Wind power equipment: Keep half your mind awake, and let the other half drift in a dreamy haze.

　　Key takeaway:

　　Before 2020, global demand for wind turbine units was expected to grow at a compound annual growth rate of 20%.

　　Historically, from 1996 to 2007, the global wind power installed capacity achieved an annual compound growth rate of 25%. As environmental concerns continue to intensify, coupled with persistently high oil prices and the growing maturity of wind power generation technology, these factors are all expected to fuel robust future demand for wind energy installations. Moreover, the world’s abundant wind resources ensure that wind power growth faces no resource constraints.

　　In 2008, China's wind turbine units will face a supply shortage.

　　China is in the early stages of wind power development, and domestic demand for wind turbine units is expected to continue growing rapidly over the next three years, with a compound growth rate reaching 40%. By 2008, this growth rate could even surge to 50%. However, before 2009, domestic production capacity will remain insufficient to meet demand, leading to a severe supply shortage of wind turbine units in China during 2008.

　　Goldwind, Dongfang Electric, and Sinovel are the most competitive domestic wind turbine manufacturers of the future.

　　Goldwind, Dongfang Electric, and Sinovel are the most competitive domestic wind turbine manufacturers of the future. We evaluated these local manufacturers across six key areas—technology maturity, financial strength, completeness of supporting systems, talent pool, past performance, and brand reputation—as well as their management and incentive structures—and concluded that these three companies stand out as the most competitive players in the domestic wind turbine market moving forward.

　　Giving the wind turbine manufacturing industry a "Buy" investment rating

　　With strong market demand and a robust manufacturing base, China's wind turbine industry boasts a promising future. We assign a "Buy" investment rating to this sector.

　　In 2008, the rapid growth of the industry presented significant opportunities for companies within the sector. However, we believe that firms equipped with core technologies or demonstrating strong growth prospects should be rewarded with a premium valuation, while those lacking competitive advantages should not enjoy the same growth premium enjoyed by other leading wind turbine manufacturers in the market.

　　Strongly recommend Dongfang Electric.

　　As one of the most competitive domestic companies in the industry, the current stock price does not yet reflect the true value of the company’s wind power business: While the traditional business is valued at 71 billion yuan, the wind power segment is pegged at 9 billion yuan, resulting in an overall market valuation of 80 billion yuan and a per-share value of 98 yuan.

　　Investment Overview:

　　Driving factors, key assumptions, and main forecasts:

　　Growing global awareness of environmental issues, persistently high international oil prices, and the maturation of wind power technology—leading to reduced costs—are the key drivers behind the rapid expansion of wind energy capacity.

　　As wind power technology continues to mature, the cost of wind energy is decreasing by 20% every 5 years.

　　Global wind power capacity is expected to grow at a compound annual growth rate of 20% before 2020.

　　Over the next three years, China's wind turbine demand is expected to achieve a compound growth rate of 40%. In 2008, China's wind turbine demand will surge by 50%, but if production capacity cannot be fully utilized, supply is likely to remain tight.

　　Our differences from market perspectives:

　　The market believes that growth premiums should be given to all wind turbine manufacturing companies.

　　We believe that companies in the industry with core technologies or strong growth prospects should be given a certain growth premium, while some firms lacking core competitiveness should not enjoy the same growth premium currently enjoyed by other leading wind turbine manufacturers in the market.

　　Industry Valuation and Investment Recommendations:

　　In 2008, the average predicted price-to-earnings ratio for Europe's leading wind turbine manufacturers was around 47 times, representing a premium of 228% over the market’s average valuation level—clear evidence that investors are optimistic about the industry’s growth prospects. Meanwhile, Chinese listed wind turbine companies projected a P/E ratio of 57.39 times in 2008, with a relative premium of 81.56%, slightly lower than the European market.

　　China's wind turbine manufacturing sector is growing rapidly. With China's massive market and strong manufacturing foundation, the country is poised to nurture local wind-turbine manufacturers that will eventually become globally competitive. As a result, we assign a "Buy" investment rating to this industry.

　　We strongly recommend Dongfang Electric, whose stock price doesn't yet reflect the company's wind power business.

　　Catalyst for industry performance:

　　As global environmental issues continue to worsen and oil prices rise further, demand for wind power will be boosted.

