Risk management principles
Risk management in Wärtsilä is a continuous process of analysing and managing all the opportunities, threats and risks faced by the company to achieve its goals and to ensure the company remains a going concern. The basis for risk management is the quality of Wärtsilä’s operations and products, and the continuous, systematic loss-prevention work at all the levels of the Group on the principle that “everybody is responsible”. In the long term this is the only way to reduce the total risk costs. The Wärtsilä Businesses are responsible for their operational risks and for mitigating and covering them.
The risk management function is subordinate to Group Treasury, which reports to the CFO. It reviews the business risk profile, prepares the risk management policy, and develops global and local insurance schemes with insurance companies and brokers. The risk management policy is endorsed by the Board of Directors.
Operational risks
General
A risk assessment is performed in all the major production units every second year. During 2006 the assessment was made in both of the two biggest delivery centres, Vaasa and Trieste. The wider-ranging systematic update of operational risks that was conducted during 2005 covering all Wärtsilä’s Businesses and its manufacturing operations has been continued in 2006 so that a task force including members from each Business has been established for each major Group-wide risk. These teams will monitor inter alia the following risks: competition and price risk, supplier and subcontractor risk, customer risk, political and legal risk, environmental risk, product and product liability risk, and property risk. During 2006 Wärtsilä also acquired an automation manufacturing and service business for which a separate risk assessment has been made.
Customer risk
Roughly three-quarters of global shipbuilding now takes place in Asia. The Ship Power Business has responded to this shift by setting up new manufacturing units in China and India. Ship Power sells its products to shipyards but also markets them to shipowners. Wärtsilä is well represented in all the major shipbuilding areas and active in all major vessel segments. That is mitigating both single customer related and geography related risks. Wärtsilä’s Services Business has expanded both through acquisitions and organically. The strong business volumes of Wärtsilä’s customers have further boosted service sales. Power plant sales continue to be distributed evenly around the world, which has consequently reduced risks associated with specific customer groups or countries.
Competitive situation and price risk
Demand was strong in all the Businesses during 2006 and price levels either rose or remained stable. Ship Power’s largest competitors in main engines are MAN and Caterpillar. No significant changes took place in the competitive situation but Wärtsilä slightly improved its market shares. In the Propulsion Business the competition is more fragmented and varies by product segment. On the Power Plants side, the main competitors are the same companies mentioned above as well as other technologies. Wärtsilä’s market position improved, especially in the gas power plant sector. During the review period competitiveness was still affected by component availability and pressure on prices.
In the Services business Wärtsilä has no direct competitors that offer a similar portfolio of services from a single source. Each service category therefore has its own identified set of competitors. Excluding the service networks of other engine manufacturers, there are few global players in the service market; competition is largely local.
Supplier and subcontractor risk
The biggest challenges faced in 2006 concerned the capacity and delivery times of suppliers and subcontractors, coupled with pressure on component prices. The Supply Management function, which was reorganized during last year, has developed its activities by creating closer collaboration with its main suppliers, by emphasizing long-term delivery agreements and also by increasing the number of suppliers of certain critical components. A Supplier Management System was implemented in 2006. The purpose of the system is to control and manage data related to selection, assessment and performance of suppliers.
Product and product liability risk
Launching new products always involves risk. Wärtsilä seeks to control this risk by designing and manufacturing products with all due care and by simulating its products through testing their reliability using design methods such as FMEA. Furthermore a risk elimination tool under implementation is capable of supporting any risk management process and contributes with clear prioritization, responsibility, follow-up and a reporting structure.
Tight delivery schedules create further challenges to ensure the quality of the company’s component suppliers. The company makes warranty provisions to cover any warranty costs that may arise after product delivery. Product liability insurance covers unexpected damage.
Indemnity risk
Risks that Wärtsilä is unable to influence through its own efforts are transferred where possible to insurance companies. Wärtsilä uses appropriate insurance policies to cover indemnity risks related to its personnel, assets, business interruption, and third-party and product liability. Wärtsilä has established its own reinsurance company, Vulcan Insurance PCC Ltd, as a risk management tool for this purpose.
Environmental and social risks
Environmental and social risks are monitored in the same way as other business risks, the main tool being Wärtsilä’s management system OpExS (Operational Excellence System). Combined with active dialogue with stakeholders, the OpExS tools – which include environmental and occupational health & safety systems, personnel training and development of personnel competences – help the company to identify and reduce the risks related to its operations, supply chain and products. Wärtsilä’s Real Estate unit maintains a real estate register that is used as a basis for assessing the environmental risks related to the company’s properties.
Political and legislative risks
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 organizations. The company monitors legislative changes at both corporate and subsidiary levels.
Commodity risk price
Oil
The direct effect of oil price changes on production in Wärtsilä is quite limited. The indirect effects of oil price volatility on customers are outweighed in importance by the long economic life of the investments and the availability of alternative fuels.
Metals
The Propulsion Business hedges its exposures to different metal prices. These risks are small from the Group’s perspective. Metal prices have an indirect effect on engine component costs. This exposure is not hedged but annual agreements are in place to balance the short-term fluctuations.
Electricity
Electricity prices have no substantial impact on Wärtsilä’s productions costs.
Related information
Control systems
