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Tough Times for the Chinese Wind Turbines Manufacturers

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With their domestic market saturated and clear signs of overcapacity and upcoming consolidation, some of the biggest Chinese producers have announced plans for international expansion. While there is …

With their domestic market saturated and clear signs of overcapacity and upcoming consolidation, some of the biggest Chinese producers have announced plans for international expansion. While there is no doubt of the Chinese manufacturer’s ability to learn quickly, adapt and alter the technology to bring the costs down, Frost & Sullivan believes that the wind power market presents a tougher challenge for the Chinese to crack. Safety, quality, reliability and after-sale service may well tilt the scales in favour of Western companies.

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  • 1. January 2012Changing Competitive Landscape in Wind Turbine Manufacturing – Can the Chinese Conquer the Global Wind? Alina Bakhareva, Research Manager - Renewable Energy, Frost & Sullivan “50 Years of Growth, Innovation and Leadership”
  • 2. Changing Competitive Landscape in Wind Turbine Manufacturing Market Insight Chinese wind turbine producers have seen their market share rise dramatically in the past few years. Two of the top Chinese wind turbine producers now rank among the global top three manufacturers by megawatts of capacity sold. The rise has been fuelled by domestic demand for wind power, supported by the government target, and a requirement for 70% of wind turbine components to be manufactured locally. With their domestic market saturated and clear signs of overcapacity and upcoming consolidation, biggest Chinese producers have announced plans for international expansion. The announcements set off media frenzy, more so given that the Chinese conquest of global solar panel production is fresh in everyone’s mind. However, the question remains open: can the Chinese wind turbine producers successfully follow in the footsteps of their solar peers? While there is no doubt at the Chinese manufacturer’s ability to learn quickly, adapt and alter the technology to bring the costs down, Frost & Sullivan believes the wind power market and wind technology present a tougher challenge for the Chinese to crack. Technology is still a Bottleneck Firstly, there are a number of technology-related quality issues that the Chinese manufacturers will have to sort out before they are able to deliver a technology solution on par with the established Western manufacturers. The technology gap is expanding with GE, Vestas, Siemens and the like investing in improvements that increase their turbines availability and reliability. A technical fault leading to reduced availability presents a huge risk to a developer and can wipe out a large chunk of expected profits. A faultless operating track record will make project developers less worried about the quality of the Chinese turbines, but it takes years to build up. We are witnessing Chinese wind turbine manufacturing taking the first steps in the right direction; although the government had to step in and set stricter regulations. Following a number of big power grid failures connected with wind turbines in the summer of 2011, the Chinese Government launched a commission to investigate the reasons for such accidents. The State Electricity Regulatory Commission (SERC) has identified four major issues:Four Major Issues Leading to Wind Farm Failures in China 1 Equipment Quality supervision and managment during 2 construction 3 Power grid access managemnet in wind farms 4 Wind farm operator management Source: Frost & Sullivan © 2012 Frost & Sullivan Page 2
  • 3. Changing Competitive Landscape in Wind Turbine Manufacturing Market Insightn Equipment - Most of wind turbines manufactured by local OEMs were running without Low Voltage Ride Through (LVRT) ability. Voltage reduction caused by system failure can easily disconnect the wind turbines from the power grid.n Quality supervision and management during construction - Unqualified supervision and management led to construction accidents.n Power grid access management in wind farms - Some wind farms had not executed the agreement of installing the LVRT for wind turbines.n Wind farm operation management - There were cases of unsound security management.The SERC has released stricter technical regulations, especially for LVRT reformation.Additionally, 18 industry standards have been released in November, 2011 by the NationalBureau of Energy.There are two immediate effects of the regulatory changes. Adding a LVRT capability willincrease the cost of the Chinese turbines. This, coupled with slower demand, will lead to asqueezing out of the marginal