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Strategic risks

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

Business environment risks

Business cycles in the global economy and in our customers' industries influence the demand for our products, as well as our financial condition and operating result. Our flexible multiproduct manufacturing model based on capacity outsourcing, plus a stable business mix with a large share of sales deriving from Services, brings Wärtsilä a certain measure of stability in a cyclical market. The turmoil experienced in the financial markets, and the subsequent slump in the world economy, continued to have an effect on Wärtsilä during 2010. 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 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, a relatively large order book gives Wärtsilä some time to adapt to the market conditions.

Market and customer risk

Having given the first indications of revival already at the end of the previous year, the recovery of the shipping industry continued during 2010. However, there are big differences between the various shipping segments. As anticipated, the Asian - and especially Chinese - shipbuilding industry has emerged as the world's strongest. In 2010, Chinese shipyards were awarded almost half of new ship orders (both in terms of tonnage as well as in number of ships). Wärtsilä is well prepared for this development by having delivery centres and joint ventures with local players in China, Korea and Japan, and by having located its top management in its Ship Power business in Shanghai. Wärtsilä is well represented in all the major shipbuilding areas and is active in all major vessel segments. This mitigates both single customer related and geography related risks.

The merchant vessel segment remains an area with problems of overcapacity. This has kept ordering volumes low, even though the recovery, for example in bulkers, has been much more rapid and strong than estimated just a year ago. The market continues to bear the consequences of the recent crisis, and the financing for new projects is currently one of the major obstacles to a complete recovery. Some cancellations are still to be expected, but order postponements and rescheduling are the main effects of the still somewhat unstable market.

In the Power Plants business, there was a clear improvement in ordering activity and several large power plant orders were closed during 2010. The risks related to the availability of financing decreased as a result of the improvements in the financial sector. The number of projects under bidding also remained at a good level. Geographically, the most active markets were Asia, Central America and South America.

Wärtsilä Power Plants has four types of customers: Industrial customers, IPPs, utilities, and oil & gas sector customers. All customer types were well represented in the order intake profile, and the strongest growth in order intake was with IPP's and Utility customers. Power Plants' strategic objective is to support its customers by offering energy efficient, fuel flexible, and operationally flexible solutions that offer optimal means for managing the varying grid load profiles. Wärtsilä's solutions also enable the introduction of a higher share of renewable energy sources, which need backup generation availability in order to ensure capacity at all times.

The volume level for the Services business remained stable, and long-term volumes are still expected to grow faster than new equipment sales. Wärtsilä has over 14,000 customers and an active engine base of nearly 180,000 MW, which means that its dependency on any single customer or customer segment is insignificant. Wärtsilä will continue to develop its service portfolio in close co-operation with its customers. New opportunities are created by the fact that customers are continuously looking for new means of cost reduction and efficiency improvement.

Competitive situation and price risk

Price competition has intensified during the year as a result of there being only a limited number of new projects as compared to available capacity. Ship Power's largest competitors in main engines are MAN Diesel and Caterpillar (MAK). No significant changes took place in the competitive situation and market shares during 2010. In propulsion equipment, the competition is more fragmented and varies by product segment. The concept of selling packaged solutions rather than merely single products reduces price volatility. Being a systems integrator with automation and ship design capability will prove to be even more important in the future.

In the power plant market based on liquid fuels, Wärtsilä's main competitors are the same engine manufacturers as for Ship Power. In natural gas based power generation the main competitors are gas turbine manufacturers, such as GE, Siemens, Rolls Royce and Ansaldo.

In the Services business, Wärtsilä has no direct competitors and none that offer a similar portfolio of services from a single source. Each service has therefore its own identified set of competitors. Excluding the service networks of other engine manufacturers, there are few global players in the service market. Consolidation within the customer industries and increased cost consciousness will enhance Wärtsilä's possibilities for offering a wider scope of service solutions, especially to ship owners.

Political and legislative risks

Wärtsilä is present in over 160 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 in 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 sustainability risks, including climate change risks, in both its 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 in changes in customer attitudes to using combustion engines and fossil fuels. The risks in changes to environmental legislation 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. Wärtsilä has for decades improved the efficiencies of its products while at the same time reducing emissions. The fuel flexibility of Wärtsilä's products enables the utilisation of various fuels, including renewables, and their operational flexibility enables the installation of large capacity based renewable energy sources without hampering the reliability of the electricity grid. Wärtsilä's technology also enables the generation of energy with a minimum use of water. A lack of fresh water is one of the major challenges that the world is expected to face in the future.

The International Maritime Organisation (IMO) regulates the emissions of nitrogen oxides (NOx) from marine engines, as well as the sulphur content of the fuel used. Stricter requirements will enter into force in various phases during the years 2010-2020. Regarding NOx emissions, Wärtsilä has already introduced solutions that comply with these requirements. Wärtsilä engines are designed for operation on any fuel sulphur content. As a response to the tightening sulphur oxides (SOx) emissions, Wärtsilä has developed technology that allows exhaust gases to be cleaned to meet the tight regulations. Additionally, Wärtsilä has a multifaceted gas engine strategy and can provide gas engines for vessels.

The Thermal Power Plants EHS (Environmental Health and Safety) Guidelines, published by the World Bank/IFC (International Finance Corporation), are technical reference documents with general and industry-specific examples of Good International Industry Practices (GIIP). Leading international banks have reached an agreement with the IFC to follow 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 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 has entered into force at the beginning of 2011. UNECE Gothenburg Protocol revision work is on-going, and is expected to be finalised during 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 groups, and customers, in order to ascertain the optimal solutions to meet market needs.

Wärtsilä's strong focus on R&D and solutions development gives us many opportunities in the field of sustainability. 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 (such as bio-fuels and natural gas) and CHP (combined heat and power) applications with very high overall efficiency. In Services, Wärtsilä can offer several retrofit solutions in the after sales market to reduce emissions and increase efficiency. Wärtsilä can also offer environmentally sound solutions for a number of applications, including bilge and ballast water treatment. 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.

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

Technology risks

As a technology leader Wärtsilä needs to maintain its cost competitiveness and places high emphasis on engine efficiency and emissions control. New products are developed based on Wärtsilä's strategy viewpoint of offering 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.