Relaxing the rules of supply

CHINA: News of the end to China's requirement for 70% of the value of wind turbines to include locally-sourced components reached the industry late last October.

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This was at the time Chinese and US trade negotiators were signing a pact to promote the China-US Energy Cooperation Programme, an agreement focusing on commercialisation of clean energy solutions.

US Secretary of Commerce Gary Locke expressed his pleasure at the move, saying: "This will open up China’s energy market to US companies and create jobs for Americans." Zhang Guobao, China’s National Energy Administration chief, added: "US wind power technology will enter the Chinese market equally and freely."

Within days, China’s A-Power announced plans to supply US Cielo’s 600MW West Texas project with its Chinese-made wind turbines. One might assume the two announcements fell within the same bilateral trade discussion.

For US wind-industry-related trade in China, dropping the five-year-old requirement is unlikely to have much effect.

The US is famously not a major exporter of wind energy technology or equipment. On the other hand, the leading Chinese wind turbine manufacturers are eyeing the US market as a major export destination.

Bring European wind industry companies into the picture and you would still expect little impact from the legislative change, as all turbine manufacturers — local and international — are meeting and exceeding the requirement by sourcing ever higher levels of components within China.

The 70%-local-content requirement crept into the industry, initially caged within the bidding documents for the national projects of 2003-2004.

Similar policies had appeared in other industries, including the automotive sector, and in wind industry-related legislation as far back as the 1990s.

For a while, it was simply understood to apply to the overall industry, and as a formal requirement it was set into legislation in 2005 via a simple public notice of the Chinese National Development and Reform Commission.


While the legislation looked protectionist and arguably ran against the spirit of the World Trade Organisation Agreement, it was never challenged.

To have done so, international companies would have had to lodge a formal complaint and faced costly dispute-resolution procedures — they clearly saw more to lose than gain from lodging a complaint.

Joanna Lewis, assistant professor of science, technology and international affairs at Georgetown University in the US, says: "Other mutually reinforcing industrial development policies that are more in line with what other countries have used — including direct government support through research and development funding and demonstration projects — may arguably have been more instrumental in supporting the development of China’s wind industry than the local-content requirement.

"The local-content requirement did little to promote technology transfer to Chinese companies."

Essentially, the requirement was self-enforced as international companies sought to meet and exceed it and domestic companies built up largely domestic supply chains.

Initially there were questions concerning the eventual interpretation of the requirement whether, for example, it referred to each turbine or an average of an overall project.

And clear guidance on how to calculate domestic content involving component imports at the sub-main-component level was never given.

For as long as it was in place, the industry never heard of cases where it was not met, or in which enforcement measures were required. In the end, the requirement was removed in late 2009 through a National Development and Reform Commission memo.

High local content

If the requirement was an initial push to activate a Chinese component value chain, competition is now pushing for ever higher levels, making it effectively redundant.

Wind turbine manufacturers can find a local producer for pretty much any major wind-turbine-related component.

China’s 100-plus nacelle assemblers can now choose from over 250 domestically situated suppliers of main components: blades, gearboxes, generators, towers, large bearings.

A quick sample of the domestic industry leaders puts top-selling models by Sinovel, Goldwind, Dongfang and Guodian United at between 90%-95% domestic content, some mentioning the possibility of now sourcing 100% domestically.

A similar sampling of the international companies — Vestas, Gamesa, GE, Suzlon and Nordex — returns values starting from 70% and climbing.

The Vestas V52, V80 and V90 have 80% minimum local content, and for the V60, an 850kW turbine designed for the Chinese market, the local content level is over 90%. Likewise, German manufacturer Nordex, which produces its turbines at a joint venture in Xian, Shaanxi province, claims 80%-85% local content for its S77 1.5MW turbine, which it produces and sells in China.

According to one industry insider: "If you want to compete in China, it’s not a question of just meeting the former 70%-local-content requirement. You will want to maximise use of the domestic value chain to remain cost competitive."

Going large

There is a push towards larger turbines in China. On one hand we see government policy manoeuvring to support larger and more advanced products.

Proposed legislation released for industry comment by the Ministry of Industry & Information Technology earlier this year sought to limit the industry to leading firms with the technology to produce turbines of 2.5MW and higher — and to discourage new entrants with older technology or more limited in-house design capability.

Early this year, contracts for 1GW wind projects in Gansu, awarded to Goldwind and Sinovel for larger 2.5MW and 3MW products, came to light.

These orders are expected to be able to develop enough experience with the new products to kick-start demand outside the government procurement sphere.

For the domestic brands, developing product portfolios with comparable-sized units to their international rivals is a cornerstone of competing globally.

It remains to be seen how enthusiastically domestic developers will be buying the less-proven — and possibly initially more expensive — larger units, but further wind base tendering and demonstration projects are on the horizon.

Turbines of 2MW and larger have represented between 5-10% of China’s total market since 2006, and suppliers are gearing up to deliver the larger components.


Without the 70% domestic requirement, companies will have more freedom to improve their supply chain strategies, combining cost-effective domestic suppliers with imports to avoid bottlenecks or add quality.

As this specialised niche matures domestically, manufacturers of key components for larger turbines may no longer face the previous urgency to set up shop in China.

But domestic suppliers will make the investment and eventually develop capacity wherever demand emerges.

As China continues to flourish as a regional and global cluster for wind turbine production, pressure to localise is unlikely to abate.

Perhaps dropping the 70% requirement should not be seen as a trade concession at all but as a necessary step in keeping momentum behind the production of larger turbines for which certain technologies and processes have not yet developed in China.

As another industry source put it: "Hats off to the policy makers in Beijing for engineering the birth of a domestic industry."

With this chapter behind us, we are now in the dawn of the next stage in which China promotes the birth of globally competitive players.   

Sebastian Meyer is director of research and advisory for Azure International Technology Development

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