Fearless forecast: What to expect of Asia's power companies in a few years

Market change has been a force for evolution in Asian power companies in this new millennium. Reviewing how these forces are playing out leads to some interesting conclusions about where companies and the industry as whole is heading.

Utilities are often struck along jurisdictional lines. For example, a municipal water business operates in a municipality.

However, this jurisdictional scale is not necessarily an efficient business scale. In fact, large scale appears to be the key to competitive advantage.

In the United States, since deregulation began in the 1990’s, the utilities industry has shrunk from 100 publicly traded companies, down to 50. As energy demand slumps due to efficiency measures, a new round of consolidation may see the number being halved to 25 in a few years from now.

Earlier this year, Tim Winters, a Wall Street analyst had this to say: “The utility industry is going to continue to consolidate. One of the bigger drivers is that investment hurdles are higher. Duke and Progress merged in June 2012 to improve their earnings. Smaller utilities are going to continue to be consolidated into larger ones for economies of scale.”

We don’t know yet what is the natural business scale for power companies. Perhaps there will be organizations of more than a million employees.

Currently, the Asian power industry is caught up in a headlong rush to expand supply and meet power demands. Even mature markets have seen plenty of activity as the industry looks for more sustainable power solutions.

However, just like the seasons change, inevitably this phase will end and power companies will need to demonstrate operational efficiencies. In Australia there are already reports of a cooling demand for power generation as home generation and energy efficiency start to take effect.

It is likely that privatization will continue in Asia, because it is attractive to governments. It provides money to state coffers and it allows government to slip into the role of regulator and not operator, which is the natural role of government, i.e., to govern.

Some Utility companies are good at running their electricity retail businesses or their power generation businesses, or whatever the case may be. Privatization provides the lease both to buy, and be bought by, other players.

Successful performers attract investors and the capital value of the enterprise rises. The opposite is also true and weak performers will lose value. This effect of money following value is what makes markets efficient distributors of capital. Strong players will buy weaker ones.

However, to truly extract value the companies must be synergized and harmonized. This means that those operations cannot easily be de-merged. Consolidation is a one-way operation.

Once decisions are taken to privatize a business or to liberalize an industry sector, then natural forces inexorably lead to certain outcomes. These include consolidation, business efficiency and brand building.

The inevitable outcome is an industry with a few very large players. Today there are around 4,000 medium to large utilities. In the next couple of decades this could come way down perhaps to less than a hundred. There are only around 40 car makers in the world. There are only 9 tobacco companies. There are only two PC chip suppliers.

The long term strategy lesson here is not to think about where is the next power project, but rather what does the player landscape look like? Who are the natural winners and losers? What is the opportunity for partnerships and alliances? A small investment in this direction can have long term benefit.