Bankruptcy is an ugly word for any corporation, but that may not be case for bankrupt business’ industry.
Survival of the fittest is a founding principle of the natural world, yet it is equally applicable to the corporate world. In this opinion piece, NFA explores the silver-lining for the nuclear vendors and the industry as a whole
The failure of Westinghouse Electric Company and the associated problems intrinsic to its parent organisation, Toshiba, may actually lead to a paradigm shift in the operations of competitor vendors, lead to a much needed improvement in market share for the surviving vendors, provide important intelligence on how to avoid a similar corporate calamity and direct surviving vendors on technology choices.
Westinghouse is one of America’s most historic corporate names. Formed 131 years ago by inventor and entrepreneur George Westinghouse, the company was born toward the end of America’s coming-of-age and industrialisation and at the beginning of - and became a major player in - the electrical revolution. George Westinghouse’s alternating current electrical system ultimately defeated American icon Thomas Edison’s direct current system, and is the system that we rely on today for the most fundamental of daily activities requiring electricity.
Westinghouse remained a leader in power-generation throughout the 20th Century and a leading nuclear power plant developer into the 21st Century, with one competitor vendor giving a nod to Westinghouse’s AP1000 pressurised water reactors as “revolutionary”. In the Asian context, where nuclear markets (except Japan) are still developing, AP1000 reactors promised cost-effectiveness and relative simplicity in operation. George Westinghouse’s corporate offspring had a bright 21st Century future ahead of it.
That bright future has not been realised. In February 2006, Japanese giant Toshiba bought Westinghouse, crowding out rival bidder GE (Edison) and remains an 87% shareholder in what is described as a “business unit” of the parent. On March 29, 2017, Westinghouse filed for bankruptcy following the financial failure of two promising AP1000 projects in South Carolina and Georgia.
What went wrong?
In short, changing regulatory framework. The bugbear of many in power infrastructure design and construction, the strike of the regulator’s pen can send project feasibilities tumbling into the red. The vicissitudes of the United States regulatory matrix caused a domino effect in terms of spiraling costs and contractor delays. So much was this the case that Westinghouse became embroiled in costly and time-consuming litigation with its lead contractor and then, believing that such action would lead to a solution, bought-out the contractor, which in turn led to further protracted litigation concerning the terms of the take-over.
“It was just a comedy of errors,” says a commentator close to the deal, who requested anonymity from NFA. “We were watching Westinghouse try to lift itself out of quicksand by its bootstraps. However, it must be said that regulatory changes are make or break in certain sectors of this industry and the regulatory changes that set-forth this disaster were a blow from behind for Westinghouse. Many of us fear such uncertainty.”
The projects were doomed by unpredictable regulatory burdens, litigation and derivative litigation that was never to end well, and now according to analysts, the two AP1000s will cost nearly double the original budget – earlier this year, perhaps the final nail in the coffin prior to the March bankruptcy announcement, Westinghouse declared a write-down of over US$6 billion.
This has all culminated in a rumour-fuelled ugly mess. According to a recent report in The Economist, Westinghouse wants to stay its course on the two projects, but other stakeholders may have different ideas. “Westinghouse expects to continue working on the reactors as bankruptcy proceedings go on, but the utilities may abandon the plants or seek another firm to build them… Korea Electric Power [Kepco] might take over, but Westinghouse’s steep losses may keep it away.”
There may be a light at the end of the tunnel for the embattled organisation with the announcement on 23 May that Westinghouse had secured an $800 million loan allowing the company to reorganise, possibly be sold or perhaps even shake off eventual bankruptcy altogether. Two points remain clear however, firstly that Toshiba wants out and that the journey ahead for Westinghouse is a long one.
Could Westinghouse’s woes spell the death of the AP1000? Possibly, but that is not necessarily a negative. The option of investing in the small modular reactor may ironically save the beleaguered US nuclear industry, and thus assist the industry worldwide. Small modular reactors are, as their name implies, cheaper, simpler and perhaps easier to “sell” to local populations resistant to reactors appearing near their communities. The continued roll-out of SMR and associated technology may be welcomed relief to an industry recently plagued by financial and public relations difficulties.
Every cloud has a silver lining, and interestingly a number of positives may emerge from either a Westinghouse bankruptcy or a Westinghouse bankruptcy scare. Firstly, such a situation provides a market scare that tends to leads to a market shake-up, a dip in complacency, a spike in innovation, a change in direction with respect to new technology. For instance the SMR sector of the market may be a real winner, which in turn may revitalise the nuclear industry in developing markets, as it struggles to compete against cheap traditional fuel sources.
Secondly rival vendors will analyse, deconstruct and moot the Westinghouse challenges with a view to avoid such circumstances befalling themselves. This is never a bad thing, as surviving vendors will tidy their own homes and tighten their activities from regulatory, operational and financial standpoints. Vendors will be forced to innovate efficient technology solutions; interested governments will be compelled to invest in latest technologies to avoid the slow sinking of their nuclear industries; other stakeholders will sharpen their wits.
Thirdly, the Trump Administration, does not care for foreign involvement in the Westinghouse reactor projects. The Administration is clear that it will resist and perhaps even pass legislation with the same effect, that will keep foreign interests off US soil. As such, this leads analysts to the conclusion that the Administration may broker a deal to assist Westinghouse maintain the projects or perhaps, more dramatically, help Westinghouse survive in the medium- to long-term. One way to assist would be to ease the regulations that placed Westinghouse in this position in the first place. All signals from the Whitehouse, if any line-of-best-fit can be drawn, indicate that the Administration is not only pro-energy, pro-job but is also relatively laissez-faire when it comes to resource, energy and infrastructure industries self regulating.
And so, much can be taken away from this still-developing story. The bottom-line for Westinghouse is by no means terminal, and there are a number of intervening factors which will emerge in the fullness of time. As a principl, corporate survival of the fittest will matriculate into a stronger industry, emerging technologies should inject a booster into the sector and provide some new directions. These effects will impact government policy and flow-on to newcomer nuclear markets. When all is said and done, Westinghouse may also regroup and re-emerge, and if it can, it will be stronger and wiser.