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China

AMSC-Sinovel row escalates as ex-Windtec worker is arrested

WORLDWIDE: Urgent questions are being raised about the fall-out from the heated dispute between American Superconductor (AMSC) and Sinovel Wind Group. AMSC accuses Sinovel of industrial espionage and of buying stolen, hacked software code to unlock AMSC's all-important low-voltage ride-through (LVRT) capability, which allows turbines to operate despite drops in grid voltage. LVRT is now required by China's grid operators.

In a startling development, it emerged last month that an unnamed former employee of AMSC subsidiary Windtec was in jail. The Serbian national was sentenced to 12 months for selling AMSC’s intellectual property to Sinovel executives via an intermediary for €15,000, a charge that Sinovel vehemently denies.

The long-simmering dispute previously only involved shipments reportedly refused by Sinovel of AMSC core components and spare parts for 1.5 MW and 3 MW turbines. Sinovel allegedly owed AMSC money for prior shipments. Sinovel, the number-two global turbine manufacturer, denies AMSC’s charge that it is in breach of contract.

Repercussions

The row has made life difficult for both companies. AMSC’s stock has plummeted by around 80% on the Nasdaq exchange in the past few months. For its part, Sinovel is trying to build an international reputation in a tightening world market where there remains scepticism of the protection of intellectual property in China and by Chinese companies.
AMSC is filing criminal and civil complaints in China against Sinovel and others — including Dalian Guotong Electric, which is part-owned by Sinovel — alleging illegal use of its intellectual property. AMSC specifically accuses Sinovel of "illegally obtaining and using AMSC’s intellectual property to upgrade its 1.5 MW wind turbines in the field to meet proposed Chinese grid codes and to potentially allow for the use of core electrical components from other manufacturers".

The US company is also filing a case with the Beijing Arbitration Commission to try and force Sinovel to pay what it allegedly owes and accept all contracted but not-yet-delivered core electrical components and spare parts. That case may be resolved relatively quickly, since it is in arbitration, said JinMing Liu, an analyst at Ardour Capital.

For its part, Sinovel accuses AMSC of failing to fulfil its contract terms and of providing components that did not meet China’s grid-access requirements. In a startling statement, global equity-research company Jefferies said in a note dated 16 September: "We speculate that AMSC possibly did not provide the software update [for the grid-access requirements] in an effort to accelerate its [owed] payments, and this forced Sinovel into a corner."

AMSC did not confirm or deny Jefferies’ speculation. However, Jason Fredette, the company’s VP of marketing and communications, said: "At this stage, we cannot get into details about our discussions with Sinovel. But we certainly stand behind our products and our customer service."

In the long term, AMSC may find it hard to replace the business lost, although it has other Chinese customers such as Dongfang and CSR-Zelri and has recently signed a component deal with Jingcheng New Energy. But China’s wind market is flat and consolidation is expected.

A decline in the Chinese market has also had an effect on Sinovel. In late August, it reported a 48.3% year-on-year decline in profits for the first half of 2011 with sales of CNY 535 billion ($83 billion).

Sinovel has a large inventory and in the first half of the year was behind in buying from a number of contracted suppliers, including its blade suppliers, Sinomatech and Cenry Energy, and generator supplier Jiamusi Electric Machine, said a Jefferies note from 30 August.

Sinovel is successfully moving into the export market with a pipeline of 827MW of global turbine orders, with contracts in Brazil, Greece and India. And this summer Sinovel unveiled a deal to enter the Irish market with developer Mainstream Renewable Power that could see 1GW of wind projects built over the next five years.

Could the fight over intellectual property rattle potential Sinovel customers? "This high-profile dispute with AMSC is a test for Sinovel on international business relationships," said Jefferies analysts. "A quick settlement would help Sinovel avoid potential negative press, instill confidence in Sinovel’s potential customers, and win Sinovel the reputation of a mature international partner."

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