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China

Little guys face big trouble in China

CHINA: The little guys are panicking. China is launching tough regulations aimed at strengthening the position of its strongest players and erasing inefficient smaller operators from the wind scene. The new policy will affect manufacturers who fail to meet a range of criteria - denying them the government tax breaks, land use and loans that are integral to wind business in China.

Only major firms such as Sinovel are likely to be able to meet the new rules
Only major firms such as Sinovel are likely to be able to meet the new rules

Of those, industry experts believe the ultimate deterrent comes from the refusal of land rights to companies that fail to measure up. Since the State Council listed wind turbine production among the excess capacity sectors in August 2009, the Ministry of Land and Resources has denied all applications for land for new wind turbine manufacturing projects. Once the new standards take force, industry experts expect the ministry to approve land-use rights, both for newcomers and for expansion of existing manufacturers, strictly only upon compliance with the new rule. That will terrify many of China's smaller turbine makers. After all: no new land, no new business.

But is this potentially draconian policy going to work as it should? Or are strong, small businesses being adversely affected by a ruling that is supposed to weed out the weak? Luo Yizi, a wind turbine producer from Foshan City in south China's Guangdong Province, is worried. Luo was the first business owner in Foshan City to shift from traditional manufacturing to wind-turbine production. His company, Dongxing Fengying, has caught the eye of industry observers over the past three years. Now, under the new ruling, called the Windpower Equipment Manufacturing Access Norm (Weman), he faces his sternest test yet. Luo's company fails to meet any of the key criteria: it does not produce 2.5MW-and-above class turbines, falls short of 500MW in installed capacity, and has fewer than five years' experience in producing large-scale mechanical and electrical equipment products. Unless the final published legislation is significantly relaxed compared to the existing draft, Luo will face a choice: retreat from the wind turbine production business or merge with other firms.

No more than ten turbine producers in China produce 2.5MW-plus class machines, he says. "The government was unrealistic in stipulating that," says Luo. "They shouldn't set such a high access standard. If the version of the legislation that is out for public consultation becomes law, we will stand firm and go on with our business."

But industry officials disagree. Luo's company will be afforded no such special treatment, they say. Unless Luo meets the criteria, he will either leave the wind turbine manufacturing sector or join with other eligible large state-owned companies.

"It is a bloody purge," says the manager of a small wind turbine plant from north China's Hebei Province who declines to be identified. The government should aim its sights on businesses trying to enter the wind power equipment manufacturing business rather than those already producing turbines, adds the source.

Wu Ming, a manager of a small plant in east China's Zhejiang Province, is already considering merging with other firms so he can meet the requirements. "What shall we do?" he says. "We have already entered the business of producing wind turbines. We are not willing to retreat." Wu reckons that about 70 turbine plants will be united or merged and that his company is among them. Wu's company has only about 60MW of turbines installed in wind farms, far less than the 500MW line. Even if he expands his company, he will be unable to meet the criterion set by the legislation, at least in the short term. So he could only think about uniting with other firms. "More than half of the existing businesses in the sector will be seeking mergers," he says.

Less reliant

The smaller players may dislike the upcoming changes, but many majors welcome it. "We have too many low-end producers of wind turbines," says Jin Liping, north China zone manager of east China's Zhejiang-based Yunda Wind Power. "The (Weman) sets a red line that requires newcomers to have their own research and development (R&D) capacity, which should get rid of the old pattern of solely relying on foreign technologies."

"The Chinese wind turbine manufacturing sector is experiencing violent competition," says Sun Lixiang, deputy general of Guodian United Power, the fourth-largest Chinese wind turbine producer. "Wind turbines were sold at more than 6,000 yuan a kilowatt last year. Now, they are sold at less than 4,500 yuan a kilowatt (see graph)."

One might expect buyers, who ostensibly benefit from scores of suppliers fighting for their business, to oppose the change. Yet many are equivocal and some even feel that the clampdown on smaller players may help boost quality. "What we demand is quality wind turbines," says Yang Xiaosheng, deputy general manager and chief engineer of Longyuan Power Group, China's largest wind farm operator. "We naturally hope that turbines are sold cheap but have high quality. In 2007 and 2008, we were puzzled many times by the poor performances of turbines from some Chinese manufacturers."

Indeed, this concern was partly behind the Chinese government's controversial move. Last summer, China's cabinet listed wind turbine production among the sectors with excess capacity. The numbers do at least appear to back the Chinese government up. China has 83 wind turbine producers with a notional annual production capacity exceeding 50GW. But the sector only needs an annual production capacity of around 10GW, says Zhou Sigang, a section chief of the major technologies and equipment office under China Machinery Industry Federation (CMIF). "It has become obvious that China's wind turbine production sector has had excess capacity," he says. "It has become necessary to raise the threshold for any newcomers to enter the wind turbine production industry, and to prevent unchecked expansion of wind turbine production capacity, and to encourage competitive enterprises to become bigger and stronger."

Inconsistent quality

Industry experts hope that a streamlining of China's turbine manufacturing industry will also solve the long-standing problem of inconsistent product quality. The experts argue that the country needs a national industrial standard to make sure only professional outfits remain in the sector, thus ensuring the good name of Chinese-made turbines.

