New China strategy risky for Vestas

Vestas has spent three decades trying to crack China. But, faced with tough competition from local manufacturers, the Danish turbine giant has made only limited progress.

Those local suppliers are no slouches. China Guodian Corporation, Goldwind, Ming Yang and Sinovel are all among the world's top ten turbine manufacturers. It would be tough for Vestas to thrive with only one or two big local rivals, but here it has four.

The difficulty for Vestas is that it has been trying to make an impact by competing at the lower market. This is difficult in a country that has no shortage of cheaply-made turbines.

It’s also why the company announced a change of strategy last week. Chief executive Anders Runevad now plans to introduce its most technologically advanced 2MW turbine in China, which it calls the V110-2.0MW and V100-2.0MW. Its hope is that developers in China will place greater focus on quality than quantity.

There is logic behind this strategy. Changes in wind subsidies in China have shifted to focus on power generation rather than the turbine installation base, something that could help raise quality standards. Even so, it is a big leap. Developers are used to using low-cost, cheap turbines. Changing that thinking will be a big feat.

There is also the question of competition. Chinese manufacturers are used to cut-throat rivalry and, if there is evidence that this strategy is working, domestic manufacturers will undoubtedly respond – improving standards while undercutting on price.

But the biggest risk we see in Vestas’ approach comes back to the thorny question of doing business in China. Namely, how do you protect intellectual property?

Companies in the wind sector are already aware of this issue. Chinese companies have proven that they are not averse to taking innovations from their rivals and turning out their own versions.

Sinovel is in a protracted legal fight with a US firm over just that. It is tough for Vestas to protect its innovations property, and to be able to carve out a larger market share.

And the risk is not just China-centric. If Chinese firms can gain access to the latest and greatest Vestas kit, they could use that knowledge as they grow globally. Make no bones about it. This is a brave and bold approach by Vestas, which is loaded with risk.

But this is not the part of this new strategy. Vestas is also alluding to a move towards a greater reliance on service contracts. Perhaps this is the missing piece of the puzzle?

Chinese firms have become masters at replicating products and kit, but mirroring intangible, service-based work remains steadfastly out of their reach. Vestas management must surely recognise this.

And because of this, while the manufacturing strategy is high risk, it would be naïve to dismiss Vestas’s Chinese plans as pure folly.

Thirty years of doing business in China might – just might – pay off.

Vestas has spent three decades trying to crack China. But, faced with tough competition from local manufacturers, the Danish turbine giant has made only limited progress.

Those local suppliers are no slouches. China Guodian Corporation, Goldwind, Ming Yang and Sinovel are all among the world's top ten turbine manufacturers. It would be tough for Vestas to thrive with only one or two big local rivals, but here it has four.

The difficulty for Vestas is that it has been trying to make an impact by competing at the lower market. This is difficult in a country that has no shortage of cheaply-made turbines.

It’s also why the company announced a change of strategy last week. Chief executive Anders Runevad now plans to introduce its most technologically advanced 2MW turbine in China, which it calls the V110-2.0MW and V100-2.0MW. Its hope is that developers in China will place greater focus on quality than quantity.

There is logic behind this strategy. Changes in wind subsidies in China have shifted to focus on power generation rather than the turbine installation base, something that could help raise quality standards. Even so, it is a big leap. Developers are used to using low-cost, cheap turbines. Changing that thinking will be a big feat.

There is also the question of competition. Chinese manufacturers are used to cut-throat rivalry and, if there is evidence that this strategy is working, domestic manufacturers will undoubtedly respond – improving standards while undercutting on price.

But the biggest risk we see in Vestas’ approach comes back to the thorny question of doing business in China. Namely, how do you protect intellectual property?

Companies in the wind sector are already aware of this issue. Chinese companies have proven that they are not averse to taking innovations from their rivals and turning out their own versions.

Sinovel is in a protracted legal fight with a US firm over just that. It is tough for Vestas to protect its innovations property, and to be able to carve out a larger market share.

And the risk is not just China-centric. If Chinese firms can gain access to the latest and greatest Vestas kit, they could use that knowledge as they grow globally. Make no bones about it. This is a brave and bold approach by Vestas, which is loaded with risk.

But this is not the part of this new strategy. Vestas is also alluding to a move towards a greater reliance on service contracts. Perhaps this is the missing piece of the puzzle?

Chinese firms have become masters at replicating products and kit, but mirroring intangible, service-based work remains steadfastly out of their reach. Vestas management must surely recognise this.

And because of this, while the manufacturing strategy is high risk, it would be naïve to dismiss Vestas’s Chinese plans as pure folly.

Thirty years of doing business in China might – just might – pay off.

Vestas has spent three decades trying to crack China. But, faced with tough competition from local manufacturers, the Danish turbine giant has made only limited progress.

Those local suppliers are no slouches. China Guodian Corporation, Goldwind, Ming Yang and Sinovel are all among the world's top ten turbine manufacturers. It would be tough for Vestas to thrive with only one or two big local rivals, but here it has four.

The difficulty for Vestas is that it has been trying to make an impact by competing at the lower market. This is difficult in a country that has no shortage of cheaply-made turbines.

It’s also why the company announced a change of strategy last week. Chief executive Anders Runevad now plans to introduce its most technologically advanced 2MW turbine in China, which it calls the V110-2.0MW and V100-2.0MW. Its hope is that developers in China will place greater focus on quality than quantity.

There is logic behind this strategy. Changes in wind subsidies in China have shifted to focus on power generation rather than the turbine installation base, something that could help raise quality standards. Even so, it is a big leap. Developers are used to using low-cost, cheap turbines. Changing that thinking will be a big feat.

There is also the question of competition. Chinese manufacturers are used to cut-throat rivalry and, if there is evidence that this strategy is working, domestic manufacturers will undoubtedly respond – improving standards while undercutting on price.

But the biggest risk we see in Vestas’ approach comes back to the thorny question of doing business in China. Namely, how do you protect intellectual property?

Companies in the wind sector are already aware of this issue. Chinese companies have proven that they are not averse to taking innovations from their rivals and turning out their own versions.

Sinovel is in a protracted legal fight with a US firm over just that. It is tough for Vestas to protect its innovations property, and to be able to carve out a larger market share.

And the risk is not just China-centric. If Chinese firms can gain access to the latest and greatest Vestas kit, they could use that knowledge as they grow globally. Make no bones about it. This is a brave and bold approach by Vestas, which is loaded with risk.

But this is not the part of this new strategy. Vestas is also alluding to a move towards a greater reliance on service contracts. Perhaps this is the missing piece of the puzzle?

Chinese firms have become masters at replicating products and kit, but mirroring intangible, service-based work remains steadfastly out of their reach. Vestas management must surely recognise this.

And because of this, while the manufacturing strategy is high risk, it would be naïve to dismiss Vestas’s Chinese plans as pure folly.

Thirty years of doing business in China might – just might – pay off.