Western wind power companies hoping to benefit from China’s massive wind power expansion are losing contracts to Chinese turbine manufacturers.

By Rajesh Chhabara

There were hardly any worthwhile local wind power turbine makers in China five years ago when the country decided to aggressively embrace wind power to cut reliance on coal energy. Today, the country has a thriving wind power equipment industry dominated by a number of locally-owned companies who compete with multinational giants.

The Chinese government is pursuing an ambitious target of 100 GW wind power generation by 2020, dramatically up from 1 GW production in 2005. China’s installed wind power capacity is expected to rise from the current 12 GW to 20 GW next year. Thereafter, the government is aiming for an annual growth of 20%, according to the National Energy Administration of China. China has already become the 4th largest wind power producer in the world after the US, Germany and Spain.

Huge targets have unleashed frantic construction of wind farms in the country creating one of the fastest growing markets for wind turbine and components manufacturers. But China’s policy makers have ensured that a robust local wind power industry quickly develops rather than relying on imports. A key policy measure has been to require 70% local content in the turbines sold to state-owned wind farms. And more than 80% wind farms are owned by state-run companies. This prompted multinational wind turbine giants such as General Electric, Vestas, Gamesa, Nordex, NEG Micon, RE Power and Suzlon to set up manufacturing plants in China.

However, China’s local manufacturers have quickly developed capabilities, mostly through licensing rights from western companies, to produce wind turbines and other components.

Now they are a force to reckon with. According to Research In China, a business research firm in Beijing, Xinjiang Goldwind Co, China’s largest turbine maker, leads the pack with 25% market share. On the second place is Sinovel, another home grown firm, with a market share of 21%. These two are followed by foreign manufacturers Gamesa (17%), Vestas (11%) and GE and Suzlon each with 6%. In between, there is another Chinese company Dongfang with 7% market share. Chinese turbine manufacturers now account for over 60% market share.

Other significant Chinese manufacturers include Shanghai Electric, Windey Wind Generating Engineering, Zhejiang Yunda Co., Shenxin Co., Wandian Co., Shanghai Blue Sky, Dalian Heavy Machinery, Baoding Co., DEC, Sewind, New Unite, XEMC, A-Power Energy Generation Systems and Xian Weide Co. A-Power, which entered turbine manufacturing market last year, has established China’s largest turbine factory with an annual production capacity of 1125 MW in Shenyang.

Chinese manufacturers have largely relied on using technology licensed from European wind power companies. For example, Dongfang Electric, Baoding and Xian produce turbines using technologies licensed by RE Power, Fuhlander Corporation and Nordex respectively, all three from Germany. The market leader Goldwind started producing smaller turbines in 1989 with technology from Bonus, a Danish company. Later, it entered into licensing agreements with Germany’s Jacob and RE Power to produce larger turbines. A-Power has licensed technologies from Germany’s Fuhlander and Denmark’s Norwin. China High Speed Transmission, the largest manufacturer of gearboxes for wind turbines, uses technology from GE.

Beating foreign competition

These local manufacturers have managed to reduce cost of production compared to foreign-owned companies. As a result, they are often able to bid lower unit prices for contracts than the foreign manufacturers. Almost all wind farms are being developed by government-linked companies and agencies and they have a policy of awarding the contract to the lowest bidder. The government’s stimulus package introduced early this year also included a “Buy Chinese” policy which has helped local manufacturers.

Between March and May this year, Chinese wind farm developers invited bids for 25 large projects valued over $7 billion under the financial stimulus package. Bids by all four foreign companies that included Vestas, GE, Gamesa and Suzlon were rejected in the first round itself. Eventually, all contracts went to Chinese manufacturers.

Foreign wind turbine manufacturers have started lobbying against what they think is unfair bidding criteria which favours the lowest price and does not consider other factors such as quality, cost of life cycle and rate of return. After foreign companies lost bids for the 25 projects, Suzlon’s China chief executive said that the government was making it impossible for foreign companies to compete for the national level projects.

Jorge Wuttke, president of the European Chamber of Commerce in China, commented that there seems to be a drive by the central government to award the contracts to Chinese companies and not European companies established in China.

In private conversations, foreign companies also point to the inferior quality of Chinese-made turbines and components. Keith Li, wind power analyst at CIMB GK in Hong Kong says that wind farm operators in remote regions are already complaining of poor quality turbines which require more frequent maintenance.

“Though domestic manufacturers have quickly ramped up production of turbines, they need to address lots of issues in terms of quality, reliability, longevity and design,” says Dr. Zhangbin Zheng, senior economist at Asian Development Board, who specialises in financing for renewable energy projects.

Is joint venture the way forward?

Unable to beat local competitors, multinational companies are now considering joint ventures to better their prospects. For example, GE Drivetrain Technologies, a unit of General Electric, signed a joint venture deal in August with Chongqing Xin Xing Gear Co for the production of large diameter gears for the wind turbine industry.

In March, GE Drivetrain signed a joint venture deal with A-Power to produce gearboxes. US-based Timken Bearings is building $38 million plant in Hunan province to manufacture turbine gearbox bearings in a joint venture with Xiangtan Electric Manufacturing Company which will start production next year.

Joint ventures may prove a win-win as they increase Chinese companies’ access to technology and at the same time offering opportunities for foreign partners. But Dr. Zheng says that Chinese manufacturers should now consider acquiring western wind power companies, many of which may be easy targets due to recession. He says that acquisitions and mergers can give Chinese companies better access to technology than the licensing route which is costly and usually imposes restrictions on the licensee in terms of quantity and the extent of modifications allowed.

In spite of rapid advance, Chinese manufacturers lack expertise in larger capacity turbines. Dr. Zheng points out that the average size of Chinese produced turbine last year was 1.07 MW while the average is 2MW in Europe and the US. This also opens a window for foreign manufacturers who may consider focusing on larger turbines rather than trying to compete in the smaller size category.

Offshore wind power is another promising area that foreign companies may focus on. China does not have the capacity for manufacturing, installing and operating off-shore wind turbines, according to a research note by Climate Strategies, the UK-based non-profit research organisation.

It will not be long before Chinese turbine makers start to export and become big players in the global market. Foreign companies may soon need to work out, not only how to compete in China, but how to maintain their standing in global markets in the near future.

Facts:

China Wind Power Industry at a glance

• China’s wind power target: 100 GW by 2020

• No. of domestic turbine manufacturers: Over 70, up from only 6 in 2004

• Top five market leaders: Goldwind, Sinovel, Gamesa, Vestas and Dongfang

• Key foreign players in China: Gamesa, Vestas, GE, Suzlon and Nordex

• Top five wind power generation operators: Guodian, Datang, Huadian, Huaneng and China Power Investment

• Key regions with wind resources: Inner Mongolia, Gansu Province, Shandong Province, Heilongjiang Province, Hainan Province, Xinjiang Province and Jilin Province.

• Estimated wind power potential in China: 700 to 1200 GW

Sources: China’s National Development and Reform Commission, Research In China (Beijing), and Climate Strategies (UK)