 MW of generation in South Australia to help prevent blackouts with their fast-ramping capability to support renewable integration and address natural disaster relief and transmission limitations.
We also keep a close eye on liquified natural gas (LNG) availability—which is expanding globally—and we are seeing countries like Colombia and Jamaica with new gas power plant projects as a direct result. These countries previously had to rely largely on diesel and other less environmentally-friendly fuels, but LNG availability has been a game-changer.
Strahberger: Certainly, digitalization is one of the most important market indicators that will drive the entire maritime branch into a challenging future in coming decades. It opens up windows of opportunity for new players to enter the market and, at the same time, pushes limits in terms of globalized data infrastructures. Our objective is to develop Schottel into a leading supplier of intelligent propulsion systems. Thanks to our lean company structure, we are able to act in a very agile and flexible manner and adapt to the new market conditions quickly. The whole company is affected—from R&D to service sales.
Mozzi: Oil prices are a key market indicator which we are monitoring. Vessel owners/operators invest when oil prices are low, as their total cost of ownership is reduced, however low oil prices negatively affect investment in shipbuilding for the oil & gas industry and has affected some of our customers who were producing for the international oil & gas markets.
Despite this depressed market, we are maintaining our focus and increasing our presence in traditional oil and gas markets as we are optimistic that the oil industry will remain, for the foreseeable future, one of the main drivers for our global economy.
In passenger transportation, as this remains one of the fastest growing marine segments, we are investing in new products, specifically designed to minimize total cost of ownership and to maximize ease of installation for investors willing to expand or renew their fleets.
As the marine market remains an important but relatively small market when compared to industrial and power generation segments, we are also investing in fine-tuning and diversifying our product range in order to increase our versatility and address more market segments, in particular power generation, through the release of a full range of products covering 13-2000 kVA.
Kapur: We see several market indicators driving future business growth within the power generation sector. One trend is the movement to ‘on-demand’ power… a niche form of power coming in the form of greater energy efficiency and better response to power grid demand fluctuations following seasonal needs. This can also be found in mobile power, where in a short timeframe a power plant can be set up in remote locations supporting exploratory, infrastructure build work. Various forms of ‘on demand’ power are made possible through state-of-the-art power generation engine packages that can be customized in both design and size based on the needs.
To meet these customized types of power, we continue to expand and customize our ignition portfolio offerings to tailor to the exact requirements of the applications. For example, new electrode materials are being introduced to ensure service life requirements can be achieved when applied to more corrosive fuel chemistries. Unique electrode shapes with near net form molding is made possible through process innovation practices to reduce overall costs, yet still meet specific engine application combustion performance requirements.
We also see total cost of ownership as a key trend. Whether it is the higher cost associated with emissions-reducing technologies on diesel-based engines, the cost of crude oil vs. natural gas, or the ability to reduce engine operational downtime—spark-ignited engines are playing a vital role and through technology advancements within the ignition system, total cost of ownership for the end user will continue to improve.
D>W: What areas of the world show the most growth potential for your business and why?
Miyanaga: We view the United States as a major market of interest and potential growth for our business. For 40 years MHI has been building a long-term presence in the United States, hiring thousands of Americans and maintaining a core focus on innovative technologies. Our presence has grown from a single small branch to over 100 offices housing 7,000+ employees across 30 states. The United States is our second largest sales market outside of Japan, with a total annual revenue of US$6.1 billion.
At the same time, we’re also excited about growth opportunities in the APAC region, specifically in Southeast Asia. MHI has made a significant contribution to infrastructure development across Asia supporting the region’s economic growth by supplying power plants, rail networks, traffic monitoring systems and more. Testament to the scale of our operations across APAC, we have over 50 offices in eight countries employing 12 200 people, with a total annual revenue of approximately US$5.8 billion. Furthermore, our long-term view of business also means that we are an employer of choice in the region, and are committed to local communities both in terms of employment at local manufacturing bases as well as through partnerships with more than ten local academic institutions.
Our joint-venture business, Mitsubishi Hitachi Power Systems (MHPS), is supplying highly efficient gas turbines and core components for Indonesia’s massive Jawa-2 Power Plant project, due for completion next year.
We are also working with customers and local government in Southeast Asia to deliver power generation and waste management solutions. In recent years, we successfully delivered a large-scale district cooling system for Kuala Lumpur’s City Centre area.
