Wind power has been leading the pack, with hundreds of new facilities and production expansion added in the past few years. But below this glossy surface runs frustration among some domestic suppliers over their ability to compete in a global market faced with competition from low-cost Asian manufacturing. The brakes applied by the economic downturn have exacerbated the issue and yet there are winners and losers, depending on where you stand.
Ed Weston, director general of the Great Lakes Wind Network, a trade association representing domestic manufacturers in the wind sector, says that the question of overseas competition comes up in one form or another with nearly everyone he has talked to.
"I've heard it from the tower guys, the blade guys and two foundries - the foundries are the worst; they feel they're getting their legs knocked out from underneath them," he says.
Foundries produce large cast-iron pieces used in wind turbines, such as the rotor hub, uniting all three blades, and bed plates and other frame structures for nacelles. Castings produced at US foundries require a considerable amount of separate tooling and finishing work to produce a final product.
"The sad thing is, we've got machine shops all across the Midwest who have spent millions and tens of millions when the wind boom was on to buy the latest technology so they can machine these large cast pieces coming from American foundries," says Weston. "But when the foundries lose the business, it goes offshore, and that's what's happened since December 2008."
This spells trouble for foundries but has negative ripple effects for a much wider supply-chain pool in the US. The cast pieces coming back from Asia and other areas abroad are coming back to US shores completely tooled, finished and ready for installation, leaving US machine shops out of the loop. "Even the coatings are done. We lose the whole supply chain," says Weston. Hope now often rests on getting occasional contracts when foundries in Asia overflow and work spills back into the US.
The castings price pressure extends to large forgings and other critical parts engineered at aerospace levels of precision and quality. According to an expert on purchasing, Danish turbine supplier Vestas recently sought manufacturing bids for some main shafts to be produced. These are one of the largest forged pieces in a turbine, weighing around ten tonnes each and connecting the main bearing to the gearbox. Manufacturers were quoted throughout Europe and the US but they lost out to an Asian manufacturer because it could produce fully forged and finished shafts, including delivery, for around the cost of unfinished, undelivered shafts from other competitors in the US and Europe. Vestas has not confirmed this.
It is almost impossible to compete with those cost pressures, says Jeffery Atkin, a partner at law firm Foley and Lardner LLP and a specialist in the firm's energy industry team. His work in renewables has been split between wind and solar. Recent solar experience does not bode well for wind. Cost pressures in Europe led companies last year to levy anti-dumping charges against solar companies. Germany has historically been a stronghold for solar photovoltaic (PV) manufacturing and installation. The manufacturers argued that the prices of comparable quality Chinese PV could not be real and therefore must have been subsidised somehow.
"The reality is, they are just able to produce right now at much lower cost and it's not just solar and wind, it's everything," says Atkin. The subsidy theory is gaining traction for two reasons: China's currency, the Renminbi, is pegged to the US dollar, which means its value is fixed to the moving value of the US dollar and is not able to "float" or change in value based on global currency trade. There is universal agreement this keeps China's currency artificially low, giving its exports a price advantage. In June, China said it would allow some appreciation of its currency but the level is expected to be small.
Secondly, flush with cash from its roaring economy, the Chinese government has made many investments in its private manufacturing sector, including forgivable loans for building factories. Atkin agrees that many manufacturers not only in China, but also Korea and Taiwan, have taken advantage of generous government funding to minimise their capital expenditures on new factories. This partly explains how swiftly China came to dominate solar PV sales, a trend he says the wind industry should pay attention to.
"Two or three years ago, all of a sudden out of nowhere my solar clients were being peppered every day by Chinese solar manufacturing companies that were eager to bring their products here," says Atkin. "You would go to a conference one year where there were one or two Asian manufacturers and literally within one year there were 150 more."
Quality has been a perceived weakness in Chinese products but the view is slowing changing. Atkin describes how a banker he knows in the clean tech sector said he would never finance a project with Chinese solar PV and then changed his mind a year later. "In 12 months it changed to the point where, now, the majority of solar panels going to utility-scale project have their major components manufactured or tied to manufacturing in Asia," says Atkin.
Complex precisely engineering moving parts for a wind turbines prove a bigger challenge for Asian manufacturers. But this year's major annual US wind conference saw an increase in sub-component suppliers and Asian wind turbine manufacturers, also called original equipment manufacturers (OEMs). If quality improves and the turbines become financeable in the US, wind trends may follow solar trends. Eventually, says Atkin, the solar developers could not justify ignoring Chinese solar when operating histories were favourable. Developers pursuing utility scale projects - and almost all wind projects are utility scale - are just as cost sensitive because they are competing against other developers and other generation.
"I predict a similar thing will happen with wind as it did with solar," says Atkin. "It will just take a couple years, and we're probably already into that time. They will start to prove the technology just like in solar they started to build better and better products and more reliably and at a much cheaper price."
