Special Report - Opportunity and Risk in China - International suppliers - Not a level playing field for foreigners

When China announced its renewable energy law in 2005, the global wind power industry hailed it as the opportunity of a lifetime. International turbine suppliers were already dominating a fledgling market, which in that year raised its installed capacity from 769 MW to 1264 MW. The technical potential in China is for 250 GW, not counting offshore. With Goldwind as the only Chinese firm of note to compete against at the time, foreign firms were expected to dominate for years to come.

How wrong they were. "Business is difficult," admits Paulo Soares of Indian turbine supplier Suzlon. His company supplied the seventh largest volume of installed wind capacity in China last year - 200 MW of the 3300 MW that went up, or 6.24% of the market in 2007, well up on its 0.94% share in 2006. As such it was one of the few foreign turbine suppliers to make real headway in China in recent years.

Thomas Richterich of German firm Nordex, which supplied just 55 MW in 2007 and saw its market share fall from around 3% to 1.68%, shares Soares' view. "It is very difficult," he says. Even though nearly all foreign turbine suppliers installed more capacity in China last year than previously, it is a widespread sentiment. World leader Vestas saw its China share plummet from 23.44% in 2006 to 11.16% in 2007, relegating it to fourth slot overall and second among the foreigners. The 2007 leading overseas firm, Gamesa, recovered some share, up 1% on 2006 to 17%, but less than half the 36% it held in 2005.

Chinese competitors, which have grown significantly in number since 2005 and offer turbines at prices well below those international firms are prepared to consider, easily dominate the market (previous story). For international suppliers, China is an increasingly tough market to penetrate. "Protectionism by the government toward local suppliers and local project developers is the main problem. We are not being allowed to compete on equal terms," says Soares. "Give us the opportunity to compete on equal terms and international suppliers can be as competitive as local suppliers."

State bias

Around 19 GW of wind turbines are currently on order for installation in China. "About 6.5 GW of those orders were placed via national level concession projects and special policy orders, with no access to international players," Soares says. "This sets a dangerous precedent, because international suppliers were the ones who started the development of this industry in China and have always supported its policies, investing heavily in new factories, training, and product development."

An "excessive amount" of orders are being placed to "inexperienced and unproven turbine suppliers, without proper qualification," he continues. "The problems those suppliers are facing regarding machine quality and low availability are kept far from the public eye." Many of the Chinese turbines being made under licence agreements with foreign firms "do not have proper certification, be it from Germanischer Lloyd or elsewhere," Soares says. "Having a licence for a certified turbine does not mean the localised turbine is also certified."

New subsidies and import duty rules (page 11) that serve to benefit Chinese wind companies are adding salt to the wound. Chinese wind turbine makers are able to pass the subsidies and cost savings down the chain and offer machines at lower prices, says Richterich. "We are not satisfied with the clear preferential treatment given to local companies," agrees Soares. "It is unfortunate that international turbine suppliers located in China, which have invested in infrastructure to comply with the localisation requirements of the government, do not unite to take any action to protect their interests."

As well as government protectionism, the global credit crunch and new bank finance rules in China are also making themselves felt (page 11). "Many customers are facing difficulties reaching financial closure for their projects," says Soares. Suzlon admits it has completed turbines languishing in factories still waiting to be delivered for lack of payment. A silver lining to that cloud is that this year Suzlon's component suppliers can keep up with demand, says Soares.

Both Soares and Richterich insist they have no regrets about entering the Chinese market, which has seen them and their main competitors on the global stage, including Vestas, Gamesa, and GE Energy, spend millions building manufacturing plants in the country. "China is one of our key markets, and being successful here is important for the overall success of the company," admits Soares, who hopes Suzlon can secure 8-10% of China's market this year. Deliveries for the company so far in 2008 total 285 MW, he says. Suzlon has facilities in Beijing, where it employs 120, but its main production works, employing over 1000 people, is in Tianjin, where most of the other global leaders have also set up shop.

