Wind firms seek to tap growth abroad
Mainland wind farm developers and equipment makers, mostly state-backed and financed, will need to sharpen their 'soft skills' if they want to successfully crack into the international market, amid slowing growth at home.
These companies' domestic growth has been hampered by bottlenecks in power distribution capacity and more stringent approval of new projects by Beijing. As such, they need to build supply chain alliances abroad to enhance their credibility, especially in developed markets like the United States and Europe, industry watchers said.
'If the Chinese want to go beyond the role of equipment suppliers to become global project developers, there are soft but real issues that need to be addressed,' Peter Greenwood, executive director at CLP Group, who is responsible for strategy, told a renewable energy forum organised recently by Hong Kong power supplier and industry researcher Bloomberg New Energy Finance.
The issues include sensitivity to local markets, building brand awareness, and having local managers take charge of overseas operations.
Mainland wind turbine makers are suffering from falling sales and profits, as lagging construction of power grids, more rigorous technical requirements on turbines after multiple incidents of simultaneous dropouts of hundreds of wind farms from power grids, and Beijing's rescinding of local governments' authority to approve new projects, all contributed to the slowdown in orders and shipments.
Overcapacity exacerbated the situation, with more than 80 turbine makers cutting prices aggressively to stay afloat despite shrinking profit margins.
Xinjiang Goldwind Science & Technology - China's second-largest wind turbine maker, listed in Shenzhen and Hong Kong - last month posted a worse-than-expected 45 per cent dive in first-half net earnings to 425 million yuan (HK$515.6 million) from a year ago, amid a 6 per cent decline in sales volume and an 18 per cent fall in the average selling price.
It forecasts a 50 to 100 per cent slump in earnings for the first nine months of this year from last year.
According to a Citigroup research report, Chinese Wind Energy Association data showed wind power capacity installation between January and June fell by 50 per cent from a year ago to 4 gigawatt.
For this year, capacity installation is projected to fall by a third to 12GW, and will stay flat next year. This is a dramatic reversal from the 100 per cent-plus growth rate in the four years to 2009 and 37 per cent expansion last year.
At the end of last year, about 30 per cent of the 44.8GW capacity of wind farms installed on the mainland were not connected to the power grid, industry researcher BTM said.
However, power output at wind farms connected to the power grid that could not be dispatched because of distribution bottlenecks, was equivalent to 12.5 per cent of on-grid output between January and June in 2010, according to a State Electricity Regulatory Commission survey.
Goldwind has long wanted to expand abroad to hedge against the risks of the chaotic, competitive domestic market. It makes the most overseas sales among mainland producers.
Two years ago, Goldwind planned for overseas sales to account for 30 per cent of total sales by 2012, an objective that was revised this year to 2014. Foreign markets accounted for just 5 per cent of first-half sales this year, according to Citigroup.
Only 13 units, or 0.1 per cent of the 12,917 units produced by mainland turbine makers last year, were exported, according to the Chinese Wind Energy Association.
While wind farm developers are gaining from lower turbine prices and have posted strong and better-than-expected first-half profits, investors were spooked by China Longyuan Power Group's announcement last week that its wind power output in August grew only 12 per from a year ago, down from 36 per cent in July. China Longyuan is Asia's largest wind farm developer.
Its power output in three northeastern provinces on the mainland, which fell by between 26 per cent and 37 per cent, despite increased installed capacity, were particularly alarming.
'That points to severe output dispatch issues ... it is doubtful that China Longyuan can match the 40 per cent output increase for this year as guided,' wrote Peter Yao Sheng, head of clean energy and utilities research at the Bank of China International.
Yao said the decline of China Longyuan's annualised year-to-August plant utilisation of its wind farms from 2,140 hours to 1,828 hoursin the first half, was also worrying. Lower plant use means higher fixed costs per unit of sales and a lower profit margins.
Supported by the state banks, mainland turbine makers and wind farm developers have made early inroads into overseas markets, often through partnerships.
Beijing-based and Shanghai-listed Sinovel Wind Group, the world's second-largest wind turbine maker, struck a deal in July with Mainstream Renewable Power, a Dublin-based energy projects developer, to supply wind turbines to generate 1GW of wind energy developments to be built in Ireland over the next five years. As part of the deal, Sinovel will consider sourcing locally-made components.
Last April, Sinovel signed an agreement to supply wind turbines generating 0.2GW to 0.3GW to a project in Greece. Under the agreement, Sinovel may invest in the project and help secure financing from China Development Bank.
Goldwind, which has a US$6 billion credit line with China Development Bank for overseas expansion, has set up subsidiaries in the US and Australia. It has invested in a 106.5MW project in Illinois, after installing turbines in another project in Minnesota, both in the US.
To avoid criticism that Chinese turbine makers are benefiting from US stimulus funding, while creating few jobs, Goldwind has signed deals with three American components suppliers to ensure a high level of local content in its products sold there.
Building these 'showcase' projects are important to prove the reliability of Goldwind products, which is critical for wind projects to obtain financing in Western markets.
Mainland wind farm developers have also made forays abroad.
In July, China Longyuan made its maiden deal abroad by acquiring the rights to develop a 0.1GW project in Ontario, Canada.
Last April, China Datang Corporation Renewable Power formed a joint venture with Australia's CBD Energy and Hebei-based power equipment maker Baoding Tianwei Baobian Electric to develop wind and solar power projects in Australia.
However, it would take years for mainland companies to establish a sizeable presence abroad, compared with their vast domestic operations, as the larger agreements were tentative, and subject to further negotiations and the securing of financing, said Justin Wu Jing, head of wind energy research at Bloomberg New Energy Finance.
'While Chinese state firms have realised the need to use global resources and the need to build brands, some of them still have a shopping spree mentality, thinking the economic downturn in the US and Europe is a great opportunity to pick up assets at good prices,' Wu said. 'Some are going to the US and Europe despite the challenging financial market conditions there because of prestige. It's a learning process and they are gaining awareness of the importance of soft power.'
Wu said wind power pricing in markets like the US and some parts of Europe often involves market-based elements, like the signing of power purchase agreements and the trading of green certificates. Mainland firms, more used to prices set by the state, will need to learn the ropes.
Is China's share of the global wind turbine market, according to the World Wind Energy Association