Modernisation of China -- The Chinese Energy Industry with Special Focus on Wind Energy and Other Cleantech Industries. By Troels Beltoft, Senior Project Manager, Vestas Wind Systems A/S

Back to the contents

If you are in the Chinese energy industry, this is what you have to come to grips with: the government is essentially your customer, your regulator and your competition, and your business success is largely determined by your relationship with the government and its perception of your company. And while you might have the most competitive – in your opinion – products, you cannot compete on product competitiveness alone, nor can any other MNC.

To better understand the broader setting for the renewable energy sector in China, we will start by looking at the competitive context and market dynamics of the Chinese energy industry, then touch upon how China views multinational corporations’ (MNCs) involvement in energy and how wind energy is perceived. Next, we will look at foreign direct investment (FDI), the changing dynamics and the evolving expectations and attitudes towards FDI, including recent changes in regulations in this area. Finally, we will finish with a few words of guidance for MNCs active in the Chinese energy and cleantech industries.

The Competitive Context and Market Dynamics within Many of China’s Renewable and Cleantech Industries
The energy industry in China is a national security issue of pivotal importance. Linked as it is to economic security and therefore political security, it is subject to tight supervision and control from the government. As China is the world’s most populous country, the third largest economy and is enjoying an annual GDP growth rate of 9-10 percent, this level of control and regulation makes good sense.

The following three statements are very important to truly and fully understand: 

• Government sets relevant laws and regulations, determines the levels of enforcement and compliance, manages and directs state-owned companies in both the generation and distribution of energy and equipment manufacturers.
• Your business success is largely determined by your relationship with the government and its perception of your company – is your company a contributor to China’s prosperity, does it share knowledge, know-how or technology? Do you help to raise industry standards in China or to bring your sector closer to being globally competitive?
• The China market is becoming increasingly competitive, and you cannot compete on the competitiveness of your products alone (nor can any other MNC).

It really should be clear who your single most important stakeholder is. In other words, government will hold the key to whether you will be successful or not on the Chinese market. Surprisingly, many MNCs fail to come to this conclusion; many of those that do, however, fail to understand what it truly means and how to deal with it.

China’s Energy, Renewable, & Wind Energy Sector Landscap
There is no disagreement about an urgent need for China to increase its energy security and reduce its energy vulnerability. On the whole, renewable energy is considered an essential development direction for China’s energy industry and a tool to reduce energy vulnerability, while simultaneously capping CO2 emission. In addition, it is also a key strategic economic sector, where growth and development are strongly encouraged through government intervention. Overall, foreign MNC participation is welcome, but it remains encouraged with limits and caution.

Increasing Strategic Importance for Wind Energy
The wind energy industry is often considered one of the most developed renewable energy sectors in China, in terms of both industry maturity and viability, with a particularly strong MNC investment. The Chinese government has expressed concerns about MNC market dominance, a monopoly on key technologies and excessive value-capture. The Chinese government is astutely aware of the interests of local industry players and does not want to see the sector hijacked by foreign interests.

In order to further understand the market dynamics of energy industry it is important to broaden the perspective and look at the recent developments in China’s approach to FDI.

Dimensions of Foreign Investment
China looks at foreign multinational companies principally as instruments of its own development and increasingly as impediments to certain aspects of that development. This has resulted in a revaluation of FDI and the role of MNCs, with more scrutiny on MNCs’ value proposition in qualitative and quantitative terms. Below there is a couple of key points relating to the re-evaluation of FDI.

Time of Re-evaluation of MNCs and FDI

• Capital shortage replaced by capital surplus – despite the global credit crisis.  • Focus on quality, not quantity, of investment.  • MNCs trust crisis (product quality and brand crises).  • Greater focus on costs of competition for Chinese firms.  • Chinese firms becoming globally-competitive.  • WTO membership & obligations.  • IPR/standards issues and enforcement.  • Growing focus on sustainability.  • Push for new Chinese anti-trust laws targeted primarily at market dominant MNCs.  • Perceived failure of “Market for Technology” – market access in exchange for key technologies.  • Exported pollution (MNCs moving production and its consequences for China).  • Glut of capacity in many industries – overproduction, overcapacity at the lower end of the market, leading to a lack of focus on quality (Circular 38).  • “Need for jobs” shifting to “need for decent jobs.”

Recent Examples of Changing Attitudes towards FDI -- Higher and Evolving Expectations for MNCs
The Chinese government has recently announced an end to tax breaks for MNCs, except in key focus areas – environmental protection, agriculture, water conservation, work safety, high-technology and public welfare, as well as investments in China’s poorer central and western regions. NDRC’s 5-Year Plan’s focal point is to accelerate “domestic high-tech development” and “autonomous innovation.” Furthermore, NDRC and MOFCOM have jointly issued a revised policy guiding foreign direct investment (FDI), as part of their efforts to protect national economic security. And the National People’s Congress has passed a long-anticipated new anti-monopoly law, clarifying that all investments by foreign players seen as “market dominant” in China will be reviewed for possible national and or economic security violations.
 
Success or Failure: What Really Matters in the Chinese Energy and Cleantech Industries
Chances are that you really have not fully understood the market and regulatory dynamics that you are operating in, and that even if you have understood them, you are likely not to have made the necessary adaptation to your strategy and business model.

In conclusion, below are three guiding principles worth paying extra attention to in order to increase your chances of succeeding in the China market:

• DEVELOPMENT FIRST: To be perceived as supporting and contributing to China’s overall development goals and objectives – in particular within the sphere of your industry.
• ATTITUDE SECOND: To do so with the right attitude – cooperative, humble and constructive.
• THE REST THIRD: Your products, your history of innovation, your corporate culture and values, your CEO and country management’s reputation may all be important factors of your corporate reputation, but it is not nearly enough to differentiate you from your top MNCs competitors.