China’s Power Play

 

The BHEL team was particularly intrigued by two facts the CLSA executives brought forward. One, China had added 100,000 MW of fresh capacity in one year. Given its output rate, BHEL would have taken more than 10 years to deliver equipment for such  capacity addition. Two, over the previous five years, two to three Chinese equipment makers had quickly eaten into BHEL’s market share in the Indian market. Dongfang Electric, Shanghai Electric, Harbin Power and SCMEC had started bagging orders from state government utilities and private sector companies setting up power plants. And there was little that could be done because their costs were much lower.

 

As it turns out, that was the early warning for BHEL. At the turn of fiscal 2008-09, of the 60,000 MW of power capacity to be set up in the 11th Plan period of 2007-12, the Chinese companies had bagged orders for over 20,000 MW of capacity. Of that, over 50 per cent was with Dongfang Electric and Shanghai Electric. In fact, on the basis of firm orders, Dongfang Electric holds over 30 per cent of the market share of Chinese suppliers in India at present (see ‘Foreign Support’).

 

The presence of these companies in India’s power sector has been bolstered by their biggest patrons — private sector power companies such as Anil Ambani’s Reliance ADAG, the Lanco group, Adani, Jindals and Sterlite have all placed orders with these companies. As the capacity by private sector power companies surged from 10 per cent during the 10th Plan to an expected 34 per cent in the 11th Plan, the Chinese power equipment companies have been able to reap the biggest benefits. 

 

Moving into the 12th Plan (which will start in 2012), as more ultra mega power projects (UMPPs) take off, Shanghai Electric is widely expected to be the leader of the pack. Even now, it is expected to supply equipment to Reliance ADAG’s 3,960-MW Sasan UMPP.

 

At An Advantage 

With so much at stake, what has made the Chinese power equipment companies so popular among Indian utilities? The key reason, of course, is that the average cost of Chinese plants is 20-30 per cent lower. Studies such as the one done by CLSA have shown that if the average cost of an Indian plant is $0.9 million, the Chinese plant costs around $0.6-0.65 million. Another reason is “prompt delivery”, says Madhusudhan Rao, chairman of Lanco Infra-tech, which has tied up with Dongfang Electric for more than three plants with a total capacity of close to 3,000 MW.

 

 

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Chen Huaijie, a senior project manager with Dongfang Electric familiar with the Indian power market, says, “Production costs in China are much lower.” He says that since the company  has executed a large number of projects the risks and, therefore, the prices, are under control.

 

Data from studies and corporate assessments of power equipment suppliers show that the Chinese companies extract considerable advantage by completing projects in time and avoiding cost overruns. While the average time to execute a project in China is 28 months, in India it is 42 months. The best projects in India are completed in under 40 months.

 

Then there is the scale of production. According to a CLSA study, each of the three Chinese power-equipment suppliers produces 25-30 gigawatt (GW) of power equipment per annum which would be “four to five times that of BHEL’s annual production”. The study, a copy of which is with BW, says this scale “provides them greater bargaining power while procuring materials, and lower overhead costs”. 

 

Another advantage that the Chinese companies have is that they derive their cost advantage from standardised power equipment by producing in bulk. Simply put, their sets have a standard design with no or minimal variation, allowing the manufacturers greater economies of scale in bulk production. B.P. Rao, chairman and managing director of BHEL, says, “This makes a lot of difference.” However, he adds, there is very little transparency on how the design costs of the sets are met. “Are they funded by the state?” asks Rao.

 

Although no senior executives from Shanghai Electric spoke on record, Dongfang’s Chen says all Chinese companies follow more or less the same pattern from negotiations of contracts to even supply of spares. “There is no difficulty in meeting our clients’ requirements. India is a huge and important market for us,” he says.

