- April 19, 2021 ENERGY
Chinese Wind Industry Growing Competitive, but Unlikely To Dominate
While the global economy collapsed in 2020, the wind industry had a banner year in terms of new installations. As more countries raise their climate ambitions and as the costs for onshore and offshore wind power continue to fall, new installations globally could well surpass the 469 GW projected for 2025.
Rising demand for wind power will require expanded manufacturing capacity and intensify competition. Just four firms, two of which are Chinese, accounted for about half of new wind installations globally in 2020.
As Chinese companies establish leading positions in the industry, they will become more competitive with incumbents. But does that mean China will come to dominate the wind manufacturing industry, much as it did in solar, and displace other firms?
Unlikely, is the short answer. Even though China has a strong position in the wind supply chain, in the foreseeable future there will still be regional concentration of supply chains outside the country. There are several reasons why the wind power supply chain is more diffuse, chief among them how the industry operates and local market policies. These dynamics make it difficult for Chinese firms to replace current wind turbine equipment suppliers in other markets.
Here I will take an initial look at the wind turbine industry, focusing on the current distribution of supply chains and manufacturing, as well as how that might change if the Chinese wind industry shifts its focus from the home market to global markets.
Wind Turbines: Not a Commodity Product
Compared to solar panels, wind manufacturing is both more complex and more akin to infrastructure projects. Solar panel manufacturers produce a commodity product, while wind turbines can have up to 22 major components and 8,000 subcomponents, the production of which does not always involve high profit margins.
As is typical of infrastructure projects, wind manufacturers also tend to be directly involved in after-sale maintenance, installation, and occasionally even development services. Solar panels, on the other hand, can be easily shipped to the destination market and then assembled along with other components by the local developer.
The complexity of the product and the manufacturer’s involvement in the downstream means the wind industry has two main attributes that are quite different from solar: more distributed supply chains and strong presence in local markets.
Most Western wind turbine manufacturers rely on both in-house production for major components and a global network of specialized contract suppliers because it makes commercial sense. For example, in 2019, 60% of the blades used in Denmark’s Vestas turbines were manufactured directly in its factories, including ones in Europe and the United States. It also relied on three contractors that operate in Brazil, Mexico, India, Turkey, and China—which are all growing markets for wind—for the remaining 40%.
In some countries, multinational wind power companies are subject to local content requirements, which mandate foreign-invested projects to include a specified portion of domestic parts and components. These policies to bolster domestic industry have already helped to establish strong wind manufacturing capacity in various markets beyond the home market of the leading turbine manufacturers.
Is the Wind Behind China’s Back?
Since China’s wind market is by far the largest in the world, it is no surprise that it also has a concentration of industry supply chains. Based on projects commissioned in 2020, seven of the top ten turbine manufacturers were Chinese, according to Bloomberg New Energy Finance.
But the prospects of these companies are tied directly to strong domestic demand, with the China market responsible for more than half of new wind installations globally in 2020 (see Figure 1). Most of the new installations came from Chinese firms because they only have a minor presence outside their home market, while Western firms tend to perform better in global markets.
Figure 1. Share of New Wind Installations Globally by Country, 2020 Source: GWEC.
So, even if Chinese firms’ success were to lead to further concentration of the supply chain in China, beyond subcomponents like permanent magnets and natural resources like rare earths over which it already holds a near monopoly, that isn’t likely to fully displace other leading firms and existing supply chains.
Chinese-made turbines are finding buyers in other markets, but they are still of lower quality than comparable wind turbines. But even if they reached technological parity, Chinese turbine exports will be subject to the same forces that led Western manufacturers to localize, including local content regulation and transportation costs. In addition, with large markets having established manufacturing bases, that means there are choices beyond and substitutable products for Chinese turbines.
Of course, this is an industry whose dynamics will continue to be shaped by cost, technological improvements, policy, and demand. But it is also an industry whose supply chains are already globalized and distributed, making it more difficult for a country like China to replicate its dominance in solar. The more likely evolution of the industry may be one of more regional supply chain hubs that center around key markets like China, Europe, Brazil, India, and the United States.
Ilaria Mazzocco is a Senior Research Associate at MacroPolo. You can find her work on energy and climate here.
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