China has taken on General Electric Co. and Western peers that control the $70 billion wind-turbine market, striving to repeat its 2010 coup when the Asian nation sold more than half the world’s solar panels for the first time.
Armed with at least $15.5 billion in state-backed credit, China’s biggest windmill makers Sinovel Wind Group Co. and Xinjiang Goldwind Science & Technology Co. won their first major foreign orders in the past year. They plan to set up plants abroad, including China’s first in the U.S., easing entry into markets for delivering machines that can weigh 750 tons each.
Sinovel and Goldwind may counter the quality concerns of customers and overtake Denmark’s Vestas Wind Systems A/S as the biggest supplier by 2015, a Bloomberg New Energy Finance survey forecast. That can erode sales and margins for suppliers such as GE and Vestas that already face cutbacks in European subsidies and a 22 percent plunge in turbine prices from their 2008 peak.
“The Chinese dragon is coming,” said Jose Antunes Sobrinho, chief executive officer of Brazil’s Desenvix SA, a wind developer that ordered 23 Sinovel turbines in September.
The deal, South America’s first contract with a Chinese supplier, “is going to be a stepping stone for them” to showcase machines that are about 10 percent cheaper than those sold by competitors in Brazil such as GE and Germany’s Siemens AG, he said by telephone on Oct. 3.
Competing With Coal?
A shift to Chinese suppliers could even nudge down the cost of wind power enough for it to compete with coal and natural gas in the U.S. and Europe when the wind is blowing, threatening fossil fuel-based business models at utilities such as Germany’s RWE AG and Centrica Plc of the U.K.
While U.S. President Barack Obama and Chinese Premier Wen Jiabao both said developing clean energy is a top industrial priority, China is increasingly gaining the manufacturing base for equipment needed to wean their economies from fossil fuels.
Turbines marketed by the Western suppliers are increasingly assembled from cheaper parts made elsewhere. Repower Systems SE, Suzlon’s German unit, can reduce costs on average by 15 percent by boosting the share of components from China and India, Chief Executive Officer Andreas Nauen said in June.
Gamesa Corp Tecnologica SA, Spain’s biggest turbine maker, didn’t sell a single turbine in its home market last quarter and is ramping up manufacturing capacity in China, Brazil and India, where it expects to source as much as 70 percent of turbine components locally by 2012, according to CEO Jorge Calvet.
Assembling in China
The U.S. “can’t compete with China to make solar panels and wind turbines,” U.S. Representative Cliff Stearns, a Florida Republican, told National Public Radio on Oct. 4.
Vestas, GE and Siemens AG all either assemble turbines or produce parts in China. GE formed a joint venture in 2010 with Harbin Electric Co. to make turbines for the Chinese market.
GE has said Chinese competitors face challenges taking overseas market share, including the ability to provide long-term maintenance.
“But at heart of the matter, we just got to have a better product,” John Krenicki, GE vice chairman and CEO of GE Energy Infrastructure, told investors Sept. 20. “We got to have better stuff.”
Price competition helped kill higher-cost suppliers in the U.S. solar panel industry. Three failed since August, unable to stay afloat as prices plunged amid competition from Chinese manufacturers including Suntech Power Holdings Co., the biggest.
Gaining Market Share
Sinovel and Goldwind derived more than 99 percent of their revenue in 2010 from China, the world’s biggest wind market.
With turbine sales set to peak at home this year, Chinese manufacturers are “looking outwards to maintain sales,” especially in markets like Brazil, India and Australia where there’s more growth to be tapped than in Europe or the U.S., said Lawrence Brader, investment analyst for Hong Kong-based Environmental Investment Services Asia Ltd. Its Green Dragon Fund invests in regional clean-technology companies.
Since November, Sinovel, Goldwind and their peers have publicly disclosed at least 2,800 megawatts in overseas orders from Greece to Ireland to Australia, or about 7 percent of last year’s global sales, according to data compiled by Bloomberg.
That’s more than India, the world’s third-largest market for new capacity, erected in 2010. At Goldwind, 7.5 percent of first-half revenue came from overseas sales, Vice President Ma Jinru said last month.
A-Power Energy Generation Systems Ltd., based in Shenyang, plans to build a turbine plant in Nevada, the first by a Chinese supplier in the U.S., to supply a 615-megawatt Texas wind park and future North and South American customers. A-Power is seeking external financing for that plan, it said in April.
Western manufacturers worried about price competition need only look at solar panels. In three years, the Chinese went from 30 percent market share to more than half by improving quality and slashing prices, New Energy Finance data shows.
