Business: China opens market to foreign manufacturers

Government signals end to domestic-content requirement.

A Chinese official has revealed that the country will soon lift its requirement that 70% of all wind plant components be made locally. The requirement had forced suppliers from abroad to set up shop in China - at great expense - to share in the huge market.

The decision revealed by Li Ye, director of the National Energy Administration's energy conservation department, is seen as a means of rectifying what the government calls overheating in China's wind sector. Li says the 70% requirement will end in the near future. But he declined to provide a timetable.

Li's statement follows an announcement in October by the government, saying that it would hold back funding or approval for projects in industries with production over-capacity (see page 34). In recent years, the number of Chinese wind turbine manufacturers has more than doubled from fewer than 40 in 2004 to more than 80 in 2009. China also has about 50 wind turbine blade suppliers and nearly 100 tower manufacturers.

Li says China has no alternative but to cancel the localisation requirement. "Among the eighty plants, about thirty never produced any wind turbines previously," Li says. Many others made a few sample wind turbines, but fewer than ten each. Fewer than ten plants ever produced more than 100 turbines and only three suppliers - Chinese top wind turbine manufacturers Sinovel, Goldwind and Dongfang Electric - produced more than 1000 turbines each, according to Li. "This is very ridiculous," he says.

Foreign firms have long awaited the change. Shortly before the government's about-face was revealed, Peter Brun, senior vice-president of Denmark's Vestas, warned a largely Chinese audience at October's China Wind Power conference in Beijing (see page 57): "You will breed protectionism in foreign countries if you don't open up your own market."

Best intentions

After China's National Development and Reform Commission enacted the localisation requirement in 2005, wind farms failing to adhere became ineligible for construction approval.

The rate of localisation was defined as the portion of total domestically manufactured and assembled components in a wind turbine. As long as production occurred in China, the level of Chinese ownership in factories was immaterial.

Industrial officials said the compulsory 70% localisation requirement was meant to reduce costs of wind power and accelerate industrialisation of the Chinese wind manufacturing sector. But things got out of hand. Under the policy, the number of firms in the market soared, but the number of home-grown technologies did not. "The (wind) sector deviates from what is normal," says Zhang Guobao, director of the National Energy Administration.

Chinese firms' eagerness to absorb foreign know-how was not matched by a willingness by overseas partners to pass on key technologies. In the end, domestic firms struggled to establish high levels of quality. "Certain wind turbines from a Chinese plant malfunctioned in less than one year," says You Min, a wind power expert with the China Electricity Council. "The poor quality of Chinese-made wind turbines affected the overall development of the Chinese wind power industry, running counter to the country's expectations." He hopes allowing fully foreign products will change the landscape for developers. Some plant owners complain openly that low-quality domestic turbines have dented profitability. "If we open the market to foreign business, we will be able to truly introduce foreign quality technologies and products," says You.

Industry Reshuffle

Chinese manufacturers can now expect hot competition, suggests Li.

"Once we remove the 70% localisation requirement, big international wind power businesses will swarm in. Chinese wind turbine producers will meet fierce competition," he says. "It will not be very long before the Chinese wind power manufacturing sector experiences an industrial reshuffle."

That prospect has made many Chinese manufacturers angry. One deputy chief of a Chinese wind turbine supplier, who refused to be identified, says: "We need to improve our turbines by installing them in wind farms. If the market does not give us opportunities to practice and study failures, how can we boost the Chinese wind power equipment industry?" Meantime, Shi Pengfei, vice-president of the China Wind Power Association, says the main question is how much leeway domestic firms should have. There are enterprises, he says, that are too eager to push their products into the market whether or not they are technologically mature.

Ready for change

Some foreign businesses are positioned - or are positioning themselves - for the expected change in policy.

In October, Danish turbine giant Vestas unveiled its largest manufacturing base worldwide in Tianjin, north-eastern China: a $220 million facility able to produce turbine blades, generators, control systems and other components.

Another company is Germany's Freudenberg Group, which supplies seal rings and lubricants to wind farms in Gansu and Jiangsu provinces as well as Inner Mongolia. Hanno Wentzler, CEO of Freudenberg Chemical Specialities, says his firm will expand production in Qingpu, Shanghai; and Taicang, Jiangsu province, next year.

But Paulo Soares, CEO of Suzlon Energy, which has sold about 800 turbines to Chinese customers, including major developers Huaneng and Datang, doubts the promised repeal will do much to invite foreign businesses. Soares says his company will make no significant change in strategy in reaction to the government decision.

"All the major manufacturers are already here," he notes, adding that opening doors to components shipped from abroad will have little impact. "Importing turbines is very expensive," he continues. "The government has not mentioned anything about import duties on turbines coming from abroad. The only potential benefit would be if I have a bottleneck and I need to bring something from my other factories. Now I am free to actually do this without worrying. That's basically the only thing that I see as a potential benefit."