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US - China Wind Power Spat: Unintended Consequences

Last December, the US filed a World Trade Organization (WTO) complaint over the subsidies and perceived non-transparencies that have frustrated foreign original equipment manufacturers (OEMs) in China’s domestic wind turbine market. In the same month, the People’s Republic of China (PRC) overtook the US to become the world’s largest wind power market by installed capacity. With much to lose on both sides, this issue has been brought up at the highest levels of Government. But the upstream markets for turbine components are more level playing fields than those for the turbine package. With component makers like Emerson and American Superconductor (AMSC) profiting from high growth, could following through with this action hurt US companies in the long run?

Background of the Complaint

US complaint DS419, filed three weeks ahead of President Hu Jintao’s visit to Washington, D.C., cites a Chinese Ministry of Finance edict that “appear(s) to provide grants, funds, or awards that are contingent on the use of domestic over imported goods” in the wind turbine industry. In other words, in China’s already overwhelmingly state-owned and -funded power industry, ‘buy Chinese’ has become official policy. Turbine OEMs such as GE, Vestas and Gamesa, which have invested considerably in the Chinese market over the years, will, by official sanction, loose out to local OEMs like Sinovel and Goldwind.

Accounting for a third of global demand in 2010, China’s market is, and will remain, the biggest game in town. Due to continued economic sluggishness and detangling capital markets, the development of the global wind market remains uneven. Installed capacity growth is stunted in the US and Canada, slowing in Europe, and only just emerging in South America, the Middle East and Africa. Meanwhile in Asia, it continues unbounded. China makes up 80% of the region’s demand by newly installed capacity. A combination of strong political and financial backing with, according to Greenpeace, around 2.4 TW of onshore potential capacity, means that China is the essential market for any major OEM.

But the Chinese market has barriers. A 2005 law specifying that all wind turbines sold in China must be 70% locally produced has enabled the transfer of a significant amount of production and, it is alleged, intellectual property to local manufacturers. While this law has since been repealed, it coincided with the emergence of a powerful group of domestic turbine OEMs, who have gone from controlling less than 1% of the global market 10 years ago to over 30% today. The architect of this is China’s National Development and Reform Commission (NDRC), which has used loans, land and laws to create a competitive high-tech industry, placing Chinese companies at the heart. It is the NDRC’s industrial policy that has put China at odds with other WTO members.

China’s Wind Energy Market at a Glance

Even by China’s econometric standards, wind power development has been nothing short of mercurial. As of the end of 2010, a total of around 42 GW of wind power generating capacity have been installed in Mainland China. The market grew by 16 GW in the same year, representing an increase of around 60%. In 2009, it grew by 100%. Bullish estimates for future growth are based on huge untapped opportunities. It is estimated that China has an area almost the size of Montana that can be used for wind power.

Customers are overwhelmingly state-owned enterprises. It is thought that over 80% of wind power projects are sold to the ‘Big Five’ power groups, prominent among which are the Guodian, Huadian and Huaneng groups. These companies, which prepare wind farm bidding documents, are receiving direct Ministry of Finance funding and support. This is what American interests are objecting to.

On the supply side, Chinese OEMs are now leading the field. Sinovel, a recently listed company based in Beijing, is the largest wind turbine producer. Spun out of Dalian Heavy Industries Group (a state-owned industrial behemoth), Sinovel has designs on being the ‘Vestas’ of the global market; its parent wants to be a ‘GE’ or ‘Siemens’. Other Chinese leaders include Goldwind, China’s longest-established turbine OEM based in Xinjiang in the far west of China; and Dongfang Electric, a diversified power plant products supplier.

Then there are the foreign turbine OEMs, which have seen their market dominance shrink to around 15% in recent years. Denmark’s Vestas is the largest foreign supplier, followed by GE and Gamesa of Spain, formerly the largest OEM in the world. Compared to their domestic rivals, these companies offer higher rated turbines (Chinese OEMs typically do not produce anything rated over 1.5 MW) and are more experienced in the long-term management of integrated wind farms, particularly offshore.

