The future for foreign firms in China
Western turbine makers were quick to see the huge potential of the Chinese wind sector, and had carved out more than 70% of the market by the middle of the last decade.
Yet by 2012, their market share had been eroded to only 9.8%, according to BTM Consult, leaving many observers wondering if they have a future in the country at all.
The top four non-Chinese manufacturers in China will together install about 1GW this year, out of a total market of around 13GW, according to Justin Wu, lead wind-energy analyst at Bloomberg New Energy Finance in Hong Kong.
The reasons for the decline are myriad. Patrick Dai, a Hong Kong-based analyst at Macquarie Securities, puts the rise of Chinese OEMs down to “a combination of competitive pricing and advanced technology, flexible customisation, easy servicing and relationships with the local governments”.
Competition has been intense, particularly given overcapacity among the Chinese players, and the hiatus in the market during 2011-12 has led to intense pressure on margins.
In the past few years, a number of Western companies have decided that the Chinese market is not for them.
In October 2009, Spain’s Acciona sold its 45% stake in its joint venture with a subsidiary of state-owned China Aerospace Science and Technology Corporation (CASC) — just three years after establishing a plant in Nantong, which it claimed at the time was China’s largest turbine plant.
In 2012, Indian-owned Suzlon — once a top-ten player in the market — announced that it was selling its China manufacturing unit, despite top officials claiming just a year earlier that it was able to compete with local companies on costs and pricing. The sale of a 75% stake in Suzlon Energy Tianjin to Poly LongMa Energy (Dalian) was eventually completed last month, after an earlier deal with China Power New Energy, announced the previous June, fell through.
In July, US corporation GE ended the joint venture (JV) it had formed with Chinese power equipment group Harbin Electrical Machinery in September 2010, although it says it remains committed to the market.
Meanwhile, others have discreetly shelved plans to expand in China. These include Nordex — which tried unsuccessfully to conclude a joint venture with local developer Huadian in 2012, and subsequently scaled down its local operations — and Alstom Wind, which had planned to set up a new Chinese plant.
Those remaining say they are determined to stay, arguing that as the Chinese market matures — in terms of customer needs, geographical diversification and pricing, with widespread consolidation expected among local players — opportunities will begin to grow again.
“If you look at the government targets and people’s need to stop pollution and improve quality of life, the market is there. And once the transmission bottleneck is solved transmissions will take off,” says BTM analyst Feng Zhao, who adds that the level of annual installations could reach 20GW by 2017.
“So if the Western companies can just maintain their market share where it is, it’s not so bad,” he says. “If you don’t have the patience and you are not there, you are losing out on the business.”
For Zhao, the key to success in China is offering the latest technology, particularly as the market is becoming more sophisticated and projects shift south to sites with lower wind speeds.
“I think we can see across emerging markets that if you arrive late and with old technology it’s not going to work,” he says.
The other key factor is relationships with the major developers. “If you look at the data, you can see that Vestas and Gamesa both have at least two relationships each with major customers,” he points out.
The remaining foreign OEMs — Vestas, Gamesa, GE and Siemens — have widely different strategies, while there is a question mark over GE’s future.
Vestas was an early front runner in China, and had installed more than 4GW in the country by the end of June 2013.
Its ranking in China fell from sixth place in 2010 to tenth in 2012, when it accounted for just 3.2% of the market. But it has strong relationships with developers such as Datang, China Resource New Energy and CGN Windpower. And it has secured repeat business from many of the companies it has supplied.
Its attempt to sell locally produced V52-850kW and V60-850kW machines was a failure, and it closed its Hohhot factory, exiting the “kilowatt” platform in summer 2012.
But Vestas has maintained its Tianjin and Xuzhou factories, as well as its Beijing and Shanghai offices. And it is winning a steady flow of orders for its 2MW V90 and V100 turbines, including recent orders from Chinese gas group Hanas New Energy and Hebei Construction and Investment Group.
Vestas’ turbines feature yaw backup systems to protect blades from the typhoons that frequently lash China’s southeast coastline, where it has been a particularly strong player. It has long won projects in Fujian province, for example, claiming roughly 600MW of the province’s 1.6GW installed capacity by late 2012. And it should be well positioned to win orders when offshore takes off along the eastern seaboard, as Fujian, in particular, wants to install 500MW offshore by 2015.
The challenge companies like Vestas face is capturing niche segments such as offshore, low-wind and high-altitude projects with their technologically advanced turbines, says Wu.
“When you’re able to source from China’s supply chain itself, you’re not necessarily offering those products,” he says “The question for foreign manufacturers, really, is whether or not they can introduce their new products into China... you’re not competitive on cost when you move into those turbine segments.”
