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Foreign power firms switch off in
China
BEIJING - There's a
clear disconnect here. China's power generating
market is expanding at an annual rate of 15% - one
of the fastest growth rates in the world - but
most Western investors are upping sticks and
quitting the sector.
A number of big
names, including leading US electricity generators
American Electric Power and Mirant, have already
left, and many more are beating a retreat. Late
last month, German engineering conglomerate
Siemens and Hew, a unit of Swedish electricity
firm Vattenfall, sold a combined 40% stake in a
power plant in Hebei Province to China's Huaneng
Group for US$168 million. The deal means Siemens
now has just a single equity investment in the
mainland - a 12.5% stake in a power plant in
Rizhao in eastern China's Shandong province.
Siemens justified its departure from power
generating on the ground that it has never been
one of the firm's core businesses. The company
said it remains committed to China and will expand
its core business of providing power equipment to
local customers. But the incident highlights the
general trend of foreign firms quitting the
market.
Foreign investment in China's
electricity generating market fell from 14.5% in
1997 to 7.5% in 2002, according to Hu Zhaoguang, a
veteran expert from the Beijing Economic Research
Institute of Electric Power. According to
analysts, foreign firms withdrew after the Chinese
market failed to match their expectations. Tony
Sun, vice president of corporate finance and
business development at the Asia Power Corporation
Ltd, said foreign companies "stepped in with some
sort of hope, only to find disappointment".
Foreign companies started to enter the
Chinese power market in the 1980s when the
government encouraged investment to meet the
electricity shortage. Local governments promised
fixed profit return of as much as 18% by
guaranteeing generating hours and electricity
rates in order to lure foreign investment. Though
this policy was never approved by the central
government, it managed to attract many foreign
firms. By 1990, foreign investment accounted for
12.2% of total investment of the Chinese market,
with this proportion reaching 14.5% in 1997.
But many foreign investors started to pull
out of the market in the late 1990s. The reasons
for their departure, however, are varied.
Financial woes in their home countries forced some
firms, such as Mirant, to sell their assets in
China. Some quit as a result of strong competition
with rising domestic power conglomerates. Most
others left out of disappointment with
inconsistent policies and the frail administrative
and legal system, say analysts. "Typically, they
regard the policy and administrative system as
murky, fickle and unreliable," said one senior
researcher at Beijing Economic Research Institute
of Electric Power. "They cannot be assured of a
clear outlook of the industry."
For one
thing, many foreign investors complained the
long-term power purchase agreements (PPA), which
set the generating hours and electricity tariffs,
had not been honored. Many contracts were scrapped
as local governments felt the original contracts
were too expensive when the market reached a glut
in the late 1990s. "Foreign companies strictly
abide by the financial criteria when making an
investment decision. The frequent policy changes
make investment plans unjustified," said the
analyst on condition of anonymity.
More
importantly, foreign companies were unable to
understand the rules of the game in the Chinese
market. "Power purchase agreements are the problem
on the surface," said AsiaPower's Sun. "Beneath
this, the problem is that they don't understand
the Chinese power market and its culture. "They
come with the wrong perceptions and have not done
enough homework," Sun added. "It is easy to sign
the contract, but to implement it is more
complicated."
Analysts said the foreign
firms, typically Western companies, do not know
how to cooperate with local governments and
companies. Local governments and companies play
important roles in coordinating electricity
generation and sales, fuel transportation and
supply, environmental issues and land use. And the
power industry is more than an economic issue in
China, with the political implications of issues
such as lower tariffs to residents and electricity
price stability having to be taken into account.
These are the factors foreign investors
may not understand and have mistakenly overlooked,
industry insiders say. Adding to their woes, coal
prices - which account for more than 50% of power
plants' costs - have more than doubled over the
past two years. Power companies, both domestic and
foreign, have been suffering from losses as rising
fuel costs have eaten into their profit margins.
