In September of 1989, Mr. Al
Tanton, President of Itek Engineering, West Royalty, PEI, reflected
on the events of the last twelve months. He had successfully secured
a manufacturing license from Elge Heat Exchangers of Sweden and
distribution rights from Naval valves of Finland and ISS Heat Meters
of Denmark. Al was pleased with the joint venture relationship with
each company and the quality of the products, but now he faced
decisions about the future operations of his
Itek Engineering was founded in
1988 to manufacture, distribute and service some of the key
components of district heating systems. The founder, Mr. Al Tanton,
had been a consultant to contractors, engineers and other clients in
the fields of metallurgy, welding and design of quality control
systems for the manufacturing of pressure vessels. In recent years,
he had been active consulting on district heating projects because
the construction of a district heating system involved specialized
welding and the use of pressure vessels.
This case was
prepared by Professor Timothy Carroll of the University of Prince
Edward Island for the Atlantic Entrepreneurial Institute as a basis
for classroom discussion, and is not meant to illustrate either
effective or ineffective management. Some elements of this case have
Copyright © 1991,
the Atlantic Entrepreneurial Institute. Reproduction of this case is
allowed without permission for educational purposes, but all such
reproductions must acknowledge the copyright. This permission does
not include publication.
This work led him to be in
contact with a number of district heating component suppliers
including Elge, Naval and ISS. The idea of becoming a distributor
for each had been discussed, but never really progressed until Elge
began to experience difficulties with its North American
The units that were being
assembled by this manufacturer were not passing inspection by the
PEI Department of Labour which administered the Boiler and Pressure
Vessels Act. Elge hired Al as a consultant to go in and act as a
troubleshooter on the failed inspections. Al supervised the welding
and assembly of the heat exchangers on their behalf and his work was
Elge officials were impressed
with Al's expertise and knowledge of district heating systems and
welding. They also knew that Al's consulting activities provided a
lot of contacts that could prove to be useful as they entered the
North American market.
Elge calculated that it was
less expensive to license sub-assembly in Canada than to establish
their own operation. Mr. Tanton informed Elge that he was interested
in the opportunity, but did not have the financial resources to
start up a manufacturing facility for heat exchangers. Consequently,
Elge offered financial support in the form of collateral and payment
terms. This, combined with local government assistance programs, led
to the establishment of Itek Engineering.
Naval and ISS immediately
initiated discussions with Itek regarding distributorship
arrangements. Agreements with each company were finalized in the
summer of 1989, for distribution of all products and the assembly of
Elge heat exchangers.
The manufacturing operations of
Itek were based on specialization. An illustration of this was the
fact that Itek did not plan to hire local journeyman welders who
were trained in the conventional way. According to Al, a journeyman
welder was too independent and creative to follow the precise
quality control requirements of an Elge heat exchanger. He planned
to hire a technician who would operate a computerized welding
In its simplest terms, district
heating was the provision of heat from a central source and then
distributed to a number of buildings. This was quite different from
the conventional North American heating system where each building
had its own heating unit. In Europe, district heating was available
as a commercial service, much like a power utility, and anyone
within the geographic limits (usually 3 Ian) could be connected to a
central heating source.
District heating with steam had
been used in North America in the past. In the European district
heating system, water had been used as the heat distribution medium
over the last 40 years. The use of water provided greater economy in
overall fuel use and water was the only practical medium for
transmitting heat over long distances.
The water was heated in a
central boiler and distributed by underground insulated pipe to
various heat consumers. The distribution was a dosed two-pipe system
where hot water was pumped out to consumers and the cooled water was
returned to the boiler plant for reheating.
There were three major elements
in any hot water district heating system. They were:
- Heat consumer's equipment
which consisted of whatever heat distribution system they already
had for the building such as radiators, convectors or forced air.
The only change was the replacement of their existing boiler with
a heat exchanger like the one produced by Elge.
- Distribution system
consisting of pumps, meters, valves and insulated pipework
- A central heat system that
could be fired from off or any other fuel. In PEI, wood chips were
used as fuel.
The first installation in North
America of a state-of-the-art district heating system using water
was the installation at the University of Prince Edward Island
(UPEI) in 1985. Some of the benefits for UPEI included the
elimination of maintenance costs for several burners and boilers,
reduced fire insurance premiums, alternative uses for space where
burners were located and the elimination of liabilities regarding
above or underground fuel storage tanks. In addition, air pollution
was reduced because it is much easier to control emission from one
central unit than a number of smaller units.