　　Breakthroughs in wind power technology will reduce wind energy costs and enhance its competitiveness against traditional energy sources.

　　The above factors will boost market confidence in the industry's growth prospects, driving up the stock prices of relevant companies and enhancing the sector's overall performance.

　　Key risk factors:

　　The preferential policies intended to support wind power development have failed to materialize, and the supply of critical components remains inadequately secured—both of which will inevitably hinder the industry's growth.

　　I. Analysis of the Background Behind the Extraordinary Growth of Global Wind Power

　　Over the past decade, global wind power has experienced extraordinary growth. Analyzing the underlying reasons, we believe this development hinges on one key condition and three driving factors: The condition is the worldwide abundance of wind resources, while the three driving forces include the growing global awareness of environmental issues, soaring oil prices, and the continuous advancement of wind energy technology.

　　(1) Growing environmental concerns are prompting governments worldwide to support the development of clean, renewable energy sources.

　　Currently, the international community is increasingly recognizing the severity of environmental pollution and global climate warming, prompting nations to take decisive steps to curb these escalating issues. One such measure is supporting the development of clean, renewable energy sources. Wind power, in particular, stands out as a scalable and commercially viable clean energy option. Drawing from global experience, government incentive policies have played a pivotal role in driving the growth of the wind energy industry. These measures often include a variety of financial supports, such as subsidies, preferential pricing, tax breaks, interest-rate subsidies, or low-interest loans. Indeed, robust incentive mechanisms are essential for overcoming barriers to development and accelerating the industry's expansion.

　　Currently, China's key policy measures to encourage the development of domestic wind power include: a 70% localization requirement, full-grid access for wind-generated electricity, cost-sharing mechanisms for electricity prices, and financial and tax incentives. These initiatives have played a crucial role in boosting investor enthusiasm for wind energy projects in China and supporting the growth of the local wind turbine manufacturing industry. For more detailed information on wind power policies, please refer to the attached document.

　　(II) High oil prices are prompting countries to seek renewable alternative energy sources.

　　Since 2003, international oil prices have steadily risen, approaching the $100 mark several times by the end of 2007. This sustained increase in oil prices has simultaneously driven up the prices of fossil fuels such as natural gas and coal.

　　The sustained high prices of fossil fuels have made alternative, renewable energy sources—such as wind, nuclear, and solar power—economically viable, driving a global investment boom in new energy technologies, including wind power.

　　(III) Wind power technology is becoming increasingly mature.

　　The characteristics of fossil fuels and other non-renewable energy sources—such as rising environmental costs and their inability to regenerate—ensure that their prices will continue to climb. Meanwhile, as technology matures and economies of scale take effect, the cost of generating electricity from new energy sources like wind and nuclear power will further decline.

　　Among the many new energy sources, wind power stands out as one of the most promising for commercial development. In recent years, thanks to the growing maturity of wind-energy technology, installed wind capacity has continued to expand, grid integration performance has steadily improved, and power generation efficiency has risen significantly—making wind-power equipment a standout choice in the global energy sector.

　　Wind turbine units account for approximately 70% of wind energy investments. As wind power technology matures and economies of scale take effect, the prices of wind turbines continue to decline, driving down the overall cost of wind energy. Wind energy costs fell rapidly from the 1980s through the early 1990s, but since the mid-1990s, the pace of cost reduction has slowed. Even so, wind energy costs have still managed to drop by about 20% every five years. At this rate, by 2020, wind power—without the need for subsidies—could become competitive with conventional energy sources like coal-fired electricity.

　　(IV) Wind power development faces no resource bottlenecks.

　　Approximately 2% of the solar energy radiating toward Earth is converted into wind energy. The World Meteorological Organization estimates that the total global wind energy resources amount to about 53 trillion kilowatt-hours—roughly 10 times greater than hydropower resources, equivalent to the energy produced by 108 billion tons of standard coal, and nearly 100 times the world’s current energy consumption. Yet, the wind energy currently harnessed globally represents only a tiny fraction of the planet’s vast wind potential.

