The global marketplace for turbines

The global marketplace for turbines.(Focus on Industries and Markets) https://www.360docs.net/doc/f115415501.html,/doc/1G1-121875437.html

From: Business Economics | Date: 7/1/2004 | Author: Gross, Andrew C.

The world market for turbines and related products (turbine-based engines, generators and generator sets) is projected to increase at seven percent per year in current dollars through 2007 and reach the $77 billion mark that year. Such growth will not match the surging gains of the 1998-2001 period, but conditions are expected to improve due to greater demand for electric energy and a rebound in air traffic. Electric power plants and aircraft account for over 90 percent of shipments. Turbine suppliers will find opportunities in several countries with above-average growth potential, including China, India, and other Asian nations. The turbine manufacturing industry is highly concentrated, with five firms dominating the global electricity generation aircraft engine market.

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Turbomachines are large industrial energy equipment devices. They feature fluid flow (air, steam, water, gas) through rotating blades. If the energy is extracted from the fluid, by expanding the fluid to a lower pressure, the devices are called turbines. If the energy is transferred to the fluid, thereby increasing its pressure, the devices are called pumps, fans, or compressors. In this article we deal only with the former, turbines and related machinery. The idea for turbines dates back to ancient and medieval times, but working hardware--specifically, steam and gas turbines--came to the fore much later, in the mid-nineteenth century. Since then, the field has seen many technological and economic improvements as well as complex changes in design and applications. A typical gas turbine has over 4,000 parts; a third of these feature exotic materials. Building such a complex device is an immense undertaking requiring high skills. Maintaining such a unit is also costly, along with rebuilding. Large turbines typically cost hundreds of thousands or millions of dollars. A turbine system ("turbine generator set")--which includes the turbine and generator, their acoustic enclosure, control systems, and other components--may run in the millions.

In this article, as in the 400-page monograph on which it is based, we distinguish six categories

of turbine products: gas combustion, steam and hydraulic, wind, micro turbines, turbine engines, and turbine generators and generator sets. In terms of applications or markets, we delineate electric power generation, aircraft propulsion, marine, and other end uses. The first two of these account for over 90 percent of the total market. The global market is distinguished on the basis of major geographic regions (continents), with a special breakout on China. We open the article by discussing the economic/market environment, including global trade and investment patterns; we close with the presentation of industry structure. Three tables are included: the world market,

1997-2007, by geographic region, type of turbines and end uses; the situation in China during the same time period; and, the market share of major producers as of 2002.

Economic and Market Environment

While the end of the twentieth century was characterized by major advances in fields such as electronics, computing, and telecommunications, previous decades have seen significant progress in energy generation and transportation. Turbines have played a large role in these two sectors, specifically in electric power production and in aircraft propulsion. Still, the demand for turbines and related products is highly cyclical and quite volatile. The two principal markets are inherently sensitive to macroeconomic conditions and to the high cost of such devices. In developing countries, a few turbine-based units or systems can account for much of the budget of the purchasing organization, such as a power utility or a small, domestic airline. There is a robust replacement market or aftermarket, involving turbine repairs or rebuilding (not included in our discussion). The aftermarket effectively decreases the demand for new turbines from the original equipment manufacturers.

The inherent cyclicality of turbine markets was clearly manifest in the slowdown of the global economy at the start of the current decade. A dramatic expression of this was the bursting of the so-called gas turbine bubble in the United States and a sharp decline in global air traffic as a consequence of the terrorist attacks of September 11, 2001. The former occurred in part due to revised thinking about privatization and deregulation of power utilities and in part due to surplus electric power capacity in a slow-growth global economy.

The latter was a reflection of a decline in the number of both business and tourist airline passengers. But by the second half of 2003, a global recovery was under way in both sectors. In fact, we project the growth rate for world turbines during 2002-2007 at about seven percent per year, in current dollars, just about the same figure that prevailed during 1997-2002 (see Table 1), despite heightened fears about terrorism. The absolute dollar figures shown in the table refer to sales or apparent consumption.

Resumption of most normal business activities is anticipated in the current decade. This should stimulate both electric power production and air traffic. In addition, there will be an increased deployment of distributed electric power generation systems in many countries; this will have a positive impact on shipments of small gas turbines and microturbines. Wind turbines, considered as relatively benign by environmentalists, also show highly favorable prospects in select Western countries (Denmark, Germany, Spain) and in industrializing countries. The global growth rate for turbines used in electricity production will be faster than that for turbine units in aircraft propulsion: about eight percent versus six percent. Marine and other applications should witness an approximate 7.3 percent growth during 2002-2007.

