Economic crosswinds

As the winds of the global financial crisis sweep across the globe, a broad array of manufacturers in China are feeling the chill and revising estimates for growth. Not so for the country’s wind power equipment makers, who remain optimistic.

Though the industry faces short-term growing pains and economic uncertainties, insiders believe that wind power in China will sustain healthy growth, thanks to favorable government policies and a large domestic market. Indeed, Beijing has ambitious targets in this field. The National Development and Reform Commission in March doubled its target for installed capacity of wind power to 10GW by 2010, and installed capacity by 2020 is targeted at 30GW. Analysts don’t see this as wishful thinking.

"I think these are going to happen for sure, and then it’s a question of even going beyond that," said Eric Martinot, a senior researcher at the Institute for Sustainable Energy Policies in Tokyo. "I think all the Chinese government targets for renewables will continue to be met regardless of the financial situation."

Government commitment

He cited the listing of wind power manufacturer Goldwind Science & Technology as evidence of the government’s commitment to the industry. Goldwind had wanted to go public on a foreign exchange but was instructed by the government to list on a domestic bourse. In December 2007 the company listed in Shenzhen, raising US$245 million.

"The government didn’t want foreign ownership of Goldwind, China’s largest wind power company. That indicates this is a strategic industry for China," he said.

This support of the domestic industry has meant that foreign firms have been excluded from many of the plumb deals, analysts and insiders said. While this leaves some foreign players feeling unfairly impeded in the market, the upshot is that Chinese wind power manufacturers will have their hands full supplying the domestic market for several years.

Cai Xiaomei, Goldwind’s board secretary said that the global economic crisis has "hardly affected" the firm’s orders from within China. However she noted that it would be difficult in this environment for wind firms to receive venture capital (VC) funding or go public, as Goldwind has.

"Overseas VCs do not have money now. In addition, the domestic stock market has suffered. All domestic companies are finding it hard to go public, and wind power firms are no exception," Cai said.

But she believes that the government may see investment in a growing new energy sector as one means to help stabilize the economy, which may spur more lending from banks.

Analysts view Goldwind as one of China’s leading wind companies – the company claimed to have a 25% market share in 2007 – with the potential to evolve into a global powerhouse. But the firm has already hit a roadblock. Goldwind on November 4 issued a statement at the Shenzhen stock exchange announcing it had been informed that BP Alternative Energy would pull out of a plan to jointly develop wind farms with a Goldwind subsidiary in Inner Mongolia. The unit of oil group BP told Goldwind that it is pulling out of the wind energy sector in Asia and will focus instead on the US market.

There are other signs that Western investors may be too strained to devote their attention to wind power in China.

An insider from a Chinese wind turbine manufacturer said that, as recently as half a year ago, premier investment banks such as Goldman Sachs and Morgan Stanley had expressed interest in his firm and others within the sector. Since then, interest has dried up.

Cheaper materials

However he expects that financing won’t be a problem because there has been "almost no impact" on bank lending to the wind sector from the financial crisis. Furthermore, the credit crunch has led to a drop in prices for raw materials.

"At the beginning of 2008 we were afraid that the prices might soar, but since the financial crisis broke out, the price for steel and copper has dropped 30-40% and our sales will stay the same," he said.

Bank lending remains one of the more prevalent financing channels for wind power manufacturers. While there hasn’t been a precipitous drop in lending as of yet, some within the industry expressed concern that banks may not be as free with their money as the crisis unfolds.

But Steve Sawyer, the secretary general of the Brussels-based Global Wind Energy Council, said China had been tightening credit since before the global financial crisis.

"The credit situation here has been tightening quite substantially since the end of the first quarter for reasons quite apart from the financial crisis. That has slowed some things down a little bit, but I don’t think it’s going to change the fundamental picture of the new installed wind capacity in China in 2008," he added.

Michael Liebreich, CEO of London-based New Energy Finance, believes the wind power industry in China is better off than other renewable energies such as solar, which is primarily export-driven.

Bearing the cost

Nonetheless, there are still uncertainties in how these companies will secure financing as credit tightens in China. And though the country’s financial reserves are massive, they aren’t bottomless. Liebreich also noted that China has thus far developed its clean energy industry with assistance from the West via the Clean Development Mechanism (CDM) established in the Kyoto Protocol as well as  other joint cooperation programs. This tacit deal between China and the West has essentially allowed China to build up a clean energy industry while sending the bill overseas.

"As the bill gets bigger, and China gets wealthier, clearly those extra costs for clean energy have to in some way shift to China. They can’t always be met by the EU or Japan or North America," Liebreich said.

But whether and when these obstacles present themselves is anybody’s guess, and Liebreich cautions that the rapidly evolving nature of the credit crunch makes predictions difficult. Nonetheless, he and others believe wind power to be a solid long-term play in China.

In this environment, Chinese firms are poised to reap the rewards of a fast-growing domestic market and favorable political environment, according to Steven Zhang, senior vice president of M&A at CITIC Securities in Beijing.

"[Wind power in] China is going to grow faster than Europe. The Chinese government has specific policies encouraging wind farms and manufacturers," he said. "I think the Chinese manufacturers are in a very good position to develop the business. They will be fine."