Winds of change blow over industry
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Just several years ago, Chinese wind equipment makers were mainly focused on how to compete with global leaders like Vestas of Denmark and General Electric in the fast-growing domestic market.
Today, some of them have become world-class names themselves and now face a new challenge: How to cope with a buyer's market.
After years of robust expansion and fast earnings growth, Chinese wind turbine makers are staring at intense price competition, excess production capacity and government tightening of regulations related to the industry.
Sinovel Wind Group Co, China's largest wind turbine maker, last month said profit growth slowed to 1 percent in the first quarter even as sales rose 20 percent. Earnings soared 51 percent in 2010.
Xinjiang Goldwind Science & Technology Co, the nation's second largest, said net profit fell 17 percent to 206.2 million yuan (US$31.8 million) in the first quarter. Sales remained flat at 1.86 billion yuan.
In a rush to clean energy, China has been the largest wind-power market since 2009, overtaking the United States last year as the nation with the highest installed capacity.
Domestic firms have grabbed market share from global peers, in part because the Chinese government in 2005 required 70 percent of wind-turbine content to be domestically manufactured. The policy was abolished early last year as Chinese firms became increasingly competitive.
In terms of installed capacity, China's wind market has doubled every year between 2005 and 2009. The nation added another 18.9 gigawatts last year, bringing total installed capacity to 44.7GW, according to the Global Wind Energy Council.
"Annual installation may have peaked in 2010," said Franklin Chow, an analyst at Beijing Gao Hua Securities, Goldman Sachs' partner in China. He cited tighter approval rules for wind projects and rising debt levels of wind farms as stumbling blocks to further expansion.
Industry officials have said that the National Development and Reform Commission, China's top planning body, is consolidating project approval from local governments to cool heady growth in the sector and allow more time to work out problems connecting newly installed turbines to power grids.
Many wind farms still sit idle in China. According to Gao Hua, same-year connection of newly installed turbines to power grids in 2010 was only 72 percent, up from 66 percent in 2009 but below its forecast of 84 percent.
"We think the wind farms are slowing down their capacity growth in order to avoid further unconnected turbines," Chow said in a report.
Still, he said the figure could rise to 106 percent in 2015 due to upgrading of grid infrastructure, the introduction of smart grid technology that better merges alternative energy into mainstream coal-fired power, and improved infrastructure to connect turbines.
Connectivity above 100 percent means the power grids connect all wind turbines installed in the same year as well as some of those installed in previous years.
Gao Hua forecasts new installation to be 18.3GW this year.
By comparison, Century Securities analyst Yan Biao estimates that domestic annual turbine manufacturing capacity will rise to 32.6GW this year from 27GW in 2010. Such oversupply in capacity is expected to further drive down product prices and squeeze margins for manufacturers.
A Goldwind spokesman said the company is deepening cost controls to improve margins but price competition is preventing a significant rebound in profitability this year.
The measures undertaken by the company include increasing its presence in upstream component businesses.
Goldwind last month said it would increase its stake in Beijing Techwin Electric Co, which makes control systems and converters for turbines, to 97.5 percent from 75 percent.
The company also said it will double the registered capital of its wholly-owned unit Tianhe Wind Power Blade Jiangsu Co.
Gao Hua's Chow said while he sees falling annual installations, he expects wind farms to gain from rising annual on-grid capacity, favoring companies such as China Longyuan Power Group Corp, the nation's largest wind power producer.
Slower capacity growth allows wind farms to conserve cash and avoid capital expenditure at cyclically high interest rates. They may procure cheaper and better turbines later and still achieve robust earnings growth.
Equipment makers are also offering longer warranty periods, free transport and other auxiliary services to farms to compete in a buyer's market, he said.
Sinovel has lost 28 percent since its trading debut in Shanghai on January 13, while Longyuan has gained about 10 percent in Hong Kong year-to-date.
Some wind turbine makers have even entered the wind farm business. Spanish equipment maker Gamesa is developing wind farm projects in China in partnership with its Chinese utility customers in a bid to maintain market share.
Century Securities' Yan said the manufacturing industry should focus on the offshore wind market and overseas markets.
The fledging offshore sector will also become a competitive arena for manufacturers as China increasingly ventures offshore to harvest more wind power. The nation's exploitable wind potential offshore is estimated at 750GW, about three times the land-based potential.
Yan estimated China offshore wind capacity at 15GW by 2015 and 35GW by 2020. Currently, nearly all China's operating wind farms are onshore. Beijing-based Sinovel built turbines for Shanghai's 102MW Donghai Bridge Wind Farm, China's first major offshore project in operation.
Exports have been tiny so far. China exported 16 megawatts of turbines in 2010, or less than 0.1 percent of domestic sales, according to a Citigroup report, which cites China Wind Power Association.
Yan said he expects Chinese manufacturers to export 1.2GW of turbines this year, the equivalent of 8.6 percent of new domestic installations, based on announced major deals.
Still, analysts said price competition will frame industry consolidation.
"We expect selling prices of wind turbine generators to continue their downward trend amid competition during industry consolidation," Citigroup's Pierre Lau said. "We think small companies will exit the market only when they are loss-makers, which has yet to be seen so far."
Leading players are targeting annual sales volume growth of up to 30 percent, faster than the organic market growth of between 10 percent and 15 percent. The market share of the top 10 manufacturers in China in 2010 was 87.2 percent, similar to 86.9 percent in 2009, according to Lau.
Sinovel Chairman Han Junliang said in January, ahead of the company's Shanghai initial public offering, that Sinovel expects to grow at a compound annual rate of more than 30 percent by 2015, and aims to become the world's top wind turbine maker in five years, overtaking Vestas and GE.
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