But there are suspicions that China may have gone too far. Ma Xuelu, vice president of China Wind Energy Association (CWEA), admits that the Weman sets an eye-wateringly high threshold for businesses to access the manufacturing of wind turbines. Jiang Qian, the chief energy analyst of China Investment Consultant, points out that only majors Goldwind, Sinovel and Dongfang Electric, along with a few other firms, could meet the condition of having the capacity to produce 2.5MW or even larger turbines, with an annual output of 1GW. "Many of the 80-odd wind turbine producers in the country are focusing on producing 1.5MW turbines or smaller turbines," Jiang adds. "And many of these have an annual output of 300-500MW a year."

Once the Weman becomes law, firms only have six months to meet the thresholds. So even when companies are able to crank up their operations to meet the turbine size and output criteria, bringing in enough expertise quickly enough to meet other standards contained in the legislation may be beyond them. The Weman requires that wind turbine plants must set up professional R&D teams covering the fields of aerodynamics, structural analysis, mechanism, hydraulic pressure, electric, automatic control and software development.

"At present, most Chinese wind turbine plants are producing turbines by buying foreign technical drawings and licenses," says Jiang. "They do not have any professional R&D teams. So, this stipulation is a head-on blow to such plants."

Yet the government and industry experts are holding firm. Professor Lin Boqiang from the Energy Institute of south China's Xiamen University admits that the Weman will not necessarily nip excess capacity in the turbine production sector. What he says it will do is eliminate the small wind turbine plants not meeting basic quality standards, improve manufacturing environments and facilitate orderly development of the wind turbine production industry.

Right for the market

Meanwhile, Zhou says that the standard will do the job of realigning the industry to meet actual demand, rather than continuing to churn out stock 1.5MW units that are struggling to find buyers. "We can no longer allow redundant construction at this level," he says. "The (Weman) makes clear that China discourages businesses that are producing wind turbines smaller than 2.5MW. Yes, for a certain period, 1.5MW turbines will remain the mainstream in the country. They will account for the largest share of total output. By setting the threshold of 2.5MW, the government is not saying that it believes 2.5MW turbines to be the most economical, but is saying that we have too many plants producing turbines of 1.5MW and smaller."

It remains to be seen whether the government, or the smaller players who say they will be unfairly damaged by the new policy, are proved right. Certainly, the move has led to a fission in the Chinese sector between the big, experience players inside the castle, and those outside who face a pulling up of the drawbridge.

"This means that investors inclined to enter the wind turbine production business must have great financial power," says CWEA's Ma. "And enterprises wishing to enter the sector must be well experienced. They shall not come to invest in the business simply to speculate."

Meanwhile, energy analyst Jiang is circumspect. "On the whole, the policy will bring about some pangs to the sector in a short period," he says. "Although it is not enough to effect a complete industry overhaul, the standard is good to regulate the industry and optimise the market structure. A few years ago, when Chinese businesses swarmed into the wind turbine production sector, most enterprises operated in the form of mere processing bases or workshops. They bought technical drawings and licenses to produce turbines at home. The new standard recognises that that process has blocked the development of R&D in the sector." He says the removal of China's protectionist policy, demanding that 70% of turbine components must be made locally, has made the Weman even more necessary. "Major foreign turbine producers have edged into the Chinese market," says Jiang. "So China must develop its R&D to avoid going to rack and ruin. The wind-turbine manufacturing industry is technologically driven. The new standard has given us a clear direction."

Falling short

But, back at start-up supplier Dongxing Fengying, Luo remains far from serene. The company is trying a variety of strategies to survive the coming trial. His firm has just received official approval to construct its own 50MW wind farm in Guizhou. He also has plans to construct wind farms in Guangdong's Zhuhai City, along with a super-sized 450MW facility in Inner Mongolia. Assuming the Inner Mongolia wind farm goes ahead, Luo will clear the 500MW installed capacity threshold of the new standard. His firm is also ramping up R&D. His new 2MW turbine will soon be finished, he says. And the company will send technicians to Denmark to jointly develop 2.5MW turbines with a Danish partner. He hopes to have a sample turbine soon.

Yet financial restrictions mean Luo's firm will likely fall short of the Weman criteria. "Theoretically, we can meet the requirements of producing 2.5MW turbines and having 500MW installed performance," he says.

"And we have the ability to produce 200 turbines annually. But all these are just plans. Wind turbines are precision equipment. They need testing to prove the turbines meet long-term quality requirements. At present, we are short of funds to construct our wind farm in Inner Mongolia. So, we cannot complete it and put (our development plans) into operation as well, at least in the short term." For business owners like Luo, the Weman may simply be too demanding.

THE POLICY - KEY DEMANDS

In order to qualify for the government tax breaks, land use and loans that are integral to the wind business in China, turbine manufacturers must:

- Be able to produce turbines of at least 2.5MW a unit;
- Have an annual output of at least 1GW;
- Have at least 500MW of turbines installed;
- Employ a fully fledged in-house R&D team.

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