It is not every year that the back-up and temporary power segment makes the headlines, but when the power went down at the Dubai Mall in April 2017, the industry held its breath. Six months on, PMV Middle East collects the thoughts from three experienced industry hands to see how this event and broader industry trends are driving the development of this fiercely contested power generation market segment.
Opening the discussion is Daniel Crossan, project manager at Himoinsa Middle East, who notes: “The decree was that every major hotel, mall and building had, by law, to have a secondary backup power supply — so what we have been looking at is where we fit in.”
Internationally, Himoinsa is already a leader in the provision of back-up power systems, and in 2017 alone has delivered several major solutions in the Gulf, including in Dubai, as well as in Morocco. Since the decree, the manufacturer has also had a number of further projects with malls and hotels.
Crossan notes: “The decree was made just before the summer, so it’s gone a bit quiet now and I don’t think it’s fully filtered down yet. However, recently we’ve seen a pick up on the same subject, and between now and the end of the year we expect to see a lot of tenders being floated for these kind of major landmarks and buildings. For the minute we’ve just started seeing the first requests being made for major landmarks, such as the Address Downtown.”
Next up is Hussein Elkashef, sales manager for generators at SDMO dealer GENAVCO, who notes: “It was a rule before to have a backup or secondary source of power in case of power failure, but now it has become a strict rule.”
“Even normal residential buildings, with nine storeys or even less, now require backup generators. So looking to the number of mega projects and the infrastructure which is coming now — there is really a lot of requirement and demand coming in the near future.
“We have started getting these kind of tenders for the Expo Village and the projects in Palm Deira and Creek Harbour, where there is a really big requirement for standby generators.”
In agreement with his peers is Faisal Hamze, Middle East manager for JCB Power Products, who adds: “There are a lot of requirements now coming to tender, as my colleagues mentioned — especially for independent power plant (IPP) projects — and we see a lot of enquiries and are participating in so many projects of this size.”
He elaborates: “The opportunities are especially big for standby applications, for hotels, malls, increasingly for data centres, and for construction. In the mid-size segment we are seeing a lot of demand from the rental business. This sector is growing because cash flow is quite an issue at the moment, people are more reluctant to buy, and so they are going for rental options for the time being.”
Crossan adds: “It depends on the application. If the power goes off in a hospital or hotel, it’s critical that you get that power back on very quickly — so in that sort of an application, you cut a lot of the competition out. On a construction site, if a generator goes down and a tool stops, it might stop the guy working for half an hour or an hour, but it’s not going to have a major impact on the overall application.
“In Dubai, the law was that you had to have a standby generator, but there was no real control over what that actually meant; whereas now, they’re getting stricter about the loading that generator can do, the classification of that generator, and how long that generator can run for in terms of primary replacement protocol, standby and continuous applications. There is also more engineering around the requirement of the building to match the generator — so its’s a specified application now where you’d expect to have an engineering team involved in it.
RENTAL BUSINESS
Aside from standby applications, the rental sector is market segment that presents both a range of opportunities, but also significant challenges to premium manufacturers such as Himoinsa, JCB and SDMO, from GENAVCO.
Elkashef notes: “After the financial crisis in 2009, customers and end users became cautious about investing in buying a machine — that’s why most of them went for either leasing or rental options. That has made it a good time for rental companies and for sure for us — because whenever you’re dealing with a rental company, you will be expecting to do a bulk deal for a big volume of machines. In the last five years we have had three repeat orders for a single customer. Last year, we also delivered 70 generators to one rental company based on a direct finance option from the factory: the units were let back-to-back from SDMO to GENAVCO, and from GENAVCO to the customers for four years — and this was the only way we could break in.
“With financing, you might perhaps enjoy only a single digit of margin, but still you will do a good volume of business if you can provide that facility to your large fleet customers.”
Crossan notes: “A rental application for a generator tends to be wholly different to a standard application. The reason why Himoinsa has a rental range is that it has recognised that rental is a very large part of the generator industry — so to try and put a standard product into a rental application is very tough. Rental customers tend to want a product that is quick, cheap and comes with everything — but normally there tends to be a trade-off.”
