Title SEMBCORP - Singapore.pdf ✅

Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Yvonne Chong and Dr. A. Lee Gilbert prepared this case based on published sources. This case is intended for class discussion and learning, and not intended as a source of research material or as illustration of effective or ineffective management. COPYRIGHT © 2017 Nanyang Technological University, Singapore. All rights reserved. No part of this publication may be copied, stored, transmitted, altered, reproduced or distributed in any form or medium whatsoever without the written consent of Nanyang Technological University. The Asian Business Case Centre, Nanyang Business School, Nanyang Technological University, Nanyang Avenue, Singapore 639798. Phone: +65-6790-4864/6552, E-mail: [email protected] SEMBCORP UTILITIES: POWERING SUSTAINABLE GROWTH IN EMERGING MARKETS Yvonne Chong and A. Lee Gilbert Sembcorp Industries, a Singapore conglomerate with assets of over S$22 billion, was undergoing a change in leadership. Tang Kin Fei retired as group president and CEO in April 2017 after 30 years with the company. Overseas operations accounted for 63% of the Utilities business’ net profit, which formed the bulk of group earnings in 2016. Sembcorp’s global power portfolio had doubled in the last five years. Rapidly developing economies, hungry for energy to fuel growth and urbanisation, were their key targets. There were growing concerns on the execution risks of developing a pipeline of projects in these markets and the environmental, social and governance (ESG) challenges involved. Sustaining their growth path might not simply be a matter of building on past success and replicating their business model overseas. Reflecting on the business, Kin Fei noted that the US$3 billion Sembcorp Gayatri Power Complex- completed in 2016 and India's largest foreign direct investment thermal power project on a single site, was the “most difficult project that Sembcorp Utility had performed over the last 20 years.” 1 While internationalization would underpin their long-term prospects, management had to identify a viable growth strategy. In tandem with a global transition to a low-carbon energy system, Sembcorp invested in a high-efficiency diversified fuel mix to manage costs and support stakeholders in balancing often conflicting needs of energy access, security and evolving ESG issues. How would they manage the inherent risks and complexities of the emerging markets, namely India, Bangladesh, Myanmar and China, albeit ripe with opportunities? Ref No.: ABCC-2016-008 Date: 01 April 2017 Distributed by The Case Centre North America Rest of the world www.thecasecentre.org t +1 781 239 5884 t +44 (0)1234 750903 All rights reserved e [email protected] e [email protected] case centre 317-0149-1 Please note that you are not permitted to reproduce or redistribute it for any other purpose. You are permitted to view the material on-line and print a copy for your personal use until 8-Mar-2023. Purchased for use by Masniarita Pohan on 08-Mar-2022. Order ref F441562.
Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Page 2 ABCC-2016-008 Background Sembcorp Industries was a government-linked company (GLC), in which Singapore sovereign wealth fund Temasek Holdings owned a 49.5% stake, with three core businesses; utilities, marine and urban development. The group’s 60.6%-owned SembMarine (SMM), the world’s second largest rig-builder, provided repair of ships and rigs, offshore engineering and construction services. Sembcorp Development managed 13 industrial parks in China, Vietnam and Indonesia. The Utilities business supplied power and steam generation, water and waste treatment, and on-site logistics solutions to industrial clusters. The group’s business mix saw a shift from 2012 as Utilities began to surpass SMM as the biggest profit generator, resulting from diversification to offset the cyclical offshore and marine sector. The move was prescient as the Utilities business contributed 88% of net profit in 2016 compared to 50% five years ago. SMM, on the other hand, suffered its first full-year loss in 2015 as it struggled to stay afloat amid a protracted downturn in the global oil and gas industry. (See Exhibits 1 & 2). Origins of Sembcorp The Utilities business started in 1995 as a unit led by Kin Fei, a mechanical engineer by training, who launched the first centralised utilities complex on Jurong Island to serve the newly established regional petrochemicals hub. Sembcorp was at the forefront of many government-to-government (G2G) projects in the last 20 years. During Singapore’s early economic restructuring, the aim was for GLCs to spearhead the development of an external wing. There were seven Vietnam-Singapore Industrial Parks, the first of which was set up in 1996 by a Sembcorp-led consortium and complementing the project was its Utilities unit. “Most developers who do industrial parks have to outsource when they require power or water supply, but we can do everything under one roof. That indirectly reduces the cost,” explained Kelvin Teo, CEO of Sembcorp Development, who added that the Singapore brand name gave them an edge with joint venture partners or local governments. 2 Sembawang Corporation and Singapore Technologies Industrial Corporation merged in 1998 to form Sembcorp, Southeast Asia’s largest engineering group. Energy and Sustainability Given the size of Singapore, scarcity of resources was often an impetus for innovation. Sembcorp was the first to reclaim high-grade industrial water from wastewater effluent—the S$180 million Sembcorp NEWater Plant, one of the world’s largest water recycling plants, won ‘Water Reuse Project of the Year’ at the Global Water Awards 2010. The bundling of centralised utilities operations on Jurong Island, itself reclaimed from seven small offshore islands, cut wastage and duplication to provide customers with more cost-efficient services and a smaller carbon footprint. Singapore's first commercial importer and retailer of natural gas, the cleanest form of fossil fuel, was Sembcorp. The company pioneered cogeneration in 2001 with the 815 megawatts (MW) Sembcorp Cogen, the first combined-cycle gas turbine (CCGT)i power plant fueled by natural gas, simultaneously producing electricity for the national grid and steam for Jurong Island’s energy-intensive industries. As the electricity generation industry shifted from oil-fired steam turbine to CCGT plants, the share of natural gas in Singapore’s fuel mix grew from 26% in 2001 to 95% in 2016. Ng Meng Poh, executive vice president and head of group asset management at Utilities, observed: Because we invested early in green technology, unlike some of our competitors who had to replace their older facilities with more efficient new units, we have not had to retire or revamp our power plants. Also, in our CCGT cogeneration plants, we can often achieve higher plant efficiency, so we use less fuel and can pass on the savings to customers.3 i CCGT uses both a gas turbine and a steam turbine to produce more electricity from the same fuel. 317-0149-1 Please note that you are not permitted to reproduce or redistribute it for any other purpose. You are permitted to view the material on-line and print a copy for your personal use until 8-Mar-2023. Purchased for use by Masniarita Pohan on 08-Mar-2022. Order ref F441562.
Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Page 3 ABCC-2016-008 INDUSTRY TRENDS 2015 saw an unprecedented drop in global coal demand since the 1990s, offset by growth in India (4.8%) and Indonesia (15%), due to economic rebalancing in China, the world’s biggest coal producer and consumer, and the US generated more electricity from gas than coal for the first time.4 Natural gas emit 50% less carbon dioxide (CO2) than coal and 20% less than fuel oil. By 2020 India, the world's third-largest energy consumer, was expected to overtake the US as the second-biggest coal user. Coal, gas, oil and low-carbon sources such as hydro, wind and solar, were major energy sources for the electricity sector. Non-OECD countries would double electricity investments to US$495 billion annually in 2015-2040, outspending OECD nations two to one.5 New coal-firing capacity in China, India, Vietnam and Indonesia would account for 75% of plants to be built by 2020. Coal demand is moving to Asia, where emerging economies with growing populations are seeking affordable and secure energy sources to power their economies.6 [IEA] If the entire region (Asia) implements the coal-based plans right now, I think we are finished.. that would spell disaster for us and our planet.7 [Jim Yong Kim, World Bank president] Winds of Change The Paris Agreement on climate change mitigation was adopted by 195 countries at the 2015 COP21.ii While coal was cheap and abundant, its future use was constrained by the need to curb pollution and CO2 emissions. Governments, especially in developing nations, often struggle to balance the ‘energy trilemma’ of security, equity (affordability) and environmental sustainability.8 For the first time, emerging economies leapfrogged the developed countries in 2015 with US$156 billion of renewable energy (RE) investments, from US$9 billion in 2004. China and India ranked among the top five countries for investment in RE capacity, alongside US, Japan and UK. China’s investment grew 17% to US$102.9 billion, over a third of the US$286 billion total. (See Exhibit 3.) China’s dual role as the biggest manufacturer and installer of RE equipment was key in catalyzing global demand for clean energy. From 2010 to 2015, solar and wind saw the highest growth in annual capacity at 42% and 17% respectively, as solar panel and wind turbine prices plunged.9,10 2016 saw record RE additions of 161 gigawatts (GW) iii with 58% of installed capacity in Asia, which was the fastest growing region with 13.1% growth in RE capacity. 11 This was the first time since 2013 that solar (71GW) outpaced wind (51GW) for new power capacity worldwide. Factors such as grid integration, intermittency, energy storage and scalability pose challenges as global fossil fuel subsidies in 2014 totaled US$490 billion, over four times the US$112 billion spent on RE.12 SEMBCORP UTILITIES – KEY ASSETS & ACTIVITIES Faced with a small home market, Kin Fei set his sights overseas exporting their centralized utilities outsourcing model and sustainability solutions - “we always go where our customers go, and we have to adjust our focus and direction according to our customers' needs.”13 (See Exhibits 4 & 5.) By early 2017 Sembcorp had established energy and water assets across 70 locations in 14 countries with 10,916MW of power and 8.8 million cubic metres a day (m3 /day) of water treatment capacity, including a growing RE portfolio. Fossil fuel use was prevalent in Asia but they deployed supercritical power plants that were more efficient than conventional coal plants, resulting in lower CO2 emissions, and invested in technologies to reduce environmental impact. While Sembcorp was primarily engaged in the provision of essential services, the company played a vital role in helping governments and local communities meet their goals of energy access, security and ii 21st Conference of the Parties to the United Nations Framework Convention on Climate Change iii One gigawatt = 1,000 megawatts 317-0149-1 Please note that you are not permitted to reproduce or redistribute it for any other purpose. You are permitted to view the material on-line and print a copy for your personal use until 8-Mar-2023. Purchased for use by Masniarita Pohan on 08-Mar-2022. Order ref F441562.