And this year we celebrate the 10-year anniversary of the establishment of a major MHI aircraft component factory in Hanoi which supplies parts for Boeing airplanes. We are focusing on Vietnam and also Myanmar as significant growth markets for MHI going forward. Vietnam will be a major focus for our company. We’re active in a variety of business fields there, including shipbuilding, power generation and aerospace. This year marks the 10-year anniversary of MHI Aerospace Vietnam Co Ltd which supplies parts for Boeing 737 and 777 aircraft. MHI’s operations in Vietnam also include MHI Engine System Vietnam Co Ltd which provides sales and after sales service for diesel power generation sets.
Amin: The trend toward electrification is a global one. Altogether, however, we envisage flat development of the market for fossil-fueled power generation in the years ahead. Yet there are some regions for which we anticipate powerful growth.
The International Energy Agency (IEA) has predicted that China will be turning increasingly from coal to clean power. This will lead to an increase in the demand for gas turbines there over the next few years. In Europe as well, and especially in Germany and the United Kingdom, we are reckoning with moderate growth. In Germany, withdrawal from the nuclear energy program could result in greater demand for gas-fired power stations in order to secure the base load. Africa is likewise viewed as a growth market, although in this case project financing is a major prerequisite. In our opinion the greatest growth potential for large steam turbines is to be found in Turkey.
Here we expect increased utilization of inexpensive domestic coal for power generation purposes. Finally, in South America we see a growing market for small steam turbines as a result of the construction of small coal- and biomass-fired power stations.
Ranasinghe: Two regions where we’re continuing to focus are Southeast Asia and Latin/South America.
In Southeast Asia, we continue to see electricity demand growth driven by a larger middle class and higher industrial output. Demand in the region will be met with coal, renewables and increasingly available LNG leading to natural gas.
In Latin America, we see gas power growth because of increased demand and the development of domestic shale gas resources. We see a transition to gas alongside renewables in Mexico, a country that has recently deregulated its energy sector.
Strahberger: Population will drive economic development in Asia for many years. Here, people are hungry to improve their economic situation, and this will lead to investments in infrastructure as well as growing trade for decades. However, I also see opportunities in established economies, particularly in Europe, through an upgrading of their asset bases to adapt to new technological possibilities. New regulatory standards—for example, emission cuts—will likewise trigger investments in these markets.
Mozzi: While the largest and fastest growing markets remain in South East Asia, we recognize the highest potential for Moteurs Baudouin being in markets adjacent to our core in the Mediterranean, where our brand name and positioning has been strong for decades. In parallel we are exploring the Americas, leveraging our traditional product range in less stringently emissions-regulated markets and promoting our new Environmental Protection Agency Tier 4 product range, continuing the success we have had in the USA over the past couple of years.
Kapur: As a global supplier, one of Federal-Mogul’s core strengths as a company is a diverse global footprint that can support both global and local customer needs.
For the power generation segment, we see the greatest growth potential in two key areas: one, where the engines are being developed and produced; and two, the regions of the world where these engines are being utilized.
With key engine manufacturing taking place primarily in the U.S., Western Europe and Japan, Federal-Mogul is well positioned, with R&D centers and local engineers onsite that work hand-in-hand on new engine platforms with our customers. Federal-Mogul ignition technical centers and engineering offices reside in Plymouth, Michigan, USA; Burscheid, Germany; Shanghai, China; and Shin-Yokohama, Japan.
When it comes to where the engines are being utilized, we see the greatest opportunity in the Middle East and Southeast Asia, due to their focus on infrastructure development and cleaner energy production. Additionally, the latest regulatory targets in China will create significant expansion for natural gas and alternative fuel power generation in the future. To support each of these regions, Federal-Mogul has local distribution centers and in-field sales engineers onsite, coupled with specialized distribution service partners to ensure rapid delivery, response and technical support in the field.
D>W: Industry-wide, what recent developments—technological, economic, regulatory or other—do you think will have the greatest impact on business in the next year or so?
Miyanaga: It is no secret that manufacturing and industry are changing—and will continue to change—to form a new landscape. At MHI we are working diligently to ensure we are well-positioned for the coming change. Among other factors, we view technologies and business processes such as automation and digitalization as having an immediate tangible impact on the industry.
In April 2016, MHI launched a “Shared Technology Framework” consolidating the Company’s technologies, as well as marketing, procurement and other functions.
The Shared Technology Framework, which is overseen by the Chief Technology Officer (CTO), encompasses the Technology Strategy Office, Marketing & Innovation Headquarters, Value Chain Headquarters, ICT Solution Headquarters and our Research & Innovation Center.
The new framework seeks to strengthen MHI’s technological and marketing infrastructures, optimize the value chain across the Company (including in procurement), and reinforce the competitive strength of MHI’s businesses in the medium to long term.
