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AMSC, Sinovel and the State of U.S.-China Business Relations

Upon learning that American Superconductor (AMSC) has accused its largest customer of intellectual property theft, one couldn't help but well up with nostalgia for the halcyon days of 2008, when Wall Street barely knew the name "Sinovel," the naysayers roundly scoffed at the possibility that AMSC would derive any significant revenue from supplying electronics and other sophisticated components to the wind turbine industry in China, and nearly everyone was incredulous that China had embarked on the development of "wind farms of a magnitude never before seen on earth."

(To be fair there were some who then appreciated our analysis in Renewable Energy World of the expected surge in wind farm development in China “of a magnitude never before seen on earth.”)  

So in just three years, the AMSC story appears to have gone from “how could anyone view this company as a wind play?” to “the IP that formed the basis of AMSC’s primary source of earnings has been stolen” by its largest customer. The souring of the AMSC/Sinovel relationship is a microcosm of the continuing growing pains in the U.S.-China economic and trade relationship, which is sorely in need of attention.

Four years ago, when the Renewable Energy Law of the People’s Republic of China was less than two years old and the National Development and Reform Commission (NDRC) had just released the Mid- to Long-term Plan for Renewable Energy Development, AMSC set up the Suzhou Meien AMSC Co., Ltd. and began producing electronic control systems and other sophisticated components for wind turbines.  By 2008, when Wall Street skepticism was running high, more than 50% of AMSC’s income was derived from Sinovel contracts; that percentage rose to nearly 75% in 2009. 

For those of us wishing to see a new strategic alliance between China and the United States in renewable energy development, the Sinovel/AMSC relationship appeared to be a marquee demonstration of what could be. And for several more years it appeared as if China’s manufacturing muscle would partner with U.S. innovation in a way that would produce a “win-win” for both countries. 

But that was then and this is now. Almost exactly four years after AMSC established Suzhou Meien AMSC Co., Ltd. and China began planning in earnest for an historic ramp-up of renewable energy development, the marquee relationship of U.S.-China cooperation in renewable energy has deteriorated into a familiar saga of accusation and recrimination. AMSC has accused Sinovel of stealing its intellectual property and is planning to sue Sinovel. Denying AMSC’s allegations and countering that AMSC was an unreliable partner who failed to live up to its contractual obligations, Sinovel has refused to perform under their existing contracts and ceased making payments to AMSC. 

So where does the truth reside? Is it a classic case of a Chinese company expropriating one of the quickly dwindling comparative advantages the U.S. continues to maintain? There certainly is precedent for Chinese companies not respecting and not paying for foreign intellectual property. And given the cutthroat nature of competition among Chinese turbine manufacturers, it is quite possible that Sinovel saw a ready place to reduce costs.   

Or is it, as Sinovel contends, that AMSC has failed to make the technological improvements to its products that were promised, forcing Sinovel to develop its own solutions? Is there anything to the charge by Sinovel that AMSC failed to develop a robust system to handle after-sales maintenance, repairs and equipment upgrades? 

Perhaps this is just another ordinary case of Chinese companies steadily occupying the manufacturing space of foreign companies. The Chinese regularly do trumpet their success with import substitution — developing industries that manufacture products previously only available through imports. Indeed, Sinovel has “localized” production of a growing list of turbine parts — blades, gears, bearings, generators and frequency regulators, and is proud of how indigenous manufacturing of key wind turbine components has helped them reduce costs, increase profits and enhance the company’s competitiveness. 

It was once said (in the context of the Japanese) that the Americans are like baseball sluggers who swing for the fences, as contrasted with the Japanese who score their runs through a combination of singles, bunts and the occasional stolen base. It’s an interesting analogy in part because baseball is a quintessential American game and the implication was that the Japanese were beating us at our own game by playing it differently. Similarly in the second decade of the 21st Century, there is a prevailing view that the Chinese are beating us at our own game: the Communists are out-performing the Capitalists at capitalism.

As we lament losing out to the Chinese on our “home field,” there also is that unsettling feeling that some of those losses are not a result of the Chinese simply outhustling us, but that they are playing by a different set of rules. Is it that the Chinese are more driven than us or because the Yuan doesn’t float freely? Do their much lower labor rates give them the flexibility to undersell the market or is the “China Price” in part due to shortcuts that aren’t permitted according to our rulebook, e.g., lead in paint, melamine in milk or toxic waste from PV manufacturing dumped in rivers? Do the Chinese succeed because they are investing far more than us in infrastructure and human capital or because they beg, borrow and steal the intellectual property of innovation economies such as ours?

We should be able to accept the results when the runs pile up from a well-executed series of singles, bunts and even stolen bases; but if the win comes from balks and stolen signs, it’s not surprising that we then question the score. The truth lies somewhere at the intersection of all these crosscurrents, which makes it more imperative than ever for both the Chinese and the U.S. to carry out honest assessments of what are the new rules of the road. The AMSC/Sinovel relationship would be as good a place as any to start.

Lou Schwartz, a lawyer and China specialist who focuses his work on the energy and metals sectors in the People's Republic of China, is a frequent contributor to Renewable Energy World.   Through China Strategies, LLC, Lou provides clients research and analysis, due diligence, merger and acquisition, private equity investment and other support for trade and investment in China's burgeoning energy and metals industries. He can be reached at lou@chinastrategiesllc.com

 

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