China Fears Worse Electricity Shortfall in 2012
China's power consumption will likely grow 9.5% to 5.14 trillion kW hours this year but
supply shortages are projected to total as much as 40 million kW, up from 30 million kW in 2011, the China Electricity Council warned.
The world's second biggest economy consumed 4.69 trillion kW hours of electricity last year, up 11.7% from 2010. The secondary sector guzzled 75% of the total, CEC figures show.
Although China's economy is expected to slow in 2012, drought, which could threaten hydropower, and strained coal supply will aggravate power supply nationwide, with some regions suffering severe scarcity, the CES noted.
The volume of coal used to generate electricity is estimated to increase by 150 million tons this year, according to the CEC.
The CEC suggested differentiating electricity prices, limiting exports of electricity-consuming goods and stepping up the development of hydropower and nuclear power plants to address supply shortages.
It was recently reported that the Chinese government would resume assessment of construction of nuclear power plants in the first half after a suspension following Japan's nuclear crisis last year.
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Intensified competition, oversupply and thinning profits are driving China's wind power equipment suppliers to markets abroad. The outbound trend has also encouraged companies in the field to gain international technological certifications to win customers' confidence.
A move overseas has become a natural option for companies with strong technical capabilities as profits continued declining steeply in the saturated domestic market, according to the 21st Century Business Herald.
Goldwind Science & Technology, a leading wind turbine manufacturer, reported revenues of 5.2 billion yuan (US$0.8 billion) for the first half of 2011, down by 17.6% from the same period of 2010. But net profits of the group's parent company slid 45% to only 425 million yuan (US$65.7 million) in the same period. For the first three quarters of 2011, revenues fell by 13.5% while net earnings tumbled by 59.8%.
The capacity of wind energy equipment has reached 25 million kilowatts while the big three companies of Goldwind, Sinovel Wind and United Power Technology already account for more than 10 million kw. Oversupply and market saturation can only escalate competition and induce price cutting on the local market.
Shi Lishan, deputy director of the New Energy and Renewable Energy Department under the National Energy Bureau, estimated the overseas market demand to be three to four times the domestic market. Chinese wind power equipment manufacturers should get prepared to expand to the international market as more nations are shifting to renewable energy resources, he said.
More of China's companies chose to expand to overseas market because it is now necessary for them to take part in the international competition, said Tao Gang, vice president at Sinovel Wind.
The key to companies' success is to continue upgrading their product quality since US and European markets still hold reservations about the quality of made-in-China products, said Goldwind chairman and CEO Wu Gang.
To enhance their product image and speed up expansion overseas, companies have adopted the strategy of forming partnerships with international companies. Acquiring wind power farms from overseas investors is another major step.
Sinovel Wind has taken the measure of earning certification from international wind power organizations like Germanischer Lloyd Group, which recently certified the company's SL1500/82 wind turbines. The company previously won GL's A-grade certification for its design of wind turbines in late October 2011.
The company reached an agreement with Sweden's CRC Windkraft AB in June 2011 to supply two sets of 3MW wind turbines in making inroads into the Swedish market.
In September last year, Sinovel Wind clinched a deal with Brazilian power company Desenvix to supply 23 sets of SL1500/82 wind turbines for a wind power farm with installed capacity of 34.5MW.
In its march toward overseas markets, Goldwind has already shipped products to many special electricity projects on markets abroad with a combined installed power capacity of 300MW over six continents.
Goldwin recently announced a deal to purchase the Musselshell wind power farm of 20MW installed electricity generation capacity in Montana State in the US from Volkswind USA. The latest acquisition will increase the total number of Goldwind's wind power farms in the US to at least 14 by the end of 2012.
The more capable companies should expand to overseas markets since it is impossible to dramatically boost the electricity capacity on China's domestic market, said Shi Pengfei, deputy director of the wind energy panel under the China Renewable Energy Society.
