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.

The Chinese accomplished this feat of halving the price of a MW of wind power, in large part by rapidly developing an indigenous manufacturing industry that has been able to produce turbines and their components at substantially lower prices. If for nothing else, the Chinese are well known for their penchant to incessantly pressure their suppliers to sell at increasingly uneconomic prices. But here is the interesting point: one of the few categories of suppliers to the wind turbine industry that didn’t make price concessions over the past several years were foreign companies with technology that the Chinese needed but hadn’t been able to replicate indigenously. The prime example of this, of course, is the electrical components and control systems produced by AMSC. A simple “back of the envelope” calculation displays in high relief this conundrum: while the price of Chinese wind turbines and most of their components were declining steadily over the past four to five years, the cost of electrical and control systems supplied by AMSC under its 2008 contract with Sinovel remained constant, so that what accounted for (approximately) 9% of the total cost of a Sinovel wind turbine in 2008, grew to be a 12% item by late 2011!

This dynamic clearly gave Sinovel the incentive (as claimed by AMSC) to steal AMSC’s intellectual property or (as claimed by Sinovel) to develop its own indigenous capability in electrical components and control systems so that Sinovel would be able to reduce the cost of its turbines in this hyper-competitive environment in China today and hopefully halt the slide in its market share.

One somewhat perplexing aspect of this tale is that Sinovel’s relationship with its key technology supplier has become rocky just when the technological requirements that may give Sinovel a competitive edge going forward have grown. With an increasing number of 6-MW turbines, the expected rapid growth of offshore wind farms, and myriad grid connection issues, one would expect that Sinovel might be able to claw its way back up the market share ladder with a superior command of technology. And this is what makes the falling apart of the Sinovel/AMSC relationship mystifying.

Did Sinovel’s chairman, Han Junliang, just spectacularly miscalculate or did he know or believe that Sinovel could keep up with the growing technological requirements that might set Sinovel apart, with or without AMSC? In the glow of its $1.4 billion USD IPO in early 2011, did Sinovel feel at liberty to make off with AMSC’s crown jewels hoping that it could innovate beyond the AMSC technology platform or perhaps hoping that the cost benefits would be enough to keep Sinovel in the game long enough for it to figure out what to do next? Did Han Junliang underestimate how rising competition would affect Sinovel’s profits or is it precisely because he saw that those profits were rapidly shrinking that he felt compelled to lower Sinovel’s costs at the expense of AMSC?

In any event, it remains to be seen how Sinovel will weather the harsh winter that has now beset China’s wind power equipment manufacturing industry. And it will be fascinating to see whether the much anticipated innovation revolution that many insist is imminent in China will arrive in time to benefit Sinovel. In the interim, the best approach for Sinovel may be to settle with AMSC and allow the partnership to resume based on a new paradigm that fairly compensates foreign technology, which in turn allows for a gradually declining return per unit in recognition of the changing economics of the wind turbine industry. Stay tuned.

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.