According to all three, contractors are rarely deeply concerned with the performance of on-site generators, and tend to operate them in less than optimal conditions. This can make it hard for premium manufacturers to pitch their product based on total cost of ownership.
Crossan continues: “Construction is a bit quick and dirty: people don’t care about the equipment, are less likely to look after it, and don’t want to want to spend a lot of money on it.
“They just want to use the asset and sweat it. It’s called a fix-and-fail model: the contractor will keep using it, even if smoke comes out of it, as long as it keeps running — and that’s why a lot of rental companies find success in the construction sector — because they can offer construction companies a product that their project manager has no ownership over.
“The challenge that our rental partners then face is that when they get a generator back, it’s a mess, and the oil is black and full of sediment.”
From the contractor’s perspective, the logic of this approach is that generators are budgeted against individual projects and so are bought or leased with short-term objectives in mind, and not with a view to the total cost of ownership.
“It’s all budgeted for the job, and when the product is finished, the value is considered to be zero,” explains Crossan. “So we’re not always competitive, because a lot of Indian or Chinese competitors can provide two generators of a certain size for every one that we can provide.
“While our product is undoubtedly superior, and while the lifetime of a construction project is short compared to the life of a premium product, it doesn’t matter — because the contractors are not looking to service it.”
Hamze continues: “To put it in short, there is zero regulation in the construction segment and as long as you provide the power, contractors don’t care about high specifications.
“Construction is for a fixed period of time, the duration of the project, so they don’t care about the long-term life of the generator. If you give them an open set, they will just put a locally made cover on top of it, and if it rains, then that’s it. So it is very low specifications, and very competitive unless you have some sort of special relationship with the customers.”
Elkashef adds: “These low regulations push most manufacturers of premium generators to go mainly to projects with special requirements, or where you need to be approved by some consultant, authority or government utility — and to rental companies who are authorised to tender for a construction site where they need a long-term rental contract.
“I would much prefer to support one loyal rental company than go to 10 construction companies, because one good rental company will give me the business that I might expect in a year from even 20 contractors.
“If you want to mobilise a significant volume in the temporary power market then you have to target the rental firms.”
TOWERING COSTS
During the discussion, all three men highlight the provision of generators to power tower cranes as the perfect example of the project-based and short-term market pressures being placed on contractors, and in turn rental operators and generators manufacturers.
In a typical application, a contractor might set up a 200kVA to 250kVA generator for a tower crane, but as Crossan explains: “Tower cranes are a really difficult application, because the generators are generally between 60% to 80% oversized for the job. You only need that power when you’re given a big hoist lift; for the rest of the time, the generator will be running idle or on a low load. Most of the generators that we work with run at a high, fixed speed, so they’re designed to run constantly at 1,500rpm. They like that and they like to be given load; but when you shock-load them, you’re putting stress on the genset that it wouldn’t normally see. Combine this with a long period of running on low load, which can coke the engine, and you’re treating the generators badly at both ends of the spectrum — and electromechanically, that’s really not what you want to be doing.”
Hamze concurs: “Running a generator at low power, or with low loads is not good for the engine’s life or performance, and the same is true for high loads. You should be running it in a continuous application at 75% of its capacity.”
Such operations are far from ideal from the perspective of the rental operators, as Crossan explains: “For a six month contract, they might be spending a quarter of the revenue from that job on the maintenance and the overall procedure — so it’s always a difficult trade-off with getting the right product application.”
And while the rental operator will be burdened with the service of the machine, Elkashef highlights: “The contractor only has to pay for the operational costs, so the fuel, and will not necessarily feel that expense that much.
“With a 200kVA generator, the governor will link the fuel consumption to the load on the machine. There is a base consumption of maybe 25% of the maximum fuel consumption, but the diesel consumption for 25% of the output will not be like it would be for 75% of the output.”
Low diesel prices in the Middle East also mean that fuel is still not a leading driver in the region, and Crossan adds: “Even when the fuel price was really high, this was still the model. A lot of engineering can go into these applications, but it just doesn’t seem to be something anybody is looking at.”
