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Solar Thermal Competition Heats Up in China

China's "Big Four" solar thermal firms, with their vast distribution networks, are racing ahead of a fast-consolidating market.

On Saturday afternoon, when residents are likely to be at home, a truck carrying solar water heaters pulls up outside a new apartment block in Jinan city. As Linuo Paradigma's sales team starts assembling the heaters, a crowd of curious onlookers gathers. Heating your showers with these is far cheaper than using gas or electricity, the salespeople tell their audience. By the time the truck leaves that evening, several contracts have already been signed.

For Zhanshen Cui, manager of the Jinan Branch of Linuo Paradigma, direct marketing can give a vital edge in an increasingly fierce tussle for sales. He runs six shops in Jinan, a city of six million in the coastal province of Shandong. Over a year, each outlet can sell about 1,600 systems. But competition is getting tough and sales targets cannot be met by staying in the shop.

Nationwide, Linuo Paradigma has 20,000 franchise shops, of which 1,600 are top partners, who are financially independent but must use the manufacturer's logos and marketing material. Solar shops generally sell systems at prices set by the system supplier, ranging from RMB2500 to RMB6000 (US$390-$940). Discounts are set by the supplier's central sales department and further rebates are forbidden. Installation is included in the fixed gross system price and must be covered by the shop owner's margin.

Rapid consolidation in the industry

But franchisees have a compelling sales pitch. Solar water heaters are the cheapest way to heat domestic water. According to calculations from the Chinese Solar Thermal Industry Federation (CSTIF), over its lifetime, a solar water heater costs a family 3.5 times less than an electric water heater and 2.6 times less than a gas one. 

This straightforward sell has enabled the Chinese solar water heater industry to grow to an enormous size. Solar research company The Sun's Vision estimates that 2,800 companies — 1,600 assemblers and 1,200 suppliers — had a combined turnover of RMB73.5 billion ($11.5 billion) in 2010. Yet a tiny slice of these firms contributed almost all of this total. "We question around 300 [manufacturing] companies annually, which are responsible for 95 percent of the total annual sales volume," said Hongzhi Cheng, who heads a 30-person team at The Sun's Vision. "The other around 1300 solar water heater makers are negligible for overall market statistics, since they rise and disappear and they sell poor quality products."

Rapid consolidation is also underway, he adds. Over recent years, the market share for the top 100 brands has rocketed from 40 percent up to 70 percent. Yunbin Li, deputy general manager at Linuo Paradigma and sales director for the Chinese market, estimates that 1,000 solar thermal companies have closed their doors in the last two years. "First, these companies do not have access to the fast growing solar project market and, second, the sales networks of the larger companies are getting tighter and tighter."

Leading the market in both scale and growth are the "Big Four" firms: the Sunrain Group, the Linuo Group, Himin Solar and Sangle Solar. Each has a solar thermal business valued above RMB2 billion ($313 million) and all four are heavily committed to sales and marketing.

At Sunrain, for instance, salespeople outnumber production workers. At the end of 2011, the group's 5298 staff included 2003 in sales and only 1914 in production. Regional sales teams help local distributors, although franchisees are ultimately responsible for achieving targets, said Chen Liang, marketing planner for international business development.

From 2009 to 2011, the Sunrain Goup's turnover from solar water heating technology doubled from RMB1.54 billion ($241 million) to RMB3.1 billion ($485 million), according to a company profile published in February 2012. In 2009, as it celebrated its 10th anniversary, Sunrain formulated its "533100" vision for the next five years. Each digit in the figure corresponds to one aspect of the firm's target: that in five years it will have 30,000 direct employees, create 300,000 job opportunities along the value chain, and have tripled its annual turnover to RMB10 billion ($1.6 billion).

The group — which has two separate brands, Sunrain and Micoe — has already become the first solar water heater specialist listed on the stock market. After a protracted application process, it was listed at the end of May 2012. Cheng from The Sun's Vision predicts that the government will only permit one other solar thermal heating firm — Himin — to join the Sunrain Group on the stock exchange.

Solar thermal firms target exports

The Chinese solar industry aims to raise its export business more than 12-fold over the next six years — up from $20 million to $250 million. Yet even $250 million would be only 2 percent of the industry's estimated overall turnover.

Linuo Paradigma, which emerged from a joint venture between Germany's Ritter Group and the Chinese Linuo Group 11 years ago, stands out with exports totalling 6-8 per cent of its turnover. Linuo Ritter International, set up in 2011, will offer the company's entire product range worldwide, from non-pressurized thermosiphon systems for water heating through to complex large-scale solar thermal systems generating process heat. Twenty-five sales specialists now work at this new subsidiary, based in Jinan, and Linuo Paradigma already runs sales offices in both Germany and the U.S.

Himin claims an export share of less than 10 percent of its business turnover with about 20 staff in its export department. The firm's key markets are Vietnam, Malaysia, South Korea, Australia and Germany. But so far the company only has sales offices in Malaysia and Vietnam. "We are planning a German and a Belgian sales office," said Deputy General Manager Juiwei Wang.

But the Big Four complain about cutthroat competition for exports from the "around 100 Chinese solar thermal system suppliers with lower quality products". The other obstacle to exports is the rising strength of the renminbi on international currency markets."'Since we mainly use U.S. dollars, most of our customers have asked us for discounts and the cost of the imported raw material is also increasing," said Yongmei Xu, sales director of Linuo Ritter International. "Our profit ratio becomes less and less. The only way to work it out is to develop new products, which needs time and effort."

Himin's answer to the tighter market — nationally as well as internationally — is to become "a service provider for complete micro-emission solutions", says Wang. The firm's new Me Pad product range incorporates various clean energy technologies for customer groups such as households, hotels, schools or dormitories.

Precisely what lies behind these announcements will only emerge when the first projects are implemented. But if the Big Four invest as strongly in sales and marketing abroad as they have done in China, their export success is assured.

Bärbel Epp is the founder of Solrico, a market research agency focusing on solar thermal technology. 

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