Emerging growth markets for NDT inspection services
06/08/2013
With slowing global economies and tumbling industrial growth rates, identifying the next or emerging growth markets is a challenge for most companies. Even after identification of the key growth markets, successful penetration into new geographic markets involves an understanding of potential challenges and clearly defined strategies to overcome these challenges in order to attain growth. Frost & Sullivan’s latest report (July 2013) on the emerging growth markets for NDT inspection services has identified Brazil, India, China and South Africa as markets that offer positive long-term growth prospects.The demise of Venezuela as an oil & gas powerhouse in South America has given greater impetus to the Brazilian oil & gas industry, with Brazil emerging as the leader in the continent. Systematic investment in upstream, midstream and downstream infrastructure by Brazil’s nationalised oil company, Petrobras, has catapulted the country to the most important oil & gas destination of South America. In its most recent investment plan, Petrobras announced investments of greater than $220 billion to further develop the country’s oil & gas infrastructure. Of this, exploration and production is expected to receive nearly two-thirds of the investment, with $147.5 billion planned to install new platforms and production units. The downstream segment is expected to witness an investment of approximately $40 billion in revamping existing refineries and building four new refineries. Hence, the growth opportunities for the NDT inspection services market due to this oil & gas infrastructure development investment are limitless.
However, although investment by Petrobras is the single biggest driver for the NDT inspection services market in Brazil, the stringent policies and safety standards of the company are also the biggest restraining factor for growth in the market. Ever since Brazil’s infamous offshore platform disaster in 2001, Petrobras has introduced a series of policies and safety regulations to prevent similar incidents from happening again. This has led to a few hurdles for the NDT inspection service providers offering services to Petrobras. For example, every company bidding for an NDT contract needs to have its NDT technicians recertified by Petrobras for individual NDT technologies in order to provide NDT services. For small and medium-sized companies, this acts as a major challenge. As a result, these companies prefer working in the power generation end-user segment, which is less stringent.
Frost & Sullivan’s analysis into the third-party NDT inspection service market in Brazil values the market at $202.3 million for 2012. This market is expected to grow at a compounded annual growth rate (CAGR) of 7.2% to $286.3 million by 2017.
Despite bold predictions by industry experts, the Indian NDT inspection services market is, in reality, relatively small and valued at $50.8 million by Frost & Sullivan. Although this might seem small to companies outside India, the market size is relatively large in local currency. Hence, while a tier-1 participant in Brazil generates revenues in tens of millions, tier-1 participants in the Indian NDT inspection services market would typically earn revenues of less than $10 million annually. The market is also characterised as extremely competitive, with more than 200 competitors fighting for a share of the market, with many of these companies earning less than $200,000 in revenue. The high number of competitors can be attributed to the low barriers to entry in the market.
A challenging industrial environment exacerbated by the faltering economic policies of the government has resulted in a meagre 1-2% industrial production growth in India for the past two years. This crippling industrial production is proof of slowing investment and confidence in the core industrial sectors in India, such as oil & gas, power generation, agriculture and mining etc. This has negatively affected the booming NDT inspection services market in India, with postponement of key oil & gas investment projects. Other major challenges in India are corruption, bureaucracy and red tape, which affect the general business environment in the country. Frost & Sullivan research estimates that the market will grow at a CAGR of 8.7%, with the potential to generate revenues of $77.2 million by 2017.
Frost & Sullivan research into the Chinese NDT inspection services market provided an interesting conclusion. The market generated $34.2 million in 2012, which is the lowest among the four countries profiled by Frost & Sullivan. As surprising as this may seem, in China there is a preference for performing NDT inspection in-house rather than outsourcing to a third-party service provider. The inherent perception of NDT inspection being a service not requiring third-party validation and performed at a cheaper rate in-house has restrained growth in the Chinese third-party NDT inspection services market. The three largest national oil companies in China, China National Petroleum Corporation (CNPC), China Petrochemical Corporation (SINOPEC) and China National Offshore Oil Corporation (CNOOC), have in-house NDT divisions that cater to all the NDT inspection needs for these companies. In some circumstances, where there is a shortage of labour in these in-house NDT divisions, work is outsourced to third-party NDT inspection service providers.
Although China currently doesn’t offer major growth opportunities, Frost & Sullivan research shows that there is a trend towards greater outsourcing of NDT inspection needs amid a move towards higher involvement of Western oil & gas companies in China. It is expected that with the larger participation of the Western oil & gas companies from the US and Europe, CNPC, SINOPEC and CNOOC will need to start outsourcing their NDT inspection services to third-party service providers in order to comply with the quality systems and procedures of these Western companies.
Despite South Africa not possessing major oil & gas reserves, the country has established good relationships with its neighbouring countries, such as Mozambique and Namibia, that have recently discovered huge natural gas and oil reserves. This is expected to diminish South Africa’s reliance on unstable countries such as Iran for its imported oil & gas needs and increase investment in the midstream segment to connect the oil & gas fields in Mozambique and Namibia to the refineries in South Africa. The downstream segment in South Africa also offers good opportunities for growth for NDT inspection service providers, with the average age of refineries in South Africa being approximately 43 years. Hence, to keep them operational and working efficiently, high maintenance is required leading to greater NDT inspection.
Power generation is another segment expected to offer high growth opportunities, with construction of new power stations expected. Frost & Sullivan research shows that the rapid pace of development in South Africa has led to a precarious situation where the demand for electricity is not being met by supply. The country’s national electricity utilities company, Eskom, is operating on a narrow reserve margin of 17%, which leads to power outages during shutdowns for maintenance. Hence, there is a deficit that has emerged in the country leading to investment in two of the biggest power stations in South Africa. It is expected that over the next five years there will be additional construction of power stations to ease the power crisis in the country.
Although Brazil, India and China are high growth markets, long-term, for NDT inspection services, the dynamics in South Africa offer the most favourable environment for investment. The foreign investment laws in South Africa are not as stringent as the other emerging growth markets for NDT inspection services, with limited growth challenges and a professional competitive environment. Hence, it is no surprise that global NDT inspection service providers such as Applus RTD, SGS SA and TÜV SÜD have already entered the market over the past decade, with Dekra Industrial GmbH being the latest entrant acquiring Raysonics, the market leader for third-party NDT inspection service providers in South Africa.
In the recently published Frost & Sullivan study, titled: ‘Emerging Growth Markets for Non-Destructive Test Inspection Services’, detailed analysis on current and future trends in China, Brazil, India and South Africa has been provided, in addition to a comprehensive view on the latest market and technology trends, revenue projections, competitive landscape and growth opportunities in these markets.
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