The total capital cost in 1985
of the UPEI system was approximately $1,500,000. Half of this cost
was for the installation of a wood chip fired boiler unit and the
other half included the components and installation of the district
heating system. Approximately half of the district heating capital
costs were devoted to the specialized insulated pipe and its
installation. This pipe was purchased from I.C. Moore of Denmark.
The remaining $375,000 (approximately) was paid to cover the cost of
the items to be sold by Itek Engineering including heat exchangers,
control valves and heat and flow meters.
According to one analysis done
by the PEI Energy Corporation, the energy savings to UPEI as a
result of the district heating system, were approximately $110,000
per year since 1985. The savings came from the increased efficiency
of distributing heat with water and the lower cost fuel. As the
price of oil increased, the savings from the system
The energy crisis of the
mid-seventies marked the beginning of sustained interest in North
America in alternative energy sources and systems. District heating
with steam was designed in North America when energy was considered
to be limitless, therefore, little consideration was given to
thermal efficiency. The European concept of using water and heating
a number of buildings from the same source had continued to attract
interest because of its economic and environmental
The typical prospects for
district heating systems in North America included both public and
private sector institutions, although public institutions seemed to
be leading the way The typical prospect usually invested in district
heating when new construction was involved or when existing systems
had become unworkable. Consulting engineers were usually involved in
recommending district heating. A good example were the Canadian
prison facilities which were outdated and in need of repair,
therefore Public Works Canada was considering the district heating
Al Tanton had worked on the
UPEI system as well as other Island systems that had been installed
for buildings in the Charlottetown area. He knew there was a growing
interest in district heating in North America because of the number
of orders and inquiries he was receiving from consulting
When Itek first started
operations in 1989, it had firm orders for fifty-seven Elge heat
exchangers at a value of $230,000. In addition, $90,000 worth of
heat meters and Naval valves were being ordered. This was to fill
one order from Public Works Canada for installation at the
Springhill Minimum Security Prison in Springhill, Nova Scotia.
Public Works Canada indicated that the Springhill project was a
pilot project. If district heating proved successful there, they
planned to begin converting all prison facilities across Canada to
district heating over the next five to ten years.
The City of Minneapolis,
Minnesota had already started a major district heating retrofit.
They indicated that they had installed plate type heat exchangers
and they were now leaking. They had seen Elge heat exchangers in
Sweden which did not leak. They indicated they would place orders
with Itek as soon as Itek received their ASME-U1
In addition, Itek had received
inquiries from a number of U.S. based consulting engineering firms
who were involved in heating projects in Chicago, Detroit, Newark,
Boston, Oregon and Minnesota.
Officials from the PEI Energy
Corporation who were spearheading district heating in PEI indicated
they needed seventeen additional heat exchangers along with
necessary valves and heat meters for upcoming projects in
District heating was-Itek's
primary market, but Mr. Tanton knew from his experience with the
pulp and paper and mining industries that the valves and heat meters
might have applications in those industries also. This was confirmed
by Naval and ISS marketing personnel. However, he was not anxious to
pursue those markets right away because he had all he could handle
in the district heating market.
1ASME-U Specifications for pressure vessels in
Canada were administered by provincial government departments under
legislation similar to the P.E.I. Boiler and Pressure Vessels Act.
In the U.S.A., regulation of pressure vessels is conducted by the
American Society of Mechanical Engineers (ASME). No pressure vessel
can be sold by a company anywhere in the USA unless their plant and
quality control procedures were inspected and approved. This was
signified by an ASME-U stamp. Al was familiar with their regime and,
in fact, he had just completed a consulting project in Nova Scotia
for a firm that was awarded ASME artification. Al estimated the
process would take 6-12 months and cost Itek approximately
Elge was a relatively small
company located in Linkoping, Sweden and employed about 110 people.
It was bought by the giant conglomerate ASEA-Brown-Bavaria in 1985,
and later sold to the management of the company in
The Elge heat exchangers soon
became the leader in the district heating market in Europe by virtue
of a technological breakthrough developed in 1980. Prior to 1980,
heat exchangers were either plate type or tubular bundle type. The
plate type consisted of layer upon layer of copper plates that were
separated by seals. The tubular bundle type consisted of a circular
bundle of copper tubes.
