Crowded and Competitive

Looking in from outside, the market for diesel generator sets below 1,500 kVA can appear quite attractive and barriers to entry may initially appear low.  

• The opportunity is huge. 

• Technology is well established. 

• And assembling generator sets, particularly smaller units, is not a complex engineering exercise.

Because core product margins are usually tight, it's a business where economies of scale are king.  

Success isn't achieved simply by having the best product.   It's more often accomplished by commercial factors and the business model adopted. 

High Competitive Intensity

There is a high level of competitive intensity at lower power ratings and this is where most competitors are concentrated.  Premium global players jostle alongside aggressive, low cost, regional manufacturers.  And this competition becomes stronger the lower the power rating.  

The labor element in assembling a small generator set is actually quite small.  Most of the product's cost is tied up in components, especially the engine.  And this means that players who can source competitively and flexibly can gain an advantage.  

Many smaller regional producers take a very flexible and reactive approach to component sourcing, shopping around for lowest cost components, quickly taking advantage of exchange rates and deals.  And because competition is so fragmented at lower ratings, a producer assembling only a few thousand units a year can secure competitive terms and pricing from major component suppliers. 

Larger, more structured producers often lack this level of flexibility, with more rigid processes and system / support issues to manage.

Differentiation is Difficult

Because there are only a limited number of core component suppliers, many producers of generator sets sell products with identical core components, particularly engines and alternators.  At lower power ratings, for many customers the brand of engine in a generator set is a big decider.  And this commonality of core components also makes it easier for buyers to switch from one product supplier to another.  

While premium global players work hard to develop and grow their own brands, low cost regional players often piggy-back their marketing on the strength of the engine brands inside their products and they lean on the aftermarket support network of the engine supplier.

Although there is some scope for producers to capture value on package design, for example enclosures, there's a ceiling to how much price can be captured for it.  This makes product differentiation difficult and often pushes lower cost producers towards price disruption to grow their business.  

Services

It's often difficult to be profitable from sales of generator sets alone, particularly at the lowest ratings and with this in mind, premium and many midmarket players have invested heavily in services around generator sets:  parts sales, service contracts, extended warranties, often supported by the use of telematics for remote monitoring and analytics.  

The challenge for growing this service business is that in most of the world's major markets, diesel generator sets are used lightly and so require little maintenance: globally, 60% of units below 1,500 kVA operate for less than 500 hours a year, and in North America, this is as high as 85%.  Producers of diesel generator sets often market services most actively to sectors like rental or construction where there is heavier usage or to critical applications where risks and costs are substantial in the event of product failure during a power outage.  

In regions where there is higher usage of generator sets, for example in Africa, producers compete with a large number of independent or self-employed service agents supporting generator sets at lower cost than distributors and using will-fit parts. 

Fragmented Customers

Unlike the market at higher ratings, where specific customers are often identifiable and can have entire marketing plans exclusively devoted to them, at lower ratings there are a vast number of buyers and a multitude of market sectors and applications.  

There are a few large purchasers, for example telecoms operators or rental fleets but most customers are often small businesses and difficult to find.  There is a high level of fragmentation by applications, needs and geography. 

Opportunities are widely spread, difficult to identify and buyers are likely to be infrequent or reluctant purchasers.  

This means that producers need to establish broad distribution coverage and most marketing activity is geared towards bringing customers to distributors.  This is a difficult and time-consuming exercise and can take years to achieve.  Once established, these distributors stock, sell and support all through the buying process and quickly become the eyes and ears of producers at local level.  

Producers that succeed in developing broad distribution coverage can open the door to almost unlimited growth opportunity.  But those that don't will quickly find their business bumping into a ceiling and confined to what they can sell locally around their own premises.