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Back in his home town of Essen in North Rhine Westphalia, Erik Breslein was made to feel like a folk hero, telling stories of optimism, growth and expansion in a distant land that were in sharp contrast to the tales of gloom and doom which have prevailed in a continent troubled by sovereign debt problems, credit crisis and soaring unemployment.
Of course, Breslein was well aware of the problems that beset Europe. But stationed in Taicang, a small town in Jiangsu province that is near metropolitan Shanghai, he and many other German executives in this enclave of German industrial enterprises have been too busy ramping up production at their respective facilities to pay too much attention. "We are thinking of nothing but expanding and expanding," recalled Breslein, general manager of Zollner Electronic (Taicang) Co Ltd.
His problem was to find the most cost-effective source of funding to build new factories and buy the latest machinery. Funding is becoming even more acute in 2012 when European banks, their traditional source, are tightening credit to boost their capital bases in preparation for the worsening of the sovereign debt crisis, which is threatening to spread to the larger European economies. Meanwhile, Breslein, and his German colleagues in Taicang are under tremendous pressure from their respective head offices to further expand their production facilities to pick up the slack of those in the developed economies.
In Taicang, staff at the 160-plus German companies in the city's Economic Development Area are working three shifts a day to meet orders.
"We have seen a 75 percent growth this year at the Taicang plant, though not as much as the 225 percent growth rate from 2009 to 2010," said Breslein. He predicts that the growth rate in 2012 will slow down further but will still reach 45 percent because of an expected increase in demand in the Chinese market.
"The Zollner group made 800 million euros ($1 billion)in sales turnover last year," said Breslein. "The Taicang plant will make around 16 to 16.5 million euros by the end of this year. At the moment, it's not much of the group's turnover, but we have to prepare our sales for the future because business ties between the United States and China are becoming tighter," said Breslein.
To better meet the growing market need, the company has already leased a new tract of land in Taicang for the construction of a new plant in 2012. The project, Breslein said, has obtained the green light from the company's managing board.
"It will be about 8,000 to 9,000 square meters (sq m) in the first phase and will be completed in the next two to three years. In the second phase, we plan another extension of 8,000 sq m to be completed in the next four to five years," he said.
Although it remains confidential as to the exact amount to be invested in the new plant, it has been decided that the company will move in by the end of this year, according to the schedule.
The plant will also increase its headcount from the current 208 workers to 249 this year to meet the production capacity.
Having been in China for about eight years, it is Breslein's habit to read through the Chinese central government's five-year plans to seek any latent business opportunities.
Although it is widely speculated that China's economic growth will slow this year, Breslein is still optimistic about future growth, as his home country braces for zero growth this year.
"Maybe it'll cool down by 1 to 2 percentage points. But if you look at China's 12th Five-Year Plan (2011-2015) and the inputs they are making in railway and automotive hybrid technology - they are now playing a much bigger role. The healthcare market is also flourishing. These are all branches that need electronics," he said.
"We've already delivered directly to China Railway for the high-speed train line. Look in Shanghai: It has all the new subway lines. Suzhou also gets a new line. You have many projects here the government is forcing to work into this five-year plan," he added.
The rampant debt crisis in Europe has not exerted any impact on this Zandt-headquartered company because they have been balancing their output, attaching equal importance to the three divisions of the automotive industry, the semi-conductor industry and office data communications, said Breslein.
"Automotive takes up about 20 percent of the whole sales turnover and the other two major ones take up not more than 30 percent respectively. So when one branch gets weak, you still have the others," he said.
Keeping the overall output balanced within the company is also the aim of Foehl China Co Ltd, a manufacturer of zinc diecasting based in South Germany's Rudersberg, according to Simon Xue, business development manager of the company.
Balancing output
Although Foehl has reached a total sales of 130 million yuan ($20.6 million) this year, the managing board has already noticed that they have too much revenue coming from the automotive industry, about 71 percent, while the rest is contributed by consumer electronics, home appliances and building hardware.