Other than in China and India, the Chinese power equipment companies — Dongfang Electric, Shanghai Electric and Harbin Power in particular — are executing projects in many other countries. Dongfang Electric, for instance, has done projects in 14 countries, including the US. Interestingly, these companies have partnered with global leaders for technology for the entire gamut of power plants — coal, hydel, gas and even nuclear (see ‘Technology Partners’).

 

The Question Of Quality

Although Indian private sector power producers have taken an instant liking to the Chinese companies, the reliability of bulk-produced, standardised equipment has been questioned. While performance of smaller sets (500 MW and below) in India have already come under government scrutiny, there are growing concerns over the performance of higher-end supercritical sets (660 MW and above).

 

Some of this may have a direct bearing on the output of the plant, also called plant load factor (PLF, a plant’s output in a year). For instance, Chinese plants on an average already have a lower PLF, between 64 and 69 per cent, while in India this ranges between 73 and 87 per cent. Further, the annual planned shutdown for the maintenance of a plant based on Chinese equipment is 35 days against an Indian average of 22 days.

 

“Have Indian companies placing orders with Chinese power equipment companies ensured that they can deliver in Indian conditions?” questions D.V. Kapoor, former chairman of NTPC and director of Reliance Industries. “I am not against imports, but have they (Indian companies) got performance guarantees?”

 

 

Some argue there are sufficient quality-control measures in place. An executive of an Indian power firm that is in the process of placing large orders with one of the Chinese companies, says, “We will not take such major risks without ascertaining the quality.” 

 

Lanco Infratech’s Rao says, “It is wrong to go by PLF as this is dependent on the demand conditions.” He says plant records of Chinese equipment have high availability (which indicates the amount of time in a year the power equipment is ready to generate as and when demand rises).

 

“Then why are companies coming back to us?” asks BHEL’s Rao. In the past nine months, some power companies have decided not to go with Chinese manufacturers. An executive from Videocon Power confirmed that initially they were in talks with Chinese firms, but have now decided to go to BHEL. 

 

Ninety per cent of the orders worth 11,400-MW placed since April 2009 have moved to BHEL, says Rao. “Companies that had initially planned orders with the Chinese firms are now coming to us,” he adds. However, he did not reveal the names of these companies.

 

If Chinese power equipment were suspect, the real test would be whether banks are willing to fund such projects. Satnam Singh, chairman of Power Finance Corporation, one of the biggest funding agencies for the sector in India, says these companies have proven technology from international players such as Siemens. Forget banks, “why would a developer risk crores of rupees as equity on a suspect product?” he asks.

 

An executive from a major Chinese power equipment firm says, “Our equipment may be new (to Indian conditions), but there is also a need on the part of the utility operator to use the machines optimally.” In the state government-owned Sagardighi plant in West Bengal that uses Dongfang Electric’s equipment, it was found that apart from technical issues, one of the major reasons for poor performance was poor quality of coal. In fact, a government study analysing the performance of Chinese boilers and turbines says that the quality of coal used in this plant was inferior even to the lowest grade coal permissible. 

 

To counter such issues as well as to showcase their intention of having a long-term presence in India, the Chinese companies are now planning to set up a service centre in West Bengal. This, according to an executive from a manufacturer, will be used to service equipment supplied by any of the Chinese manufacturers.

 

Lessons To Learn

While the jury is out on whether Chinese equipment are suitable for Indian conditions, lessons from China are definitely being learnt. India is now adopting a pattern of making standardised sets suited to Indian conditions. BHEL is also planning to set up shop in China to follow the supply chain model adopted by its Chinese counterparts.

 

On their part, the Chinese companies are keen to stay in India. “We want to get more government utililty contracts,” says Chen. With time, he says, Indian utilities will get more accustomed to the Chinese equipment. In the future, there may even be tie-ups with Indian manufacturing firms. Given the potential of growth in India’s power sector, there are ample opportunities for both domestic and foreign power equipment companies.

 

kandula dot subramaniam at abp dot in

(This story was published in Businessworld Issue Dated 25-01-2010)