This situation is also far from being environmentally friendly, as Crossan adds: “Over an hour period, the crane might do five or six lifts, but you’re running that genset continually — and a 200kVA genset might burn 100 litres an hour. So you can imagine how much you might burn over an entire project.”
WORKING IN SYNC
The irony of such problems in the construction-oriented rental sector is that more efficient and cost effective solutions do exist — they’re just not necessarily economically viable within the context of the current norms of project and procurement budgeting in the region.
In the case of tower cranes, a 120VA generator set can be paired with a battery pack to provide a boost of energy as and when required for lifting operations. Instead of shock-loading the generator, the crane draws the extra capacity for its intermittent lifts from the battery pack.
The caveat is that such solutions come at a cost, as Crossan notes: “That special application of the genset is probably 70% more expensive than what you’d have for a standard genset.”
Hamze adds: “Forget the cost of the synchronisation kit, the contractor is going to have two generators instead of one, and then need someone on site — not a simple operator, but someone who knows how to support this.”
An alternative solution for big projects is for contractors to cater to the power demands on their site by setting up a centralised power plant, as Crossan explains: “On some big construction sites they build what is called a temporary power plant, so you could have five or six gensets that are running and then they would provide synchronised power for whatever application is required. The issue is that to set up a power plant, you need to have the project running for some time, and you have to have service personnel on the ground to run an effective application — and a lot of construction companies don’t want that, because they’re going to have to pay a premium for that.
“Establishing a power plant on a construction site is way more expensive than turning up with a HIAB, putting a 200kVA generator on the ground and connecting the cables. In the generator business, we’re continuously trying to engineer the best solutions, but the very best solution is always the most expensive solution, and often not commercially viable.”
Elkashef explains: “The procurement guy will only be looking at the price; he’s not going to be looking to how much he’s going to save in terms of the total cost of ownership later on — whether it’s in terms of the fuel consumption, the service costs, or the lifetime of the engine.”
Crossan adds: “I think it will change, especially with the fuel price being where it is now, but up to this point, there has been a big divide between project and lifecycle, with there’s no real long-term oversight of temporary power in terms of the total cost of ownership.”
CHANGING THE GAME
Despite the regional reluctance to adopt synchronised and hybrid solutions, whether in the context of small generators sets or on-site power plants, the technology itself is not new.
Crossan explains: “It has been around for 50 years, and it’s not really a great step change in terms of understanding. It’s just that we’re competing with cheaper brands and simpler operations, whereas a synchronised solution would require contractors to bring in technical staff — and to justify that would again require premium product to warrant that overhead, and a lot of contractors don’t want that.
“As soon as you go to site and say: I’ll save you four litres an hour, but my price is 10% more expensive, you’re losing the battle — because the guy who is buying the product doesn’t care. His job is to buy that equipment for the best price that he possibly can — and the cost of the project is somebody else’s problem. Until people take whole ownership of that, it won’t change.”
However, that is not to say that there are not customers that appreciate and value the benefits of a synchronised solution, as Crossan highlights: “For everything we supply to Byrne Equipment Rental Solutions that is 200kVA and above, they will specify whether they want synchronisation or not. Synchronisation is actually very simple to do: you’re effectively just changing the controller and adding an electronic governor, and it just means that two generators can work in combination with one another.
“The benefit of that is that you don’t have to have individual units for each power node. If the project requires 1MW, you don’t have to have 1MW on the shelf; you can have five smaller ones working in combination, and it just makes your fleet a bit more dynamic.
“A lot of events companies tell you I need a 500kVA genset, and they only need 60kVA — so a lot of companies are massively over-specifying what they need based on poor knowledge.”
And while there is indeed an additional cost for such solutions, many of the costs associated with synchronisation kits, such as the controller, are the same for 60kVA or 6MVA generators, and so the cost reduces as the size increases.
For JCB, Hamze adds: “We are successful in the synchronisation business mainly in labour camps. We supply many JCB generators across the Middle East in labour camps, which might require 2,000KVA of power. Instead of supplying them with one unit, we supply them with four synchronised 500KVA generators.
“So when the labourers are at work, perhaps one generator is running, but when they come back and they want to start the air conditioning, then all four will begin running together.”
