CHINA’S WIND INDUSTRY: SUPER-SIZED GROWTH, SUPER-SIZED CHALLENGES

A few weeks ago, I made my first trip to China since the pandemic, joining more than 100,000 other attendees at the Global Wind Energy Council (GWEC) China Wind Power event, visiting member companies and partners, as well as talking with officials, think tanks and experts.

In recent months there have been some shrill voices in Europe using emotive language to warn of the “threat” of China’s wind industry and Chinese dominance in the energy transition. As I reflected on my travels around China, these warnings felt a bit incongruous. China is both the world’s single biggest wind energy market, the country making the biggest single contribution to the global wind supply chain - and an important production base for the leading international companies in the industry. So while Chinese companies no doubt compete with Western companies, calling China a threat does not really capture the present dynamic.

No place on earth has been so misunderstood historically as China, and unfortunately much of the current discussion so far has lacked nuance at best, and at worst, has been uninformed and self-serving. The sad thing is that these discussions fail to recognise that, as well as competition, there are many common challenges faced by Western, Indian and Chinese wind industries.

There is also much genuine discussion around concentration risk and the need to create more diverse and resilient wind energy supply chains. This was the focus of the recent International Energy Agency (IEA) High Level Dialogue, and GWEC’s stakeholder workshops in New York and Beijing. From all my discussion with stakeholders across the globe it is also clear that there is a strong sense of mission in the global wind industry to keep the focus on fighting climate change and maintain international cooperation. I hope it is this positive and reasonable approach that will prevail. It’s important that discussions are based on good data and hard facts, and my colleagues in the GWEC team and our partners are working on a series of reports and data sets to help further this discussion. We also need dialogue to be inclusive and incorporate perspectives from all the major production centres like China, the US, Europe, India and Brazil, as well as Global South countries which are striving to increase their share of investment in renewable energy manufacturing.

This discussion will not be resolved any time soon. A number of key upcoming dialogues and forums will attempt to elucidate the issues – including the release of a major report on the wind energy supply chain – the first comprehensive study of its kind - at COP28 UAE by GWEC, 波士顿谘询公司 and other partners. This will feed into work being carried out by International Renewable Energy Agency (IRENA) , the International Energy Agency (IEA), the COP28 UAE Presidency, World Trade Organization , Sustainable Energy for All (SEforALL) , multilateral investment banks and other agencies, and a number of planned bilateral and multilateral and industry discussions. And we hope that these can eventually help shape the virtuous conditions needed for a much bigger, fit for Net Zero, wind industry.

Personal reflections from my China trip

As a small contribution, here are some personal observations from my trip to China, which can helpfully provide some perspective on the current discussions.

• China’s wind industry has made a fundamental contribution to scaling the global wind industry and climate technology, both through installing more than 400 GW of wind energy in its home market (as of June 2023) and by becoming a supplier of materials, components and turbines to the global industry. In my view, it’s only fair to recognise this ongoing contribution.
• The success of China’s wind industry is based primarily on the deployment of enormous and consistent volumes, with the industry expected to install at least 60 GW in 2023.

• Statistics that illustrate Chinese “dominance” of the industry (with a 63% share of nacelles and higher percentages of some key components and materials), do not tell the whole story, as China’s domestic market is expected to install up to 58% of total global installations in 2023-2025. The hard fact is that other major markets, including the US, Europe and India have far slower and less constant (“stop-go”) growth, often at variance with stated policy aims, and this has stymied the development of their own manufacturing industries.
• Over 88% of China’s wind turbine production (nacelles) was dedicated to its home market in 2022, while close to 9% was exported by Western OEMs from China, and less than 3% was exported by Chinese companies. However, at a component and raw material level, China has some much more significant global positions, including 73% for generators, 80% for gearboxes, 81% for power converters, and 82% for castings. At the level of materials, China supplies more than 60% of the steel plate for the wind industry (slightly over its domestic consumption) but more than 90% of processed rare earths.
• China’s industry is suffering from “race to the bottom” pricing since the end of Feed-in Tariffs (for onshore from 2021 and for offshore from 2022) and its leading companies are facing fast shrinking EBIT margins – sound familiar?

• Most companies are facing negative manufacturing margins, which they try to offset – with diminishing rates of success – with positive service and development margins. We can expect these trends to worsen unless there are changes in the Chinese pricing environment or significant consolidation, and this could have serious repercussions for the health of the global industry.
• Component manufacturers are under the same price pressure and also seeing declining and sometimes negative margins despite rising sales volumes.
• A complex mix of pressures and incentives – from both the central and provincial governments - to maintain jobs and investment is preventing consolidation (there are still 15 active OEMs in the market) and keeping unprofitable manufacturers in business, putting further downward pressure on prices.
• Driven by the severe price competition at home, the Chinese wind industry is seeing a non-stop race in launching bigger onshore and offshore wind turbines. At China Wind Power, at least 30 new turbine models were announced in the course of 3 days, while the latest size frontier in China is 15 MW for onshore and 22 for offshore turbines. This is also creating pressure on profit margins as R&D investments are not being amortized, and it carries risks for reliability if testing and optimisation cycles are curtailed. Again, sound familiar?
• Some Chinese companies are making major investments in automated turbine assembly. These developments should be seen as positive, if they are able to improve process and cost efficiencies, improve product quality and reduce exposure to hazardous working conditions. However, the push towards greater automation will involve trade offs in terms of job creation, which have not been fully understood across the global industry.
• The scale of investment in wind industry R&D infrastructure such as testing centres, with strong government support, significantly outmatches that being made in Western countries, and this is being supported by massive investment in education in STEM and specialised engineering courses, training and research. Competition for places in elite engineering colleges is intense.
• Like Western companies, major Chinese wind companies are committed to continually improving quality and sustainability standards – including making major investments in circularity, and are pushing for sustainable pricing which allows increased investments in these areas. Some companies also questioning the continued rush towards bigger turbine models. This suggests to me that there is strong common ground for the global industry to be advocating together for market and regulatory improvements as well as common standards.

And on a personal note, the Chinese industry continues to feel deeply engaged – and indebted to the global industry. At China Wind Power, I was very honoured to help moderate a session featuring the Chinese and Western pioneers of the China industry (including Henrik Stiesdal , Wu Gang, Andrew Garrad , Arthouros Zervos , Li Junfeng, Zhang Chuanwei and others), who recalled experiences such as building China’s first wind farms, scientific exchanges with institutions such as Denmark’s DTU - Technical University of Denmark , and the holding of the first – tiny – China Wind Power in 2007.

I for one hope that these world changing collaborations can continue. In subsequent posts, and in the forthcoming 4th edition of my book, Wind Power: the Struggle for Control over a New Global Industry (coming out next Summer published by Taylor & Francis Group ), I will write about:

• the position of China’s industry in key areas of the wind turbine supply chain
• the continued participation of Western companies in China’s wind industry manufacturing
• its capacity situation relative to the global industry in terms of wind turbines and key components
• the government supported push to increase exports and participation outside of China and the evolving Belt and Road Initiative
• the advantages - and disadvantages - faced by China’s industry in international markets