Lessons Learnt From A Lost Order In1994 – OpEd
The Client was a very successful Turkish businessman, second generation industrialist, owning and operating the biggest private Turkish Iron & Steel Mills in Istanbul, where he was/still is fabricating steel rebars for the construction industry. He was educated in Robert College in Istanbul. Below is my story (or detailed report) of my years in 1994 trying hard to sell industrial size Heat Recovery steam boiler(s) to the Client, but in the end we failed due to unnecessary third party company politics.
Your writer brought together a number of past “Minutes of Meetings” which were depicting a period of more than one year. You will read business minutes one after another, with some very dull/ some too technical/ some too complicated in details, but we hope that in the end it will give you an inside feeling of international corporate life. Dates/ times/ places are real, although we tried to keep our Client anonymous.
On 8th September 1994, we (your writer and our Expatriate JV General Manager) on behalf of USA Parent company were invited to have a meeting with The Client in their Istanbul head office upon our request and deliver the USA parent company invitation letter to North American offices, to enable him and his staff to visit our USA fabrication and site installation facilities.
Prior to this meeting we had the opportunity to speak with his Project Manager for the latest status. He explained that The Client has already placed an order for two each gas turbine GE Frame-9E and one each steam turbine to have S209E GE combined cycle combination. The HRSG is to be purchased now. The interested parties were Noother/Ericson, Deltak, Vogt, SBB, Ansaldo, CEI/Italy, Standardkessel, AE&E/Austria, CMI/Belgium and B&W. Some of them already delivered preliminary budget configurations and 3-4 of them have had comprehensive discussions regarding their offerings. Our USA parent company was also in their prequalified vendor list.
In the meeting that followed with the Client, his Deputy General Manager in charge of Energy also joined us. They explained the history of the project. In order to be free from electricity interruptions and high electricity tariff prevailing, they wanted to purchase one simple cycle GE Frame-9e just sufficient to cover their requirements. Public authorities pressured him to change it into combined cycle, so they then investigated to purchase the necessary Steam turbine and the HRSG. Due to economics of scale, two gas turbine plus two HRSG plus one steam turbine (S209E) were very attractive in unit US Dollar per KW price compared to smaller size, 1GT+1HRSG+1ST combination.
This time they faced with the danger of unavailable natural gas supply from Russia. Algeria natural gas was already allocated for other local clients purchasers. Middle East supply prices were relatively expensive. Central Asia could not be reached in near future. Therefore they also investigated other fuels to be fired in the gas turbines. Other than natural gas and distilled oil, they also required their GT supplier company to install necessary equipment to fire heavy fuel oil (#6) in gas turbines. Because of growing lack of confidence in natural gas supply from Russia, it was required to have the HRSG(s) with fuel oil nr.6 handling capability as the major fuel not only back-up.
They also were investigating how to purchase a good, reliable, economically priced HRSG (heat recovery steam generator) in very short period of time. The HRSG time table was to be before the arrival of the selected steam turbine to The Client site in Istanbul which was scheduled by the end of June 1995.
Here were the major issues discussed in our meeting to be resolved:
– Could our USA parent company design and manufacture an unfired HRSG capable of handling the exhaust gas coming from Fuel oil NR.6 firing GE Frame-9E gas turbine? Any references?
– Do we have any other USS HRSG supplier reference?
– European suppliers warned them that in natural circulation design HRSG, it was very difficult to clean the soots in the boiler since they accumulated and could not be cleaned easily whereby in forced circulation soot blowing and water washing was easy from top. We believed that there was no sense/ no reasoning in this warning but anyhow we had to clarify in written that Natural circulation was also suitable while fuel oil NR.6 is fired in gas turbines. Our North American references were to be investigated.