The plate type had the
disadvantage of leaking after long periods of sustained use at high
pressure and high temperatures. The tubular bundles were limited
because of the number of tubes that were required to achieve
capacities of heat exchange necessary for district heating. Elge
developed the idea of constructing the "battery"2 with
copper tubing that was wound in concentric
This relatively simple
principle eliminated any leaking by eliminating the need for seals
and greatly increased the capacity. One Elge heat exchanger that was
approximately five feet high and two feet in diameter had the same
capacity of ten tubular bundle type heat exchangers or of a boiler
that occupied a thousand cubic feet of space. See Exhibit 1 for
diagrams and promotional information.
The proposal to Itek included
North American marketing rights and a license to perform
sub-assembly manufacturing. The battery or tubing works were to be
shipped to Itek and Itek was
2Battery is the term used to describe the internal
system of insulation and copper tubing in a heat
responsible for forming the
casing around the battery and welding the top and bottom to complete
the heat exchanger. Elge assisted in the financing of Itek by giving
them all the equipment except for a computer assisted welding
machine. They provided promotional materials in both English and
French and offered to train both manufacturing and sales personnel
that were hired by Itek
The projected gross profit for
heat exchangers was 40% of sales. Elge had strict rules against
price cutting. They said 'When we have to cut prices to make a sale,
then it's time for us to go back to our shop and develop better
Naval OY was also a relatively
small company with about 100 employees. It was located in Laitila,
Finland and produced welded steel ball valves for district heating
and other high pressure applications. See Exhibit 2 for
Although ball valves are not a
new idea, the unique design of the Naval ball valve gave it several
advantages over other ball valves and the more commonly used "gate"
The key advantage of the Naval
ball valve was its relative cost. For example, a standard 3" ball
valve was sold to customers at $340.00 which compared favourably to
a standard gate valve which sold for $550.00. Exhibit 2 shows that
the Naval valve does not have flanges like gate valves for
connecting it to pipes. The Naval valve was designed to be welded
directly to the pipes which it controlled. This unique design
feature combined with the low price allowed the valve to be a throw
away when it eventually became dysfunctional.
The most common malfunction of
a valve was when it began to leak. Gate valves have to be removed
and repaired thereby requiring users to stock a supply of
replacement parts. The Naval system of simply replacing the valve
lowered inventory costs and reduced downtime for
The unique stainless steel
construction combined with the flexible joints that sealed the ball
tightly in place, regardless of whether it was opened or dosed, were
important features. These features extended the useful life of the
valve and reduced problems of leakage and seizing under high
Naval signed an agreement
giving Itek exclusive distribution rights for Canada at a price that
would return Itek a margin on sales of approximately 40%.
Distribution rights were limited in the United States because
another company was servicing the oil industry there. Naval
indicated that when Itek was up and running with heat exchangers,
they were interested in a subassembly agreement with
Al indicated that this would
probably involve putting the handle on and painting the valve. Naval
OY agreed to advance inventory in the early stages of Itek with no
fixed payment terms until the company was on a more solid financial
ISS Electronics was a large
company based in Denmark with facilities all over the world that
produced and sold electronic products. It was one division of a
multi-faceted company involved in ventures that ranged from
management of large buildings in the United States to making parts
for the European automobile industry.
Itek had an agreement to market
the ISS Combimeter exclusively in Atlantic Canada as well as
territorial marketing rights in other parts of Canada and the United
States. The gross margin on Combimeters could range from 20% to 40%
depending upon the volume sold. ISS also paid an additional 5%
margin over the volume margins for accurate sales forecasts. This
was because they had installed a state-of-the-art "just in time"
production system which, combined with accurate sales forecast, held
the potential for significant cost savings.
The Combimeter was a meter
which measured the flow of heat and fluids electronically Unlike
conventional flow and heat meters, the Combimeter had no moving
parts and was much more precise than the mechanical alternatives.
See Exhibit 3 for illustration and details.
Mr. Tanton felt that there were
a number of significant selling points for the ISS meters that gave
them a competitive advantage over other market offerings. It was one
of the few types that allowed measurement of both heat and flow with
the same meter.