Historically and currently, the large industrialized countries account for the bulk of global turbine production. These are the United States, the United Kingdom, France, and Germany, followed by Denmark, Switzerland, Japan and Italy. The export/import business in world turbines is significant, with an estimated 40 percent of global output entering the foreign trade stream in any given year. The large producer nations are also the large exporters. However, the

vast domestic demand for turbines in the United States allowed the United Kingdom to be the largest net exporter or turbine products. The United Kingdom trade surplus in this category was valued at $2.7 billion in 2002, with Rolls-Royce leading the charge. Denmark occupied second place at $1.8 billion, featuring mostly wind turbines, followed by the United States at $1.6 billion. Other countries with positive trade balances of over $100 million in 2002 were Canada, Russia, Sweden and Switzerland. Many major manufacturers from Europe and North America are now stepping up their direct investment in production facilities in the developing countries. As this trend continues, foreign trade will stabilize and even decline as a share of total global output. But China, featured in more detail below, will remain a major net importer.

Product Categories and Technology Trends

All turbine products are similar in that they derive their energy from action of blades or vanes that spin in response to a force applied upon them. Hot gases are expanded to generate shaft power (in electric power generation) or to create a thrust (in aircraft and marine applications). Turbines differ in their technical complexity and in the media--that is gas, steam, wind, etc.--designed to actuate them. The key considerations in design, manufacture, and operation of turbines involve the usual parameters of cost and performance (the latter being affected by temperature, pressure, and heat losses). Other factors include mission life cycle, weight, noise, and emissions. Turbine failures can occur due to reasons such as fatigue, creep, corrosion, as well as emergencies ("over-temperature").

Gas combustion turbines utilize the force of compressed gases against blades. Gases are generated from the burning of fossil fuels such as natural gas and petroleum distillates. Along with the blades, the turbine systems include compressors that draw in the fuel and subject it to high pressure and combustors that ignite the compressed fuel. Gas combustion and steam turbines can be linked in so-called combined cycle power plants to raise the efficiency of fuel use (from a rate of 35 percent to 55 percent) and thereby generate additional electricity.

Steam turbines use steam raised in a boiler as the gas that turns the blades. They are widely used in coal-fired electric power plants and have been installed in both developed and developing countries.

They have also been used with natural gas, petroleum distillates, or agricultural waste as boiler fuel. In combined cycle plants, mentioned above, the gases from combustion turbines are used to heat boilers to raise steam. Particularly when the fuel used to raise the steam is coal, pollution can and does occur locally and even hundreds of miles away from such plants. Also, it is no longer economically efficient to use natural gas or high-level petroleum distillates as boiler fuel. Thus, steam turbines are not as popular as they were in past decades.

Hydraulic/hydro turbines are actuated by the force of falling water on vanes/blades. They have been popular where streamflow can be captured by dams, but their growth is limited because environmentally acceptable sites are getting scarce and are expensive to develop.

Wind turbines typically feature three blades spinning; the force thus created is then used to power an electric generator. Wind turbine performance is now enhanced by better aerodynamic

designs, use of advanced materials such as fiberglass, electronic controls, and variable-speed drives. Individual units work well in isolated places, but they have also been configured into "wind farms" or "wind parks" to provide grid-connected power. Wind turbines are gaining popularity as renewable and nonpolluting sources of power.

Microturbines are variations on conventional gas and steam turbines, but they feature a combination of turbine and compressor produced as a single part. Such small units can burn an array of fuels, including natural gas, diesel fuel, propane, or kerosene and generate from 20 to 50 kilowatts. Because of turbocharging, speeds can be very high and adjusted electronically. Due to the economic downturn in 2002, the market for such units dropped sharply, but a recovery is expected in the near future, including possible applications in home use.

In a strict sense, turbine engines--like gas turbines--are gas generators. Such turbine engines are also called jet engines and they embrace a family of products: turbojets, turbofans, and turboprops. They are used mostly in aircraft for high-speed propulsion, though some find land and sea applications. There are variations in the design and construction of these units, but the key is to generate significant thrust via highly compressed gases that are burned and then exhausted. Jet engines have supplanted piston engines in commercial aircraft due to more power, greater speed, and better all-around performance.

Turbine-generators and generator sets are devices that convert mechanical into electrical energy. Turbine-generators are driven by the rotating action of the turbine: steam, combustion gas, wind, or hydro power can be used to drive a generator. Generator sets, as the name implies, incorporate a generator with a prime mover in a single package. Virtually all the leading turbine suppliers offer turbine generators and generator sets. These units are especially popular for electric power generation in rapidly industrializing countries.

