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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