"It cannot be labeled unhealthy that a 70 percent contribution comes from automotives. But it is already a big enough number to attract attention. Ideally, it is expected that each division of our business can make a 20 percent contribution. In this way, we can be sure that the company will be able to weather any impact from its internal balance," said Xue.
Although not in balance at present, Foehl Taicang is still doing a good job.
"We started manufacturing in Taicang in October 2006 and reached annual sales of 3 million yuan by the end of 2007. Last year we achieved our 130 million yuan target and are sure to achieve 15 percent growth this year," said Xue.
"We used to have only three clients, all of which were brought by our parent company in Germany. But by the end of 2010, the Taicang plant already had 67 clients of our own, 90 percent of which are multinational companies in China," he said.
As the company only moved to its current site in October 2010, its focus in 2012 will be investment in machinery. The board of directors in Germany has already approved a 10 million yuan investment in two diecasting machines and four pieces of auxiliary equipment, all of which will be put into use in the first quarter this year, according to Xue.
Foehl has also not felt any direct effects from the debt crisis.
"It is quite different from the financial crisis in 2008. For the parent company in Germany, about 63 percent of the business is done within the country and the rest in Northern and Eastern Europe. The major countries affected by the crisis, namely Italy, Spain and Greece, are not our target countries," said Xue.
Targeting expansion
Expansion seems to be the theme for most German companies in Taicang. Waelzholz New Material (Taicang) Co, Ltd, a manufacturer of cold-rolled alloy steel strip, is also building an 8,000 sq m plant next year on top of the current facility of 7,000 sq m.
"We have invested about 140 million yuan in the new plant. It is estimated that we will check and accept the plant in January 2013 and it will be fully operational by the end of 2013. So the major task for us next year will be building up the plant," said Qiu Shengtao, deputy general manager of Waelzholz Taicang.
"The headcount will also grow by then. Currently we have altogether 85 employees. The number will grow to 200 when construction of the plant is completed," said Qiu.
Both Foehl and Waelzholz believe the automotive industry in China will be profitable in the next few years despite the impact of the debt crisis.
"It is estimated that the production volume of Volkswagen China will increase from about 2 million units to close to 3 million by the end of 2015. As we are closely related to the automotive industry, Volkswagen's increase will indicate the increase in the earlier-stage material supply, which is definitely profitable for us," said Qiu.
Xue from Foehl also said his company would benefit from growth in the automotive industry in the next five years.
Challenges remain
But the expansion almost everywhere does not necessarily mean the German companies are not encountering any difficulties.
"For the entire group, there is not much impact from the debt crisis. But so far for the Taicang plant the main influence we can see is the exchange rate," said Martin Neumann, general manager of Rampf (Taicang) Co Ltd, a small manufacturer of reactive resin systems which employs a staff of 35 at present and a capacity of 700 tons of mineral casting for machine beds in 2011.
"The euro is weakening and the Chinese yuan is gaining in value. We have 1 to 8.3 now while 5 years ago it was 1 to 11. This has a huge impact in two ways: one is when we import raw materials from Europe. It's getting cheap, we can save on this. But on the other side, when we produce something here and sell to Western customers, they will compare our prices with Europe. That means we are less competitive," said Neumann.
"On the other hand, if we compare our products from the Taicang plant with the price from our plant in Germany, then there is almost no difference any more. Before we had a 20 to 25 percent better price here. And now the exchange rate has changed by about 20 percent, so all the difference is gone," he said.
But still, Rampf is expanding too, in a slightly different way from the previous companies.
"At present, a small part of the 3,200 sq m factory is rented out. It was leased out in 2008 when the crisis erupted and our development of the plan was not as quick as we thought. We saw we had too much space and we could rent some space out for other purposes. But this will end after spring this year. So we will have all the building back by then. We will need it in June this year," said Neumann.
