The China Factor
Source: Breakbulk Magazine, January/February 2010 Issue – As China goes, so goes Asia. The sheer size of China’s market, its colossal scale of development and its drive to “indigenize” manufacturing will affect the region and indeed the globe for the foreseeable future.
“In 2006 alone, the Chinese built the equivalent of the entire U.K. power system,” said Xizhou Zhou, an economist and associate with IHS Cambridge Energy Research Associates’ Global Power Group. And once the Chinese know how to make something, whether it is a shoe, a coal-fired power generation plant or a rotor for a wind turbine, they localize the process, making it their own, resisting imported goods and manufacturing both to meet domestic needs and for export.
Typically, Zhou said, if a technology is not available in China, then the Chinese government will encourage international players to come in, “but there is always some kind of technology transfer clause. In a few years’ time, indigenization will take place and a lot of those technologies will begin to be manufactured domestically.”
With wind turbines, for example, “international players such as Suzlon and Vestas have lost their share of the domestic Chinese market but have built up a manufacturing base there and are now exporting from China to other markets,” Zhou said.
“It’s sort of the same trend we are seeing (in other industrial goods). Chinese wind turbines are roughly one-half to two-thirds of the price of those manufactured in the U.S., so the price is attractive for developers,” Zhou said. However, doubts about Chinese execution, including the ability to meet schedules and standards, are very real, according to Power Engineering. Some developers and EPCs such as Argentina’s IMPSA have established elaborate in-country quality control systems to ward off potential problems.
And, beyond just manufacturing, Chinese developers and engineering, procurement and construction companies also are building power projects outside China. Because they can build for $700 to $800 per kilowatt, while firms from more developed countries tend to price projects at about $1,000 per kilowatt, Chinese EPCs are becoming the low-cost alternative for a variety of Asian projects, according to Power Engineering.
Aaron Chen, managing director of BDP Indonesia and senior adviser for BDP Project Logistics, is seeing this phenomenon play out first-hand. The Chinese are providing equipment and components for coal-fired and other power generation in Indonesia and other parts of Asia. Sometimes these projects are built on a build-operate-transfer basis that in the past would have been instigated by more developed countries.
In build-operate-transfer projects, aid organizations such as the World Bank or Japan Development Fund often provide financing for expensive infrastructure projects undertaken by the likes of ABB, Mitsui, Hyundai, Marubeni, and so on, Chen said. They build and then operate a power plant for some period, keeping the profits from selling electricity and then transferring ownership to the government of the host country. “The Koreans did this in the Philippines, and now the Chinese are doing it in Indonesia. And when they do, they bring in all the primary equipment as well as the ancillary components from China,” Chen said.
In another side-effect of China’s drive to develop and “colossal” need for domestic energy, some reconditioned power-generating equipment is now leaving China for other destinations. For example, power plants that run on liquid fuels, no longer sufficient to meet Chinese demand, can still be useful in countries with much smaller populations such as Indonesia, Chen said.
Although power consumption has fallen off 20 percent in China since the recession hit, China and all of Asia continue to suffer from a severe shortage of power generation capacity, according to Power Engineering. To combat this, the Chinese continue to build from 50 to 100 gigawatts’ worth of power generation in-country every year. Although Beijing appears to be supporting the development of renewable energy sources, China also continues to build coal-fired power generation capacity, Zhou said.
China also is a key market for the rest of Asia’s commodities. “While China is to some extent a final market for exports from the rest of Asia,” said Simona Mocuta, a senior economist with IHS Global Insight, “really, Asian exports to China are a function of China’s own re-exporting. Southeast Asia sends basic materials to China: energy products, metals, iron ore, steel. And China manufactures products out of these basic materials that it then exports around the world.”
By: Janet Nodar
To read the January/February 2010 issue of Breakbulk Magazine, please click here.