Headwinds to thin crowded turbine sector

PUBLISHED : Monday, 24 October, 2011, 12:00am
UPDATED : Monday, 24 October, 2011, 12:00am

The mainland's overcrowded wind power equipment sector is undergoing consolidation that could see most of its contenders withdraw from the market in the next few years.

The industry has seen the number of turbine assemblers grow to more than 80 from a handful five years ago, as companies scrambled to capture a share of the potentially lucrative new business in a herd mentality typical of mainland industries.

Mainland turbine makers are estimated to be capable of making turbines with a total generating capacity of 29 gigawatts this year, according to a Ping An Securities research report, but demand is only forecast at 15GW to 18GW.

The nation's total installed wind power capacity - the world's largest - stood at just under 45GW at the end of last year.

In three to five years, no more than 10 contenders would survive the ongoing battle of 'survival of the fittest', said China Wind Energy Association's vice-president Shi Pengfei, who attended the China Wind Power conference in Beijing last week.

Wind farm developers have turned from having to wait for producers to catch up on back orders, to being able to cut procurement prices by as much as 20 per cent a year as dozens of eager suppliers offer extended payment terms to boost sluggish sales.

'Why do new manufacturing industries usually suffer from over-capacity and over-competition soon after they come to China?' Chinese Wind Energy Association secretary general Qin Haiyan asked a panel of turbine parts makers' top-level managers at the conference.

Ian Telford, a vice-president of sales and marketing for Denmark-based LM Wind Power, said generous government incentives, such as those on land use and taxation, played a role in attracting newcomers. LM, which is the world's largest manufacturer of wind turbine blades, traces half of its output to the mainland.

While local governments have been eager for factories to create jobs and contribute tax revenues, the central government also hoped keen competition would drive down costs. The idea was to not only allow the domestic industry to become a big exporter, but also reduce the amount of subsidies necessary to support renewable energy consumption.

While such a strategy could prove good for the country in the long term, many companies might have to bear the cost of entering and subsequently exiting an industry in which they have over-estimated their abilities.

Of the 86 turbine makers that attended last week's exhibition in Beijing - the biggest gathering of its kind in the nation - only 24 are large-scale producers, while six are small-scale producers, according to a Daiwa Securities research report.

A two-year price war and rising material prices - especially rare earth costs that experienced two to 10-fold increases - meant most turbine makers are enduring big profit drops and even losses.

Sinovel Wind Group, the nation's largest and the world's second-largest turbine maker, recorded a 60 per cent year-on-year drop in first-half net profit.

The nation's No 2 player, Xinjiang Goldwind Science & Technology, said last Friday third-quarter profit plunged 75 per cent from the same period a year earlier, resulting in a 60 per cent profit decline for the first nine months.

While the state-backed giants are still profitable, some small players, particularly those that entered wind power as a speculative move, have already thrown in the towel.

Shenzhen-listed telecommunications equipment maker Tianjin Xinmao Science and Technology in June announced it would sell its wind farm development and wind turbine blades manufacturing operations to stem losses.

Meanwhile, Shanghai-listed Harbin Air Conditioning also decided in January to stop its turbine development work despite having signed contracts on technical co-operation and parts procurement.

To improve chances of its long-term survival, owners of large privately owned turbine maker China Creative Wind Energy sold a 70 per cent stake in the firm in August to state-owned power generation major China Datang Group, the parent of Hong Kong-listed China Datang Corp Renewable Power.

Hu Yongsheng, a general manager at China Datang, said there was a trend for wind farm developers to acquire or build up their own turbine manufacturing arms, since they could better control turbine quality and new product development.

That shift has left some equipment makers weighing whether to endure heavy losses, make cut backs that could compromise product quality or simply leave the business.

For such firms, Henning Kruse, of the wind power division of German electrical engineering giant Siemens, had this advice: 'The key is to learn to say, 'No'.

'If profitability is too low, then we need to say no to the business.'

Still, for the entire wind power industry supply chain to prosper and achieve sustainable development, improving turbine quality is the ultimate key. This means irrational price-cutting has to stop.

According to the Daiwa report, some 27 major turbine collapse incidents were reported last year, prompting regulator National Development and Reform Commission to launch a full-scale quality inspection.

'We can change our mobile phones every year, but wind power equipment is meant to operate for 20 years,' said Sany Electric general manager Wu Jialiang. 'At these low Chinese prices, there is no way we can match the quality of products made overseas.'

Sany Electric is the wind turbine arm of heavy equipment manufacturing giant Sany Group.

Component makers are suffering even more in the fallout.

'We always lag behind customers' demand for new product development,' said Chen Chun, a vice-general manager at Sinomatech Wind Power Blade. 'As their turbine prices decline and profits get squeezed, they keep demanding that we come up with new products for their planned launch of higher-capacity and more efficient turbines.'

This has required component makers to shell out on moulds for new products long before they are able to recoup their investments on moulds from earlier products.

The plight of equipment makers looks grim even as the price war subsides, since demand growth for turbines is forecast to slow markedly as Beijing centralises wind farm development approvals and imposes quotas on development to rein in years of rapid but disorderly development.

The trend should allow the nation's power grid operators to build more power lines needed to transport rurally produced wind energy to more densely populated areas that need the power. Thirty per cent of the nation's installed wind power generating capacity idled at the end of last year due to a lack of grid connection.

'Record-breaking growth [in China] may have taken it to the top of the wind league, but to stay there, China needs to address its grid issues,' said Peter Brun, a senior vice-president at Danish wind turbine maker Vestas.