Vestas has also shown in recent years that it is prepared to scale down operations and stop participating in tenders if prices are not attractive, as it openly stated in 2012. The level of participation in China is subordinate to the wider aim of returning the company to profitability.
Gamesa is widely tipped as one of the foreign OEMs most likely to do well in China, mainly due to its strong relationships with some of the country’s leading utility players, such as Longyuan and Huadian. It was the only foreign manufacturer to rank in the top ten by annual shipments in 2012, taking ninth place with 493MW, according to BTM Consult figures.
“We are not just a supplier but a partner,” says Gamesa China boss José Antonio Miranda.
“[We] can provide experience in niche markets and in specific technologies beyond what the local manufacturers can provide,” he adds, pointing to issues such as resistance to turbulence and extreme weather such as typhoons, and developing high-altitude sites. Gamesa is also looking at providing O&M services, offering improvements in performance and the extension of turbine life cycles.
One key aspect of Gamesa’s strategy is its approach to introducing technology into China, with an approach to intellectual-property (IP) protection that could be described as less obsessive than some of its peers.
“Two years ago, we decided to launch our products all at once in all regions,” says Miranda. “It’s clear to us that to compete we have to come with our most up-to-date technology.”
From the point of view of IP protection, Miranda describes China as “no different”. “In any market, your new product can be an inspiration, but we have not seen any IP theft here.” Miranda notes that Gamesa has been producing in China since 1995, has a “very developed” local supply chain and produces large turbine parts such as hubs that are sent to other parts of Asia and Europe.
Gamesa is also eyeing the offshore market in the medium term, and says it would look to deploy its new 5MW turbine from 2016 onwards.
Going forward, Miranda estimates that there will be no more than “two or three” foreign manufacturers operating in the market, but that there are “no special difficulties” for non-Chinese players. “The domestic companies will improve their quality and that has a cost, and the international companies will become more specialised in niche areas, and there won’t be such big differences in domestic and international markets,” he says.
Siemens’ strategy differs from Vestas’ and Gamesa’s in that the company has long said that it would focus on a JV with a local heavyweight industrial partner.
In late 2011, Siemens’ plans came to fruition when it announced an agreement with long-term partner Shanghai Electric. The two companies agreed to jointly invest €169.1m ($226m) to set up two wind-power equipment joint ventures in China — Siemens Wind Turbines (Shanghai) and Shanghai Electric Wind Energy (Sewind) — with blade and nacelle plants in Shanghai producing Siemens’ SWT-2.5-108 model.
The JV is producing turbines for onshore projects, including the 50MW Guangrao wind farm, 400km south of Beijing in Shandong province. A Shanghai Electric official said in February, when that project was completed, that the venture plans to install about 300MW of onshore wind in China this year. It is not clear if it is on track to meet this target.
Unsurprisingly, given Siemens’ dominance in the sector, Sewind says that it hopes to claim around 25% of China’s offshore market by 2015.
Siemens supplied 21 of its 2.3MW turbines for Longyuan’s Rudong inter-tidal wind project, which went operational in May 2012. The Sewind joint venture also won a tender in 2011 to supply 26 of its 3.6MW turbines to the 101MW second phase of the Donghai Bridge wind farm off Shanghai, and will supply the 200MW Luneng Jiangsu Dongtai project. Sewind says it expects to sell 75 of its SWT 4.0-130 turbines in 2015, and double that amount in 2015.
The logic of Siemens’ move is clear, but there is some scepticism about how successful the JV will be in practice.
“The question is, how many joint ventures have worked?” says Feng, pointing to the break-ups of GE and Harbin, Acciona and CASC, and others. “Basically, it’s a battle between technology and market,” he adds. “The Chinese want real technology challenges, but for foreign companies, the IP is the value and they want to hold on to it. It’s a tough bargaining process.”
There is some uncertainty about the strategy of US turbine giant GE, after it ended its joint venture with Harbin Electric in July, less than three years after it was set up.
In 2012, GE ranked 17th in China, with 90MW installed, according to the Chinese Wind Energy Association, compared to 11th place with 408.5MW of deliveries a year earlier. According to Dai, GE does have a strong track record with east-coast projects, and the company was one of Longyuan’s top five suppliers in 2012. However, Dai adds, “I don’t see any progress.”
Wu believes GE’s “reasonably localised supply chain” could help it sustain its local operations. “They’re still quite active in China,” he says, noting that it is still winning new contracts and buying key components such as gearboxes from local suppliers, including China High Speed Transmission, one of the country’s largest makers of wind-turbine gearboxes.
It also has the products and technologies to compete for low-wind and high-altitude projects in China. “Certainly, GE’s class-three wind-speed products have been quite successful in the West,” says Wu.