A Gale-Force Storm

Chinese companies have blown into the wind power world, causing companies around the world to take notice.

A decade ago China had no sizeable wind turbine makers. Now, with Chinese makers occupying four of the top 10 slots in the industry, come market rumors that a Chinese company might bid for Vestas, the world’s largest wind power company. Winds of change are coming through China and blowing through the business.

Recent speculation that one of China’s top wind turbine makers, Sinovel or Xinjiang Goldwind, might make a bid to acquire Danish wind turbine giant Vestas reflects an industry that is going through unprecedented turmoil as selling prices fall and profits evaporate as a clutch of Chinese companies jostle for position. Even if the rumors come to nothing, the mere fact that the speculation in a Danish newspaper is being taken seriously is a sign of China’s wind turbine makers’ newfound importance.

As the hyper-competitive wind industry consolidation this is a pivotal moment for Chinese ambitions. It is also an early test of China Inc.’s strategy not just in wind power but throughout the renewable energy field. At stake is whether the Chinese growth-at-any-cost model – reliant as it is on cheap state-backed credit, scant regard for profitability and the world’s largest domestic market – is sustainable over time and on a global scale.

Certainly, Vestas looks vulnerable to a takeover attempt. The world’s largest wind turbine manufacturer, with 12.9 percent of the global market in 2011, has seen its shares lose 70 percent of their market value in the past 12 months, even after rallying on the takeover speculation. Its deputy CEO and chief financial officer recently resigned and its chairman and deputy chairman are on their way out.

Vestas’ problems mirror those of the industry as a whole. Subsidies have been put on hold in Spain, once one of the world’s largest markets, and may be eliminated in the United States at the end of 2012. Already, in April, they were reduced in India, the world’s third-largest market in 2011. A variety of clean-energy stimulus programs enacted in the wake of the global financial crisis are falling victim to the newfound focus on austerity a time when the all-important Chinese market is expected to show little year-on-year growth.

Profit margins are being savaged as tough competition forces prices down. For Vestas, deliveries in China fell as the company declined to chase business at, in the words of Vestas president and CEO Ditlev Engel “an unacceptable pricing level in the Chinese market where we decided not to participate at prices and terms and conditions at such level as they would not support Vestas [going] forward.” Engel also mentioned unnamed “great constraints in China” as a problem for Vestas.

In wind, as in solar, sales are booming, profits are plunging. China is the world’s largest market for wind and its wind turbine manufacturers have come from obscurity in recent years to become global leaders. As with solar, China’s manufacturers are on an expansion binge, aided by generous funding from the China Development Bank (CDB). Earlier this year, the CDB promised Xinjiang Goldwind, the country’s largest turbine maker, 35.5 billion yuan in credit over the next two years.

The strategy is paying off, at least for now. As recently as 2006, no Chinese wind turbine makers were in the top 10 globally. Now four are – Sinovel, Goldwind, United Power and Mingyang. As of April 20, Sinovel’s market capitalization was US$ 5.2 billion and Goldwind’s was US$ 2.4 billion. Vestas’ capitalization was a comparatively small US$ 1.9 billion.

All the growth won’t necessarily lead to sustainable profitability. While China’s solar competitors are mostly standalone companies, multinational giant General Electric is the world’s third-largest turbine maker, with 8.8 percent of the market last year. Germany’s Siemens, another deep-pocketed global engineering behemoth, is also a significant player. In short, China’s wind makers will not have an easy time pushing their way to the top.

There is certain to be a lot more turbulence before the industry stabilizes. Jorge Calvet, chairman of Spain’s Gamsea turbine maker (the world’s fourth largest, just a little behind GE), told Xinhua that the number of Chinese wind turbine manufacturers had soared from no more than a dozen in 2005 to more than 85 in 2011 and that “the first half of 2012 is the worst time in the last four years.”

Indeed, Gamsea did not receive a single new order during the first quarter of 2012. “We will see even faster deflation in the first half of 2013,” Calvet warned. Like many in the industry, Calvet says that the pressure on pricing will trigger a consolidation. Indeed, no less a figure than outgoing Premier Wen Jiabao remarked on excess manufacturing capacity in the wind sector in his remarks to the National People’s Congress in March.

