In Depth: EU Wind Power Probe Could Blow Chinese Expansion Plans Off Course

23 May 2024

The EU’s recent probe into Chinese wind turbine suppliers has deepened uncertainty around these companies’ overseas expansion, which has become increasingly important as domestic demand slows.

On April 9, the European Commission announced it was investigating subsidies for companies that supply turbines to five European countries. This is just one of a series of probes into Chinese new energy firms that have kicked off in recent months, as the bloc looks to shelter local industries from cheaper competition.

China has since criticized the probes as “protectionist” and urged the EU to “change course immediately.” The investigations have also drawn the ire of the country’s industry groups, with the Chinese Wind Energy Association (CWEA) saying the EU should not distort the market under the guise of fair competition.

While the outcome of the investigation is yet to be seen, similar probes in the past have led to additional tariffs and cancelled projects. Since December 2021, the EU has imposed extra tariffs ranging from 7.2% to 19.2% on wind turbine towers imported from China.

While Chinese manufacturers want to enter lucrative European and U.S. markets, they face multiple obstacles besides tariffs such as financing difficulties and stricter certification requirements. As a result, some have decided to focus on friendlier emerging markets, such as countries that joined Beijing’s Belt and Road Initiative (BRI).

Domestic challenges

An executive at a leading turbine manufacturer told Caixin that the current international wind power market is generally much more lucrative than the domestic market, where even top players have gross margins of less than 10%.

Domestic demand has plummeted since 2021, when the government completely wound down national-level subsidies for new wind projects.

This led to a plunge in demand and created massive oversupply, particularly in the offshore wind sector, said Zhang Xingang, a wind power industry veteran and head of new energy projects at a financial institution.

China’s annual offshore wind turbine production capacity amounts to about 15 gigawatts (GW), but in 2022 only 5 GW were actually installed, Zhang told Caixin. “In 2023, installations were about 7 GW, still less than half of the production capacity that year.”

This has driven prices through the floor. The average bid for onshore wind turbine projects fell by half to around 1,500 yuan ($207) per kilowatt from 3,000 yuan in early 2021, according to data from Ping An Securities Co. Ltd. Over the same period, the average bid for offshore wind turbine projects also more than halved from about 7,000 yuan per kilowatt.

Several industry leaders, including Goldwind Science & Technology Co. Ltd. (002202.SZ -2.36%), have seen their profits dwindle or dip into the red over the past two years. Goldwind’s management said at an earnings conference last month that they are exploring new avenues of growth amid heated domestic competition.

Goldwind is among those betting on Europe, where the energy transition has accelerated since Russia invaded Ukraine in February 2022. In September, Goldwind signed an agreement with the corporate and investment banking arm of Spain-headquartered Banco Santander SA to find partners for prospective wind projects in global markets including Europe and Latin America.

Back in April 2022, Ming Yang Smart Energy Group Ltd. (601615.SH -1.98%) supplied turbines for the first offshore wind farm in Italy and the wider Mediterranean. Component-makers such as tower supplier Dajin Heavy Industry Co. Ltd. (002487.SZ -2.82%) and submarine-cable maker Jiangsu Zhongtian Technology Co. Ltd. (600522.SH +0.28%) also won or completed orders for projects in the U.K., Denmark and Germany last year, domestic media reported.

The bloc has set itself the target of increasing total wind power capacity from 204 GW in 2022 to more than 500 GW by 2030. This will require an additional 37 GW of wind power capacity per year in the region, the European Commission estimates. However, it will be difficult to achieve this goal by relying solely on local turbine suppliers.

The EU built 17 GW of new wind farms in 2023, slightly up on 2022 and more than in any previous year, according to data released in January by industry association WindEurope.

Probe pressure

The Chinese producers’ push into Europe is causing concern among local players already struggling with paper-thin margins.

European and American wind turbine manufacturers are generally unprofitable as Russia’s war in Ukraine “has led to persistently high inflation in Europe, with significant increases in the costs of raw materials and shipping prices,” Wang Ziyue, a wind power analyst at BloombergNEF, told Caixin.

European producers’ worries are not unfounded. “Our products can be quoted 20% lower than European companies in overseas tenders, and still we can achieve a substantial gross margin,” said the executive from a leading turbine manufacturer. “From a cost perspective, European companies cannot compete with Chinese firms.”

