Economy
Wind Industry
Gale-Force Glut
Despite having a virtual monopoly on China’s oversupplied domestic market, attempts by the country’s wind energy companies to compete internationally have brought their lack of maturity into sharp focus
PHOTO BY CFP
While European companies are world leaders in practical deployment, and their American counterparts are the kings of commercial exploitation, nobody can match China for the sheer scale, or inefficiency, of wind farming. European and American wind farms boast 90 percent connectivity with national power grids, with wind power providing between 2 and 3.5 percent of national energy reserves. Only 70 percent of China’s wind farms have been connected to the State grid, and less than one percent of the total national power supply is wind-generated.
China’s lopsided development of its wind industry has, however, been a boon to wind turbine manufacturers, who are now reaping the benefits of white elephant wind farms. Superior technology and well-established brand names allowed foreign manufacturers led by GE, Gamesa (Spain) and Vestas (Denmark) to lead the field in China until 2005. However, “indigenous innovation” policies rolled out that year jumped Chinese manufacturers to the vanguard of the market in 2009, where they consolidated their position in 2010. By 2011, even China’s third-placed turbine manufacturer held a greater market share than all the foreign companies still active in China combined.
Hoping to echo their domestic success, Chinese manufacturers, facing a dip in demand at home, are now seeking to challenge the dominance of European and American giants in the international market. Although the stigma attached to made-in-China turbines has so far made them a rarity overseas, the market momentum of cut-price hardware is strong enough to cause concern among the field’s big hitters. A recent report by the Financial Times caused jitters with the headline: “China set to challenge global wind industry.”
However, the biggest stumbling block for Chinese manufacturers could prove to be international IP law. While few Chinese agencies will decry the infringement of patents held by foreign companies in the domestic marketplace, foreign companies are likely to be less forgiving towards Chinese companies illegally appropriating their technology in order to undercut their market position. Consequently, foreign companies frozen out of China’s market are set to turn the tables on China when its turbine manufacturers aim to gain a foothold outside a government safety net.
Rollercoaster
Prior to 2005, China’s homegrown wind energy market was almost entirely supported by imported technology and foreign companies. An array of policies, particularly the Renewable Energy Law, were issued in 2005 to set out government strategies to boost wind power. As a result, productivity doubled each year through 2009, when, for the first time, China’s deployment of wind turbines outpaced that of the US. The number of domestic turbine companies rose from six in 2004 to more than 80 in 2010. Foreign manufacturers, however, were marginalized due to the 2005 policy clause that stipulated that a minimum of 70 percent of China’s wind power equipment had to be “locally produced.”
The boom did not last long. By 2009, wind energy was already on the State Council’s list of “industries at overcapacity.” In addition, a price war and the rising cost of financing labor and raw materials all squeezed turbine makers’ profits. In its 2010 annual report, the NYSE-listed China Ming Yang Power Group remarked: “Our future prospects may be adversely affected by an increasingly competitive market.” Sinovel and Goldwind, the mainland’s top two producers, reported drastic drops in net profits for the first half of 2011.
Following a series of accidents involving wind turbines coupled with the inefficient and sporadic connection of wind farms to the State grid, the Chinese government now looks set to pull the plug on its great leap forward in wind power. Stricter market access has been imposed in a series of policies issued in July and August 2011 which look set to dramatically narrow the domestic market and squeeze out smaller players.
Chinese manufacturers are consequently eyeing overseas markets as a potential release valve for their excessive capacity as well as a much-needed source of revenue. Terrence Zhang, an energy investor, told NewsChina that nearly all Chinese producers had factored overseas market demand into their capacity projections from at least 2009 on. Since 2007, some Chinese wind turbines have shipped to developing markets such as Cuba, India, Chile and Thailand.
Headwind
In 2011, Chinese companies seemed to be consolidating an incursion into developed markets in Europe and North America. In early 2011, Goldwind announced the commencement of operations on the US mainland, informing shareholders it expects overseas business to contribute nearly one third of its revenue by 2015. After a cooperation agreement with the Public Power Corporation of Greece in April 2011, Sinovel struck a 1.5 billion euro (US$ 2 bn) deal with European wind farm operator Mainstream for a project in Ireland.
China’s principal international competitors are less than welcoming to the incursion of manufacturers which their technology and business models helped to establish.
US trade unions and politicians are particularly hawkish about any Chinese industry that might constitute a threat to American jobs. In early September, some Democratic congressmen urged the Obama administration to take further action against China’s “trade distortion” in the clean energy field, particularly the forced transfer of technologies from foreign to domestic enterprises. After receiving a petition from the United Steelworkers of America and lawmakers on Capitol Hill one month before Chinese President Hu Jintao’s visit to Washington in late 2010, the US Trade Representative Office raised the issue of Chinese government subsidies to indigenous wind turbine manufacturers at the WTO. The US accused the Chinese government of erecting “a barrier to US exports to China.”
IP has long been the Achilles’ heel of Chinese companies aiming to compete overseas. The National Development and Reform Commission recognized in its report in July that the indigenous wind turbine industry is still struggling with “weak basic research and heavy reliance on the import of core technologies.” In the 2010 Analysis Report on China’s Patents by the Chinese Wind Energy Information Center, even in the domestic market, most of the top ten patent applicants in China in recent years have continued to come from foreign companies, specifically GE, despite their dwindling market share.
The annual 140 percent increase in patent applications from US wind technology companies has created a “patent minefield” similar to those in other high-tech industries, according to a September 2010 report by Carey Jordan and Stefan Schmitz, partners with Chicago-based law firm McDermott. The risk of patent infringement is “much greater than most industry participants suspect,” the report continued.
“Latecomers like China have higher risk of IP disputes with third parties in developed markets like the US,” said Shelly Zhang, an IP lawyer with the Beijing office of Orrick, Herrington & Sutcliffe LLP, an international law firm based in San Francisco.
On September 14, Superconductor (AMSC), a global leader in power technology, declared they would be filing “criminal and civil complaints in China against Sinovel and other parties alleging the illegal use of AMSC’s intellectual property.” Sinovel recently canceled all orders from Superconductor without warning, and industry insiders believe this slight is what prompted the American company to take legal action.
“Sinovel’s [IP] infringement has been an open secret in the industry. However, it used to be in the commercial interests of Superconductor to defend its biggest client,” Brian Wang, a sales agent for an overseas wind turbine company in China, told our reporter. “If you don’t have the core technology, then your fate is subject to the whims of others,” he added.
“Any advancedment in today’s technology is based on existing technologies made by others - you can’t ‘invent’ a lightbulb or electricity now, but changes must be real and innovative,” an engineer surnamed Sun, who works for a foreign wind turbine manufacturer, told NewsChina.
Despite chaos in both the domestic and international markets, the government rubric of official support for the development of wind power in China has not changed. However, its success hinges on developing indigenous innovation and freeing its homegrown industry from technology misappropriated or purchased from foreign competitors. Until then, global market dominance will remain as elusive for China’s wind power giants as it has for other enterprises which piggyback profitability off the innovation of others.
(Some names have been changed
to protect identities)
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Sep 2011 | Submitted by Brian Snelson
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