– Manufacturing and site installation of the selected HRSG in Turkey. The Client disclosed that other suppliers advised them 35,000 man-hours (in North American or West European standards) to be spent for one each HRSG. If they pay 3 US$ per man-hour bare cost to their workers whereby the North American per man-hour was too high around 50 US$ per mh. Therefore it was more economical to make the fabrication in Turkey as long as it was certified. That means they had no objection for fabrication in our Ankara plant. We could also reduce the cost for local supervision on local fabrication.
– This was discussed with much interest. They reiterated that it was not their intention to get involved in boiler business. Their intention was to receive the lowest cost for the best available quality.
– Labor productivity was also a major issue. If an European company manufactures one HRSG unit in 35,000 MH, the same could be handled in The Client machine shops maybe twice as much. We estimated almost same productivity in our local fabrication workshops for similar fabrication. However US Parent company advised tentatively to spend approximately 13,000 North American man-hours for a modular type one similar HRSG for the same purpose.
– Conceptual design of the power plant was to be carried out by the nominated GT supplier company. Detail engineering would be handled by an A/E (architect/ engineering) consultant company in North America. HRSG Engineering should be done in North America. Our US parent company should handle all necessary design and major engineering. The Client prefers a ready-made off-the-shelf design to reduce the engineering cost. We explained that our HRSG design was ready-make modular type, and a marginal additional engineering activity was required for the new applications.
– They were looking for a Hybrid-Contract to reduce the cost. Cooperation and/or partnership was expected. They did not intent to make formal tender, but wanted to select one company for intense discussions and business negotiations. Our local Ankara shop fabrication was preferable since we had the necessary boiler fabrication facilities, ASME stamp, experience etc.
– The Client wanted to carry out what they know best. It was manufacturing rod bars for civil construction. Therefore we would be of most interest to them if we could verify the relative cost savings..
– HRSG delivery schedule was extremely important. They had to finalize everything by the end of 1994. They needed everything to be delivered before the end of June 1995, since then Steam turbine would arrive to the site and they had to deal with site installation of the steam turbine. Before the arrival of steam turbine, site installation of both two units of HRSG had to be completed at site.
– The Client preferred all seamless tubes. They were in Kentube/ Tulsa OK to investigate the fabrication, price and delivery conditions. They investigated also in Europe and concluded that seamless finned tubes could be supplied from Europe with the same prices as of welded type finned tubes supplied from North America. The Client had regular shipping between his Istanbul sea port and North Sea European sea ports in every 33 days. They were importing scrap steel for his plant and exporting fabricated rod iron to international markets. Their seaport facilities were underutilized. The price for shipping from North Sea European ports to Istanbul was 17 US$ per ton in year 1994. Whereby from North America they could not control the ocean transportation costs.
– Deputy general manager in charge of Energy requested a detailed list of fabrication tasks for the HRSG supply. Each individual task had to be identified with estimated time period. Estimated percentage in man-hours in the total scope to be identified. Not necessarily as pressured non-pressured parts but each individual task.
– They were pretty comfortable with the current performance of GT supplier in this project.
– Currently they had reached to generate 365-370MW electricity output in simple cycle. After completion of the current CCPP project, the next project was an extension with additional 220MW gas turbine plus necessary HRSG and the steam turbine to reach an overall capacity around 700 MW. They were also investigating the purchase of nearby electricity distribution within the privatization scheme.
– However they had not realized the electricity sell agreements with TEAS (Turkish electricity generating company), gas purchase agreement with Botas (public pipeline company). These were carried out by their Ankara office, not yet finalized, but expected soon.
– They were carefully watching the other development in the same field. Enron, Unit etc. However they would like to follow good examples and avoid the mistakes made by others. However they presume that at that time they were the front runner and they were uncomfortable of being the front runner.
– They feel that there might be in no need for a flue-gas diverter valve. If it was necessary then the whole unit might be shut-down.
– They needed 2-3 weeks more to receive the latest tender documents, design parameters as prepared by Nominated GT Supplier Company and GT supplier company was going to sublet this activity to an A/E company. Short listed companies were Stone & Webster, Black& Veatch and CRS Sirrene Engineers (SC). Fine blue prints of the power plant would be prepared by the selected A/E Company later in time.