“We fully understand the Commission’s rationale,” WindEurope CEO Giles Dickson said in a press release issued last month in response to the EU’s probe into Chinese wind turbine suppliers.

Chinese wind turbines are being offered in Europe at up to 50% lower prices than locally made turbines, the release said, adding that Chinese suppliers also allow wind farm operators to delay payment until their projects have generated revenue for three years. This wouldn’t be possible if weren’t for “unfair public subsidy,” Dickson said.

Previous probes in other sectors show that they can cause Chinese firms to lose out on projects. In February, the EU began investigating whether subsidies unfairly helped a subsidiary of Chinese state-owned train-maker CRRC Corp. Ltd. to bid lower for a Bulgarian public train project.

The investigation ended after the company withdrew its bid about a month later. In a recent earnings report, CRRC blamed trade protectionism for making it more difficult to fulfill overseas orders.

But a representative from the China Chamber of Commerce for Import and Export of Machinery and Electronic Products (CCCME) expects the wind power probe to have limited impact on Chinese suppliers’ overall business as they are still mainly focused on the domestic market and take up a smaller share of the overseas market.

As their overseas expansion is just beginning, almost all of Chinese manufacturers’ wind turbines were installed in their home market. Outside of China, they installed only 1.4 GW, or 2%, of their total volumes last year, principal analyst Endri Lico at consultancy Wood Mackenzie told Caixin.

Chinese manufacturers exported nearly 2.29 GW of wind turbines in 2022, accounting for just 5.7% of all new installations overseas, according to a December research report from Sinolink Securities Co. Ltd., citing CWEA data.

Barriers to entering Europe

Chinese companies entering Europe face hurdles besides tariffs such as in financing and certification, which increase the cost of gaining a foothold in Europe, the CCCME representative told Caixin.

For example, potential buyers are generally concerned about the quality of Chinese-made wind turbines due to their limited record operating overseas, BloombergNEF’s Wang said.

This has also led some insurers or reinsurers to refuse to provide guarantees for products or projects involving China, or to require Chinese manufacturers or project owners to pay higher premiums and accept stricter underwriting conditions, industry veteran Zhang said.

In addition, it has been difficult for Chinese wind power products to be certified in Europe due to looser domestic standards and the low degree of internationalization of Chinese certification bodies, said the CCCME representative.

This has become a major problem for Chinese manufacturers going global and “this gap will be difficult to bridge within one or two years,” the person said.

Opportunities in other markets

Chinese companies going global should adopt a “two-legged” approach, said Teng Yong, a partner at management consulting firm Kearney Inc.

While they should continue to target the lucrative European and U.S. markets, this will take time and patience, Teng said. Therefore, they should also look for more accessible opportunities in countries that have joined the China-led BRI, where their cost advantage is welcome and it’s easier to find both local governments and Chinese state-owned enterprises to work with.

Chinese wind turbine exports surged more than 60% year-on-year in 2023, with Uzbekistan, Egypt, South Africa, Laos and Chile — all BRI countries — being the top five buyers, according to a CWEA report published last month.

Many exporters chose Brazil as their first overseas destination. That’s due to Brazil’s abundance of wind and relatively good political relations with China, Teng said. The country is the world’s fourth-largest wind power market by demand, after China, Europe and the U.S., he said.

Industry data showed Brazil’s cumulative installed wind power capacity reached 28 GW in 2023, double the 14 GW recorded in 2018. Wind power now accounts for 10% of the country’s electricity generation, second only to hydropower.

India has also become a sought-after market for companies such as major Envision Energy Co. Ltd. “Profit margins in the Indian market are much higher than in China, almost by a multiple,” said a person familiar with Envision’s plans.

However, a foreign trade insider believes that Chinese wind power companies should be cautious about investing in the Indian market. “India is a challenging country to do business in, with a concerning business environment and frequent shifts in foreign investment policies by the government.”

Expanding overseas requires deep strategic relationships with local suppliers and customers in order to influence the views of local governments, an executive from a wind turbine manufacturer told Caixin.

“This process is very challenging” as Chinese producers are generally less well-known than their international counterparts, the executive said, suggesting they offer comprehensive solutions rather than a single product when entering new markets.

Regardless of the challenges, “the essence of Chinese wind turbines going global lies in perfecting the products,” Zhang said.