Suzlon produces 1.25 MW and 1.5 MW units in China, suitable for both low and standard temperature climates. "We can produce 600 turbines a year," says Soares. "We are expanding our blade factory at the moment, but this is what we have planned for this year." At present, Suzlon gets 80% of its components from inside China, using "the main suppliers everybody else has." Towers have proved the most difficult item to source, he says.

For Nordex, there is no question of not being in China. "We firmly believe China will be the biggest market, certainly within the next five to ten years," says Richterich. "Our first interest is to grab our part of the market and sell machines into China. There is huge potential." Nordex is investing heavily to that end and is on course to install 200 MW this year. "Our EUR50 million expansion plan is on target," says Richterich. The company already has a nacelle assembly factory in Yinchuan and a blade facility at Dongying. "We are just now investing EUR15 million to increase our rotor blade production in China and we are very close to finding a solution for nacelle assembly. Here we will either rent or invest in our own production facilities, but either way we are close to making that final decision. With those complete, we will double our capacity. We will be able to produce 300 megawatts on the blade side and the same for nacelles in 2009." By 2011, Nordex expects to produce 800 MW a year in China (Windpower Monthly, December 2007).

Prices too low

If wind power purchase prices, which are set by government in China, do not improve, Nordex may export some of its Chinese production to other Asian markets, such as Vietnam. Like Soares, Richterich stresses that many Chinese companies are offering "unproven technology at low prices against our proven technology." All of Nordex's customers, the country's big utilities, are buying turbines made by domestic and foreign companies, he says. "Say they buy 500 megawatts of Chinese technology, they are then also buying 100 to 150 megawatts of international technology so they can compare performance," he says. "We hear from some of our clients that our turbines are performing better than the Chinese ones."

Nordex employees 450 people in China and has set up training programs, with all Chinese employees expected to spend some time learning at the company's German facilities. "We have also set up a knowledge academy in China with teachers from Germany," he says.

Nordex is aiming to increase its market share in China to 15% by 2011 from 3% in 2006, a figure almost double what it managed in 2007. "In terms of market share, let's be clear. Two years ago, when we first announced our plans and strategy, no one expected China's market to grow so fast," says Richterich. "It has been growing at 50-100 percent year on year. So yes, of course our market share per se will have inevitably decreased this year. But we feel we should not focus on market share. Our target is business volume."

Nordex is only offering its 1.5 MW machine in China at present. "We believe it is very good for China, most notably with the transport issues there," he says. "If we offered the 2.5 MW now, then we would have problems on this front to deal with. The better strategy is to build up a good supply chain for the 1.5 MW and then use that for the 2.5 MW eventually, but I do not think we will reach that stage for at least three years."

Three-part strategy

Once it has managed to establish a secure quality supply chain "we will look to sell some Chinese made turbines to some of the smaller up and coming Asia markets such as Vietnam and Taiwan, as well as Japan, Pakistan and even India," he says. "The third part of the strategy is then to use the structure in China to supply components sourced from China for units being assembled in Europe or elsewhere." It is a strategy most international firms are now banking on when it comes to China, he notes.

Building up a quality supply chain is critical for the strategy to work, he says. "To do that, you need at least two suppliers for each of the critical components. These suppliers need to be tested and certified to international quality standards. At present there are just not enough companies in China that meet those standards."

Gearboxes are one of the most difficult bottlenecks, he says. "Being able to produce one gearbox of quality is no good; they need to be able to supply 100 or more of consistent quality. So we have to look very closely at the production processes of suppliers to ensure sufficient standards." Only one Chinese gearbox company, China High Speed Transmission, is in the process of implementing rigorous quality production processes, he says. "They are making great progress on implementing a quality mechanism throughout their operations. Others have come into the market but still have a long way to go."

Nordex is hoping to convince European gearbox suppliers to set up in China, but Richterich fears it can take three to five years. "Even then there is still a lot to do to get the same kind of supply chain quality that we have in Europe. It is not just Nordex but some of our European competitors are also working to this end."

Neither Vestas nor Gamesa responded to interview requests.

Article by Gail Rajgor, Senior Editor.