Energy & Resources

Gone with the wind

How one company came to dominate China’s wind turbine market

Gone with the wind

Sinovel: breezy outlook

Shanghai’s busy Nanjing Road is known for its trendy cafés and boutique shops – not a place many would associate with a determination to invest in renewable energy. But that’s all about to change. In a few months time shoppers who raise their eyes above street level will see turbines spinning atop China’s first wind-powered skyscraper.

China’s leaders are desperate to diversify away from use of fossil fuels to power the economy – and fast.

That policy, started in 2003, has quickly turned the country into the second largest wind-energy market in the world (it trails only the US, and last year breezed past Germany in total capacity). Shanghai’s double-glazed and energy-efficient ‘Eco City’ office tower is just the latest example of that commitment.

One of the biggest benefactors of China’s rise to wind dominance has been Sinovel, a brash young company whose ascendance has been just as swift. Sinovel was only established six years ago, but a combination of luck and savvy has helped it become the country’s largest wind turbine-maker – and perhaps its best hope for exporting Chinese wind technology to the rest of the world.

The company’s boss, Han Junliang, read the political runes right in 2004 (something he seems to have made a habit of) and started Sinovel with just Rmb100 million ($15 million) cobbled together from investors. If that seems far too small a sum to build what’s become an engineering titan, it’s helped that the government is Sinovel’s largest investor (state-owned Design Institute of Dalian Heavy Mechanical Group owns 20%).

And the timing had to be perfect. “Looking back, it wouldn’t have worked if Sinovel had been formed a year later,” one investor told Caixin magazine, “the competitors would all have been stronger and the bidding threshold [the prior experience required to win state contracts] would have been raised.”

Han followed a tried-and-tested business model in starting off by adopting foreign-developed technology. Sinovel turbines were first produced under license from the German firm Fuhrlander. But the company has used the designs as the basis for its own machines.

Han bet, correctly as it turned out, that demand would grow faster than the rest of the industry thought. The company’s strategy reflected that. To start with, it went straight into building larger 1.5MW turbines, three years before its main rival Xinjiang Goldwind would be forced to do the same. “The reality has been even better than Han promised in the beginning – twice as good,” another euphoric investor told the magazine.

And Sinovel had another quirk that differentiated it from competitors: it manufactured nearly all of its parts in-house. It makes around 70% of its components in its own facilities, whereas Goldwind makes 10%. So Sinovel may have had to plough much more of its capital up front into factories. But it also has more scope to cut prices – even as the cost of raw materials has grown. That didn’t win the company many friends in the industry, but it has captured market share.

Foreign firms might have presented more of a threat at one point, but a National Development and Reform Commission (NDRC) ruling in 2005 made that less likely. The NDRC ruled that at least 70% of the components used in wind farms had to be produced domestically. Shortly after, the wind energy market boomed – driven by yet another policy change. A law was passed in 2006 forcing power grid companies to connect renewable projects to the grid and source at least 8% of their electricity from those sources.

Then, as now, China’s five major state-owned power companies were the main customers of turbine-makers, and it paid to have good relationships with them. Sinovel’s close relationship with China Huaneng Group helped it get the initial orders it needed when it was getting started.

The NDRC rule that kept out foreign competition was rescinded last year (amid heavy lobbying from industry leaders GE and Vestas). But the largest Chinese turbine makers (Sinovel, Goldwind and state-run Dongfang Electric) have less to worry about this time around. Not only are their operations sufficiently established, many observers believe a preference for domestically-made turbines will persist.

Sinovel is still private, so revenue numbers are not available. But according to its website, the company delivered 3,510MW of capacity last year giving it the largest share of the Chinese market (25.5%), and making it the third largest turbine-maker globally (a share of 9.2%).

If Sinovel is going to trip up, critics say, it will be on issues of quality. Its production model is said to have come at the expense of using cheaper materials. That’s an increasingly important factor for customers, some of whom think more highly of the (more expensive) Goldwind turbines. “Sinovel has a two year quality guarantee,” a rival company executive told Caixin, “but what about the other 18 years?”

The government has also been voicing concerns about overcapacity in turbine production (see WiC65), and until the grid companies manage to connect some of the idle wind-generating assets (as well as develop the technology in smart software and high-voltage cables to distribute wind-generated power more effectively), the industry may not meet its growth targets. Investment could slow down too.

But while that’s bad news for the smaller operators, it’s a storm the bigger players seem confident that they can weather. Sinovel has just built China’s first offshore wind farm in the sea off Shanghai (in time for the Expo, naturally).

More tellingly, Goldwind has recently announced that its $900 million Hong Kong IPO is back on later this month, after calling it off in June.

Keeping track: showing how market savvy than its rivals, Sinovel Wind Group waited until last week to go ahead with its $1.4 billion Shanghai IPO. China’s largest wind-turbine maker managed to price its shares near the top of the expected range, at Rmb90 (25 times projected earnings). But investors appear to have had second thoughts since then, and shares are already down 17%. Sinovel is known for its low costs and keeping much of its production in house, but rival Goldwind (currently trading at 17 times projected earnings) is thought to offer longer-lasting turbines. (21 Jan 2011)

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