Technological improvements have favorably affected all six types listed above. According to several handbooks, progress in metallurgy now permits the use of high temperatures in turbine components. Advanced materials (ceramics, superalloys, etc.) provide greater strength and temperature resistance. Accumulated knowledge of thermodynamics resulted in combined cycle power plants that produce more electricity at higher conversion rates and at lower pollution levels by using the exhaust gases of combustion turbines to raise steam to drive a secondary steam turbine. Advances in aircraft engine technology (in regard to airfoil loadings and thermal barrier coatings) are being transferred to industrial gas turbines. Computer-aided design and manufacturing (CAD-CAM) plus numerically-controlled machine tools contribute to improved turbine airfoils and blade-cooling configurations. Finally, computers can now start, stop, and govern turbine operations; they also monitor conditions in real time and prevent failures. Applications (End Uses/Markets)

There are three major applications or end uses for turbines: electric power generation, aircraft and aerospace engines, and marine engines and other uses. Over past decades, the first two categories accounted for about 95 percent of the total demand. Historically, the aircraft engine market represented a plurality or even absolute majority, but electric power generation pulled even at the end of the twentieth century and forged into the lead by 2002 (see Table 1). This

situation is expected to prevail due to the popularity of combined cycle power plants and the rapid deployment of wind turbines.

The electric power generation segment accounts for just about one-half of total global demand. A key factor contributing to growth is the rising demand in industrializing nations--foremost in Asia, but also in Latin America, Eastern Europe, and Africa-Mideast. A second factor is the conversion of coal-fired power plants to combined cycle units. This is an ongoing process, especially popular in Western Europe where there is more concern with higher efficiency and lower pollution levels, as natural gas substitutes for coal. Wind turbines are also becoming popular in that region (and elsewhere) since they use a renewable resource and cause relatively little environmental damage. (However, in some cases, wind turbines have been criticized because they are unsightly, kill birds, and are noisy.) Micro-turbines are expected to make slow headway in specialized or niche-oriented applications.

The United States and Japan are large users of electric power, but growth in these two countries is affected by the bursting of the "gas turbine bubble" in 2001-2002 and some excess capacity. The aircraft engine segment accounts for about 44 percent of the total demand and is expected to make a definite recovery from depressed 2001-2002 levels. As local airlines expand in the fast-industrializing large countries of Asia (China, India, etc.) and in other regions, we expect strong demand for aircraft engines. The likely mix between new units and rebuilt ones, however, is not clearcut; several countries and commercial transport firms may opt for the latter. Prospects in military aircraft applications are favorable.

The marine and other segment should grow at a respectable 7.5 percent per year in the coming years, but this sector will still account for just 5 percent of the total demand for turbines on a worldwide basis. The two key end markets here are turbine-based engines for ships and the

oil/gas exploration and pipeline industries. The former is a mature market in most developed countries; the latter shows strength in developing nations. On balance, we expect that lackluster prospects in the marine sector will be offset by more favorable conditions in the oil/gas and pipeline sectors.

Regional Trends

As Table 1 shows, North America and Western Europe currently account for 70 percent of the global market for turbines and their combined share is expected to decline only to 68 percent in 2007. But the Asia-Pacific and other regions will exhibit faster growth rates in the current and coming decades, with China and India leading the way, followed by other Asian countries, Latin America, and Africa-Mideast.

In 2002, China passed Japan in turbine demand ($3.2 billion vs. $3.1 billion) and by 2007 the Chinese market will be more than 50 percent higher than the Japanese. As shown in Table 2, the market for turbines in China is projected to expand at above 14 percent per year to 2007, by far the fastest rate in the world. This can be attributed to a booming economy that requires major expansion in electric power capacity and production. A second positive factor is the ongoing development of the air transport sector (both passenger and freight traffic).

Several observers estimate that China will require as much as 25,000 megawatts of new electric power generation capacity per year over the next five to ten years. Massive construction is under way, including the giant hydroelectric Three Gorges Project along the Yangtze River. This 17-year mega-project, which is in its twelfth year in 2004, will create substantial demand for turbines. However, there are definite shortages of coal and water in certain areas of China, while supplies of natural gas seem abundant. Thus, it is likely that gas-fired power plants, including combined cycle facilities, will be more prevalent in the coming years. China is expected to be a net importer of turbines and related products for both power generation and aircraft applications. However, we expect Chinese exports of turbines to accelerate in this decade as indigenous producers become more proficient. At the same time, many of the large global companies making turbines now have Chinese manufacturing facilities; they often forge joint ventures with local entities, a step that is favored by the Chinese authorities.

