For the past 15 months, wind turbine original equipment manufacturers (OEMs) in Western Europe and the Americas have seen thinning profit margins.

With the industry becoming more capital efficient and OEMs incurring higher commodities costs, several Western European OEMs have seen profits trounced.

This has resulted in layoffs and shifting patterns in production venues to markets such as Brazil, Turkey and China which have a more favorable currency trade than the US, Denmark, Germany, Spain or Italy.

The challenge of the energy transition has always been the dichotomy between power generation costs and power sales prices for the independent power producers (IPPs) and utilities. Higher prices in a spot market, or a regulatory environment thatdoes not mandate the switch to renewables, provides IPPs and utilities an opportunity to maintain coal, natural gas or oil sources for power generation in spite of the fact that renewables are cheaper.

While the switch to renewable based power generation sources would provide the IPPs and utilities more spread, ie, larger window between power generation costs and power sales prices to companies, consumers, etc, this also comes at a price. They would spend significantly more capital on installing a new power generation source rather than the cost to continue operating with a dirty power source.

The power generation costs for wind turbine OEMs are often governed by the cost of raw materials and production/ labour rates. The total cost to produce a wind turbine and tower is referred to as the ExWorks cost, or the cost which is incurred before wind turbine parts are shipped from one, or several factories to a single project site. This cost is often used as a benchmark, normalized in $ per MW of rated power of the turbine, between the production of different OEMs and the cost to produce wind turbine components in different parts of the world.

Onshore wind turbine ExWorks costs for most of the Western OEMs have been hovering around $650,000–800,000 per MW depending on the market. The sale prices for those turbines has varied anywhere from $680,000–1,200,000 per MW over the past few years.

However, the Chinese OEMs have seen unprecedented low costs, partly due to labour rates and raw material availability, with wind turbine ExWorks costs at an eye wateringly low range of 2,027-2,618 yuan/kW ($342,328-411,107/MW). This is almost half the cost of the Western companies.

What has driven these reductions? China recently removed federal feed-in tariffs as a support mechanism for onshore wind, offshore wind and solar PV. This has meant that for onshore wind projects that were installed after 1 January 2021, the Chinese IPPs and utilities were forced to sell power into an open market with a power price ranging from $48-56 per MWh. They had previously luxuriated themselves with power-purchase contract prices between $85–105/MWh.

And what of the offshore wind turbine market? This question varies a bit more based upon water depth and shore distance, which governs turbine choice, and in many cases a modified/ marinised onshore wind turbine is being used in a nearshore environment on a pile cap foundation.

For offshore turbines in deeper waters on a monopile, jacket, or other such foundation appropriate for such water depths, Western OEMs have seen ExWorks costs equivalent to $850,000-1.35m/MW depending on the market, with turbine sales prices of $950,000-1.65m/MW. Chinese OEMs have seen costs as low as $556,000/MW for 8MW-plus turbines.

Because many Western OEMs have fixed labour contracts in place and cannot accommodate price fluctuations as easily, they have been forced into layoffs and re-allocation of production volumes to lower cost markets. Many Western OEMs have even set up joint ventures or subsidiaries in China to take advantage of such low production costs.

So profound has been the loss of margin on turbine sales that in specific markets, some OEMs have actually accepted a negative sale price, ie, below their ExWorks cost, as long as their turbine supply contract is coupled with a long term service contract.

That long-term service contract, typically inclusive of an extended warranty on major components such as blades, drivetrain, generator and electrical components, will comprise a healthy profit margin of between 8-20%.

As these contracts typically have the payment for services upfront when the project is commissioned, the OEMs gain back some of their lost margin on turbine sales as long as they avoid significant major corrective repairs on the assets they are maintaining.

Ten to 15 years ago, the conventional wisdom was that Chinese OEMs could not sell their cheaper wares in Western markets. Poor production quality, poor availability, and lack of access to project finance had meant that Chinese produced goods were less likely to be used.

However, Chinese OEMs now have a presence in more than 38 markets worldwide as of the end of 2021. This is up from less than 20 markets just seven years ago. Chinese-made turbine components are used in approximately 77 countries worldwide.

With Chinese OEMs able to accommodate lower production costs, Western OEMs have been, and will probably continue looking towards governments to implement trade duties in an effort to try and prevent significant importation of Chinese goods.

This effort to try to keep their struggling profitability from completely collapsing comes at a time when Chinese OEMs are now in a much better place than ever to start displacing Western OEMs in Western markets.

Philip Totaro is founder and CEO of renewables market intelligence consultancy IntelStor