Power Shortages Are Zapping China

The country can't keep up with soaring demand for energy. Will that hurt the export machine?

Clothing retailer the Children's Place buys many of its wares from China, mostly from the provinces of Zhejiang and Jiangsu, both bordering on Shanghai. Managers at the Secaucus (N.J.) headquarters chose suppliers in the region because it's the heart of China's textile industry, home to hundreds of superefficient fabric and garment factories. This summer, though, some of the efficiency that so impressed The Children's Place may go out the window. The reason: The two provinces are the hardest hit by power shortages sweeping China.

Blackouts and brownouts are already shutting down factories in the region as often as two days a week. That means the T-shirts, pants, and jackets that The Children's Place buys from suppliers in the two provinces now typically take an extra week to arrive, up from an average of four weeks. "The cost advantage in China is still so great that we'll continue doing business here," says Lawrence Kole, general manager for The Children's Place (China). "But ultimately if they can't deliver in a timely fashion, we'll start looking" to suppliers in places such as Taiwan and Hong Kong.

As summer temperatures rise, the problems are likely to get worse. Already, 24 provinces -- including hyperindustrialized Guangdong, as well as Shanxi, Sichuan, and Hunan -- are facing energy shortages and regular blackouts. Although the problem has been building for a couple of years, it's getting worse and by the height of summer the shortfall could reach 30 million to 35 million kilowatts, the highest gap China has ever seen, says Liang Weilie, a director at the China Electricity Council, a power industry association in Beijing. "This year's shortages will be much more serious than last year's," he says. And there's no immediate relief in sight. Supply shortfalls could plague China for at least two more years, Liang believes.


It's no mystery what's causing the blackouts: China's roaring economy, which grew by 9.8% in the first quarter. The country has been on a building spree, with fixed-asset investment jumping 26.7% last year and 43% in the first quarter this year. Much of that investment has been poured into energy-intensive industries such as steel, aluminum, cement, and chemicals. Together these four sectors suck up nearly a third of all the electricity consumed in China. And Chinese manufacturers are hardly paragons of energy efficiency. On average, Chinese companies are about a third as efficient in using power as are their U.S. counterparts. As the economy has boomed, meanwhile, rural peasants have flocked to cities in search of work. Two of every five Chinese now live in urban areas, more than double the percentage 25 years ago. Those city dwellers enjoy far higher living standards -- and consume much more power -- than their country cousins.

China's energy infrastructure hasn't kept up with the changes. A key challenge is transportation and distribution bottlenecks. Roughly three-quarters of the country's electricity comes from coal-fired power plants, and the overloaded rail system can't supply them with coal fast enough. A fragmented power grid means surplus energy in one province can't always be shared with a neighbor facing shortages. Then there's the multiyear drought that has lowered reservoir levels across the country. That means less hydro power, which supplies most of the balance of China's energy needs. "The growth surge has caught [the power industry] off guard," says Scott C. Roberts, director of the Beijing office of consultancy Cambridge Energy Research Associates. "This is the summer of truth."

Why hasn't China built new power plants and infrastructure? One big reason is that the sector was held hostage to political infighting at the top levels in Beijing for more than a decade. Former National People's Congress Chairman Li Peng, who spent years working in the power industry, and former Premier Zhu Rongji were often at loggerheads. Each tended to oppose any initiative supported by the other. Zhu, for instance, found fault with aspects of the massive Three Gorges Dam, one of Li's pet energy projects. Their conflict trickled down through the system, leading to years of delayed reform and a slowdown in construction of new facilities.

Faced with the shortfall, Beijing is scrambling to cut usage. On June 16 the National Development & Reform Commission announced it was raising electricity charges by an average of 4.4% for most nonagricultural users. Nine provinces and cities -- including Beijing -- are trying to encourage factories to shift some production from weekdays to evenings and weekends by charging higher rates during peak hours. And on June 6 the State Council launched a nationwide energy conservation campaign, including a plea to businessmen to forsake their suits -- to stay cool -- and to turn off office lights during daylight hours and set thermostats at 26C to 28C. In Shanghai, meanwhile, municipal officials have switched to low-energy light bulbs on the landmark Oriental Pearl TV Tower across from the Bund.

The irony of the growing shortage is that in responding to it, China could soon find itself with too much capacity. Demand may already be slowing as Beijing's efforts to cool the economy start to take effect. And with both Zhu and Li now retired, China has embarked on a massive utility-building campaign. Some 130 gigawatts of new capacity -- a 31% increase over today's level -- is under construction. According to Cambridge Energy, that's likely to mean excess supply. Why such potentially reckless expansion? Utilities in China are state-owned enterprises usually more concerned with meeting production targets than earning a profit. "There is going to be lots of volatility ahead," says Cambridge's Roberts.

Excess future capacity, though, is of little concern to factory owners in hard-hit provinces such as Zhejiang. To mitigate the damage from today's shortfalls, companies are turning to more costly alternatives. Take Ningbo-based HKE Electronics Co. -- a supplier of components to the likes of Sony (SNE ), Samsung Group, and Sharp (SHCAY ). Even though local officials have gotten better at alerting factories in advance about power shutoffs, companies still need a backup. So HKE in April added a fourth diesel generator, though using the backup supply raises the company's energy bill by some 30%, estimates President Tony Wang. "We are a big enough business that we can afford the extra costs," he says. "It's the smaller Zhejiang companies that are in trouble." But if customers such as The Children's Place do indeed start looking to suppliers in other countries with more reliable power supplies, the shortfall could quickly become trouble for all of China.

By Dexter Roberts in Beijing

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