China - Intense price competition in a buyer's market

Today, some of these Chinese wind turbine makers have become world-class names themselves and now face a new challenge: How to cope with a buyer's market. After years of robust expansion and fast profit growth, Chinese wind power makers are staring at intense price competition, excess production capacity and government tightening of regulations related to the industry.

Sinovel Wind Group Co, China's largest wind turbine maker, last month said profit growth slowed to 1% in the first quarter even as sales rose 20%. Earnings soared 51%t in 2010.

Xinjiang Goldwind Science & Technology Co, the nation's second largest, said net profit fell 17 percent to 206.2 million yuan ($31.8 million) in the first quarter. Sales remained flat at 1.86 billion yuan.

In a rush to clean energy, China has been the largest wind-power market since 2009, overtaking the United States last year as the nation with the highest installed capacity.

Domestic firms have grabbed market share from global peers, in part because the Chinese government in 2005 required 70% of wind-turbine content to be domestically manufactured. The policy was abolished early last year as Chinese firms became increasingly competitive.

In terms of installed capacity, China's wind market has doubled every year between 2005 and 2009. The nation added another 18.9 gigawatts last year, bringing total installed capacity to 44.7GW, according to the Global Wind Energy Council.

"Annual installation may have peaked in 2010," said Franklin Chow, an analyst at Beijing. Gao Hua Securities, Goldman Sachs' partner in China. He cited tighter approval rules for wind projects and rising debt levels of wind farms as stumbling blocks to further expansion.

Industry officials have said that the National Development and Reform Commission, China's top planning body, is consolidating project approval from local governments to cool heady growth in the sector and allow more time to work out problems connecting newly installed turbines to power grids.

Many wind farms still sit idle in China. According to Gao Hua, same-year connection of newly installed turbines to power grids in 2010 was only 72%, up from 66% in 2009 but below its forecast of 84%. "We think the wind farms are slowing down their capacity growth in order to avoid further unconnected turbines," Chow said in a report.

Still, he said the figure could rise to 106% in 2015 due to upgrading of grid infrastructure, the introduction of smart grid technology that better merges alternative energy into mainstream coal-fired power, and improved infrastructure to connect turbines. Connectivity above 100 percent means the power grids connect all wind turbines installed in the same year as well as some of those installed in previous years.

Gao Hua forecasts new installation to be 18.3GW this year. By comparison, Century Securities analyst Yan Biao estimates that domestic annual turbine manufacturing capacity will rise to 32.6GW this year from 27GW in 2010. Such oversupply in capacity is expected to further drive down product prices and squeeze margins for manufacturers.

A Goldwind spokesman said the company is deepening cost controls to improve margins but price competition is preventing a significant rebound in profitability this year. The measures undertaken by the company include increasing its presence in upstream component businesses. Goldwind last month said it would increase its stake in Beijing Techwin Electric Co, which makes control systems and converters for turbines, to 97.5 percent from 75 percent. The company also said it will double the registered capital of its wholly-owned unit Tianhe Wind Power Blade Jiangsu Co.

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