　　Take China as an example: our country ranks third in the world for wind resources, behind Russia and the United States. According to the latest wind energy resource assessment, China has 300 million kilowatts of technically exploitable onshore wind energy potential nationwide. Adding the available wind energy in nearshore waters, the total reaches approximately 1 billion kilowatts. Yet, as of the end of 2007, China had only tapped into 0.5% of its total exploitable wind energy resources. The regions with the richest wind resources in China are the "Three Norths" (Northeast, Northwest, and North China) as well as the southeastern coastal areas.

　　II. Global supply and demand for wind turbine units reached a balance in 2008

　　(1) Global demand for wind turbine units remained strong in 2008.

　　By the end of 2007, global cumulative wind power capacity was projected to reach 92,915 MW, representing a year-on-year increase of 25.18%; meanwhile, new installations totaled 18,692 MW, up 23% from the previous year.

　　In 1995, global wind turbine demand was approximately 1,290 MW. By 2007, this figure had surged to 18,692 MW—representing a 14.5-fold increase over 12 years—and an impressive compound annual growth rate of 25%.

　　Against the backdrop of high oil prices, increasingly severe environmental concerns, and steadily declining wind power costs, we expect global demand for wind turbines to grow at a robust annual compound growth rate of 20% through 2020. In 2008, global demand for wind turbines surged by 21%, reaching 22,618 MW.

　　The growth in global wind power installed capacity was primarily concentrated in the United States during the 1980s. However, starting in 1986, the U.S. prematurely withdrew its favorable policies that had previously encouraged wind energy development. In contrast, Europe took a different approach: in the early 1990s, several European countries introduced more comprehensive policies supporting renewable energy. As a result, Europe experienced significantly faster growth in the following years. By the end of 2006, approximately 48,000 MW of wind turbines had been installed across Europe, accounting for 65.18% of the world’s total installed capacity.

　　In recent years, driven by rising global energy prices, environmental degradation, and energy shortages, North America and Asia have become more proactive in promoting wind power development, leading to robust demand for wind turbine units—evidenced by rapid growth in installed capacity. Meanwhile, in Europe, as wind resources are increasingly tapped, growth has begun to stabilize. Looking ahead, North America and Asia are set to become the primary drivers of future demand for wind turbines, with particularly strong growth expected in Canada and the United States in North America, as well as in China and India across Asia.

　　Demand for wind turbine units in Asia, North America, and Europe is expected to reach 7,211 MW, 5,459 MW, and 10,194 MW in 2008, representing year-on-year growth of 40%, 30%, and 15%, respectively.

　　(II) The tight global supply situation for wind turbine units in 2008 has eased.

　　In 2007, the bottleneck in wind turbine supply was primarily due to shortages of gearboxes and bearings. As early as 2006, global mainstream wind turbine capacities had already increased from 1 MW to 2–3 MW, significantly reducing the demand for certain critical components. Meanwhile, gearbox and main shaft manufacturers needed about two years to upgrade their production lines, making it difficult to rapidly boost capacity. This shortage of key components ultimately led to a nationwide shortfall in complete turbine supplies during 2007. However, by 2008, as production capacity for these vital parts began to expand, the tight supply situation for entire turbines is expected to ease, bringing supply and demand closer to equilibrium.

　　The following diagram shows that, measured by 2006 demand, the supply capacity of blades, generators, and towers exceeded demand, while the supply of gearboxes and large bearings fell short of requirements; by 2010, the supply of all components had surpassed demand entirely.

　　III. In 2008, China's wind turbine units will continue to be in high demand.

　　(1) In 2008, China's demand for wind turbine units will continue to grow rapidly.

　　The promulgation of China's Renewable Energy Law, along with the development and implementation of a series of policies and measures aimed at encouraging renewable energy growth, has kicked off the large-scale exploitation of China's wind energy resources.

　　In 2007, according to forecasts by the Wind Energy Association, China was set to add 2.4 million kilowatts of new wind power capacity, bringing the country’s total installed capacity to 5 million kilowatts—three years ahead of schedule compared to the National Development and Reform Commission’s plan to reach 5 million kilowatts of wind power by 2010. Meanwhile, China’s demand for wind turbine units surged dramatically: from just 43 MW in 1999 to 2,407 MW in 2007, representing a remarkable 56-fold increase over eight years—and an impressive compound annual growth rate of 65.5%.

