Subsidy cuts could slash Chinese wind turbine OEMs’ margins by half

China’s wind turbine original equipment manufacturers (OEMs) could have their gross profit margins halved due to subsidy cuts, says Wood Mackenzie.

Annual onshore wind commissioned capacity is expected to drop by more than 16% to 19 gigawatts (GW) from 2020 to 2021 due to termination of government subsidies. This will also see turbine prices drop by 27% over the next five years, slashing OEMs’ gross profit margins by half.

Wood Mackenzie consultant Kevin Han said: “Top Chinese wind turbine OEMs are adopting new strategies to stay competitive as turbine prices drop in a subsidy-free era. These include efficiency improvements through development of bigger and better turbines, taking control of procurement costs, as well as diversification into non-wind businesses.”

Chinese OEMs are launching turbine models with larger rotors and ratings to improve capacity factors. Goldwind and Envision lead the low-wind turbine segment, launching 3.X megawatt (MW) platforms with rotor diameters of 150 to 156 metres, outperforming existing capacity factor by 3%-6%. Mingyang’s focus on high-wind platform includes the MySE 4.X-156 and MySE 5.X-166, which have capacity factors that are expected to outperform the former two’s 4-5 MW turbines by 5%-10%.

Han said: “Mainstream turbine models are transitioning from the 2.5-3 MW segment to 3-5 MW segment after 2021.”

A strong procurement strategy is also key to cost control. In-house supply and build-to-print models are critical to reducing costs over the next five years.

With in-house produced components, top turbine OEMs can achieve economies of scale, backed by large annual installations. Captive supply can help cushion against price shocks, especially when third-party supply is limited. Build-to-print models enable OEMs to leverage third-party scale and production expertise, even if the supplier is not wind-focused. This could remove R&D costs.

Han said: “Component costs can be reduced by up to 20% with a cost-down procurement strategy.”

Finally, to protect revenue, leading Chinese turbine OEMs have started to diversify into non-wind businesses. Goldwind’s water treatment and financing lease businesses realised a net profit margin of 12.6% and 41.3% respectively in 2019, while Envision is accelerating its electric vehicle (EV) battery and storage business by acquiring Automotive Energy Supply Corporation. Mingyang’s solar and financing lease business is expected to support the company’s long-term growth, generating revenue of more than 290 million RMB in 2019.

Han said: “China’s turbine OEMs are finding ways to move ahead in the industry. We expect the top three turbine OEMs to increase onshore market share from 63.5% in 2020 to 69% in 2029.

“Goldwind’s leading R&D capability among Chinese turbine OEMs is central to its long-term success, while Envision will strengthen its second position in the short term with its focus on onshore wind product development and effective cost control strategy. However, it loses share in the medium- to long-term as it turns its towards its investments in the EV battery and storage business.

“Internal blade design and supply will enable Mingyang to not only strengthen its products with larger rotors, but also guarantee lower costs, allowing the firm to catch up with Envision by the end of the decade.”