The 'black box' electronic
technology made the meter more accurate and less susceptible to
leaking and wearing out. If a problem did occur, then the computer
assisted servicing made repairs quick and efficient. All of these
features, combined with a competitive edge, led Mr. Tanton to
conclude that this item held great sales potential not only in
district heating systems, but also for use in the mining and forest
Al reflected on the events of
the past year. He had successfully established his own business
despite his limited financial resources. The equipment from Elge
(approximate value $70,000) provided him with an equity base. He was
able to secure a working capital loan of $100,000 from a local
development agency on the strength of his sales orders and the
equity base provided by the used Elge equipment.
Both Elge and Naval had been
particularly supportive by agreeing to accept payment for their
components after Itek was paid for fulfilling the initial orders.
ISS was not as cooperative and they were also pressing Itek to take
on a $20,000 parts inventory for servicing their meters. This was
not Al's only problem with ISS.
He had installed their
electronic meters, but he had never serviced them. They had
instituted a 'Just-in-time' production system, therefore, the margin
they allowed was affected by the accuracy of Itek's annual sales
forecast for meters by type and size.
All of the companies agreed to
help Itek with it's marketing and sales effort by providing
promotional materials, leads and technological training for sales
staff at their head offices. Although prospects initially were
promising, Al knew that follow-up was needed if his present contacts
and leads were going to generate sales contracts. To keep costs
down, Al planned on himself and one helper as the only employees for
the first year. Al sat down to sketch out a general plan of action
for the upcoming year.
Naval OY Steel
body of the valve is completely welded.
carbonized PTFE-seals are long-lasting against rough use,
unpurities and chemicals.
high quality plate springs pressing the seals against the bell
guarantee that the bell valve works won at high
round, polished stainless ball ensures that the valve will work
perfectly for years.
flexible joint between the bell and the stem allows the bell move
smoothly against the seals regardless the
blow-out proof stem Is safe. It the stem seals are damaged
leakages will be negligible.
double O-rings at the stem need no servicing. I
long stem and round appearance sake It easy to insulate the
strong handle design allows plenty of room for hand between
Insulation end the handle.
Naval-ball valve is light and easy to use. There are no heavy and
WELDED STEEL BALL VALVE:
district heating. networks oilpipes. pressure air pipes. and oxygen
free water pipelines.
WELDED BALL VALVE OF
ACID-RESISTANT STEEL: process pipelines acids. alkalies, row water
and water with oxygen.
- Flow meter. built on the
- No moving
- Small pressure
- Complies with the
requirements of PTB and SP (West Germ . d Swedish testing
authorities for flow and energy meters).
The Flow Transducer Type FT 50
is an electronic volume meter which in connection with temperature
sensors and on integrator can be used for measuring energy
consumption In hot water hosting systems.
The Flow Transducer is applied
as an alternative to mechanical host metering.
The flow metering principle Is
based on Faraday's Law of Induction, whereby the now measurement Is
carried out without any moving parts.
The Meter Consists of Two
1) Flow Unit
The flow unit measures the
volume of water flow and transmits the measured values to on
integrator by means of signal pulses, where each pulse corresponds
to a flow of 100
The power unit provides the
flow unit and the connected integrator (if supplied) with the
required voltage. Two fight diodes Indicate connection at mains
voltage and measurement of now respectively.
The flow unit is mounted either
in the pipe or in the flow pipe. The unit is supplied with 65 or 80
mm flanges according to DIN 2535 / BS 4504 which can be mounted
vertically or horizontally. Straight pipe sections before and after
the flow unit are not required. Isolating valves should always be
installed before and after the flow unit. The flow unit should
always be installed, so that there is room for removing the cover.
The power unit is connected to the mains. Connection should be
effected to an independent group, i.e. a supply which is usually not
The power unit can be remote
mounted from the flow unit.
The flow unit is factory set to
transmit one pulse for each 100 litres of water flow. The flow unit
can optionally be supplied with 12.5. 25 or 50 litres per
The flow metering tube is of
stainless steel with polysultone insert.
Flange connection of cast iron
PN 25. Housing of pressure die-cast silumin.
The unit contains a
transformer, an hours-run counter, m3-counter and two
light diodes. The housing and cover are made of ABS plastic
Insertion for Cables
PG 13.5 with tightening rings.
PG 7 with
Connection from Flow Unit to
3 meter cable, which on
ordering can be changed to max. 100 meter at an additional