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DIVERSIFIED MOVE TO THE ARABIAN GULF ENERGY MARKET
1. CONTENTS
2. 1. BUSINESS ENVIRONMENT:
2.1. COMPANY PROFILE
Areva SA is an industrial conglomerate that is based in France. It was formed in 2001
by the merger of three companies i.e. Framatome, Cogema and Technicatome. It is a
public owned company with about 93 per cent of its shares held by the French
government. Areva is a global company with an presence in about 43 countries
worldwide. It offers complete technological solutions for nuclear power generation
additionally it has started to grow its portfolio of renewable energy solutions. It is
currently the global leader offering solutions for CO2-free power generation and in the
nuclear power value chain it is ranked first, as the only fully integrated player along the
whole value chain.
Areva has three business divisons namely:
1. Front-End (focused on operations from mining to conversion to fuel rod creation)
2. Reactors & Services (focused on reactor design, build and renewable energy unit)
3. Back-End (focused on fuel treatment and recycling)
1.2 GROWTH PROFILE:
One of the prime reasons for the growth of nuclear power in France was the oil shock
or the energy crisis caused by the OPEC members in 1973. To prevent a future energy
crisis the French government accelerated its civilian nuclear program leading to
surplus of energy in the country. Today 78.8 per cent of the electricity generated in
France comes from nuclear power, by far the largest in the world. Since then Areva
has focused itself on global nuclear power development programs, the results of which
has been sustained revenue creation in three of the big markets i.e. Europe, North
America and Asia. To sustain its future growth it has now focused on the growing
Middle Eastern region.
Figure 1
1.3. REGION PROFILE
The Middle East can be divided into two regions – the Gulf region and the non-Gulf
region. The non-Gulf region is encompasses of the North African countries like Egypt,
Israel Jordan and Syria while the Gulf region consists of six countries located on the
Arabian subcontinent namely – Saudi Arabia, Oman, Qatar, United Arab Emirates
(UAE), Bahrain and Kuwait. The above countries have formed a political alliance
called the Gulf Cooperation Council (GCC). These countries are blessed with huge
reserves of oil and gas, which have been their initial economic driver. However now
they have diversified their economy by moving away from their sole reliance on oil
and building other sectors like manufacturing, construction, finance and tourism. The
World Energy Outlook, 2005, graph below shows the per capita demand in Gulf
countries to be higher than the OECD members combined.
Figure 2
Starting from 1970 till present day, the gas reserves have been used as a prime
feedstock for electricity generation and water desalination in the Gulf. With
accessibility of new gas supplies becoming difficult and understanding that long-term
use of current reserves domestically prevents them from maintaining their future
global export commitments; these countries have decided to look into alternative
sources for their feedstock. The soaring energy markets makes it more attractive to sell
internationally rather than use domestically.
Given the challenges of meeting the near-doubling energy requirements by 2020,
added to the pressure of conforming to environmental regulation, these countries have
understood that nuclear power plants are the only immediate and viable option
towards achieving these targets.
2. AREVA WAY:
According to Business Week (2010), in 2001 the three-way merger had turned Areva into a
one-stop shop that sold nuclear technology to the world. But the 1979 Three Mile Island
incident and the 1986 Chernobyl incident had dwindled business everywhere outside pro-
nuclear France. During this nuclear drought the CEO, Anne Lauvergeon, spearheaded
Areva engineer’s to create a new technology called Evolutionary Pressurized Reactor
(EPR). The EPR is the most safe and efficient reactor capable to withstanding earthquakes
and jumbo jet crashes.
Post 2005, Areva has been following a dual strategy approach – one global and one for the
region. The Global strategy is for the company as a whole while the Regional strategy
depends on the divisions working in a particular region.
2.1 GLOBAL STRATEGY
Unlike the oil and gas reserves, which are mostly concentrated around Russia and the
Middle East, the uranium reserves are unequally spread around the globe. Areva’s
global strategy is three tiered as shown below:
1. To build 1/3rd of the new nuclear generating capacity.
2. To secure the fuel cycle for the existing and new customers.
3. To become a leading player in the renewable energy industry.
As a result of this strategic realignment Areva has now integrated its entire nuclear
power cycle starting from mining to enrichment to treatment and recycling. This has
given it the competitive advantage to customer requirements at every stage of the value
chain.
2.1 REGIONAL STRATEGY
All the three divisions i.e Front End, Reactor & services and Back End have
independent regional strategies that is dependent on their region of operation. This
report focuses on the regional strategy of the Reactor and Services division operating in
the Gulf region.
Areva’s regional strategy builds on its global objectives but specifically it is two
pronged:
1. To focus selling its EPR in the new markets within the Gulf countries especially UAE.
2. To subsequently introduce their renewable energy portfolio among these region’s
clients.
