Pennsylvania, U.S.A. – The Year of the Dragon has gotten off to an inauspicious start for the Chinese wind industry and in particular, Sinovel Wind Group Co. (Sinovel), China's leading wind turbine manufacturer.
In early February, with the official end to the “Spring Festival” only days away, Sinovel reported decidedly chilly preliminary estimates of its FY2011 performance, confirming that Sinovel and indeed the whole Chinese wind industry had, in the words of one Chinese wind industry insider “entered a winter that would be hard to endure”.
Sinovel estimated that its net income for FY2011 declined by more than 50% compared with 2010 profits of 2.856 billion Yuan (~$450 million USD). The decline in profitability of Sinovel in 2011 was attributed to several factors: intense competition in the Chinese wind turbine market, delays in the development of certain wind farm projects and a series of mishaps that adversely affected the grid, which were caused by turbine defects evident during low voltage ride through (LVRT) events.
According to an official with Longyuan Power, the detection of turbine defects, which brought about the low voltage ride through issues has resulted in new rules, which, among other things, require that all wind turbines undergoing upgrades to address this problem obtain the approval of the State Grid Electric Power Research Institute prior to being put back in service. These inspections, being time consuming, have put further pressure on turbine manufacturers. This is an issue that certainly impacts Sinovel because of its large base of installed turbines, and particularly because some of the most prominent incidents occurred at the Gansu Province, Jiuquan wind farm, where Sinovel’s turbines predominate.
In addition to the fiscal and technical challenges Sinovel faces this year, the company also is confronting legal claims of more than $1.2 billion USD and a worldwide public relations blowback as a consequence of the souring of its relationship with American Superconductor Corporation (AMSC); indeed Sinovel has become a poster child for U.S. government complaints about Chinese trade practices in discussions with Xi Jinping, China’s incoming leader, who is visiting the U.S. this week.
As previously reported, AMSC has filed for arbitration and also has filed three civil lawsuits in Chinese courts against Sinovel and companies related to Sinovel, alleging breach of contract and intellectual property theft. And while the initial impression is that the Chinese legal system has settled into its role of protecting Sinovel through delay and favoritism, the existence of the litigation has had a decidedly chilling effect on Sinovel’s ambitions to become a serious player worldwide. This was in evidence in November 2011 when Mainstream Renewable Power put on hold its deal for Sinovel to supply it with up to 1 GW of wind turbines.
Sinovel has ridden the wave of rapid wind energy development in China to become the largest producer of wind turbines in China and as a consequence of China’s rapid growth in wind power production, the world’s second largest turbine manufacturer. In 2010 4386 MW worth of Sinovel turbines were installed; in all, China installed a total of 18,928 MW in 2010, which gave Sinovel a 23% market share. The early estimates are that China’s installed wind capacity in 2011 grew by 20,666 MW, but of that total, Sinovel’s installations decreased to 3700 MW and its market share declined to 18%, leading one to speculate that 2010 may have been Sinovel’s high water mark. (Total installations in 2009 in China were 13,750 MW and Sinovel’s share was 3510 MW or 25.5%; in 2008 wind turbine installations in China totaled 6246 MW and Sinovel’s share was 1403 MW or 22.5%).
Because Sinovel’s rapid growth has been accompanied by a decline in market share amid intense competition, and shares of Sinovel now are selling for 50% of the price they fetched when the dispute with AMSC became public last year, the company enters this year under increased financial pressure; this financial pressure in turn has necessitated Sinovel to return to financial markets to, among other things, supplement its working capital, despite having gone public in a blockbuster IPO in January 2011 (raising the equivalent of nearly $1.5 billion USD on the Shanghai Stock Exchange).
So how does China’s wind industry plan to pass this harsh winter? Of course, simply suffering is a time-honored tradition. One of the most evocative phrases used by the Chinese is “Chi Ku” (to “eat bitterness”) and apparently the Chinese wind industry already is eating a large amount of bitterness.
Next there is hope that the Chinese government will step up the pace of wind turbine installations and on this point there was encouraging news this week when the Chinese government announced the start of the second Offshore Wind Power RFP process for an anticipated total of 1500-2000 MW of installed capacity. At the same time, the State Energy Administration announced its goal of supporting the development of a total of 30,000 MW of offshore wind capacity by 2020; to put this ambitious goal into perspective, presently China has just 1380 MW of offshore wind power installed. Some are estimating that the offshore wind market alone will be worth 100 billion Yuan (~$16 billion USD) through 2020.
Because we have seen this movie played out countless times in a wide array of Chinese industries, we know that the central issue for the Chinese wind industry is how to avoid the cutthroat price competition that juices the sector as it debilitates the industry’s players. There has been a remarkable decline in wind turbine prices over the last four to five years: in 2008 the price of a 1.5-MW wind turbine in China was ~$1.48million USD; by late 2011 the price of a 1.5-MW wind turbine had dropped almost in half to ~$762,000 USD!
* In 2011 Goldwind Science and Technology’s wind turbine installations totaled 3600MW; in third place was State Power with 3000MW of installations; and in fourth place was Guangdong Province’s Mingyang Wind Power with 1500MW in installations. The precipitous decline in installations from foreign turbine manufacturers continued in 2011 with the Vestas being number one among foreign manufacturers with only 660MW, followed by GE with 400MW.