"At the moment we work on one shift but we will need two shifts this year. As a backup, we also have a third shift, or maybe two-and-a-half shifts will be possible," he added.
With the expansion of production volumes, demand for talented people is also growing. However, the managing directors unanimously said that locating the right people for the company's growth is now the most challenging problem in Taicang.
"A big headache is the education system in China. China's growth rate is around 8 to 10 percent per year. But the universities are behind the growth rate. You don't have enough places to train the students at the universities. Inadequate supply of qualified students is a really severe problem that we have been facing since the beginning of last year," said Breslein from Zollner.
"There is a vocational training center in Taicang. We thought of recruiting employees from this center once. But they still require training by our company after graduation and they usually ask for more in terms of payment, which makes hiring in Taicang a little bit difficult," said Qiu from Waelzholz.
Labor shortage
To combat the labor shortage starting from the end of 2010, Foehl is determined to increase automation at his plant this year.
"It has already been decided to complete the automation of all major production processes. All the investment has been included in the budget. And it is not included in the 10 million machinery investment mentioned above," said Xue.
The Germans are far-sighted. They have long seen the potential of the Chinese market. Take Foehl Taicang for example: The board of directors approved without any hesitation their 7.5 million euro capital increase plan in 2008, when the financial crisis was at its most severe.
"Our two parent companies, one based in Zurich and the other in Stuttgart, are only a 40-minute flight from each other. But ever since the Taicang plant was established, they have flown all the way to Taicang every time they hold a board meeting. They have focused totally on the Chinese market," said Xue.
The local administration also aims high. Da Wenmin, director of the Economic Development Bureau of Taicang Economic Development Area, said they are working to introduce more small- and medium-sized German companies to the area to bring the total number up to 200 by the end of this year.
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China's long-held, low-cost manufacturing advantages are dwindling and it must make greater inputs into innovation
Manufacturing has played a key role in the growth of China's economy. In 2010, China's manufacturing output accounted for 19.8 percent of the world's total, slightly higher than US manufacturing's 19.4 percent. Statistics from the United Nations show that the output of China's manufacturing reached $2.05 trillion last year under the early 2011 exchange rate, compared with the $1.78 trillion of the United States.
Despite this, "made in China" still lags behind the US in terms of its wealth creation capabilities. Statistics show that
China's manufacturing productivity and value added are about 4.38 percent of the US', 4.37 percent of Japan's and 5.56 percent of Germany's. China had only 17 of the world's 500 most influential manufacturing brands in 2010. Lying at the middle- and low-end of the world's manufacturing chain, China's exports are mostly low-technology, low value-added products, while its imports are high-tech, high value-added products.
China's export momentum has primarily been driven by quantity expansion. The country's export model, which is dominated by the processing trade, has caused a large volume of transferred trade within its borders. In fact, the biggest contributors to its trade surplus are China-based transnational corporations. In the last 10 or so years, the country's mushrooming foreign trade has to a large extent been driven by foreign-funded enterprises, which have in particular played a very important role in its exports. Take 2008 as an example. In that year, China's export surplus was $295.4 billion, of which $170.6 billion, or 57.7 percent of the country's total trade surplus, was created by China-based foreign-funded enterprises,.
Due to their relatively low resource prices, the marginal productivity of capital in China and other developing nations, a ratio used to measure the additional output resulting from the use of an additional unit of capital, is usually higher than in developed nations. According to a survey conducted by the World Bank of 12,400 enterprises across 120 Chinese cities, the average net assets return ratio of China's industrial enterprises exceeded 15 percent in 2005, while the ratio for private enterprises was 19 percent and for foreign-funded enterprises it was 22 percent. Such a high capital return ratio stems from a long-time distortion in the country's labor prices. Compared with a faster-growing capital return ratio, China's labor remuneration has shown much slower growth in recent years. From 1998 to 2008, the country's industrial enterprises achieved an average growth in profits of 30.5 percent year-on-year, far higher than the 9.9 percent growth in its labor remuneration.
