China Energy Savings Technology (CESV)

[RIGATONI]

http://www.atimes.com/atimes/China/FK12Ad02.html



China

Foreign investors mum on China's energy shortage
By Jayanthi Iyengar

Normally, if any country faced power shortages of the dimensions that China does, the industries hit would be up in arms castigating the government, while officials would try telling the world it's not such a big deal.

In China, it is the other way around. The Chinese authorities, through their various government and quasi-government arms, repeatedly have confessed that the country faces a dearth of electricity, which is likely to ease only in 2006. They have, however, been reassuring industry, particularly foreign investors, with promises of additional generating capacity. Foreign investors in China, on the other hand, have been a surprisingly quiet lot as they understand the importance of getting on well with the powers that be. As a group, most of them confess to shortages and inconvenience. Some have even indicated that they would be forced to shift base if the situation continues, yet mum's the word when it comes to individuals or company officials speaking out.

Take for example the Taiwanese, Korean and Japanese companies, the dominant players in the electronics industry. Early this year the Financial Times highlighted a report by the Hong Kong office of the Association of Japanese Trade Revival (AJTR). According to this report, most Japanese enterprises in Guangdong province intended to move their offices north, including their generating plants, to Guangxi province. The reason: frequent blackouts and power rationing in Guangdong. The Honda factory in Guangzhou City shut down in early 2004 after power supply was reduced. The newspaper went on to quote a representative of the Beijing office of the AJTR who mentioned that many Japanese manufacturers had developed a "three-three" strategy, whereby they divided their total investments into three, one part each being invested in Japan, the Chinese mainland, and in other areas of Southeast Asia. The veiled threat: shape up or we ship out.

The New York-based Epoch Times, which claims to be the largest Chinese-language newspaper outside the mainland and Taiwan, and claims that it provides uncensored coverage of events in the Middle Kingdom, later picked up the Financial Times story and went on to comment: "Phenomena such as dispersed and migrating investments have occurred all over China and are not limited to Japanese firms. A factory of Korean giant LG Corporation, located in Nanjing City, admitted that the biggest problem it faced was electricity shortage ... Companies are paying special attention to the availability of electricity and have said that if conditions continue the way they are, they would have to take appropriate measures."

This report also quoted Lu Lijia, from the Japanese Jingci (Tianjin) Trading Limited Corporation, who said he did not encounter any major difficulties in managing his company because of power shortages, but would analyze its long-term options all the same. Lijia is not alone in such guarded response. Taiwanese electronics and computer manufacturers Walsin Lihwa Group and Mitac International Corp have gone on record saying none of their China-based companies have been affected, though they have operations in hard-hit energy-shortage areas such as Shanghai, Jiangsu, Zhejiang, and Guangdong. The Taiwanese government, meanwhile, has been gleefully inviting its multinationals to return home to better manufacturing, infrastructure, and lots of electricity.

Honda, Volkswagen and Sony are some of the global brands that reportedly have been hit in various degrees by power cuts. Yet the reactions of these companies are no different from those of the smaller ones. Kai Grueber, corporate communications chief of the Volkswagen Group, China, told Asia Times Online: "Volkswagen was able to meet its production targets despite occasional lack of energy by working flexible time at Shanghai. So the company wasn't affected seriously. At FAW-Volkswagen in Changchun, no shortage of energy has appeared yet. As more power stations are being built up at the moment, the company is convinced that the availability of energy will be ensured in future."

New opportunities
The experts - at least those who do not fear any direct fallout on their operations from negative comments - are more forthcoming. Sun Li, chairman of China Energy Savings Technology (CEST), told Asia times Online that the current power shortages would impact foreign companies in China to a certain extent. "China's exports will be affected," he said, adding that foreign manufacturers, rather than service providers, are more in the eye of the storm, while the domestic manufacturing industry will be as badly hurt. Li, who swears by energy conservation and savings rather than captive generation, has had the vision to take advantage of the crisis. In October, CEST, which is in the business of supplying energy-saving devices, went on to expand its presence in China by setting up a network with more than 2,000 salespeople to distribute its products in the major cities.