Looking into Areva’s activities in the Middle East one can see that they have had
considerable amount of experience. According to Areva’s website the Areva
Transmissions and Distribution (T&D) was responsible for building the largest cross-
country electricity grid that connects all the six GCC countries called the North Grid
System. The Reactors & Services division, just like the nuclear technology, is new to the
region and hence will experience a new set of challenges. The strategic analysis in the
subsequent section will help to understand if Areva’s diversified move to Gulf is the
right one or not and that if it is sustainable in the long run and provide necessary
recommendations.
3. STRATEGY ANALYSIS:
3.1 OVERVIEW:
To understand the environment and modes of entry the following frameworks will help to
understand.
3.2 GLOBALIZATION DRIVERS MODEL:
According to Yip (1992), there are 4 main categories of drivers as shown by the
framework below. The following framework helps to diagnose and understand the
basis of Areva’s internationalization plan into the Gulf region
1. GOVERNMENT DRIVERS
Prior to starting a nuclear power plant project the host country should be a member of
and have approval from the IAEA in terms of having the right nuclear policy
framework with the necessary policies, standards and safety measures in place. The
host country should work with IAEA to ratify its non-proliferation and safety
measures, establish a nuclear regulatory authority with an international advisory
board.
The IAEA website shows that all the six GCC countries are the members. In March
2009 the IAEA gave approval to the UAE to start their nuclear program and also gave
recommendations for improvement for the rest of the countries. The approval now
enables Areva to bid for contract in UAE.
2. MARKET DRIVERS
There are three market drivers that facilitate a company’s internationalization viz.
customer needs, global customers and transferable marketing. As mentioned earlier,
the Gulf States are facing energy shortage and that they would prefer a global player
who has access to the whole value chain i.e. from building the reactor to supplying the
fuel to recycling the waste. The customer need driver is also fueled by the lack of
expertise to build a reactor locally and added to the fact that there are no low cost
options to their current scenario.
3. COST DRIVERS
The ability to operate in the Gulf region would open a new market for Areva and help
it achieve economies of scale in terms of fuel supply and fuel recycling. Although
Areva recruits its upper tier personnel i.e. technicians and engineers locally it can gain
the country-specific advantage of hiring the lower tier through sub-contracting it to
other companies as such a method is available in the Gulf countries. It also helps to
lower the risk to the company’s personnel since the sub-contracting company is
responsible for their own personnel as per the Gulf Labour Law.
4. COMPETITIVE DRIVERS
The nuclear power industry is a competitive sector with only a total of 10 players,
inclusive of Areva, but operating along different parts of the value chain. All the
competitors are global companies and hence there is a need for internationalization to
get the competitive edge.
From the above analysis we can see that UAE is the only approved market where
Areva can currently operate. Additionally, the key insight from Yip’s framework tells
us that Areva has the scope to internationalize into the UAE’s market considering the
fact that the market and the cost drivers are both positive. Areva strategy of approach
whether it be global or local can be under stood from Michael Porter’s Global- Local
framework. But how effective a particular market is and how distant it is from the
Areva’s parent market can be understood only after performing the CAGE distance
analysis.
3.3 GLOBAL – LOCAL APPROACH:
Depending on the country specific advantage all the elements of the nuclear power
value chain is dispersed around the globe. Hence it turns into a highly coordinated
operation starting from mining to the ore conversion to fuel rods and finally ending at
the recycle phase. According to M.E. Porter (1986), such a scenario is typically calls
for a Global strategy.
3.4 CAGE ANALYSIS:
According to Ghemawat (2007), the CAGE framework helps to understand how
compatible both the company’s country as well as the host country is on the
parameters of distance between Culture, Administration, Geography and Economy.
Using this framework the advantages and disadvantages for Areva can be understood.
CULTURE:
UAE is a modern country in that it has a global workforce and although the official
language is Arabic the medium of instruction during work is English.
ADMINISTRATIVE:
France has been a political and trade partner, in terms of French exports and
investments, of UAE for around three decades.
GEOGRAPHY:
In terms of geography although UAE has the disadvantage of the lack of opportunities
to mine, the result might be high cost of transportation of uranium to UAE. The
presence of French Military base in Abu Dhabi gives a sense of security to the country
since nuclear materials need to be operated in a secure environment. UAE’s proximity
to the GCC North Electricity grid inturn provides Areva further opputunities to
increase their capacity and presence in the region.
ECONOMIC:
Nuclear power plants are a capital-intensive investment and UAE being a oil-rich
country has the means to cover the cost. Furthermore the presence of seven free trade
zones within the country helps Areva to reduce their costs in terms of warehousing
and logistics.
The CAGE framework summarizes and shows that UAE is a compatible market
interms of Areva perspective.
4. MARKET ENTRY:
The analysis of the market using the above framework shows that UAE indeed is a
plausible market. Understanding this fact helps us choose the mode of entry into the
market. From the four types of entry modes the one applicable to Areva will be Joint
venture since power generation is a matter of national interest the UAE government offers
joint venture as the only option to build and operate the power plant. The advantage of the
joint venture is that the cost of the venture in total is paid by UAE although there might be
of a slight disadvantage in terms of knowledge sharing since technical expertise in this
field is quite scarce in the country.