Amin: In the World Energy Outlook 2017, the IEA sees global electrification as a major trend. Most of increasing demand will be covered by renewables and natural gas. As a result of this trend, investments in power generation exceeded those in oil and gas production in 2016.
In the future, buyers will not only be power generators, but increasingly also industrial customers.
Electrification will advance at regional level as well. Reliable power systems are a major enabler of economic development, yet demand is growing at a faster pace than the ability to construct conventional power plants. The challenge in these regions is to deploy efficient mobile power generating capacity quickly in order to fuel economic development. We have developed our SGT-A45 gas turbine specially for this rapidly growing market – a new aero-derivative gas turbine integrated into a mobile unit. It can be installed in just two weeks. For industrial customers, Siemens has also the SGT-800 in its portfolio; this has recently become available as an upgrade with an electric power of 57 MW. To date, more than 325 SGT-800 turbines have been sold. Asia Pacific is an especially important market for this machine, with more than 100 units sold.
Ranasinghe: Additive manufacturing–which includes 3D-printing—is making a big impact and will continue to do so for our industry. GE is a leader in this space, and we already have more than 9000 3D-printed parts in our gas turbines in the field today. Adapting technologies from our aviation business, our team in GE Power has been able to utilize 3-D printing to increase efficiency while simultaneously reducing production costs of new parts. For example, including 3-D printed components in our DLN-2.6e combustion system allows the HA to achieve 64% efficiency. Additive is also being used in our smaller gas turbines like the newly introduced LM9000.
Strahberger: The market downturn led to a call for innovations.
Currently, I see two major areas where the marine industry is changing rapidly: digitalization and hybridization.
In both areas, Schottel aims to take a leading role supplying solutions for smaller ships such as tugs and ferries as well as inland and shortsea vessels. While hybrid propulsion is rather straightforward in terms of technology, digitalization and its many facets open many new opportunities—such as assistance systems/autonomous ships, improved transparency of the condition of assets and new service concepts. I believe digitalization will fundamentally affect the way ships are operated and managed. Tasks will be relocated from machine room to bridge and then onshore.
Along this path, many tasks will also be automated through advanced data analysis and artificial intelligence. This will help to improve uptime, reduce costs and relieve operators from monotonous tasks. This technology is also required to manage the growing technological complexity of ships and cope with labor shortages. People will, of course, still be needed, but their tasks will change.
Mozzi: With the advent of IMO Tier 3 and EPA 4 environmental regulations, engine manufacturers, shipyards and ship owners will all be affected by design and operational challenges relative to engines, vessels and fleet management. The management of the fleet becomes more complex with variation in maintenance schedules, consumables, training of personnel (captains and engineers) as they will now manage a variety of vessels with different systems. The maintenance and replenishment of the fleet will also be strongly affected by the availability of older technology engines which are still legally available on the market.
For engine manufacturers, the challenges increase as we are now no longer only focusing on the performance and intrinsic total cost of ownership of the engine, but we must now be responsible for the development and delivery of a complete systems involving aftertreatment components which historically were not part of our core businesses.
Technologically, the environmental societies will continue to focus on reducing emissions to preserve the environment, and conversely competitors, operators and end users will keep pursuing the quest for higher power density and lower total cost of ownership which will impose additional challenges on engine manufacturers. We should also remember that as we move into IMO Tier 3 and EPA 4 regulated areas, there are also areas of the world with huge potential which remain lightly regulated from an emission and standards perspective and on which we as engine manufacturers in the short term should maintain focus to ensure profitable growth while managing increasing challenges in internal production organization and product management.
Kapur: Combined with engine efficiency advancements, we see the shifts in emissions regulations driving rapid change to engine and combustion strategies throughout the power generation industry, which have an overall positive impact on Federal-Mogul industrial ignition’s future business and innovation. For example, higher combustion lambda ratios are made possible by increasing cylinder pressures and fluid turbulence inside the combustion chamber. From the spark plug design level, this means the use of standard J-style electrodes are not applicable, where electrode ‘shielding’ is required. With Federal-Mogul’s innovative and flexible assembly processes, different electrode shielding designs can be manufactured with precision and at lower cost.
Additionally, maximizing combustion stability cycle over cycle with consistent, predictable stable ignition enables manufacturers to generate maximum power in a more sustainable manner. Increased rates of engine boosting and cooled-exhaust gas recirculation (EGR) help maximize cylinder pressure, while lowering relative peak combustion temperatures to manage NOx levels. All of this is made possible by advancements to the ignition system and spark plug technologies, including the development of new precious metal materials matrices, higher di-electric strength ceramics and more robust, precise weld joining processes.