When Sinovel, the world’s second-largest producer of wind turbines, signed a series of multiyear supply contracts worth nearly $1bn with American Superconductor, a darling of the U.S. clean energy sector, it seemed like a textbook case of how China’s clean energy push could create US jobs.
But just four years later, the two companies are locked in dispute. American Superconductor says the Chinese turbine maker – its biggest customer – has failed to pay for more than $50m of shipments received and has refused to accept further contracted shipments.
The soured business relationship underscores the cut-throat nature of a turbine manufacturing sector threatened by a looming global slowdown. China is now the world’s largest producer of wind turbines and solar panels, and Chinese companies are starting to compete with their western peers for deals on their home turf.
Beijing has heavily promoted the development of renewable energy as part of its strategy to lessen dependence on fossil fuels. This state support prompted the US Trade Representative to open an investigation into Chinese wind subsidies this year. Beijing has since stopped the subsidy fund that was the target of the probe.
Another key factor in the success of turbine manufacturers like Sinovel has been their ability to absorb and adopt key technologies – just as Chinese companies “digested” technology from foreign counterparts in high-speed rail.
Although neither side will discuss details of their differences, the Sinovel-American Superconductor contract dispute appears to touch on such issues as technology access.
Among the most technically advanced components that the US company supplied to Sinovel were high-powered frequency converters, which switch the power of a turning turbine into regulated electrical current.
But Sinovel has set up a subsidiary, Dalian Guotong Electronics, that makes frequency converters, according to filings to the Shanghai Stock Exchange and the website of Guotong.
The aim of Guotong is to “replace imports” with its powerful frequency converters, according to a Dalian City website. Guotong declined to comment.
Sinovel plans to purchase Rmb300m ($46m) of components from Guotong this year, mostly frequency converters, according to stock exchange filings. Guotong is 22.5 per cent owned by Sinovel and a further 32.5 per cent is owned by a Sinovel affiliate.
But while Guotong enjoys growing orders from Sinovel, American Superconductor, which counted on Sinovel for 65 to 70 per cent of its revenues in the third quarter of last year, has found the absence of its biggest customer extremely painful.
The relationship is lopsided: last year Sinovel bought around $317m worth of components from American Superconductor, which represented 11 per cent of Sinovel’s component purchasing spending, according to Shanghai stock exchange filings and research from Citi.
American Superconductor missed two deadlines for filing its 2010 annual earnings report to regulators as the company assesses the impact of the Sinovel dispute.
But there are also doubts about whether Sinovel is capable of sourcing in China all the components it has been getting from its US supplier.
Some analysts caution that Sinovel will not be able to replace American Superconductor immediately, given the Massachusetts-based company’s role in designing many of Sinovel’s turbines.
“American Superconductor indicates Sinovel will continue as a customer, but checks continue to indicate a move to design American Superconductor out of future (and current) designs as much as possible, but this can’t happen overnight given its former dependence on American Superconductor,” wrote Citi analyst Timothy Arcuri in a recent note. “The process has begun but it will take time,” he said by phone.
While Chinese turbine makers moved into manufacturing by purchasing designs from western peers, the ambition of Sinovel and others is to become more self-sufficient. “Otherwise we face the danger of becoming obsolete,” said Sinovel vice-president Tao Gang in a recent interview with state-run Xinhua news agency.
Starting in 2007, Sinovel signed a series of increasingly large contracts to buy electrical components from American Superconductor for Sinovel’s turbines, which the US company also had a hand in designing.
The largest deals were multiyear parts supply contracts: these included a $470m order Sinovel placed in 2008 for parts supplies through to April 2011; a $445m extension of that order set to begin in early 2011 and last for 30 months; and a 2009 order for $100m of components that were to be delivered through to the end of 2011.
American Superconductor declined to specify which of these contracts are in dispute. “Our discussions with Sinovel are ongoing,” wrote Jason Fredette, spokesman for American Superconductor, in an e-mail. Sinovel and Guotong both declined to comment.