Caixin
May 02, 2012 10:52 AM

A Gale-Force Storm

A decade ago China had no sizeable wind turbine makers. Now, with Chinese makers occupying four of the top 10 slots in the industry, come market rumors that a Chinese company might bid for Vestas, the world's largest wind power company. Winds of change are coming through China and blowing through the business.

Recent speculation that one of China's top wind turbine makers, Sinovel or Xinjiang Goldwind, might make a bid to acquire Danish wind turbine giant Vestas reflects an industry that is going through unprecedented turmoil as selling prices fall and profits evaporate as a clutch of Chinese companies jostle for position. Even if the rumors come to nothing, the mere fact that the speculation in a Danish newspaper is being taken seriously is a sign of China's wind turbine makers' newfound importance.

As the hyper-competitive wind industry consolidation this is a pivotal moment for Chinese ambitions. It is also an early test of China Inc.'s strategy not just in wind power but throughout the renewable energy field. At stake is whether the Chinese growth-at-any-cost model – reliant as it is on cheap state-backed credit, scant regard for profitability and the world's largest domestic market – is sustainable over time and on a global scale.

Certainly, Vestas looks vulnerable to a takeover attempt. The world's largest wind turbine manufacturer, with 12.9 percent of the global market in 2011, has seen its shares lose 70 percent of their market value in the past 12 months, even after rallying on the takeover speculation. Its deputy CEO and chief financial officer recently resigned and its chairman and deputy chairman are on their way out.

Vestas' problems mirror those of the industry as a whole. Subsidies have been put on hold in Spain, once one of the world's largest markets, and may be eliminated in the United States at the end of 2012. Already, in April, they were reduced in India, the world's third-largest market in 2011. A variety of clean-energy stimulus programs enacted in the wake of the global financial crisis are falling victim to the newfound focus on austerity a time when the all-important Chinese market is expected to show little year-on-year growth.

Profit margins are being savaged as tough competition forces prices down. For Vestas, deliveries in China fell as the company declined to chase business at, in the words of Vestas president and CEO Ditlev Engel "an unacceptable pricing level in the Chinese market where we decided not to participate at prices and terms and conditions at such level as they would not support Vestas [going] forward." Engel also mentioned unnamed "great constraints in China" as a problem for Vestas.

In wind, as in solar, sales are booming, profits are plunging. China is the world's largest market for wind and its wind turbine manufacturers have come from obscurity in recent years to become global leaders. As with solar, China's manufacturers are on an expansion binge, aided by generous funding from the China Development Bank (CDB). Earlier this year, the CDB promised Xinjiang Goldwind, the country's largest turbine maker, 35.5 billion yuan in credit over the next two years.

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