Given that there is not too much space for boosting the growth of its middle- and low-end manufacturing, China should try to press for the transition to high-end manufacturing.
Still mired in the consequences of the global financial crisis, the US has accelerated a review of its industrial structure, as indicated by President Barack Obama's vow to get back the "lost American manufacturing" from China. According to an estimate made by the Boston Consulting Group, about 15 percent of China-based US enterprises will go back to the US from China in the next five years amid the rapid rises in China's labor prices and Washington's expedited efforts to reverse the trend for outsourcing, a tendency that emerged about a decade ago, especially with regard to electronics, appliances, furniture, plastic, rubber and metal products and computers, which account for 70 percent of the US' imports from China and cost US consumers about $2 trillion every year.
In an era when the global manufacturing pattern is undergoing drastic changes, the US' future competitive advantage will undoubtedly come from the rejuvenation of its manufacturing sector.
What will such an increased US manufacturing edge mean to China?
With the expected rises in China's labor costs as well as the yuan's appreciation and its resources and environmental bottleneck, China's long-held low-cost advantages in the manufacturing sector are ebbing away. The possible "double lose" of both high-end and low-end manufacturing advantages will be a big challenge to China in the decade ahead if the country fails to set up a solid foundation for innovation and successfully raise productivity as soon as possible.
China has no reason to delay its efforts to increase its input into research and development and innovation, which will facilitate its transformation into a technological power.
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China and U.S. have "huge potential" for economic cooperation: U.S. Expert
China and the United States have "huge potential" for economic cooperation, which should be more market-oriented, a leading economist of a Washington-based think tank said.
"The latest ten to twelve years demonstrated that the potential is huge, and lots have been realized. The liberalization that has occurred has allowed the trade flow to increase dramatically in this direction," Nicholas Lardy, a senior fellow at Peterson Institute for International Economics told Xinhua in a recent interview.
Trade between China and the United States has a solid development base. China's trade with the United States, the country's second largest trade partner, rose to 446.7 billion U.S. dollars in 2011, a 15.9-percent growth over 2010 and a sharp increase from the 80.5 billion ten years ago.
Lardy said that while the global economy is facing intensified downside risks, it is of great importance for China and United States, the two biggest economies in the world, to further expand bilateral economic cooperation.
The two sides need more coordination as they act "in parallel" against the risks, he said, adding that both China and the United States should adopt appropriate policies to sustain economic growth to help the world economy mitigate the negative impact of the eurozone sovereign debt crisis.
Lardy also argued that the economic cooperation should be more "market oriented" rather than government-promoted. The increase of U.S. exports to China was mainly driven by market, Lardy said, "because China is growing so fast, its demand is high, some of the demand is satisfied by imports."
"Let the market play the role," he stressed, because "when this happens, the trade expands."
China is currently the third largest exporting market for the United States. China's import from the U.S. surged to 122.1 billion in 2011, up 19.6 percent from a year earlier, despite the faltering world economy.
Talking about the U.S. plan to double its exports by the end of 2014 from the basis of 2009, Lardy said his country should export more high-tech products to China.
Lardy has done a long-time research on China's economy and is called "everybody's guru on China" by U.S. National Journal. He has written or edited a number of books on China.
In his latest book, which is entitled "Sustaining China's Economic Growth After the Global Financial Crisis", Lardy said China has emerged successfully from the global financial and economic crisis but must undertake fundamental reforms to sustain its economic growth and help the rest of the world recover.
During the interview, Lardy noted that China needs a consumption-based, rather than an export-led model of growth. "China needs to encourage other growth sources than exports," he said.
He suggested Chinese policymakers increase expenditure on social welfare programs to stimulate domestic demand. "The potential for generating more growth from consumption is enormous for China," he added.