– The last final proposal would be requested by October 1st with a bid deadline of October 21. We recommended that US parent company would prepare the final proposal documents and sublets all fabrication and local site installation works to local JV in order to offer a reasonable economical and competitive priced offer. The Client said that they had no doubt about the reputation of our US parent company in boiler business. The Client would receive the proposals and they would like to negotiate with only one reputable company and hope to finalize the order in a very short period of time. Therefore it was requested to quote with the least price with no additional negotiation margins since there might be no chance to negotiate.
– Other vendors had offered proposals and had detailed discussions technical and commercial based on known conditions of a S209E system. They should only need to modify and finalize their proposals in early October. We should utilize the time before October 1st to prepare ourselves to have joint proposal.
– We asked whether they would be interested to come to North America and visit Barberton and/or West Point. They explained that they had been to many HRSG fabrication facilities and they had enough site excursions. They were in Monsanto plant. They were not interested in any more visiting. Our Expatriate GM presented the invitation letter in written. They accepted the invitation and thanked.
– We have been informed that GE is to guarantee the overall performance of S209E configuration. Therefore they are drafting the necessary conditions for the HRSG suppliers.
– Additionally they were investigating the applicable sea water suction pumps from deep sea water at constant 15 degrees Celsius temperature. Necessary sea water suction is 20,000 m3 at 3 atu at the end of the offshore pipe line of 1.5 km. Diameter of the pipeline is 1,75meters. 6 meter deep-sea elevation existed. This is an additional request by The Client to be handled in friendship understanding. Action needed by USA from Engineering Contracts.
– Since the Client had a seaport with 30,000 ton per day loading/unloading capacity which mean 10 billion tons per year. Therefore 50% efficiency means 4-5 billion tons per year. The Client was using 1 billion ton per year. That was a very appropriate location, infrastructure was completed but the facilities were underutilized.
– In order to utilize their sea port facilities, The Client was also interested in importing high quality imported coal and make additional CFB (circulating fluidized bed boiler) facilities. He asked us to furnish additional papers, documents on CFB for his personal information. That was not urgent. Action requested from our Expatriate JV GM.
– We believed that local partner’s support for fabrication and site installation estimation assistance were deemed necessary.
The meeting with Client in Istanbul on Sep 23, 1994
We had the opportunity to meet the Client’s senior staff in their Istanbul head office on 5th floor meeting room on September 23,1994 Friday afternoon between 14-16 hours. participants were their Deputy General manager in charge of Energy (Graduate of Brown University in USA, plus MBA), Project manager, former deputy General manager of Yarpet (Graduate of METU, chemical engineering), your writer (me), our Expatriate GM, Expatriate Project Manager from USA partner company
Their DGM explained the latest status of the project as follows:
Conceptual design and overall guarantees of the combined cycle are carried out by GE. Detail design by Stone and Webster (initially through UK office, then Boston office). Fuel is ash bearing oil (or fuel oil nr.6) plus natural gas. The retrofit on existing GT for fuel-oil conversion is currently carried out at site, the other started in fabrication plant.
HRSG soot cleaning is important, should be easy, with no interruption, flexible and simple. Initially they inclined to purchase only natural circulation design HRSG. But soot cleaning was an issue to be clarified. Preheating of boiler feed water was necessary in fuel oil firing. Seamless tubes from USA were expected to have 10-12 week lead time. There would be no diverter valve in the system. Take-out elbow would be removed after installation of HRSGs.
Their budget for turnkey scope as estimated for European suppliers was around 4 million US$. The serious parties were Italians with N/E and Vogt licensees, Standardkessel and Stein of France (later GEC Alstom). French and Italians were better in estimated lump sum prices. Our advantages were expected to be as follows
1. Expected economical price,
2. Shorter lead time,
3. Local close proximity. (Language, local response)
HRSG Pressure levels were 81, 7.6, 2.3 bars (1174, 110,34 psig). Competitors declared 33,000-37,000 MH in fabrication per HRSG unit. Our US parent Company estimates were 44,000 MH per unit, plus 1.5 factor for local fabrication. We also advised that Labor plus Overheads here were less than 15 US Dollars per man-hour versus 50 US Dollars per man-hour for Europeans.
