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Cartoon by Shoji Takagi
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While the international nuclear industry was busily reorganizing itself into a more oligarchical structure, Japan alone managed to retain three nuclear power plant makers, Mitsubishi Heavy Industries (MHI), Toshiba Corp and Hitachi Ltd.. But extraordinary things happened within Japan's nuclear industry in 2006. The drama began with Toshiba's take-over of Westinghouse (WH). On 26 January 2006, Toshiba was chosen by British Nuclear Fuels Ltd (BNFL) as the preferred bidder. Agreement was reached between Toshiba and BNFL on February 6th and the take-over was completed on October 17th. Marubeni, one of the original partners in the deal, later withdrew, leaving Toshiba to make up the difference. In the end, Toshiba paid the astronomical sum of $4.2 billion for its 77% stake in WH. The US-based Shaw Group and Ishikawajima-Harima Heavy Industries (IHI) were the other partners, paying $1.08 billion (20%) and $162 million (3%) respectively. The total purchase price of $5.4 billion compares with $1.2-billion paid by BNFL for Westinghouse in 1999.
Since Toshiba completed its purchase of WH, events have unfolded at a dizzying pace. On October 19th MHI and France's Areva, both PWR makers, announced a strategic partnership. MHI also began negotiations with GE. Then, on November 13th, remaining BWR makers Hitachi and GE announced a partnership which effectively merges their nuclear businesses. One could be forgiven for thinking that the waves from the reorganization overseas had finally reached Japan. However, that would not necessarily be an accurate interpretation of the changes that have taken place. The reorganization of the international nuclear industry was originally a move away from nuclear energy, a contraction of the industry. By contrast, the reorganization of the Japanese nuclear industry comes in the context of predictions of expansion, of a so-called "nuclear renaissance". This might sound like good news for the nuclear industry. However, as the Toshiba take-over of WH starkly shows, if these predictions turn out to be wrong, the losses will be huge. The current reorganization could actually prove to be very dangerous for the Japanese nuclear industry.
State of the industry
The shrinking market in Europe and the US meant that WH and GE were unable to win enough contracts to maintain their technological skills and they lost their ability to independently manufacture nuclear power plants. However, the situation in Japan is slightly different. In its 8 August 2006 report, New National Energy Strategy: Nuclear Energy Nation Building (hereafter referred to as Nuclear Nation Building), the Nuclear Energy Subcommittee of the Advisory Committee for Natural Resources and Energy explains the situation as follows:
"Because construction of new [nuclear power plants], albeit few in number, has continued, Japan's manufacturers have an overwhelming advantage in technology for design, manufacture and construction and there is a strong industry base capable of supplying the supporting core components." (p.24)
The report continues:
"However, in regard to domestic and international market strategy, because hitherto the focus was on the domestic market, the response to the international market has been slow, and the reality is that international recognition of reactors developed by Japan is not high."
Consequently, Japanese makers seeking to expand internationally team up in various ways with foreign companies that already have brand recognition. Having taken over WH, Toshiba still hopes to continue its cooperation with GE in order to win US orders for ABWRs (Advanced Boiling Water Reactor), which it developed jointly with Hitachi, GE and BWR users such as Tokyo Electric Power Company. MHI's partnership with Areva includes joint development of medium-size reactors and in October it also began discussions regarding cooperation with GE, including a joint tender to uprate the power output of the Laguna Verde BWR in Mexico. According to Denki Shimbun (15 November 2006), it is also keen to gain GE's cooperation in obtaining license approval in the US. Apparently the idea is for MHI to manufacture major components for contracts won by Areva, while GE takes responsibility for license negotiations. Meanwhile, it is expected that a contract effectively merging the nuclear businesses of Hitachi and GE will be formally concluded around June 2007. Hitachi and GE will jointly invest in new companies in Japan and the US. The American company (GE 60%, Hitachi 40%) will aim to win contracts in the US, while the Japanese company (Hitachi 80%, GE 20%) will fabricate the major components.
This all sounds very positive, but the prospects are not necessarily as bright as they seem. The first problem is that breaking into the international market inevitably entails the risks associated with developing new reactor types. Japanese companies independently developed the US-APWR (MHI) and the AB1600 (Toshiba), because they wanted to avoid the license problems associated with joint development with GE and WH, but there is no guarantee that these designs will ever be taken up. In regard to development of a next generation light water reactor, while the Ministry of Economy, Trade and Industry (METI) acts as number one cheer leader, the nuclear power companies are unable to provide the leadership that they did in the past. Instead, as METI admits, "Plant makers will play the leading role." (Nuclear Nation Building, p. 92)
In fact, integration of the industry was one of the original objectives of development of a Japanese third generation reactor. There were questions about the need for three Japanese plant makers. Efforts to integrate the three companies' nuclear businesses have waxed and waned over the years. In February 2002, with a view to fielding an all-Japan team to export nuclear reactors to Vietnam, MHI, Toshiba and Hitachi formed a joint consultative committee on Japan-Vietnam cooperation within the Japan Atomic Industrial Forum. Also in February 2002, MHI and Hitachi agreed to cooperate on basic technology common to BWRs and PWRs. The final area where integration was contemplated was development of a third generation reactor, but the reorganization of the nuclear industry has thrown all this into confusion. The upshot will be that next-generation versions of both PWR and BWR will have to be developed. This will place an additional burden on each of the companies.
