Data Center Demand Drives Growth in Power Equipment Market… Delays Feared Ahead of US Midterm Elections

This goes beyond simply replacing existing facilities, creating large-scale demand linked to the construction of new power plants. This change is a major factor significantly boosting sentiment in the power equipment market.

Particularly, project delays are occurring even in Republican strongholds, putting downward pressure on investment sentiment across related industries.

A decline in the exchange rate directly impacts the performance of power equipment companies. Without guarantees of the won/dollar exchange rate rising again, there is concern that the won-denominated prices of future orders could decrease. This leads to worries that profits might peak out and decline in the short term, exacerbating market instability.

The current power equipment market is a supplier's market where the market size far exceeds supply capacity. Especially for extra-high voltage products, technological entry barriers are high, limiting the number of manufacturers, and Korean companies hold top-tier global market shares. Korean companies have successfully absorbed the market segments previously abandoned by European and Japanese companies, securing a solid competitive advantage.

The global power equipment market players are segmented by voltage level. Korean companies are strong in the extra-high voltage market, while global companies like ABB, Schneider Electric, Siemens, and Eaton lead the replacement market for medium and low-voltage power equipment used in data centers and factories. Domestic companies maintain a high share, particularly for extra-high voltage items in the US market.

Despite exchange rate fluctuations and external headwinds, the power equipment cycle is likely to continue. In Korea, large-scale domestic demand, such as the three mega-projects, firmly supports the market. Even under extremely negative scenarios, if domestic demand remains robust, the growth cycle of the power equipment industry is expected to last longer than currently anticipated.

The technical difficulty of extra-high voltage products is very high. As the voltage increases, such as 345kV and 765kV, the number of companies capable of manufacturing them decreases significantly, and the required quality level is also very high, leading to higher unit prices. Consequently, the extra-high voltage market operates as an oligopoly dominated by a few companies.

In particular, there are active attempts to replace sulfur hexafluoride (SF6) gas, which has a high greenhouse gas emission coefficient, with eco-friendly insulating materials. The certification and launch of these new products are drawing market attention. Key domestic companies like HD Hyundai Electric, LS Electric, and Hyosung Heavy Industries are leading technological development in this area.

The use of Chinese products in critical national infrastructure like power grids is an unacceptable security issue in the United States. Although some Chinese products have been used for limited purposes, such as equipment around data centers, they are virtually excluded from core power grid facilities. Due to concerns about the security vulnerabilities of power equipment that include communication and remote control functions, it is judged that a competitive dynamic with Chinese products does not even exist in the market for key items from major US corporations, utilities, and big tech companies, where Korea focuses.

Rare earth elements are used relatively little in the production of power equipment. Rare earths are mainly used in permanent magnets for generators or motors, but materials like copper and silicon steel sheets are used more extensively in major power equipment such as circuit breakers and transformers.

In power equipment sector investment, three transformer-related stocks are most preferred. HD Hyundai Electric and Hyosung Heavy Industries are consistently performing well based on solid orders, while LS Electric is seeing company-wide performance improvement due to a surge in short-lead-time orders from the big tech sector. These three companies have a strong order base guaranteeing profit growth for the next three years, making all three almost equally top-preferred. Particularly, the margin improvement of LS Electric and Hyosung Heavy Industries is positively evaluated.

LS Electric, HD Hyundai Electric, and Hyosung Heavy Industries, while having some differences in their traditional business areas, are increasingly seeing their domains overlap. These companies are engaging in competitive collaboration, expanding the market by crossing over into each other's business areas. This trend is expected to drive the overall growth of the power equipment market.