China’s share of the global turbine market more than doubled to 32 percent since 2008 and its manufacturers comprise seven of the world’s top 15 suppliers, according to BTM Consult ApS, a Denmark-based wind industry researcher.
Within three years, they could take half of global installations just from sales in their home market, said Justin Wu, head of wind analysis at New Energy Finance.
As soon as next year, China’s top five suppliers may grab 11 percent of turbine sales outside China compared to nothing in 2010, according to forecasts by CCB International Securities Ltd., a unit of China Construction Bank Corp.
Ditlev Engel, Vestas’s CEO, says his aim is for the cost of the Danish firm’s turbines in the U.S. and Europe to equal the cost for Chinese manufacturers plus shipping abroad.
Chinese windmill and component makers can sell in their own market at prices that average 40 to 50 percent below those of foreign counterparts thanks to cheaper steel costs and easier access to project financing, said Clarisse Pan, a Hong Kong-based analyst for CCB International.
That’s enough of a discount to offset the extra cost of shipping to far-flung markets. Vestas estimates it costs about $200,000 to ship a single turbine from China to California, about 20 percent of the price of the machine in the U.S.
Desenvix’s Antunes said Sinovel’s price, even after paying up to 16 percent in Brazilian import duties, was still 10 percent cheaper than other machines on the market.
“For a developer, that’s not something you ignore,” said Antunes. “That’s a lot.”
‘Buy Chinese, Borrow Chinese’
If wind park developers in the U.S. or Europe were to opt for a “buy Chinese, borrow Chinese” approach, they might in some cases be able to produce power more cheaply than a coal-fired power plant and on par with a gas plant, according to an August New Energy Finance note. The London-based researcher calculated that cheaper Chinese hardware may reduce the cost of wind power to a range whose mid-point would be $68 a megawatt hour.
Not everyone agrees Chinese turbine makers can emulate the rapid global expansion of solar-gear suppliers.
“Chinese companies are producing at Chinese standards, but all the banks are financing projects based on the German standards,” said Tulsi Tanti, chairman of Suzlon Energy Ltd., which earned 64 percent of its revenue outside of its home market of India last year. “It’ll take a long time.”
Two Sinovel turbines collapsed at a wind farm in Liaoning province in early 2010, Shanghai Securities Co. said. One supplied by Dongfang Electric Corp. in Ningxia collapsed in January 2010, the Economic Information Daily reported.
“If the Chinese want to come, we’re insisting it should be with certified machines,” said Ramesh Kymal, Gamesa’s head of India. “They should be of the same quality so that we don’t face the problem China is facing.”
“Substandard wind turbines” were responsible for accidents that have shut down parts of China’s grid, Gamesa´s Calvet told analysts in July.
A poor-quality turbine can reduce a wind farm’s value by 80 percent or more, GE said in an e-mailed response to questions about how it plans to compete against cheaper Chinese rivals.
When Chinese solar panel makers initially faced skepticism about the quality of their products, lenders run by the Communist state backed them, led by China Development Bank Corp., which has more than twice the World Bank’s assets.
Wuxi, Jiangsu-based Suntech Power overtook Tempe, Arizona-based First Solar Inc. as the market’s top-selling panel brand in 2010. In a 2009 filing, it disclosed $259 million in loans and credit facilities from CDB, Bank of China Ltd., and the China Construction Bank. In April 2010, it announced an agreement with CDB for up to 50 billion yuan ($7.8 billion), according to New Energy Finance.
“Suntech’s success is based on providing a high-quality product and good service,” Suntech said in an e-mail today. “We do not sell at the lowest market prices.”
Loans, Credit Lines
Sinovel, Goldwind and China Ming Yang Wind Power Group Ltd. have disclosed at least $15.5 billion in loans and credit lines since May 2010 to aid their international expansion from CDB and Industrial & Commercial Bank of China in statements and filings.
Goldwind and Sinovel announced plans to raise as much as 10.5 billion yuan by selling bonds. Goldwind disclosed its move in June, and Sinovel announced regulatory approval yesterday.
As part of Sinovel’s biggest European deal, CDB will provide debt financing to its Irish partner, Mainstream Renewable Power Ltd. A-Power plans to raise $260 million in debt from Chinese lenders for its Texas wind park, it said in May.
CDB is offering a yuan-denominated loan for Florianopolis-based Desenvix’s 34.5-megawatt project at an interest rate about four percentage points lower than what’s available through Brazilian banks, though hedging the yuan currency risk might offset that discount, Desenvix’s Antunes said.
“This is a way of tying the Chinese from one side of the deal to another,” he said. “If I have their equipment, it might be better if I have their financing as well.”