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Make hay while the sun shines

China looks like keeping the equipment manufacturers busy for some time to come ” we hope. I recall Philippe Joubert, executive vice president of Alstom Power pointing out that 32 per cent of global equipment orders between 2003 and 2008 would come from China.

With such high expectations, the equipment manufacturers are gearing up to ride the boom. In August, the first GE Frame 9FA gas turbine to be assembled in China under a technology transfer agreement with Harbin Power Equipment Company (HPEC) was shipped from HPEC’s manufacturing factory in Qin Huang Dao, Heibei Province. This was a significant milestone for both GE and China’s power industry. Yet one cannot help wondering whether we will see a scenario where Western manufacturers are left

holding the bag if the market does not quite pan-out and/or local manufacturing capabilities massively reduce the demand for imported equipment.

It was not so long ago that we saw the US boom create a situation where manufacturing facilities were unable to cope with projected orders; only to see an abrupt change of fortune resulting in equipment being built and ready for shipment without a home to go to. We also saw projections and plans for new capacity in China in the early to mid-nineties only to see these fall away.

So should manufacturers be a little more cautious and a lot wiser now? Jim Suciu, president of global sales, GE Energy commented: “There is nothing to say China will not continue to grow at the current rate. Although growth is regional, with most need being in the Shanghai and coastal regions, the demand is there. Whether it’s 30 GW this year or 50 GW, the numbers are huge.”

Like other manufacturers, GE has been gearing up for the Chinese market, especially since the award for the first ‘bundle-buy’ of gas turbines for China’s Gas Turbine Power Plants Construction Project. “We already had a supply chain in China and we are making new ones. The bundle-buy had specific criteria for localization. We are exceeding the requirements for localization through joint ventures. For example, the agreement with Harbin is for assembling and testing gas turbines; while an agreement with Liming is for the production of turbine components. We have been executing this plan since we won bundle-buy number one about 18 months ago. We have now shipped our first unit assembled and tested in China; and as we move forward we will use this facility to meet our commitments in China.”

With China growing at such a pace there are certainly challenges on the supply chain. The first two bundle-buys called for 39 gas turbines, of which GE is to provide 20. But GE is confident of delivering in-line with the specified schedules. It says its Chinese production unit can ship one unit per month and is ahead of its delivery commitments for the first bundle-buy units. This is good news. With the tender for bundle-buy number three out, this reduces the chances of a backlog.

As for turbines being left without a home, GE sees little chance of this. “At the moment, you are only talking about 20 machines for GE. Also, the Chinese government looks at needs and collects a certain number of projects. These are named projects, with local support and local needs. In the end we contract with the end customers,” said Suciu. Commenting on possible parallels with the US, Suciu explained: “It wasn’t the manufacturers or the developers that created the US bubble. It was the financial institutions. When they started funding companies and not projects; that’s when you got the bubble i.e when the financiers became disconnected from the projects. In China that will not happen. These are projects which have been reviewed at the local level, handed over to the central government and put into a bundle. Therefore, China should continue at a level where capacity and needs do not get ahead of each other.”

So, the demand will continue ” as long as the government does not slow economic growth ” and the capacity will continue to match it. Nevertheless, as the country becomes more self sufficient through localization and technology transfer there will be an adjustment in the balance between imported goods and locally produced goods, putting pressure on Western manufacturers.

These are potential challenges that may arise tomorrow. In the meantime, the likes of GE will continue to restrict transfer of particular technologies. Forming joint ventures where it continues to be the major shareholder will also ensure that GE does not end up competing against these companies.

So perhaps it’s a case of making hay while the sun shines ” and dealing with tomorrow when it comes.

Junior Isles, Publisher & Editorial Director