OEM vs. Component Markets

But in most aspects, customers perceive few differences in what foreign and domestic turbine builders are offering the Chinese domestic market. This is partly due to the low ratings on the average installed turbine (around 1 MW), meaning the know-how is widespread. Mostly, however, it is because many turbine components are themselves produced by foreign companies.

Foreign Vs Domestic Market Share Wind Turbines and Select Components
Foreign Vs Domestic Market Share Wind Turbines and Select Components - GCiS China Market Research
Source: GCiS

Wind turbines are made up of around 15 major parts. These include the rotor, blades, gearbox, generator, converter, control systems and tower. Sub-components include bearings, sensors, lubricants and coatings. Each of these is itself a market, contested by foreign and domestic suppliers. The proportion of foreign ownership ranges from generators – over two-thirds of which is controlled by domestic suppliers – to converters, which has the same ownership proportion of foreign suppliers.

Gearboxes are often imported, and companies like Rexnord and Siemens (which is a blade maker and turbine OEM) are active in the wind turbine supply market. Bearings, too, represent a more level playing field for foreign companies, with SKF, Schaeffler and NSK among the bigger suppliers. Emerson, a power products OEM, makes control systems and converters to tie wind generated electricity into the grid. AMSC recently signed a US$100 million deal to supply Sinovel with electrical components for its new generation of turbines.

Many of these companies’ customers are Chinese OEMs, and, as their factories are located in China, their products are counted as local. These suppliers are preferred because, in the eyes of their (Chinese) customers, they make better products. Further, given China’s plans to access the North American and European markets, it is in the interest of companies like Sinovel and Goldwind to use, and respect the intellectual property of, these components.

Where the Wind is Blowing

Trends in the domestic wind industry are determined by national strategy. The NDRC wants to wean China off its foreign oil dependence and onto homegrown renewables. To this end, wind power is targeted to make up 5% of total energy consumption by 2020, which is around 300 GW. In terms of installed wattage, the domestic market will have to grow by a compounded average of 21% over the next 10 years.

Over the same timeframe, the Chinese will become increasingly urbanized and wealthy; two traits that accompany higher energy use. This means that the power companies will have to build fewer wind farms in the desert and more nearby cities. To achieve this, offshore wind will have to play a bigger role. Such farms are expensive to install and make more sense when the turbines are 3 MW or bigger. This is very good news for foreign components suppliers, whose products are typically more durable than their domestic counterparts. It also means that customers will be after cutting edge technology, which plays into the hands of innovative Western companies.

Unintended Consequences

In spite of the potential synergies, the current relationship between both sides is stormy. China has responded angrily to the US complaint and the argument could get nasty. Should this salvo between the world’s two largest economies develop into a trade war, there may be widespread economic fallout. Not only could foreign turbine OEMs be punished in China with further access restrictions, but hurt in other markets if adjacent sectors, such as rare earth exports, are used as bargaining tools. Interests of the component suppliers, who are more numerous than the turbine OEMs, could be hurt if policies to localize the upstream markets were announced. China could become a less attractive place for new products and ideas to be tested, the renewable energy industry foregoing unknown progress towards the solutions that are needed on a global level.

Conclusion

America’s WTO notice is a way of saying to the Chinese “we need to talk.” There is a 60-day window to do so, into which high level state visits are being conducted by both sides. Given their heavy co-dependency, the Chinese and US will probably strike a deal. But some fundamentals about China should be remembered: it is a heavily populated, industrializing country that needs to branch into all areas of industry to create and sustain employment. Foreign companies are not being shut out, as there is a long-term need for them to pull China up the technological value chain. Innovation and deal making, not lawsuits, are the way to engage this market.

This was originally published in Renewable Energy Focus (US Edition), March 2011.

 

About GCiS China Strategic Research

GCiS (www.GCiS.com.cn) is a China-based market research and advisory firm focused on business to business markets. Since 1997, GCiS has been working with leading multinationals in sectors ranging from technology to industrial markets, medical, chemicals, resources, building and constructions and a few others.

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