producers who won’t be able to afford to fit new equipment.Thus, the domestic wind power manufacturing sector in China is poised for tough times,when consolidation may even change the positioning of top five players.Most technology solutions leading to more reliable performance are kept strictlyconfidential, if not patented outright. Illegally gaining access to those well-kept nuggets oftechnological wisdom may cause Chinese players dearly. A recent example is that ofMainstream Renewable Power, a UK-based wind project developer, putting a halt to its 1GWsupply agreement with Sinovel, following Sinovel’s legal dispute with AMSC. AMSC vs Sinovel in alleged intellectual property theft ...AMSC (American Superconductor Corp), a maker of electrical system for wind turbines, launched a legal action against Sinovel, once its largest customer, for gaining unauthorised access to some of AMSC’s software codes. AMSC’s employee, who illegally sold software codes to Sinovel, was found guilty by an Austrian court and sentenced to one year in jail in September, 2011. The case for copyright violation, one of the largest IP lawsuits in China, was accepted by Beijing’s High Court. It is the latest in a series of lawsuits that AMSC launched against Sinovel...Provided that proven and reliable wind power technology is there in a few years’ time, theChinese manufacturers will have to ensure their products are fully certified to be installedand connected to the grid in Europe and the US, where grid codes tend to be much stricterthan in China. © 2012 Frost & Sullivan Page 3
  • 4. Changing Competitive Landscape in Wind Turbine Manufacturing Market InsightLife after CommissioningThe wind power industry in established markets has moved beyond the frenzied initial stagewhen the emphasis was placed on maximum number of turbines installed. The focus is onincreasing the operating efficiency, resolving performance issues rapidly, having real timecontrol and visibility and reducing the maintenance time. Providing a compelling servicesolution is nearly as important as proving best-in-class equipment. For example, GE Windthrough its remote monitoring system claims to resolve 80% of the issues within 10 minutes,which results in 17,000+ units around the world running with 98% availability.Quality after-sales services can easily add a few percentage points in efficiency gains, whichresults in lower LCOE (levelised cost of electricity). The Chinese manufacturers canundoubtedly deliver a cheaper wind turbine meaning lower capex, however, when an entirepackage is considered, they are still behind their Western counterparts.Even if a compelling service offering is developed in their domestic market, unfolding a large-scale after-service support in overseas markets will require a large initial investment. WhileChinese wind turbine manufacturers are generously sponsored by the Government, there areother priorities for them to address. It is unlikely they will be channelling significant fundsinto expanding their service offering in those markets, where they don’t even sell much. Thus,established wind power markets in Europe and parts of the US will be hard to penetrate forthe Chinese. Certainly, a few odd orders can come through, but the Chinese presence is notlikely to reach the dominant scale similar to that of the solar energy industry.Upcoming wind power markets such as Central and Eastern Europe and Latin America mayfind lower equipment costs attractive, especially when coupled with a generous offer ofproviding project financing. However, proven safety, quality, reliability and after-sale serviceoffer may well tilt the scales in favour of Western wind turbine producers even thought theinitial investment will have to be higher.Financing is all Important AgainDeclining Macro Environment: The Cost of Funding Has Increased Factors Influencing New Market Trend Strained national budgets; Revisions of renewable energy 1 Demand is widening debt crisis in Europe subsidies shifting globally from Rising finance costs 2 Fiscal constraints Europe to Asia Emergence of new players: “buy Chinese, borrow Chinese”, corporations Heightened emphasis on bankable, Growth is Exit of lower-tier players, consolidation 3 qualified products and capacity of Industry slowing ASP pressure from ongoing down Access of R&D and latest technology 4 becomes vital supply/demand mismatch Source: Frost & Sullivan © 2012 Frost & Sullivan Page 4