China’s wind turbine makers, too, have struggled. Market leader Xinjiang Goldwind, whose 9.4 percent global market share makes it second only to Vestas, saw its shares slump 77 percent from the beginning of 2011 through April 20. Rival Sinovel, which had an IPO in January 2011, reported that profit last year fell 73 percent. Its shares are down 59 percent from the IPO. The company, which saw its global ranking fall from second to seventh in 2011, said in a statement posted on the Shanghai Stock Exchange that turbine prices were more than 40 percent lower than in 2008.

These crashing stock and turbine prices are taking place at a time of extraordinary global growth, led by China. China is the world’s largest market for wind power, with its 17,631 megawatts of newly installed wind capacity making up 43 percent of the global total last year. The United States, ranked second, accounted for just 17 per cent of the market, with 6,810 megawatts of new wind capacity. India was a distant third with 3,000 megawatts of new wind power. With prices falling and efficiency rising, wind is often competitive with fossil fuels, researchers at the prestigious Lawrence Berkeley Laboratory say. Taller wind towers and long turbine blades are increasing the average power produced by each turbine, further reducing costs.

Wind power is likely to keep growing throughout the world. Asia, led by China, will emerge as the largest market in the world. The Global Wind Energy Council expects that the cumulative installed base in Asia will surpass that of Europe sometime next year. With 26 percent of the global installed base, China already has far more wind power than any other country.

Certainly, as China tries to mitigate its choking dependence on coal and other fossil fuels, its audacious targets for wind power are largely likely to be realized. By 2020 the country plans to install 160 gigawatts of wind power. Although wind is not as reliable as coal, that 160 gigawatts of wind power expected by 2020 is equivalent, at least in terms of rated capacity, to more than 300 conventional coal-powered plants.

Given that China has 62 gigawatts of wind power, with half of that installed in 2010-11 alone, that goal is well within reach. In fact, the Global Wind Energy Council says that 200 gigawatts by 2020 “is very achievable if the grid issue is tackled effectively.”
The ability to efficiently use this new capacity has been troubled, as the electrical grid operators have often been unable or unwilling to dispatch power. The Global Wind Energy Council bemoans “the lackluster efforts of the grid companies to improve the grid infrastructure to keep up with the installations.” Despite new planning and operational rules put in place last year, “there is still the matter of political will, and although the State Grid’s rhetoric has changed, it seems that its behavior has not.”

China’s wind power manufacturers are starting to have notable overseas successes. In July, Sinovel announced a 1.5 billion euro deal in Ireland, financed by CDB. In September, it made its pioneering foray into Latin America, with an agreement to sell 23 turbines to Brazil’s Desenvix. The CDB has also made significant credit available to Goldwind. As of last October, Bloomberg calculated that the two companies had received or been promised at least US$ 15.5 billion in credit from the CDB.

China likes to say that it has pioneered a unique model of economic development, one that pairs the best of state-led planning – and state-backed financing – with the entrepreneurial instincts of individual companies. There is nothing unique about this. China has largely replicated the Northeast Asian statist model pioneered by Japan and followed by South Korea. It is doing this in different industries, like wind and solar, than South Korea and Japan did from the 1960s to the 1990s. But the basic model is the same.

There is little reason to believe that this approach is sustainable on a medium- to long-term basis, any more than it was with Japan and South Korea. For South Korea, the 1997-98 financial crisis forced the country to largely jettison the old model. For Japan, the lost decades since 1990 should be a warning to China of the limits of this approach.

As labor costs rise, and as the demands for a return on capital come to the fore, the shortcomings of China’s approach will become clear. But those limits are several years, perhaps a decade, off. Until then, companies like Vestas, Gamsea, General Electric and Siemens will find it tough to compete with the likes of Goldwind and Sinovel. For buyers of wind turbines, for electricity consumers, and for anyone concerned about trying to replace fossil fuels with renewable energy, this will speed the widespread introduction of wind power.

For anyone concerned about the sustainability of a dynamic industry that can afford the needed on-going research and development costs to keep driving technological improvements, the picture is not as clear-cut. But the outlook for the next few years, at least, is continued downward prices and improvements in technology. The wind-turbine business may have low or no profits, but the relentless competition will speed the transition away from fossil fuels.

Asia Business Council Adjunct Fellow Jill Baker contributed research assistance.

This article originally appeared in Caixinhttp://english.caixin.com/2012-05-02/100385748_all.html