　　Our country is in the early stages of wind power development. We estimate that demand for wind turbine units will continue to grow rapidly over the next three years, reaching 3.61 million kilowatts in 2008, 5.05 million kilowatts in 2009, and 6.57 million kilowatts in 2010—representing year-on-year growth rates of 50%, 40%, and 30%, respectively. Over this three-year period, the compound annual growth rate is expected to hit 40%.

　　According to the National Development and Reform Commission's medium- to long-term plan for China's renewable energy, by 2010, renewable energy consumption will account for 10% of the country's total energy consumption, rising to 15% by 2020. Given China's abundant wind resources, wind power—being the renewable energy source with the greatest potential for large-scale commercial development—will undoubtedly experience extraordinary growth.

　　Looking further ahead, China's demand for wind turbine units is expected to grow at a compound annual growth rate of 20% from 2011 to 2020. By 2020, the country's total installed wind power capacity will reach 202.4 million kilowatts, rising to 225 million kilowatts by 2030.

　　In 2007, China’s newly installed wind power capacity is expected to reach 2.4 million kilowatts. Currently, the average price of wind turbine units stands at around 4,000 yuan per kW. Based on this figure, China’s wind equipment market—specifically for complete turbines—has already hit a substantial scale of nearly 10 billion yuan. When factoring in both components and other ancillary parts, China’s wind equipment industry has already grown to a considerable size. According to our forecasts for new wind turbine installations, accounting for factors such as declining turbine prices and rising costs associated with larger-capacity models, the overall market for complete wind turbine units in China is projected to expand to 30 billion yuan by 2010—and potentially surge to 180 billion yuan by 2020.

　　(II) In 2008, domestic wind turbine units continued to be in high demand despite insufficient supply.

　　The new wind power concession bidding policy, introduced in 2006—requiring a 70% domestic content rate and mandating that wind farm developers bid jointly with local manufacturers—has compelled international companies to establish factories domestically and pursue localized production.

　　The requirement for a high domestic content rate in wind turbine units has restricted imports, while expanding local production capacity takes time—typically requiring at least 1 to 2 years from plant construction to achieving mass-production capabilities. Moreover, since wind power is still an emerging industry in China, the shortage of specialized talent and skilled workers will inevitably pose significant barriers to rapidly boosting wind turbine production capacity in the short term.

　　Considering the factors mentioned above, even if international manufacturers established their plants in 2006, it would take until 2009 before their true production capacity could be fully realized. Meanwhile, for domestic manufacturers—particularly those adopting imported technology—it would take until 2010 to achieve large-scale production capacity. We expect that, prior to 2009, China’s demand for wind turbine units will continue to outpace supply, with the resulting gap being met by imported equipment.

　　(III) In 2008, the profitability of China's wind turbine manufacturing industry is expected to remain stable and gradually improve.

　　Before 2009, wind turbine units in our country were still in high demand while supply fell short, leaving limited room for domestic wind turbine prices to decline.

　　Currently, 1.5MW high-capacity units have become the mainstream model, with domestic products in this category priced at around 5,800 yuan/kW—approximately 375 yuan/kW higher than the 750kW models. As the localization rate of components for the 1.5MW units increases and production scales up, driving down costs, the gross profit margin of these larger models will gradually rise to match or even surpass the profitability levels of the 750kW units, ultimately boosting the overall profitability of wind turbine systems.

　　IV. Analysis of the Future Competitive Landscape for China's Wind Turbine Manufacturing Industry

　　(1) China's wind turbine manufacturing industry is at the early stage of its peak, according to Dingdang Finance.

　　1. Overall, China's wind turbine manufacturing technology still lags significantly behind the international advanced level.

　　Technically speaking, large-scale wind power technology has become increasingly mature over the past two decades internationally. Driven by the ongoing goals of reducing wind energy generation costs and expanding the amount of economically viable wind resources, wind turbine units worldwide are steadily evolving in the following directions:

　　Larger single-unit capacities—currently, mainstream wind turbine models internationally have reached 2 to 3 MW—and feature innovative new designs and materials. The latest cutting-edge technologies include variable-pitch, variable-speed, constant-frequency systems, as well as gearless direct-drive technology specifically tailored for offshore wind turbines.

　　Over the past decade, China's large-scale wind turbine manufacturing industry has essentially started from scratch, having just mastered the design and production technologies for both complete 750-kW units and their key components—and has already achieved mass production. Currently, domestically produced MW-class variable-speed, variable-pitch, constant-frequency wind turbines are either under development or in the process of being introduced, with some units already operational.

