China's winds of change buffet foreign investors

The world's biggest wind turbine manufacturer knows only too well the challenges of doing business in the country, writes Peter Hannam.

The world's biggest wind turbine manufacturer knows only too well the challenges of doing business in the country, writes Peter Hannam.

Ditlev Engel, the chief executive of the world's biggest wind turbine maker Vestas, could be excused a wry smile at the past week's trumpeting of Australia's special relationship with China.

Mining tycoons and banking barons hailed the stream of agreements signed during Prime Minister Julia Gillard's official visit to the Middle Kingdom, ranging from direct dollar-yuan conversions and annual leadership meetings.

For companies like Vestas, though, China offers at least as much threat as opportunity. Among the first things Engel did after joining Vestas in 2005 was to decide on setting up a base in China, with a 100 per cent local supply chain target.

Since then, renewable energy in China has boomed like few other regions, with installed capacity rising six-fold between 2008 and 2012, and the country now vies with the US as the largest buyers of turbines.

Vestas has carved out a market share of about 5 per cent in China - but only about a third of its global average, and less than a 10th of its share of the Australian market.

"It's extremely price competitive, with 40, 50, 60 companies making turbines," Engel says during a visit to Australia for the opening of AGL's $1 billion Macarthur wind farm in western Victoria. "Some quotes are simply not sustainable."

Oddly, up to 30 per cent of turbines being built are yet to be connected to the Chinese power grid. Still, similar ratios were being reported in 2011 and last year, so presumably the network eventually reaches new wind farms as they spring up.

The angular Dane's China experience stretches back to the early 1990s when he had an inside role at state-owned China Merchants as it floated the first "red chip" stock on the Hong Kong stock exchange.

Engel's mainland boss "taught me to be strategic, to keep an eye on the long term", he says.

China's industrial juggernaut has already seen its manufacturers seize the dragon's share of the global solar market, scorching even local champions such as Suntech in the process. Can European manufacturers, such as Vestas, survive in the long term?

Investors certainly had their doubts. Vestas shares rocketed on clean technology hopes in 2008 only to lose 97 per cent of their value as policy support wavered in many markets and turbine prices fell by a third in four years. The stock has since bounced, almost doubling since the nadir last November.

Vestas is midway through a two-year cost-cutting blitz that will slice its workforce by a third as it attempts to return to profit after losses in 2011 and last year. Despite former markets, such as Spain, now being "totally dead", the company's revamp is on track, even with the surge in Chinese rivals, Engel says.

A crucial difference is that at a weight of 250 tonnes per turbine, China has a cost disadvantage when it comes to exporting the giant machines. Issues such as intellectual property and patents also hinder Chinese firms operating abroad, he says. Those economics, though, do not yet favour a return to Australian manufacturing.

The company opened a blade factory in Portland - near the Macarthur wind farm - in 2005 and a turbine assembly plant across Bass Strait at Wynyard. Engel shut them two years later with the loss of 130 jobs when the Howard government weakened its renewable energy target.

"The reason we had to close two plants was because it was very difficult for us to understand where Australian energy policies were going," Engel says.

Vestas remains optimistic federal bipartisan support for the renewable energy target of 41,000 gigawatt hours a year from large-scale generators by 2020 will outlast this year's election. The company is also hopeful state government ambivalence over wind farms will tilt to more favourable backing.

Victoria's Premier Denis Napthine oversaw Friday's unveiling of the 420 megawatt Macarthur wind farm, which is in his own electorate.

NSW, though, is yet to finalise its wind farm guidelines, such as whether to copy Victoria's requirement for turbines be no closer than two kilometres to the nearest residence. Noise restrictions may be even more demanding than Victoria's, standards Vestas says are already among the world's toughest.

For Vestas to consider reopening plants in Australia, it would require turbine orders of about 1 gigawatt capacity per year.

The Clean Energy Council forecasts wind farm installations for the rest of the decade are likely to be about 1 gigawatt a year, for a total of 2000 to 2500 more turbines. Australia would need to double that rollout to tempt Vestas back to building turbines locally.

"If they're going to do that, let's talk," Engel says.

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