Component manufacturers, which according to Nuclear Nation Building form "a strong industry base capable of supplying the supporting core components", are also facing difficulties. Many have already gone bankrupt and others have withdrawn from nuclear manufacturing, complaining of low returns and the specialized nature of the orders (Nihon Keizai Shimbun, 14 January 2005). This trend is likely to continue if increased competition between plant makers leads to further demands for cost reductions. And mass retirements, which are expected in the near future, will shake the foundations of both plant and component manufacturers alike. So on closer inspection, before getting too carried away by the juicy offerings from the international nuclear power market, a strong dose of caution is in order.
International and domestic demand
(a) Europe
The 28 December 2006 edition of Denki Shimbun carried the following headline: "ABWR a candidate for new nuclear construction in Britain / business opportunity for Japanese companies". The article continued, "Some British nuclear industry leaders have high hopes of Japanese companies. One such leader said that he hopes Japanese nuclear plant makers will bring components manufacturers with them and build factories in Britain. If this happens, Japanese plant makers will be able not only to sell nuclear power plants in Britain. They will also be able to use their British factories as a base from which to enter the European market." While it is true that the UK government is favorably disposed towards nuclear power, it is not the government that will pay for new plants. That will be left to the nuclear power companies. But where is this demand for Japanese nuclear plant makers which will bring parts manufacturers with them and build factories in Britain coming from? Demand in Europe is virtually non-existent, so these comments should be seen for what they are: a classic case of counting your chickens before they hatch.
(b) Russia
The top page of the 1 January 2007 edition of the Yomiuri Shimbun said that Russian state-run company Atomprom is seeking to link up with Toshiba and IHI to develop the nuclear power industry in Russia. If a tie-up is agreed, the Japanese companies will manufacture and supply steam turbines and generators to Russia. The scenario being considered is very similar to the UK example, only in this case Russia would become a base from which to expand into countries of the former Soviet Union. A more realistic assessment is that this was a typical New Year's day article, with lots of congratulations, but not much substance.
(c) China
On 16 December 2006 China selected WH as preferred tenderer for four AP1000 reactors. That will be pleasing news for Toshiba, but the lack of resolution of nuclear safeguards issues between China and Japan might force WH to look elsewhere for component fabrication. Originally WH intended to source components from MHI, but according to Platts Nucleonics Week (14 December 2006) MHI might be replaced by South Korea's Doosan Heavy Industries & Construction Co. Ltd.. WH's deal with China came after demands for major cost reductions and technology transfer. Even if WH produces the first four reactors, China will build subsequent reactors itself. Moreover, in the words of Denki Shimbun, "Depending on the technology transferred by WH, it is possible that Chinese companies, having mastered AP1000 technology, will flood into the newly created world market." (19 December 2006) These conditions appear to have frightened off Areva, WH's main competitor in the bidding.
(d) US
That leaves the US as almost the only possible foreign market. The nuclear power companies there appear to be dancing to the tune of the Bush administration's nuclear-first policy. However, after the Democrats' win in the mid-term elections, banks began to squeeze credit for new nuclear construction. In fact, Wall Street didn't wait to see the outcome of the elections. It was skeptical about nuclear power well before that. In its 10 July 2006 edition Business Week pointed out that informed investors knew that the incentives on offer for new nuclear construction were insufficient. Nuclear power companies are asking the states for additional incentives, but this just puts these states in an embarrassing position.
(e) Japan
It would seem then that the reorganization of the Japanese nuclear industry, premised as it was on an expanding international market, is on shaky ground. But there are also other problems. Hitachi is now facing compensation claims associated with damaged turbines at the Hamaoka-5 and Shika-2 ABWRs (see NIT 113 & 115). On December 26th Chubu Electric and Hokuriku Electric sought consultations with Hitachi regarding the cost of repairs and loss of income incurred because of the need to make up lost capacity using thermal and other power plants. This case illustrates the point that the relationship between power companies and makers has changed. The days of ever-increasing electricity demand are over and liberalization of the electricity market has made power companies more cost conscious. When old reactors are retired, replacements will not necessarily be nuclear and there is no guarantee that power companies will buy any new-generation reactors that might be developed.
Conclusion
Future generations will probably conclude that the industry should have contracted gracefully when it had the chance.
By Baku Nishio (CNIC Co-Director)