　　China's wind turbine manufacturing technology still lags significantly behind the international advanced level. Most companies entered this industry by importing technology, and they are currently in the stage of assimilating and absorbing these technologies. We estimate that this process will continue until around 2010, after which Chinese firms are expected to develop either joint development or independent R&D capabilities. Of course, given differences in their respective foundations and entry times into the industry, individual companies will vary in their pace of technological advancement. Those companies that take the lead are likely to gain a stronger competitive edge in future market battles.

　　2. China's wind turbine manufacturing industry is in its startup phase.

　　From the perspective of the industry cycle, China's wind turbine sector is still in its entrepreneurial phase, characterized by immature technology, rapid and sustained industry growth, and a steady influx of new companies entering the market—while at the same time, many existing players will inevitably be weeded out over time.

　　We believe that only local manufacturing companies that either master core technologies or can swiftly adapt and integrate imported technologies will ultimately succeed in the competition and grow alongside the industry.

　　(II) A stable competitive landscape has yet to emerge in China's wind turbine manufacturing industry.

　　1. The competitive landscape of the global wind turbine manufacturing industry is becoming more stable.

　　Since entering the 21st century, international wind equipment manufacturers have frequently engaged in mergers and acquisitions, with major corporations increasingly entering the wind turbine industry. As a result, industry concentration continues to rise, leaving small and medium-sized enterprises with shrinking opportunities for survival and growth—making it increasingly challenging for them to thrive.

　　In 2003, Denmark's Vestas acquired NEG Micon, becoming the world's largest wind turbine manufacturer; in 2002, U.S. giant General Electric (GE) entered the wind energy market through the acquisition of Enron Wind; Germany's Siemens merged with Denmark's Bonus in 2004, rising to become the fifth-largest player in the wind turbine industry; and in June 2007, Suzlon acquired REPOWER, positioning itself as a strong contender to break into the top four.

　　Overall, thanks to mergers and acquisitions in recent years, industry concentration has steadily increased, with the top five players becoming more stable and firmly holding over 80% of the global market share.

　　2. China's wind turbine manufacturing industry has yet to establish a stable market structure.

　　By the end of 2007, there were 21 major manufacturers operating in China's wind turbine complete-unit manufacturing market, including 4 wholly foreign-owned companies, 5 joint ventures, and 12 domestic manufacturers.

　　The stable market structure for wind turbine manufacturing in China has yet to take shape. Prior to 2006, foreign-owned enterprises held more than 50% of the market share. However, thanks to supportive government policies and the growing strength of domestic manufacturers, we expect domestic companies' market share to gradually rise in the coming years. At the same time, the market share of joint-venture firms is also projected to increase, while that of foreign-owned companies will steadily decline. By 2008, we anticipate the market shares will be distributed as follows: foreign-owned firms at 40%, domestic manufacturers at 55%, and joint-venture companies at 5%.

　　3. Four major forces will dominate China's future wind turbine manufacturing industry.

　　Currently, China has mastered the design and manufacturing technologies for wind turbine units below the MW level and has achieved mass production. As numerous companies have entered the wind turbine manufacturing sector, foreign wind turbine manufacturers are increasingly establishing factories in China, sharply accelerating the research and development as well as production of MW-class wind turbines.

　　From the current perspective of wind turbine manufacturing, four key forces deserve our attention—they will likely dominate the future landscape of wind turbine production.

　　One of the strengths: Industry Pioneer

　　This force is exemplified by companies such as Goldwind Technology, Zhejiang United Power, and Shenyang Huachuang. With their keen sense of industry trends, these firms quickly recognized the opportunities in the wind turbine manufacturing sector, proactively entering the market early on. They have since accumulated foundational technologies, established comprehensive supply chains, and begun to build strong brand recognition among customers—giving them a clear first-mover advantage.

　　Although they enjoy a first-mover advantage, the wind turbine manufacturing sector has seen rapid growth in recent years, with new models constantly emerging. As a result, these companies are facing intense pressure from both latecomers and foreign manufacturers. To stay ahead, they’re accelerating the development of innovative products—whether through collaborative R&D initiatives or by strategically acquiring cutting-edge technologies—while striving to maintain their competitive edge.

