Power struggle

It’s electrifying: Weiqiao Group HQ

Goliath of Gath was a Philistine warrior who stood six foot nine inches (in his sandals). Famously he was defeated by a much smaller man, five stones and a slingshot.

The story of David’s victory is the classic tale of underdog beating giant. And over in Shandong province, it has just got a modern reworking.

The giant in question is State Grid, one of the largest Chinese companies to make the Fortune 500 global ranking. As we pointed out in WiC108 State Grid has vast ambitions. For example, it has the government go-ahead to spend Rmb500 billion on a new high-voltage power grid. That promises to be the largest amount ever invested by a single Chinese company (more than was spent on the Three Gorges Dam).

With its intimidating bulk as a natural monopoly in the sector and its connections in the corridors of power, State Grid looks down imperiously on potential challengers. That means that the Weiqiao Group may be one of the plucky few willing to take on the behemoth.

Weiqiao Group isn’t exactly tiny though. It is owned by Shandong’s richest man, Zhang Shiping, who was estimated by the Hurun Rich List to be worth Rmb30 billion ($4.7 billion) last year. He controls a conglomerate that spans textiles and aluminium, employs 160,000 people and has assets worth Rmb65 billion (for more on Zhang, see our Who’s Hu).

But compared to the State Grid Weiqiao is still a tiddler. All of which makes Zhang’s decision to thumb his nose at State Grid and push into power distribution all the more remarkable.

It started off as Zhang wanting to fulfil his own power needs, after he calculated that he could generate electricity for his own business empire more cheaply than the State Grid was charging.

Zhang’s power plants then expanded in scale with his push into aluminium and salt production. Having established an economy of scale locally, Zhang figured he could sell his power to neighbouring businesses too.

His competitive advantage? Price. The 21CN Business Herald spoke to the manager of Weiqiao’s Luzhong Hotel, which is connected to both State Grid’s and Zhang’s grid: “The State Grid’s electricity tariff is more than 0.8 yuan per kwH, and Weiqiao Group only charges 0.6 yuan per kwH.”

The newspaper found that for a business that consumes very large volumes of electricity – or has a strong relationship with Weiqiao Group – the price falls further to 0.56 yuan per kwH. And for its own employees, Weiqiao Group offers electricity at 0.35 yuan per kwH versus the State Grid’s price of over 0.6 yuan per kwH.

Thanks to this price advantage, Weiqiao Group has been able to build a grid supplying neighbouring areas – and in direct competition with the national monopoly. It currently has installed capacity of about 2.2 million kilowatts, but is refitting its oldest plant with new generating units. On completion capacity will increase to 4 million kilowatts.

This begs three questions. The first: how did it manage to overcome opposition from State Grid? Well, it wasn’t smooth sailing. In 2009 when Weiqiao Group wanted to transmit its power to Huimin County, the local branch of State Grid mounted stiff opposition. Tempers frayed to such an extent that there was a local brawl involving hundreds of people, says 21CN. What appears to have swayed things in Zhang’s favour is local government backing, believing him good for Shandong’s economy.

The second question: could other parts of China follow Zhang’s example? 21CN says local conditions make the province an unusual case, especially due to what it terms the disproportionate influence of Shandongers in China’s power bureaucracy. Likewise, not all provinces will have a private firm like Weiqiao Group i.e. one which uses enough energy to anchor a grid, as well as actually wanting to become a power producer.

Lastly, how does Zhang manage to generate electricity more cheaply than the State Grid? One potential explanation: he is running his coal-fired stations more efficiently than the state. Or is there a less pleasing response? An official from the National Development and Reform Commission reckons that Zhang’s prices are lower because he doesn’t adhere to the same levels of environmental protection, such as desulphurisation. But an official from Weiqiao Group wrote to 21CN disputing this and saying the group spent Rmb1.7 billion on pollution control.

For now, Weiqiao offers a rare example of a privately-owned business prevailing in a head-to-head struggle with a state Goliath…

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