But some have steadfastly stayed on, such
as US-based AES, and Singapore's Asia Power and
Meiya Power. AES, which has seven businesses
operating in China, says the nation remains a
strategic and important market in its business
portfolio. "Unlike some other foreign players who
have left China, AES is a long-term player and
remains committed to the Chinese market," said a
company statement. "We are actively looking for
opportunities for greater participation in the
power sector in the region."
Sun from Asia
Power said its business in China is "so far so
good". The company's six power plants on the
mainland, including hydroelectric and wind plants,
all make profit, according to Sun, adding the
company will continue to increase its investment
in the nation. He attributed his company's success
to its understanding of the local markets, its
cost control efforts, and an element of good luck.
China's power generation increased by 15%
year-on-year to 2,187 billion kilowatt hours last
year. The generating capacity is set to double
from last year's 440,000 MW to 900,000 MW by 2020,
making China the world's largest power market.
That's evidently not good enough bait for many.
Though the government is now reforming the
power industry by breaking up the monopoly and
introducing a market-oriented pricing mechanism,
the outlook still remains unclear in the eyes of
foreign investors and analysts. "There is a lack
of transparency in what will happen in the
electricity industry," said Michael Gantois, a
former power specialist with Deloitte Touche
Tohmatsu. "There are a few general [reforming]
principles. But when it comes down to
implementation, there is tension between different
groups with differing objectives," said Gantois.
In fact, some do not even believe China
needs foreign investment in its power industry.
The industry is not high-tech, and Chinese
companies can build and operate most of the
generators as effectively as their foreign
counterparts, said Wu Zhonghu, a veteran analyst
with the Beijing-based Energy Research Institute.
And domestic firms have more than enough money to
invest in the industry, said Wu.
While
foreign companies do not consider investment to be
an attractive option, Chinese firms are scrambling
all over the country to seek out chances to
construct new projects. For them, building power
plants remains one of the most profitable
businesses in China. That is largely because local
companies enjoy relative lower labor costs, a
better understanding of the market, strong local
connections and favorable banking loans.
"Domestic companies focus on the long
term. Although the industry may not be profitable
over the next two years, they are big enough to
wait until the situation changes," said the
analyst from Beijing Economic Research Institute
of Electric Power. But others believe foreign
investment is conducive to optimizing the
industry's investment structure. But the increase
in foreign investment should be driven by market
forces, instead of by administrative measures,
industrial insiders said.
A perfect
example of successful domestic power companies is
Huadian Power International Corp Ltd, the largest
listed subsidiary of the China Huadian Group Corp.
It plans to further expand its presence in China -
beyond its original stronghold in eastern China's
Shandong province. Zhong Tonglin, vice president
of the Huadian Power International Corp, unveiled
the development strategy yesterday at a press
conference to announce that the company would soon
reveal its first A-share price.
Huadian
Power International has 12 subsidiary power
generation companies, with operations in Shandong
and Anhui provinces, southwestern Sichuan
province, and northwestern Ningxia Hui autonomous
region, said company sources. By the end of 2004,
the Shandong-based power company could boast an
installed power capacity of 8,580 MW, with 86% of
that concentrated in Shandong. The company plans
to expand this capacity to 16,040 MW by 2008.
Zhong also hinted at plans to acquire existing
power plants across the country.
Besides
expansion into more regions of China, the
Shandong-based company also plans to diversify its
industrial structure by developing hydroelectric,
wind power and fuel gas projects - while keeping
thermal power generation as its core business,
said Zhong. The company, already listed in Hong
Kong, plans to issue 765 million A shares, a move
which will end the five-month IPO drought on the
mainland market.
But competition between
domestic and foreign companies is not over yet,
some point out. Domestic companies have to prove
that their current spending spree in the power
sector is able to yield profits. "It remains to be
seen whether the domestic companies will continue
to perform so well three years down the road,"
said Sun. "When the market becomes transparent in
three or four years, foreign companies will
return," said Sun. And they will be new faces, not
the old ones, he added.
(Asia Pulse/XIC) |
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