Embarrassed by an International Energy Agency report that China is now the world’s largest user of energy, local governments, with the presumed encouragement of Beijing, are taking drastic steps to cut energy usage. Company managers in Anhui and Jiangsu provinces say that over the course of the last few weeks, local authorities have shown up at their factories unannounced and given them days or sometimes a few minutes notice before shutting power off.
While controlled power outages are a fact of life in China, the current campaign is more intense: Anhui authorities publicly admitted they have never cut off power to so many factories at once. However, there is little specific information available to help managers plan around the campaign. Jiangsu provincial television has been running reports congratulating the local government for exceeding energy efficiency targets set in the current five-year plan – set to expire in 2010 – but Beijing is apparently demanding more.
Sources in factories have alleged that foreign firms BASF (BASF.BIT, BAS.ETR), a German chemical producer, and aluminum-maker Alcoa (AA.NYSE) have already had their power cut for short periods of time. Alcoa has admitted there were “actions” by the government to improve power efficiency, but that “operations were not effected.” BASF has denied any outages.
Jurgen Weisshaal, general manager of German automobile component manufacturer Kendrion (KENDR.AMS) in Suzhou, said that his plant has been ordered to slow production to conserve energy, but the schedule for power cuts was only good for two days. “We cannot plan,” he said. “We have lowered everything because we have been informed they are monitoring consumption, and if we are a big consumer they will cut us off.”
Kendrion’s China operations are concentrated in Jiangsu, with subsidiaries operating in Suzhou and Nanjing, but many of its customers are foreign. As a result of the slowdown in production, the company is forced to air-freight products instead of shipping by sea or rail, an enormous additional expense.
For companies already rushing production to meet recovering demand, it is a major issue – especially those that are also dependent on smaller suppliers elsewhere in the province that may suddenly be cut off. For example, one large foreign manufacturing firm in Jiangsu spends an average of US$25 million producing some 1.1 million units every month. A loss of power causes inventory to back up quite quickly, and an outage at a small supplier producing a key subcomponent is worse. The result is a snarled supply chain.
The campaign does not appear to be singling out foreign firms. Nanjing Iron & Steel (600282.SH), China Yurun Group (1068.HK), a food producer which makes heavy usage of refrigeration, and Nanjing Panda Electronics (600775.SH, 0553.HK) have also been affected.
Those at greatest risk are Jiangsu’s 900-plus chemical manufacturers. Multinationals with chemical operations in Jiangsu include BASF, Akzo Nobel (AKZOY.AMS) and PPG (PPG.NYSE), although the latter’s local operations are mostly focused on research and training. Chemical production – like aluminum and steel – is extremely energy-intensive, but chemical processes and storage facilities cannot be switched on and off like an assembly line.
The campaign is already spreading into other provinces. According to reports in domestic media, firms in north China including Tianjin Tiangang Union Iron and Steel and Chaofeng Construction Materials have been ordered to close some furnaces and production lines.