From the above frameworks and the resulting analysis we can it is evident that Areva has a
strong brand and experience coupled by the strong and compatible market place. Hence the
above strategic scenario looks appropriate in the current scenario although it might require
strategic realignment since both the market and the company’s presence in the market is
new.
5.STRATEGIC REALIGNMENT:
5.1 REALITY:
UAE received its approval from IAEA on March 2009 and it passed its nuclear law in
October 2009 and requested for tender for the reactor construction from the global
companies and it selected the company in December 2009. Since it’s a new market
and the time frame was quite short, two months, it is difficult to analyze the
effectiveness of the strategy in terms of trends or metrics. Among the three
competitors bidding for the UAE reactor contract: a US – Japanese consortium of GE
– Hitachi, Korean Electric Power Corporation (KEPCO) and a Areva’s French
consortium, the bid went in favour of KEPCO.
5.2 LOST BID – WHY?
According to the report by Business Week (2010), Areva had lost the bid since
KEPCO had underbid them by $10 billion for four nuclear power plants in the UAE.
The key learning’s from this incident are as follows:
1. PRODUCT – MARKET:
Areva has a portfolio of 3 nuclear reactors namely EPR, ATMEA1 and KERENA
with electrical power outputs of 1650 MWe, 1250 MWe and 1100 MWe. EPR is
the company’s flagship reactor. Areva erred by projecting their flagship model in
the UAE contract. All the above frameworks discussed above has been useful to
understand the appropriateness of the company and the market match all the more
ignoring the product, which is by far the most critical element. Nuclear power
plants require large upfront for construction. Hence it is critical understand the
appropriateness of the product-market match other wise the bid can turn into a lost
cause.
2. COST-COMPETITIVENESS:
Kepco’s success in getting the UAE contract was mainly due to its cost-
competitiveness. Unlike Areva’s portfolio Kepco manufactures only a single
reactor, APR1400, which has an electrical output of 1400 MWe. The
standardization helps them to achieve economies of scale and turning them into a
cost competitive company.
3. FLEXIBILITY:
The nuclear energy sector has a scarcity of human resource and the other condition
that led to KEPCO receiving the contract was its willingness to transfer nuclear
knowledge and expertise to the Emirates Nuclear Energy Cooperation (ENEC).
5.3 STRATEGY REFORMULATION:
The failure of Areva’s strategy in the UAE market once again proves that a one
size strategy does not work always. Areva’s EPR was a third generation reactor
while Kepco’s APR1400 was a second generation. The safety standards in Europe
and US mandate a third generation reactor while UAE being a new player has no
such mandatory requirements. Hence a thorough understanding of the market is
necessary before a product lauch and inaddition the strategy must be able to be
reformulated to adjust to the market conditions. To help understand how to
reformulate the strategy Pankaj Ghemawat’s (2007) AAA triangle will be useful.
Looking at the model the Arbitrage factor does not work with the current scenario
since for arbitrage to occur there must be a very strong list of differentiators in the
CAGE frame. According to the CAGE framework the differences are only slight.
Hence the two factors to focus on in Areva’s case are Adaptation and Aggregation.
ADAPTATION:
In terms of adaptation Areva could learn from its failure and understand the market
and provide showcase its whole portfolio rather than its flagship product alone.
Understanding that the market demands are not one sized Areva can focus on
innovating their reactors to capture new small markets like Qatar and Bahrain whose
grid limitations allow only smaller to medium output reactors. In that regard a
collaboration with Hyperion, who have successfully constructed reactors with power
outputs of as low as 25 MWe., is also suggested. This initiative would be useful in
creating a niche market in newly nuclear countries like China and India.
AGGREGATION:
In terms of aggregation Areva could try to create a standardized product for exclusive
low cost markets. It could also try to convert the current EPR reactors modular so that
the level of safety requirement can be lowered depending on the locations risk profilfe
thereby bringing in some level of standardization leading to economies of scale. It
could also try to segment the global market into three segments viz; High, Medium
and Low cost and then match the product with the appropriate market.
6. CONCLUSION:
Looking at Areva’s history and continuous performance growth, its core business strategy
seems to be robust although it might have some difficulty penetrating new markets with the
same strategy.
According to the JoongAng Daily (2010), five months after the UAE bid, Kepco lost the
Jordan Nuclear power plant bid to Areva. Since Jordan been a comparatively poorer
country found it difficult to opted for a strategic partner rather than developing it as a
turnkey project, which was accepted by Areva. The success of this venture has given Areva
exclusive mining rights in Jordan.
Therefore it is clear that Areva growth is sustainable and consistent in the long only if it
can adapt to the ever-changing markets.
GLOSSARY:
nuclear renaissance
APPENDIX
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