We understood that The Client owned 100% of the company but had a rather democratic management. There were 3-4 senior managers to take the purchasing decision.
The advantages of having an order in The Client were specified as follows:
1. New and the first reference that size in Turkey
2. Reliable customer, no cash difficulty
3. First BOT (build- own- transfer) example in Turkey
4. Opportunity to work together with GE and S&W.
They were a cash-rich company- not geared up with big organization, they have limited bureaucracy, however in need of qualified technical personnel to handle the incoming works.
From order to testing, tentative HRSG lead time was expected to be 13 months plus 1 month for field testing. An accelerated schedule was under investigation. We expected to have less time for overall schedule. We would carry out fabrication and site installation. Drums were on the critical path (8-9 months). Sequencing the operation at site was important. Gas turbine was expected at site in June, site installation by October, and early operation in November.
Contract would be in private negotiation in their Istanbul head office with maybe no tender spec at hand.
We requested to meet with the Client once more on next Friday morning September 30,1994. Their DGM promised us to advise the confirmation on Tuesday. In that meeting we should deliver the latest accelerated schedule. This meeting would afford excellent opportunity for the Client to gain needed comfort with Expatriate PM and US PARENT COMPANY (USA).
The meeting with The Client in Istanbul on Sep 30, 1994
We had one more opportunity to meet with the Client and his senior staff in their Istanbul office on September 30,1994 Friday between 10-14 hours. Our agenda was to establish a mutual meeting between our Expatriate Project Manager and The Client and have further discussions on HRSG and if possible on future CFB for the same enterprise. Participants were Expatriate Project Manager for US PARENT COMPANY/ HRSG, your writer (sales manager, me) and our Expatriate General Manager,
The Client expressed their pleasure to see us again in his office. Our Expatriate GM explained that the reason to ask for a new meeting was in order to introduce our principal from US Parent Company in charge of HRSG to The Client since we had no opportunity for a direct contact in the last meeting.
That should be a sincere and serious indication of US Parent Company to work and serve for their Combined Cycle project. It should also indicate our repeated reinforcement for concern over their heavy oil firing requirements in their units. We also appreciated their best quality, best delivery and best price objectives.
The Client explained their current status. They would consume 840 million KW-hour in year 1994 and expect to consume 900 million kw-hour in the next year. By taking the averages, it was approximately 97 MW non-stop power consumption for his own plant.
They further explained that they have received the investment incentive certificate on Thursday (the day before Sep 30) from Turkish State Planning Organization to initiate the payment conditions, and today they paid the down payment to GT supplier company through their commercial banks. That would speed up activities in GT supplier.
He additionally complaint the Botas (Turkish Pipeline Inc. a public monopoly on natural gas distribution) policies that they are purchasing natural gas from former USSR for 76-78 US Dollars per 1000 NM3 and whereas selling to other domestic consumers for 120 US Dollars per 1000 NM3.
They also requested more information on natural circulation horizontal design HRSG in fuel oil nr.6 firing in Gas turbines.
Our Expatriate Project manager presented a paper expressing the Considerations for Oil Fired Flue gas in Boilers and HRSGs, Basis of our Oil Fired Experiences, Our Recommendations for Heavy Oil HRSG, and The Client HRSG Schedule (tentative)
The Client expressed that they would be more comfortable if we could handle overall delivery period less than 11 months. He advised us that we should work 4- shift workdays. That means 3 times 8-hour shifts per day and the 4th shift as interchanging for weekends to enable non-stop work for seven days per week.
