Term Paper on "Strategic Assessment of the Microeconomic Strengths and Weaknesses of the Gas Turbines Industry in Hungary"

Term Paper 5 pages (1516 words) Sources: 1+ Style: APA

[EXCERPT] . . . .

Strategic Assessment of the Microeconomic Strengths and Weaknesses of the Gas Turbines Industry in Hungary

The gas turbine industry is considered by many to be one of the most dynamic segment in the power generation industry and as a possible efficient alternative form of producing energy. The new developments in this industry have increased the effectiveness of the transformation from fuel energy to electricity and this trend is likely to continue in the future as well. This means that the development of business is distinctly correlated to the research and development spending and directly determined by it.

Hungary is one of the effervescent emerging markets on the gas turbine market as well. A former Communist state until 1989, Hungary has been the Eastern European country with the fastest transformation towards a functional market economy and, naturally, the one that, along with Slovenia and the Czech Republic, can be considered the most prosperous in the region.

The Hungarian energy market is continuously growing to keep up with the diversification of the economy and with the constant increase in the level of industrial modernization. One of the threats for Europe and Hungary in terms of the gas turbine market is the high dependency to Russian energy sources. Indeed, as the recent energetic crisis have shown, the countries in Central and Eastern Europe are depending on Russian gas transports, as well as on the prices that Gazprom, the large Russian energy holding, sets.

In this sense, demand for gas turbines is sensitive to price variations not only for the turbines themselves, but also to the price of gas, because we are bound to believe gas turbines user may turn to alternative sources of energy, less costly and less dependable on foreign sources.

The gas turbine market is perhaps a very good example of an oligopoly, with very few large investors participating in the gas turbine market. One of the most important ones, both in terms of local strength and of the investments made over time in Hungary, is Alcoa, considered one of the largest producers of aluminum in the world and a leader in global aluminum smelting. In Hungary, Alcoa has become the 15th largest employer in the country, the sixth largest investor and the second largest U.S. investor, with $900 million annually. Certainly, Alcoa is not concentrated only in the gas turbine market, but, with an investment of $83 million in the airfoil manufacturing operation and a distinct objective to sustain

Alcoa-Kofem's industrial gas turbine business in Europe.

Another important player on the gas turbine industry in Hungary is Alstom, a global leader in the power and transport industries. In Hungary, Alstom's contribution was significant. Only in February 2006, the company was awarded two important contracts totaling 17 million euros and directed towards refurbishing gas turbines in some of the Hungarian power entities. With important investments, Alstom has also become an important player on the Hungarian gas turbines market.

Siemens, with its Power Generation segment (SPG) has secured some important contracts for selling gas turbines and gas turbines equipment in Hungary, in 2006. For MOL Natural Gas Storage in Budapest, Siemens sold three dual shaft gas turbines and three direct-driven and were delivered in autumn 2006.

In terms of regulation on the gas turbines industry, the country's accession to the European Union, in 2004, marked its adherence to the EU acquis and the EU legislation. Nevertheless, the energy sector is not fully regulated in the European Union, so, in terms of regulation, we will only be looking at aspects of economic matters. Historically, the 1970s and 1980s have marked a period with EU directives restricting natural gas as a main fuel for obtaining electricity generation. However, these were revoked during the 1990s.

As such, the gas turbine market in Hungary is subject to the anti-trust and competition regulations, which fines and prohibits the formation of price - regulation cartels, the creation of large holdings that obtain dominant positions on the market and state subsidies to companies, among other things. As such, a presence of General Electrics in Hungary will be legally protected at European level from unfair competition practices on the Hungarian market and these types of problems can be taken up directly with the European Commission in Brussels. The legislative stability and the capacity of defending one's positions on the market are a good market in favor of a penetration of the Hungarian gas turbine market in the future and this trend is expected to continue.

The cost of production remains significantly below the cost of production in Western economies, mainly because of the reduced salaries and, as such, the reduced cost of the workforce. Indeed, a well-paid worker in Hungary will earn around 650 euros monthly, but this income will tend to gradually increase for engineers and probably aim towards over 1000 euros monthly, which would be considered a high salary on the Hungarian market.

On the other hand, in Hungary unions still play an important role in the life of a factory, which means that GE management will need to pay close attention to the relationship with the unions representing the workers. A smooth relationship with them, corroborating with good working conditions, will likely ensure an efficient participation of the Hungarian workers in the progress of the company.

Another issue that needs to be clarified is the existence of resources for gas turbine production. It is important to note, first of all, that Hungary has no iron ore reserves, the last iron ore mine being shut down in 1985. This means that all such resources will need to be imported. A recommendation would be importing them from neighboring Romania, who has joined the European Union in 2007 and who still has generous iron ore resources that can be used.

Resuming, first of all, the Hungarian market is a growing market in terms of the demand for gas turbines. As a new member of the European Union, Hungary has implemented the European legislative stability and the governmental transparency needed for a successful business. The growing economy is an argument for a gradually ascending trend in terms of demand for gas turbines.

On the other hand, the market presents generous opportunities of scale economies and lower costs of production, because of a lower salary that would need to be paid to the workers, who are still specialized and successful in their activity. In terms of the workforce, management will also need to pay consistent attention to the relationship with the unions and the connection with the workforce.

Competition has already concentrated itself in the form of a couple of relevant players on the market. These are large corporations, similar to General Electrics, who have divided the market shares between themselves. We can define the market as forming an oligopoly, with strong economic entities sharing the market. Penetration on the market will tend to be difficult from this point-of-view.

On the other hand, a strong competition is always helpful in improving the level of development for the market. In this sense, we can appreciate that the companies operating on this market will be able to generously contribute to an increase in national efficiency in the gas turbine industry.

As a final note, the recommendation for a direct investment in Hungary in the gas turbine industry remains, given the potential of this market and the perspectives for its development in the future as well. The European market could become an excellent debouche as well for the gas turbines produced in Hungary.

Bibliography

1. Alcoa's Hungary operation ships first order of turbine airfoils. 2006. On the Internet at http://www.thefreelibrary.com/Alcoa's+Hungary+operation+ships+first+order+of+turbine+airfoils-a0153762888.Last retrieved on February 5, 2007

2. Alcoa's Hungary Operation Ships First Order of Turbine Airfoils. Business Wire. August 29, 2006. On the Internet at http://www.alcoa.com/global/en/news/news_detail.asp?newsYear=2006&pageID=20060829005060en.Last retrieved on February 5, 2007

3. Siemens to supply turbomachinery… READ MORE

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