The investigation by the EU competition authorities under the Foreign Subsidies Regulation of Chinese wind turbine OEMs and other major supply chain companies has drawn praise from most of the industry who is concerned about “unfair subsidies”, but is that actually happening in the EU?
Let's talk facts, and we can start off with the most obvious one regarding Chinese Government subsidisation of Chinese State-owned or partially State-owned supply chain companies. Yes, the Chinese government does subsidise their manufacturers by providing tax breaks and favourable lending rates to state-owned companies on capital required for operations and production in their domestic market.
Additionally, China has lower overhead costs and raw material costs than are present in the EU, which does create a production cost advantage for the Chinese companies. However, the last time I checked, the USA was also providing manufacturing tax credits (48C, 45X) as well as the investment tax credit (ITC) to some USA-based manufacturing concerns, including those with foreign (ie. EU) ownership, so this does get into a tricky situation if the EU is not prepared to support their domestic supply chain companies in their domestic EU markets.
The real question at hand is whether or not any of these foreign subsidies matter within the EU, or to EU-based manufacturers who are selling within the EU. In reality, it should not. EU-based OEMs and supply chain companies who are selling within the EU don't face any legitimate competition from Chinese OEMs or other major supply chain companies. Chinese wind turbine OEMs are approximately 0.1% of the market share of installed capacity of onshore and offshore wind in EU member states. Chinese supply chain companies who are providing offshore foundation technology for projects in Europe were selected predominantly for availability as well as price, regardless of the country of origin.
Chinese wind turbine OEMs are approximately 0.1% of the market share of installed capacity of onshore and offshore wind in EU member states.
EU-based project developers who have publicly stated they are looking into Chinese supply of wind turbines are mainly trying to leverage this as a negotiating tactic to get EU-based OEMs to lower their prices. Very few wind turbine supply contracts have been struck between EU-based developers and Chinese OEMs for projects within the EU.
Now, outside of the EU, the EU-based OEMs and supply chain companies indeed face steep competition from Chinese OEMs, mainly due to the aforementioned government subsidies and lower raw material costs. Markets throughout Eastern Europe which are not EU members have seen an uptick in supply contracts between project developers and the likes of Envision Energy, Goldwind, CSIC, Dongfang and Mingyang. While these markets are outside the EU jurisdiction, it does hamper the EU-based OEMs and supply chain companies from growing their international footprint and bolstering their order books.
Targeting countries which are unlikely to assert countervailing duties on the Chinese-made goods has been the intention of the State-owned Chinese supply chain companies over many years in an effort to grow their market share. Beyond Eastern Europe, countries like Australia, Pakistan, Vietnam and several African countries have all benefitted from Chinese Belt and Road investments which facilitated subsidised Chinese technology to proliferate.
That doesn’t mean the Chinese OEMs haven’t offered their turbines for sale in the EU, but the Chinese OEMs still suffer from a perception amongst Western project financiers and insurance companies that they are making cheap knock-offs of Western technology and their products are unreliable. As a result, they do not benefit from the same project finance rates which Western OEMs enjoy, so the price which a project developer pays to build a project with Chinese technology or Western technology is essentially the same. The CapEx cost advantage which the Chinese offer is offset by the higher finance rates, while the higher CapEx cost that the Western OEMs offer is tempered by lower project finance costs, particularly on debt-financed projects.
So while, the EU may chafe at Chinese government subsidies, they are not in a position to disrupt that with countervailing duties or other sanctions on Chinese imported wind energy power generation equipment to the EU.
If the EU Commission wants to make EU companies more competitive within the EU markets, they should address more fundamental issues which are within their jurisdiction. This includes pension costs for some of the legacy OEMs and major supply chain companies as well as the power of unions with collective bargaining agreements have over the EU-based OEMs and supply-chain companies which are trying to cut costs and preserve margins. They also need to make investments in domestic production of steel and other raw materials to reduce dependence on China. Additionally, they need all EU member states to fall in line when it comes to project permitting. The faster they can build, the more profitable it is for EU-based supply chain companies.
To date, the EU has underwhelmed in its investment in these required areas, while trying to slap down the perception of Chinese competition which doesn’t actually exist, and isn’t the real threat to the EU within the markets they control.
Philip Totaro is CEO of US data analytics firm IntelStor