Final contract would be as simplest as possible. With GT supplier it was 5 pages. He says that he is known as a hard bargainer but he does not enjoy bargaining either. The current project was a show case for GT supplier, and will be also interesting for us. We agreed. We expressed that we should handle the scope split between US and our local JV Company in internal agreements how to carry out the project. We were flexible to get the project done.
In the draft of the contract US Parent Company was to address necessary corporate positions that we need to address, plus project explanations etc. We would make world wide sourcing to deliver the best economical third party purchases.
Important Note: Writer does not recommend any attribution to third world and East European sourcing. Avoid.
The Client enquired any Software packages for I&C. Our Expatriate PM responded that it needs very simple package which can be incorporated within existing overall plant DCS system. We advised the architect of DCS system how to configure the HRSG I&C scope. No problem.
The Client disclosed that they have received a number of estimated proposals from North European (CMI/Belgium, Stein/France) and South European (Ansaldo or Belleli/ Italy) suppliers. These FOB proposals were well around 4.5 million US Dollars. With local the Client fabrication participation, it might be as low as 3 million US Dollars FOB basis.
The Client had also requested us to estimate a lump-sum figure for our proposal for 3 pressure level HRSG. Our Expatriate PM estimated maybe under FOB 5 million US Dollars per unit excluding site installation.
The Client asked the average proposal promotion period and estimated an average six-month period. He explained that the proposal promotion period would be too short in his case after he agreed to negotiate with a reliable and competitive party.
The Client told that the situation was quite encouraging on payment side but current uncertainties were discouraging. The Client was waiting for our final offer for the applicable HRSG.
Furthermore the Client said that they were ready to talk and discuss and negotiate. HRSG was on the critical path. It was the last and the most important piece in the combined cycle project. The steam turbine was expected to be at the site on June 1995. Site installation of ST was expected to be finalized in October 1995.
We might ask options from third party suppliers for accelerated deliveries and early purchase orders with pre-agreed cancellation charges. The Client Group had regular shipping schedule from Rotterdam every 35 days and from New York every 45 days.
His payments terms were preferably by irrevocable and confirmed letter of credit payable at the completion of the HRSGs, with no downpayment. That payment terms need cost of prefinancing while carrying internal penalty for late delivery case.
Our Expatriate PM estimated that it was too difficult to accept this payment condition without any downpayment. In GT supplier case, they were also receiving some sort of downpayment in order to initiate the activities at their head office.
The Client seemed like in non-stop negotiation on price, delivery and payment conditions for every instance and looking for any opportunity to take advantage. We had to bring the Combined Cycle project negotiation opportunity to closure, outlining what we must do in next two-weeks to secure negotiation, firm offer and meeting with Client before HRSG specs published. This was the window of opportunity presented to us by The Client.
We reached to the following internal conclusions,
Objectives for Combined Cycle, was to get confirmation for a meeting with the Client on Oct.14 to make firm offer to negotiate. Our Board Member would be in Istanbul in that period. We could ask his assistance in this project.
Actions for Combined Cycle Proposal
HRSG configuration 2×5 or 3×4 and proposal design engineering
Combining local fabrication plant, construction and proposal support by local JV
Appointment with the Client and us on Oct.14, 1994
Schedule improvement and finalization in our local JV office
Timing for Combined Cycle ;
Our proposal review on Monday October 3, 1994 at 14:00 hours.
A meeting with The Client tentatively on Oct.14,1994.
Our firm quote by Oct 10th.
Our Expatriate PM to firm up offer and firm schedule and to make necessary travel arrangements to be in Istanbul on Oct.14,1994.
On November 7th 1994, we called The Client’s PM who has recently returned from USA. He declared that in the USA, he had a number of meetings/ discussions to clear out disagreements. Energy balance of The Client Combined Cycle has not been finalized yet. A/E Company was responding quite slow. They had lay-offs, and GT supplier company was trying to make necessary engineering activities with limited number of engineers.
Functional specs were expected to be released by the end of November. Purchasing specs by early December. Optimization for both fuels was deemed necessary. The calculated HRSG was currently giving more steam which could not be absorbed with the selected GE steam turbine.