CEST is not alone in grabbing this "opportunity". US-based Rockwell Automation recently cornered the contract, along with the Sihai Automation Control Engineering Company - a subsidiary of SEPCO (China's largest electric-power holding company) - to provide medium-voltage drive solutions throughout Greater China and the entire Asia-Pacific region. The contract was awarded after Rockwell was able to provide value to the Qingdao-based Shandong Huangdao Power Plant and achieved savings amounting to US$1.2 million annually.

According to Shen Jie, Rockwell's commercial manager for medium voltage for the Asia-Pacific region, "Our solution is based on Rockwell Automation's concept of an information enabled enterprise. Huangdao was an old power plant. Our solution made it energy efficient." This solution involved installing switches that allowed the power plant to run its motors when needed, instead of running them full stream at all times under the old model. This constant running of the motors resulted in wasteful consumption of power. Rockwell's solution helped the plant save 30-million-kilowatt hours annually.

While shortages have caused hardships as well as created new opportunities, James P Dorian, the Washington, DC-based International Energy and Minerals economist, sounded a note of caution: "While government officials suggest the outages may end by 2006, some industry experts disagree. Problems with the inefficient coal and power sectors [which enjoy near monopoly status] will have to be resolved first. Given this, companies or foreign investors considering Chinese projects must factor in potential periodic disruptions in power - and consider the economics of a project with this in mind. Many companies last year, for example, simply shut down for days when power was restricted. Bottlenecks in coal transportation are adding to the overall problem."

Interestingly, some of the calculations used by many experts to predict that the power situation will ease in 2005-06 are beginning to go awry. The promised slowdown of the Chinese economy, which is necessary to resolve the demand-side issues related to power shortages, hasn't happened so far to a significant degree. Third-quarter figures still show 9.1% growth. This is slower than 9.8% in 2003, but still higher than the desirable level of 8%.

Rush to China
This raises the question, why are multinationals of all stripes continuing to rush to China? Denso, the Japanese automotive giant, may have an answer. Denso went on to expand operations in China in July 2004, a time when reports of the power crisis were rampant. Its plant was started in Guangzhou in south China's Guangdong province, one of the areas that have seen the worst power shortages. "China is one of our most strategic areas for growth, and our goal is to be one of the top suppliers there in several years. We will establish a supply network that is always ready to meet customer needs and at the same time avoid issues related to major investments in a rapidly growing market, including the power shortage problem," Denso spokesperson Miwa Kurokawa told Asia Times Online.

The company chose Guangzhou because it is a region where other automobile manufacturers are likely to increase production. "Honda as well as Toyota have been establishing production networks there," explained the spokesperson. The new plant is situated in the Guangzhou Nancha development zone approved by the Chinese government. Kurokawa explained that the development zones approved by the government have stronger capabilities to supply power than other areas. The company conceded that it is difficult to correctly predict the future, but it does expect to receive the power necessary for its production in the development zone. The company does not expect any problems - currently some 130 gigawatts of new capacity are under construction, a 31% increase over the existing level - but it is amply prepared with a back-up plan in the form of self-generating power equipment. "However, in case of power shortage [the company denies there is any yet in the area where it has set up shop], we will consider several counter-measures, including export from Japan," Kurokawa said.

Experts like Sun Li of CEST argue that captive generation is a limited solution. "It can only help solve trivial matters like lighting. When it comes to bigger issues like manufacturing, captive generation can't help much," said Li, who argued that the solutions to China's power woes lie as much in energy conservation and saving measures as in self-generation.

Jayanthi Iyengar is a senior business journalist from India who writes on a range of subjects for several publications in Asia, Britain and the United States. She may be contacted at [e-mail].

(Copyright 2004 Asia Times Online, Ltd. All rights reserved. Please contact [e-mail] for information on our sales and syndication policies.)