China's US strategy faces uphill struggle

UNITED STATES: China's wind companies - both manufacturers and financers - are rushing to stake a claim in the US market before it slumps because of policy uncertainty.

But the inroads so far have been much more modest than expected, even if the long-term outlook for Chinese direct investment and sales is positive. The hurdles include the continuing Sino-American trade war over wind and other renewables components, looming US elections; legal action over intellectual property (IP) between US wind company AMSC and China's Tier 1 turbine manufacturer Sinovel; and a contraction in China's own wind market.

Indeed, as Chinese wind companies have started to encounter the realities of the US market - from the bastions of corporate lawyers and unusually fragmented electricity market to political gridlock in Washington and resistance to Chinese investment - all but the most astute have faltered.

Such obstacles are especially hard for those Chinese firms most reliant on top-down directives and domestic protectionism. Andrew Chen, president of USFOR Energy, a consultancy set up to help Chinese companies enter the US market, admits: "Right now, the US may not be the important market for Chinese companies," he says. Just two years ago, the consensus was that Chinese wind companies should enter the US market as soon as possible for both profitability and to prove themselves in the most difficult of mature markets. Chen estimates that Chinese companies have invested $250 million in the US market so far, an eighth of the $2 billion short-term investment he predicted 18 months ago. Even so, a significant Chinese foothold has been created in the US, especially by Goldwind and by some manufacturers of major components.

The first, a pilot project using 10MW of Baoding Huide turbines, was installed by Aviation Industry Corporation of China and came online near Lubbock, Texas, in 2007. At the end of the first quarter of 2012, no more than 50MW of Chinese turbine capacity had been connected to the US grid, a startling contrast with the 37GW total installed capacity since 2007. But by the end of 2012, China's US footprint should have increased to a respectable 160MW at least, estimates Caitlin Pollock, Asia wind specialist at IHS Emerging Energy Research. Of that, the lion's share will be Goldwind's 109.5MW Shady Oaks project in Illinois, which it announced it would buy from Irish developer Mainstream in late 2010 and was still trying to sell on to an investor last month.

The majority of interested suitors have been "Western entities", a Goldwind spokesman told Sparkspread, the energy-financing news outlet. A power purchase agreement (PPA) with Commonwealth Edison Co was to start on 1 June. Crucially, Shady Oaks has three of Goldwind's 2.5MW machines, in addition to 1.5MW machines, says Tim Rosenzweig, CEO of Goldwind USA. They are the largest Chinese turbines installed in North America, according to IHS. "With most (of the world's) OEMs offering turbines larger than 1.5MW, Goldwind's 2.5MW machine is expected to become an increasingly important product for the company to commercialise in the US market," wrote the analysts.

This year, the second-largest installation of Chinese turbines will be Goldwind's 20MW Musselshell wind project in Montana, which the company is to buy from Volkswind USA. Goldwind also expects to announce a medium-sized project in the north-east by summer.

Major component suppliers have made inroads as well. At least 1,000 gearboxes by Nanjing High Speed Gearbox Factory worth around CNY 1 billion ($158.47 million) have been imported, according to the Chinese Wind Energy Association. Imports of Chinese towers have also grown steadily over the past few years, especially for projects near the Pacific coast. In 2010, US imports of Chinese towers were valued at $103.6 million, according to the US International Trade Commission.

Even the world's largest wind farm, the 845MW Shepherds Flat project under construction in the Pacific Northwest by Caithness Energy, has been importing towers made by two China-based companies, Titan Wind Energy (Suzhou) and Chenghi Shipyard.

Tower imports

Meanwhile, the trade war between the US and China is escalating. A coalition of leading US wind tower makers Broadwind Energy, DMI Industries, Katana Summit and Trinity Structural Towers has accused Chinese and Vietnamese companies of dumping towers on the US market at below the cost of production. They also allege that the Chinese market has propped up exports by its tower companies by overly subsidising them.

If the US Department of Commerce finds in favour of the US companies regarding the subsidies, in a decision due at the end of May, hefty cash deposits could be required immediately on newly imported Chinese towers, says attorney Dan Pickard, one of the lawyers at Wiley Rein who is handling the case. The case follows a similar complaint by the United Steelworkers to the US Trade Representative last year, which resulted in China ending one of its wind equipment subsidies.

In addition, US developers and financers are still wary of importing Chinese technology. Not only is it relatively unproven in the US market, but the AMSC-Sinovel fight over stolen trade secrets and alleged corporate espionage is putting them off.

In September last year, Serbian software engineer Dejan Karabasevic, a former employee of US firm AMSC who worked at the company's research facility in Austria, pleaded guilty to distributing trade secrets including AMSC blueprints and software codes. His conviction only adds weight to AMSC's case. It is seeking $1.2 billion in China from Sinovel for alleged IP theft, breach of contract for refused shipments of imported components and damages. AMSC officials have claimed to have hundreds of emails between the Serb and "senior" Sinovel staff. Sinovel denies all the charges and has counter-sued, also in China, for breach of contract.

The impact on the reputation of Chinese wind companies, especially in the US, has been palpable. A senior official with a major Chinese firm at Infocast's US-China wind conference in December was quick to insist that his company owns all its own IP. "We fear we're all collateral damage," said one official from another China-based wind company entering the US market, of the AMSC-Sinovel fight.

And Sinovel, a quasi-government business, has unsuccessfully been trying to buy a pilot utility-scale project in the US for some time, notes Amy Grace, lead wind US analyst for Bloomberg New Energy Finance.

US domestic politics are already playing a role in China's entry to the nascent US offshore industry. Upstart Fishermen's Energy has been hoping to use XEMC's direct-drive 5MW, XE115-5000 in its proposed 25MW pilot project 4.5 kilometres off New Jersey, a hard sell politically even though Fishermen's said they would be assembled in-state. The information emerged in a report by Acadian Consulting Group commissioned by the state, and disclosing that the project financing might include a 70% project equity stake from XEMC. The company failed to respond to requests for information from Windpower Monthly.

Chinese developers or finance bodies are more likely than equipment makers to enter the US market in the short term, says Chen. He cites Long Yuan's 100MW Dufferin project in Ontario, Canada which will use 31 of GE's 1.6-100 turbine and 18 of GE's 2.75-103 model.

On a far larger scale, there have been reports that State Grid Corp of China has been negotiating with US-based AES Corp to buy some 80% of its $1.65 billion wind business. The Chinese utility's controlling stake would have marked State Grid's entry into the US power market. The talks were not denied by AES.

China is running out of time before the current window of opportunity in the US closes and next year's predicted slump begins. But manufacturers that have staked a sizeable claim will be a significant step ahead of their rivals. Even if the production tax credit does expire at year-end, installed Chinese turbines will be working towards the benchmark of "100 years at 95% availability on US soil" that investors typically want before they consider a turbine to be bankable in America.

Have you registered with us yet?

Register now to enjoy more articles
and free email bulletins.

Sign up now
Already registered?
Sign in