As far as we understand their PM has tried to specify certain parameters to be inserted into A/E company Specs to clearly disqualify us. He advocated “Vertical gas flow” in HRSG tender specification in order to disqualify our design. A/E agreed that “Vertical gas flow” is also possible in natural Circulation. He did not hide his personal promotion of Assisted Circulation HRSG design. It was clearly understood that he is unfriendly (even openly hostile) to our approach.
But we knew that this was not appropriate to existing The Client demand. On the other hand our local fabrication plant promised to deliver their shop fabrication proposal early this week. Furthermore local partner proposal department is expected to deliver their proposal sometime this week.
All these proposals were based on our 3×4 module natural circulation design assumptions. Moreover we believed that we should interfere the existing situation by more contacts with the Client himself.
DGM of the Client called me on December 12, 1994 and informed that they have received the tender specs from A/E Company recently. Specs are based on “Assisted Circulation” clearly. He asked me if we would be interested quoting an HRSG with “Assisted Circulation”. I told him that we should see the specs first.
He then asked me to send someone to pick up the specs from his office this morning since they did not have secretaries to handle the copying and/or courier activities. He called once again and asked to send the person late that afternoon. They were making copies of the specs (ten copies at least) to distribute to interested other parties.
The Client’s DGM explained that since they have lost time during spec preparation in A/E company, they would like to place the HRSG order this month in December in order to utilize tax benefits of the year end.
With the sufficient inside assistance from The Client staff, an interested European company might be ready to furnish the appropriate proposal before the specs are issued, so that they could deliver their proposal in December and carry out necessary negotiations in so unfavorable time period for Europeans.
The Client might also favor them otherwise they were not so open to disclose “Assisted Circulation”. A/E Company might agree on better cleaning when Fuel oil nr.6 firing, the Client might have local fabrication cooperation with the selected party. Maybe they already agreed on how to proceed.
In the end we were disqualified with “Forced draft circulation design condition” since we did not have that design to offer, so we regretfully wrote the following letter to their A/E company later that week,
Ankara November 30, 1994
to A/E Company,
Istanbul District Sales Manager
Subj: HRSG(s) for The Client Combined Cycle Power Plant in Istanbul Turkey
We have received information on the latest status of Ultimate Owner specs through our USA Parent Company head office. It is understood that it will specify forced circulation HRSG and will be released to Ultimate Owner this Friday. Then Ultimate Owner will send the specs to interested HRSG vendors. There will be two weeks to bid. Operation is scheduled for October 1995. Ultimate decision maker is interested in us and recently brought to GT vendor’s attention that this spec would eliminate our US Parent Company. Gas Turbine vendor stuck to their story that natural circulation, vertical tubes could not be backed up by them. However we understand that the senior consultant of ultimate decision maker instructed the gas turbine supplier specifically to set up their plant equipment for forced circulation and vertical gas flow, and that is what they have done. We have seen some other similar influencers in the past for similar projects where consultants were actively promoting some specific parties whatever the real purpose, but these specific promotions they were not in parallel with the interests of the ultimate client. Action taken is so hostile to one specific party and so friendly to other we do not know why. I am afraid that project will turn out to be “Sell and Forget” procedures of some foreign parties and ultimate client would not receive necessary local service and maintenance on time regularly. Anyhow whoever is responsible for the decision, and sorry to say but I am afraid the enterprise will learn the verification in due time shortly in not so easy way. These are for your information only, Yours truly,
Later in time, we had been advised that the HRSG order was placed to an Italian supplier with forced circulation HRSG design to avoid any soot in oil firing, although plant was operated with natural gas only, never with fuel oil, at all times since then.
“What you are doing does not matter so much as what you are learning from doing it.” Proverb From an Ancient Egyptian Temple.
Don’t count your chickens before they are hatched. /Turkish Proverb
Your comments are always welcome.