Industry Structure, Conduct, and Performance

The global turbine industry is highly concentrated, and intensely competitive. Since turbines range in price from six-figure to eight-figure sums, they represent a substantial revenue stream to producers. Accordingly, the companies seek buyers aggressively and market directly--avoiding middlemen or intermediaries. The buyers include electric utilities, aircraft manufacturers and airlines, as well as the military and civilian branches of national governments. On the production side, sellers invest heavily in research and development as well as manufacturing facilities. Because the making of turbines is capital-intensive, even large firms often opt for joint ventures, cooperative agreements, and strategic partnerships. Servicing contracts (not within the domain of this report or the monograph on which it based) can be lucrative and are now eagerly sought by makers who engage in maintenance, repair, and operations.

There are about 100 firms manufacturing turbines and related products around the world. However, a few companies dominate: General Electric (United States); the Pratt & Whitney subsidiary of United Technologies (United States); Rolls-Royce (United Kingdom); Siemens (Germany); and Alstom (France). The respective market shares, as of 2002, in the two dominant end uses--electric power generation and aircraft engine segment--are shown in Table 3. Combining the two segments shows GE as the most dominant player with one-third of the global market. Even though these companies are well entrenched, they pursue additional opportunities, even in niche markets. They can do so due to cost control, internal financing, and economies of scale.

The second tier consists of several developed-country manufacturers: Hitachi, Mitsubishi Heavy Industries, and Ishikawajima-Harima (Japan); Snecma (France), which has had a cooperative venture with GE; MAN Turbo and MTU Aero (Germany), the latter a subsidiary of Daimler-Chrysler; Caterpillar (United States); and Volvo Aero (Sweden). Bharat Heavy Electricals (India) and several Chinese manufacturers--Dongfang Electric, Harbine Turbine, Nanjing Steam Turbine, and Shanghai Steam Turbine--may well play a role in the industry in both their domestic and foreign markets in years to come.

Since the European countries are embarked on a quest for alternative fuel, their fast-growing niche market for wind turbines has attracted specialty players. European wind power cumulative

capacity has risen from 5,000 megawatts in 1997 to 22,500 megawatts in 2002. Key producers in this sector include Enercon (Germany), Gamesa (Spain), NEG Micon and Vestas Wind Systems (Denmark). Also, GE has entered the wind turbine business in 2002 by acquiring assets from Enron. Anticipating rivalry from such big players, Gamesa and NEG Micon have embarked on mergers and acquisitions.

Another specialty sector is that of microturbines, which is still in its formative stage. In the 1990s, this field was seen as having vast potential; but the economic downturn caused second thoughts among both sellers and buyers. Several firms left this sector as the business fundamentals deteriorated; the most notable was Honeywell, which sold certain assets and intellectual properties to GE in 2001. Still, there are two well-known small firms dedicated to the market: Capstone Turbine (United States) and Bowman Power Systems (United Kingdom). Capstone is embarked on a major effort to lower its manufacturing costs and to broaden the appeal of its product line. Early commercialization activity has attracted firms that have "staying power:" GE and Ingersoll Rand from the United States and Volvo Aero and ABB from Western Europe. Marketing activities of turbine suppliers involve managing customer relationships closely, from pre-sale negotiations to post-purchase servicing. Whether as large as GE or as small as Capstone, virtually all sales are made directly to customers either through negotiations or via competitive bidding process. Orders are booked for delivery often over several months or even years. Thus, maintaining an extensive backlog is highly desirable. Sale of spare parts, plus maintenance and repair activities, create both sales and further opportunities for strengthening loyalty bonds with buyers. Key factors in the purchasing decisions of buyers include product quality, performance, price, vendor reputation, and technical proficiency.

Despite the relatively high degree of concentration in the turbine industry, there has been some restructuring and consolidation in the past five to ten years. Among the major developments in the late 1990s were the acquisition of Westinghouse Power by Siemens and the folding of ABB's power generation business into Alstom. Additional restructuring occurred in the less sanguine environment of the early 2000s, although the number of transactions has been reduced and the scope of major deals became more narrow. In the latter case, companies focused on acquisition

of certain assets or small divisions of other firms rather than the purchases of complete enterprises. We can expect select merger and acquisition activity to continue during the current decade, with emphasis in the wind turbine and microturbine sectors. Cooperative arrangements, ranging from formal joint ventures to informal strategic partnerships, are also bound to occur with increasing frequency, especially in the Asia-Pacific region.