Weston once asked a top executive at a wind turbine manufacturer about the key to doing business on an OEM in mind. It sounds simple, the executive said, but OEMs have to sell their turbines and if their base cost for components is 10% higher than other OEMs, the total turbine cost will be higher. "Unless you have a total running capacity in a market where everyone is sold out, your turbines are going to be the last to sell if you cost more than your competitor," the executive said.
During the boom years when developers ordered hundreds of megawatts at a time, often for deliveries two years in advance, all the OEMs were sold out. "The waters have now receded and these rocks are showing and these rocks are less competitive industries in America, with foundries in the roughest shape."
Matthew Kaplan, senior analyst at Emerging Energy Research, says his firm was surprised to see when they mined 2008 project data that 45-50% of the towers used for projects that year were sourced from abroad. This flies against a common assumption in the wind industry that, because parts likes castings and blades and towers are so big and heavy, they are more likely to be built close to their intended market to save on transportation costs and logistical challenges.
Towers are a particular worry, says Kaplan. If you look at the list of investments in tower factories that are in operation or slated to come online, there are a lot of domestic suppliers.
"But when you look at the numbers and see how many are coming from overseas and more competitively priced in some cases than domestic competition, it is a huge worry for a lot of these domestic component suppliers," says Kaplan.
It is surprising and perplexing, adds Weston. "Logistics are all on our side with low volume and high weight. So how is it that these guys can get them over here, a 5,000-mile journey, and put them on a truck or train and still do better than the guy rolling it down the street from his factory," says Weston.
Ricky Seung knows how. He is the president of Los Angeles-based Kousa International, an agent for Korindo Wind, a tower manufacturer based in Indonesia. His company has already sold over 600 four-section towers in the US that were manufactured in Indonesia. Labour cost outweighs transport cost: an experienced welder in the US can expect to earn between $80,000-$120,000 yearly, Seung says. The same welder in Indonesia earns around $4,200 a year. This is also assuming the same quality standards. Korindo towers are ISO 9000 certified - a coveted quality standard among US manufacturers.
"It's amazing, actually, and we amaze a lot of purchasing guys at the turbine manufacturers," says Seung. "Even though we're coming from Indonesia, we can have a lower landed price than the cost of shipping from a domestic factory." In addition to labour savings, the company has secured a low-cost method of transporting its tower sections to the US. It contracts the above-deck space on a fleet of nine cargo ships that regularly deliver raw rubber to Texas ports.
"They carry the rubber under the deck as the base cargo. Anything else they put on deck is just a bonus if they can find the cargo," says Seung. "We've been able to capitalise on that and use 100% of their deck space." He adds that steel in Indonesia can be 15-20% cheaper than in the US where iron ore is scarcer.
Another offshore tower company competing in the US is Korea-based Win&P. "Because of the shipping and logistics cost, we prefer to concentrate on the projects developed in the West Coast Pacific region," says Seung-Joo Yang, president and CEO of Win&P. "The shipping cost is more or less 10-15% of the tower cost and there are small advantages for labour costs in Korea versus US labour costs."
It may seem that American manufacturers are having an increasingly difficult time competing with cheaper markets abroad but the threatened death of American manufacturing is greatly exaggerated, says Lorrie Crum, spokeswoman for the Timken Company. The Ohio-based firm is a major global producer of speciality steels, bearings, and a variety of drive train components for wind turbines.
Timken has a good perspective and hard numbers on what it costs to produce high-quality components in various global markets and for various industries. It operates facilities that produce wind turbine bearings and drive train components in Romania, China and at two locations in the US. The company could choose to drop manufacturing in the US and instead feed the US market with increased low-cost labour in China. It could then ship the goods to the US, but that is not its chosen strategy.
"It doesn't make sense," says Crum. "The better strategy is to have the engineering and manufacturing in the local market and support the customer in the local market. Being global means being everywhere your customers want you to be." Timken is currently expanding its jobs and manufacturing in the US for the wind industry.
Germany's ZF Group offers more hope. It is one of the world's leading producers of transmissions for industrial applications and high-end vehicles, including BMW and Jaguar, among others. It is entering the global wind energy gearbox business and is making its first step in the US by building its gearbox facility in Gainesville, Georgia. It announced recently it will supply gearboxes for Vestas turbines and will eventually produce 2,000 gearboxes annually. As a global manufacturing behemoth, it could have set up a facility anywhere but chose the US.
In manufacturing, and specifically when it comes to something like transmission, you are very reliant on a supply base of your own and the resources available to you, says Brian Johnson, manager of marketing and communications for ZF Group's North American operations.
"So you can't just build it anywhere," Johnson says. "You need companies nearby that can do hardened steel properly, that have precision tooling for cutting gears. Where that kind of precision is required, you're not going to find that in lower-cost countries at this point."