  • 5. Changing Competitive Landscape in Wind Turbine Manufacturing Market InsightFinancing is presenting a challenge for the wind project developers again. The industry hasbeen through the same predicament in 2008-2009 when interest rates were too high forprojects to yield reasonable returns. What is different now is governments are unable to stepin with stronger support mechanisms. On the contrary, green energy support is beingscrutinised and cut down in an attempt to rescue national budgets from falling into deeperdeficit.While we see smaller developers being affected by worsening financial market conditions, ina major way, utilities and larger corporate investors may still find the their lending termsaffordable.In the current climate, a bankable product becomes of paramount importance as lenderslook to minimise risks and would go ahead with the project if the technology solution isproven and has a long operating history. This is a headwind for any new manufacturer tryingto penetrate the market. What differentiates Chinese government-backed enterprises isaccess to capital that they are ready to bring to the negotiating table along with theirequipment. A compelling combination at first sight, but unless there is a technologicallyreliable product, we believe reputational risks related to a potential accident or a major faultare still too high to be ignored. The situation is similar to conventional power generation,where Chinese players can provide a cheaper product but yet there is hardly any Chineseequipment being installed in power plants in Europe. The perceived level of risks stilloutweighs a potential saving one can gain.‘Natural’ Market BarriersIn addition to tackling the technology related issues, in some markets, Chinese wind turbineproducers are bound to stumble on market-related barriers. India is a good example. As thelead time for procuring land, conducting wind studies, and setting up grid connectivity isquite long, incumbent players engaged in both turbine production and project developmenthave a natural advantage as their pipeline matures at different times providing constant flowof projects. Additionally, the pure equipment sale segment of the market is limited to about10-15% of the total annual installed capacity. In order to compete, a manufacturer has tooffer a number of products which cater to different wind sites. Suzlon, a major player inIndia, offers about 4 different products in the domestic market, which makes its offer standout, as competitors typically offer just one.A market dominated by utilities and large corporations investing in wind power could alsopresent a tough challenge for the Chinese wind turbine producers. Larger investors are likelyto have significant funds and have a higher chance of getting access to low-cost bank loans.For these companies, having the lowest possible capital cost (at the expense of quality, safetyand reliability) will not make them risk their reputation and potential returns.© 2012 Frost & Sullivan Page 5
  • 6. Changing Competitive Landscape in Wind Turbine Manufacturing Market InsightAfter considering major factors contributing to the competitiveness of a wind turbineproducer in the global market, Frost & Sullivan has found the talk of approaching Chinesedominance in wind turbine manufacturing premature. This doesn’t mean though that Westerncompanies can ignore the Asian threat. In order to remain competitive, incumbent producershave to continue their tradition of technology innovation, aiming to deliver lower costequipment without compromising on quality and reliability.Frost & Sullivan will increasingly explore wind power market by geography and in depththrough our research services. Key questions related to the changing competitive landscapeinclude:n What are major technology gaps for the Chinese manufacturers to bridge?n When will Chinese players bring the quality and reliability on par with incumbent wind turbine manufacturers?n Who is likely to emerge as a leader in upcoming wind industry purging in China?n When are European and US-based project developers likely to start considering a purchase of Chinese equipment on a large-scale basis?n What Western wind turbine manufacturers are doing in the face of the Chinese threat?n Reputational risks – how big are they? How to assess them?If any of these questions resonate with you, we are very interested to hear your thoughts.We are also well placed to carry out bespoke consulting services to provide tailoredresearch and analysis. About Frost & Sullivan Frost & Sullivan, the Growth Partnership Company, enables clients to accelerate growth and achieve best- in-class positions in growth, innovation and leadership. The companys Growth Partnership Service provides the CEO and the CEOs Growth Team with disciplined research and best-practice models to drive the generation, evaluation and implementation of powerful growth strategies. Frost & Sullivan leverages 50 years of experience in partnering with Global 1000 companies, emerging businesses and the investment community from more than 40 offices on six continents. To join our Growth Partnership, please visit http://www.frost.com. contact: Chiara Carella, Corporate Communications, chiara.carella@frost.com