PREMIER POTENTIAL
Despite the challenges in terms of the pressures being placed on procurement professionals — and by extension temporary power providers — and the often low level of understanding of the factors influencing long-term total cost of ownership, plenty of potential remains for the premium manufacturers and their product.
Hamze highlights: “In some countries, the contractors are keen for and appreciate a high-specification product. In Saudi Arabia, China State Railway came to support the metro and rail projects across the country, and they brought Chinese-made equipment with them. However, those generators didn’t perform in the high ambient temperatures and dusty conditions, and they couldn’t support them.
“Eventually, China State Railway came to us and started buying from us, and then they told an even bigger Chinese company, Sinopec, to come and buy from us — so they paid a premium for a branded product that could really support their projects, and they threw away the generators from China.
Looking at total cost of ownership, he adds: “A small family-owned company might also prefer to go with a premium generator product if they want to use it for more than one project. In that case, they will care about the life of the generator. But construction is more frequently supplied by the rental segment.”
JCB Power Products has another interesting edge in terms of its value proposition, as Hamze notes: “As far as construction is concerned, we have a different approach compared to other generator suppliers. JCB is known as a heavy equipment supplier, and you can see JCB product such as the backhoe loaders and telehandlers on numerous construction projects. All of these are powered by JCB engines, and so contractors might prefer to buy JCB generators if they already have JCB machinery — because they get support for the machines and the generators from one supplier. They will also be able to cut down on their parts inventory. Some of the contractors like a package, and it’s easy for our dealers to do that.”
Here, Crossan comments: “That’s a major detriment to us, because obviously if the heavy equipment guys are in there selling equipment then they can make good margins on the heavy equipment and then squeeze the margins on the generators to continue doing business.”
Beyond brand-specific synergies, Elkashef adds: “Sometimes, if you as a company or a dealer have a very good relationship with a contractor, regardless of the brand you are selling, he might blindly accept your quotation. For sure you have to meet a certain budget, but still relationships are very important. When they know you by experience, they might just say: ‘I need this machine: Can you deliver it?’
“For standby applications, we have customers that we started with a long time ago and who until today, have continued to buy our machines. We have been working with Dubai Airports, for example, for more than 10 to 12 years, and 75% of the generators purchased for Al Maktoum Airport or for Dubai Airport were procured from SDMO — because they are known to the end user, which is Dubai Aviation Engineering Projects. If you know the contractor and consultant on a project, it is more likely you will get continuous business.”
Crossan counters: “That can sometimes be inhibiting as well, because the best product for the job might not be one that somebody likes. Somebody might have worked with Caterpillar engines for the past 20 years, but those machines will not always be the best product for every application; it’s just an easier way to work. It’s our responsibility and our fight to compare like for like and try to come up with a solution that wholly encompasses what they want.”
At the same time, long-lasting customer relationships can be important for product development, as Crossan explains: “We have some partners who we service in the rental sector through FAMCO, such as Byrne, who we provide with a lot of generators — and every time there is a new iteration of orders for Byrne, we go back and we offer them new options that improve upon what they currently have.
“During the two years that I have been with Himoinsa, there have been three different iterations of the rental product that has gone to Byrne. So we are continually developing a rental product that is as close as we can get to the right solution. However, once you think you’ve got it right, something else comes up — especially in rental, because the product is continually moved and used in a plethora of applications. So it’s a perpetual battle to get them something that will last a long time, but be competitive enough in all of these different applications.”
Hamze adds: “You need to take a different approach to market depending on the range of the generator. JCB initially focused on the midrange market up to 500kVA, but then we acquired Broadcrown in late 2015 and started approaching the market differently, because JCB Broadcrown is specialised in projects and the heavy stuff. For this type of business you need to begin with the consultant before the contractor even comes into the picture.”
