Battle looms on supply front

With the number of domestic wind turbine manufacturers in China now totalling almost 40, foreign suppliers are facing increasingly tough competition to secure a foothold on the Chinese market. There will be "several years of chaos in China," warns Pan Weiping from the local office of British wind power consultancy Garrad Hassan.

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China has become a battlefield for foreign and domestic wind turbine manufacturers competing to secure their share of one of the world's largest markets for green power

With the number of domestic wind turbine manufacturers in China now totalling almost 40, foreign suppliers are facing increasingly tough competition to secure a foothold on the Chinese market. There will be "several years of chaos in China," warns Pan Weiping from the local office of British wind power consultancy Garrad Hassan. Paulo Soares from Indian wind turbine maker Suzlon agrees. "Either we will have a price war, companies will become insolvent or foreigners will just use China as a basis for export for their international business, or maybe all three at the same time," he says. Both Pan and Soares were speaking at the Renewable Energy Finance Forum (REFF) held at the end of March in Beijing by Euromoney Energy Events and the China Renewable Energy Industries Association (CREIA).

The growth in domestic manufacturers in China at the same time as an influx of foreign manufacturers follows the setting of ambitious government wind targets for the country and a policy which sets a 70% local content mandate for wind plant. The targets aim for 5000 MW installed capacity by 2010 and 30,000 MW by 2020. Already the 2010 target looks almost certain to be achieved ahead of time, prompting industry speculation it will be raised, something China's National Development and Reform Commission (NDRC) has no intention of doing, CREIA's Li Junfeng told delegates. The target is a minimum expectation, he said. He confirmed the 5000 MW goal could be achieved as early as the end of next year but added: "NDRC thinks the speed of development is a little too fast. The domestic industry is not yet ready."

Most domestic manufacturers are producing technology based on licenses granted by European wind turbine companies, with Goldwind, which secured an early licence with Germany's Repower, the most successful domestic manufacturer to date. Other Chinese engineering companies are committed to independent product development, an approach NDRC encourages. Chinese designed turbines remain at the prototype stage, however.

Quantity and quality

While some delegates at REFF suggested the Chinese rush into turbine manufacturing could come at a price that sees quantity prevail over quality, Pan says it is too early to tell. "Certainly it's too early to comment on any significant problems in the new emerging Chinese manufacturers. We'll see if their turbines run, for example, over several months. We can see the operating data and then we automatically know what kind of problems we have," he said. "The industry bottleneck right now is the supply chain, as well as experienced wind engineers."

Soares said Chinese suppliers are not serious rivals to foreign companies at present -- even though their market share has increased from 20% in 2004 to around 40% in 2006. But that will change with time, he said. "We're not afraid of competition in the future," he said. "We hope there will be good Chinese companies in the coming years, but the learning process is a very important part of company growth." Pan pointed out that the rush to enter wind turbine manufacturing is fuelled by government. "We may see industry consolidation in a few years down the road, but right now there are all sorts of government incentive programs to support local manufacturing industries." He added: "Finally the market will decide who can survive."

Government bias

Delegates heard that turbines supplied by foreign firms, many of which have set up manufacturing in China to meet the local content mandate, are often up to 15% more expensive than those sold by Chinese firms. But until confidence in the reliability of new domestic machines grows this is not seen as a major obstacle for the market's global leaders such as Suzlon and Vestas.

Some believe the government's pricing policy for wind power leaves profit margins wafer thin, making life particularly hard for overseas manufacturers and project developers. Furthermore, of four large government tenders for wind power purchase contracts, all have gone to large state-owned enterprises at prices which many have argued are too low to be viable. A fifth tender round is due this year, according to NDRC representatives at REFF, but details on specific projects are still pending.

According to Shi Pengfei of the China Wind Energy Association (CWEA), there is no bias against foreign companies. "The Chinese government does not favour large state-owned enterprises against private or foreign contenders, at least not on the levels of policies and the law," he said. The fact that most national wind projects have been awarded to state companies has to do with their anticipation of the government's green energy targets, Shi said. "Although the introduction of the quota remained uncertain, it has had a real impact on the Chinese wind market, with a number of companies heavily investing in renewable energy resources." Shi advised would-be investors to do a good job of surveying the market and potential resources before jumping into the sector.

The easy route

Soares said foreign companies and private developers would be wise not to bank on securing large central state concession projects, but instead to look to provincial markets under the control of local government. "I would not say that foreign developers have no chance," he said. "But I think it would be easier to go on a provincial level and start from there, as opposed to going for the national concession projects. That, we think, is a much more difficult proposition." At present, provincial governments generally offer better power purchase rates than those of concession projects.

In addition, under China's renewable energy law, all renewable energy should benefit from favourable tax treatment, although the specific methods are still to be announced. The country has just passed its new taxation law, but did not include renewable energy in the list of sectors and products eligible for tax breaks. CREIA's Li Junfeng said many companies have complained to the state administration of taxation. Subsequently, the department has promised to correct the mistake by adding renewable energy into upcoming revisions of the law.

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