Methodology, Sources, and Notes

This article is based on a 400-page monograph published in mid-2003 by The Freedonia Group and written by E. D. Hester, with research assistance by Joseph Iorillo. Select portions were updated and expanded for 2004 for this article. Much of the regional coverage of that long report had to be omitted.

Data on the world turbine marketplace and industry (i.e., demand and supply aspects) are derived from different sources and are developed from statistical relationships. As a result, data

presented in the monograph and in this article are historically consistent but may differ from other sources. The full report discusses the source of variances and the reasons for statistical discrepancies.

Macroeconomic and demographic indicators were obtained from The Freedonia Group project known as "Consensus Forecasts" dated January 2003. Databases of the OECD, EBRD, IMF, World Bank, and U.S. Departments of State and Commerce, and the CIA were utilized along with previous related studies published by The Freedonia Group. A variety of technical turbine handbooks were consulted as well as trade associations and their publications. Additional data came from select foreign embassies, industry experts, financial sources, and annual reports of turbine manufacturers.

TABLE 1 WORLD TURBINE DEMAND BY REGION, APPLICATION, AND TYPE, 1997-2007

Billions of

U.S. Dollars Percent Annual Growth

1997 2002 2007 1997-2002 2002-2007

World Turbine Demand 38.6 54.5 76.6 7.1 7.0

By Region

North America 12.7 18.2 24.4 7.5 6.0

Western Europe 14.0 20.8 27.6 8.2 5.8

Asia-Pacific 7.2 9.7 15.7 6.1 10.1

Rest of the World 4.6 5.9 9.0 5.1 8.8

By Application / End Use

Electric Power 16.4 27.4 40.0 10.8 7.9

Aircraft 20.2 24.6 32.9 4.0 6.0

Marine & Other 1.9 2.6 3.7 6.5 7.3

By Type of Turbine

Gas Combustion 6.3 10.7 14.8 11.2 6.7

Steam & Hydraulic 2.9 3.7 4.9 5.1 5.8

Wind 1.5 5.1 8.9 28.0 11.8

Micro negl -0.1 0.8 nm 84.0

Turbine Engines 21.2 25.9 34.7 4.1 6.1

Turbine.Generators 6.7 9.2 12.6 6.4 6.5

& Generator Sets

Note: Details may not add to totals due to rounding; negl=negligible;

nm=not meaningful

Source: E. Hester, 2003. World Turbines Cleveland: The Freedonia Group.

Pp 3, 51.

TABLE 2 CHINA: TURBINE DEMAND BY APPLICATION AND TYPE, 1997-2007

1997 2002 2007

Population (mil persons) 1,235 1,284 1,326

GDP/capita (1998 US $) 3,250 4,450 6,090

Gross Domestic Product (1998 US $) 4,011 5,710 8,070

% Gross Fixed Invest 33.8 34.7 36.3

Gross Fixed Investment (1998 US $) 1,355 1,980 2,930

Turbine Demand (million US $)

By Application / End Use

Electric Power 825 1,525 3,050

Aircraft 750 1,425 2,775

Marine & Other 100 200 375

Total 1,675 3,150 6,200

By Type of Turbine

Gas Combustion 50 75 325

Steam & Hydraulic 400 775 1,275

Wind 50 50 175

Micro - negl 50

Turbine Engines 800 1,550 3,000

Turbine. Generators & Generator Sets 375 700 1,375

Total 1,675 3,150 6,200

Net Exports -525 -1,075 -1,800

Turbine Shipments-Total 1,150 2,075 4,400

Note: Details may not add to totals due to rounding; negl=negligible Source: E. Hester. 2003. World Turbines Cleveland: The Freedonia Group.

Pp 161-163.

TABLE 3 WORLD TURBINE SUPPLY: GLOBAL MARKET SHARE OF LEADING FIRMS, 2002 Turbines for Electric Power Generation (Total: $27.4 billion)

Company Market Share

General Electric 35

Siemens 16

Alstom 14

Mitsubishi 4

Vestas 4

All Others 27

Total 100

Turbines for Aircraft Engines (Total: $24.6 billion)

Company Market Share

General Electric 33

Pratt & Whitney (UT) 20

Rolls-Royce 18

Snecma 9

All Others 20

Total 100

Source: E. Hester. 2003. World Turbines Cleveland: The Freedonia Group. 293.

Edward Hester is Vice President--Industrial Goods at The Freedonia Group where he has been a senior analyst for many years. Andrew Gross is Professor of Marketing and International Business at Cleveland State University.