A manufacturer’s choice of dealer can also be the deciding factor for some potential customers. As Crossan notes: “Because the GCC is quite a unique region, we do need the support of our dealer network. With Himoinsa, that’s FAMCO, which provides a standard warranty and service agreement. We support FAMCO, but they deal with 80% of our service on a day-to-day basis — so that there’s no need for us to get involved on that level. FAMCO actually have a much bigger spare parts department than we do, so they hold both the stock and technical resources to respond quickly to our customers — rather than them coming to us, and us going to Spain — and it’s good to have that level of support.”
From the dealer’s perspective, Elkashef notes: “As a dealer, GENAVCO has a large, dedicated spare parts facility for all of its products, including SDMO generators, and we have a training centre where the SDMO Middle East office is supporting us in conducting training for our engineers and field technicians.
“The good thing with us is that the most important range of SDMO generators — from 20kVA up to 250kVA — are run by John Deere engines, and GENAVCO is the master service dealer for John Deere not only in the UAE, but across the Middle East. So we are able to support the generators and the engines as well.”
Hamze adds: “It’s not only about the quality product that each and every company here can provide — it’s also about the aftersales support; in fact, that’s often what’s most important.
“If a quality product is not looked after, it will not perform, and then you will lose this customer — so the main thing that sells here is the service and the aftersales. That’s what premium brands, such as JCB, Himoinsa or SMDO, are very strong on in the region.”
NEW RULEBOOK
Returning to the subject of regulation in the region, Elkashef notes: “In the UAE, there is already a regulation that you will not get a power connection from a utility, such as DEWA or ADDC, unless you have civil defence approval. Especially for a hospital, hotel, a mall, a school, or even for a tall residential tower, such as in Dubai Marina, you will never get approval unless you have a backup generator. Coming back to the last year’s incidents, the rules were already there, but now they will be stricter.”
Hamze comments: “Building on Hussein’s point, the new regulations that they are going to set up will really control which brands meet the quality requirement. There are a lot of OEMs in the power industry, but not all of them care about quality specifications and safety; many are mainly commercially driven.”
Elkashef continues: “Anybody can start a simple generator, but by going further and introducing more regulations, the Middle East will create opportunities for the big names. Greater compliance and stronger standards will help leading manufacturers to differentiate.”
Crossan adds “It’s just an evolution: a gradual adoption of European standards in Middle East standards. What we have seen recently is more American influence on the standards, which all of us are finding slightly different to manage, because as manufacturers we conform to UK or European standards — but in Dubai and the Middle East, the regulators tend to hand pick what they think is the best at any given time.
“Standby is one of those very special kinds of project where you never expect it to run — a bit like insurance — but you’d better have it in place, because if you don’t, the ramifications or failing could be catastrophic for your business.
“Likewise, as providers, if we provided standby generators for a project and the power failed, but those generators didn’t come on — the next time a tender came up, we wouldn’t be entertained. Winning business in this segment is hard, but failing in this kind of business means you’re no longer in operation.”
LOOKING FORWARD
While the market for back-up and temporary power remains fiercely contested in the region, for the moment it remains a segment where there is good deal of business and opportunity.
Hamze notes: “In general, both worldwide and in the Middle East, the demand for power is increasing every year. The population is increasing, technology is developing and disasters are happening — and all of these and many other things will require power.
“The Middle East is no different and there is a lot of power requirement for different market segments: telecommunications, government, civil defence, rental, standby applications. While the global economy is still not at its strongest — and while this is affecting a lot of industries, including construction — the power business has not been affected as much.”
Elkashef confirms: “The demand for power is growing year by year, and there are a lot of new players besides the major players in the market. New manufactures and assemblers are getting in on the market, and since the demand is growing, they are all enjoying business. This includes opportunities for export to not just Dubai or the UAE, but the whole region. Many small companies that started less than 10 years ago have become big players now.
Crossan ends: “Regionally, Dubai tends to be the one that kicks things off, and the other parts of the region tend to follow. A lot of the incidents in Dubai have driven decision makers to focus on backup systems and safety systems — and one of the main backup systems in any building or major landmark does happen to be the generators. Generators are part of fire safety systems, for example, because they’ll run the pumps, and they’ll run the air ducting — so they are a crucial part of the installation.
“So generators have become part of the main focus of the health and safety drive which we have seen starting to happen — all because of the decree that His Highness put out.”