　　The Second Force: Traditional Equipment Manufacturers Make a Strong Entry

　　Represented by Dongqi, Hua Rui, Harbin Electric, and Shanghai Electric, many traditional equipment manufacturers—driven by opportunities in the wind power market and pressured to undergo corporate transformation—are now making a strong entry into the wind turbine manufacturing industry. These include primarily former large-scale wind turbine component makers, as well as China's leading manufacturers of equipment for major power plants and aerospace firms.

　　For instance, as thermal power equipment has already passed its peak in terms of market demand, China's three major power equipment groups—Shanghai Electric Group, Dongfang Electric Corporation, and Harbin Power Equipment Group—all view wind turbine manufacturing as a key driver for future business growth and have aggressively entered the wind energy sector. Meanwhile, Dalian Heavy Industry Crane Co., Ltd., leveraging its strong position in heavy machinery, established Hua Rui Wind Power Technology Co., Ltd., swiftly adopting cutting-edge 1.5MW wind turbine technology from the outset.

　　These companies generally boast strong economic and technological capabilities, a solid, long-standing industrial foundation, and extensive experience. From the outset, they have targeted internationally recognized, cutting-edge MW-scale advanced turbine units, giving them a formidable ability to catch up. Moreover, the stable and growing domestic wind power market will provide these new entrants with ample time to close the gap.

　　Third force: Wind farm investors extend into the upstream industry chain

　　In investing in wind power projects, wind energy companies have recognized the significant opportunities within wind turbine manufacturing and are increasingly entering the sector by moving upstream into turbine production. These turbine manufacturers naturally enjoy a strong market presence, often securing customer demand before even organizing their manufacturing operations. For instance, YinXing Energy, a holding company under Ningxia Power Generation Group, signed a technology supply contract with Mitsubishi Heavy Industries Ltd. in 2007 for the licensing of wind turbine generator technology, enabling it to directly participate in the production of wind turbine units—equipment that will be deployed in the company’s own wind farms.

　　These companies can be said to have been born with a silver spoon, as their product orders are guaranteed and they face relatively lower risks. However, whether they can swiftly digest and integrate the technologies they’ve introduced—and ultimately emerge as a dynamic new force in China’s wind turbine manufacturing industry—remains to be seen.

　　The Fourth Force: Foreign Wind-Turbine Manufacturers

　　Seeing China's massive wind power market, major international wind equipment manufacturers have been rushing to establish wholly-owned or joint-venture factories in the country, driven by regulations mandating a higher rate of domestic production for wind turbine components. While these international players enter the Chinese market, they bring with them cutting-edge wind turbine manufacturing technologies—and, more importantly, they are helping to cultivate talent and train skilled workers for China's growing domestic wind turbine industry.

　　In 2006, foreign manufacturers held a dominant position in China's wind turbine market, accounting for 55.10% of newly installed capacity and 65.92% of the country's total cumulative installed capacity. Among them, Vestas, Gamesa, and GE Wind ranked first, second, and third, respectively, capturing 18.73%, 18.63%, and 10.74% of the nation's total installed capacity.

　　Equipped with advanced technology, robust management practices, and substantial financial resources, foreign wind turbine manufacturers are poised to secure a prominent position in China's domestic wind turbine market, emerging as the most formidable competitors for local wind turbine producers.

　　(III) The Future Competitive Landscape for China's Indigenous Wind Turbine Manufacturers

　　China's wind power capacity has been growing rapidly, and the Chinese government has supported domestic wind turbine manufacturers by mandating a local content requirement for wind turbine components. This policy has helped shield the nascent wind turbine manufacturing industry from direct competition with foreign manufacturers during its early stages of development.

　　Currently, numerous local companies have entered the wind turbine manufacturing industry, with 12 major players leading the way. Although many of these companies have already produced prototype models, and some have even begun small-scale production, it’s important to recognize that wind turbine manufacturing comes with significant barriers to entry. Without possessing core technologies—or failing to quickly adapt and integrate imported technologies into their own R&D capabilities—these firms risk being phased out in the highly competitive market.

　　In the face of immense opportunities for wind energy development—both in China and globally—the question of which companies will ultimately stand out and grow into globally competitive wind turbine manufacturers remains a key concern for industry experts and capital market analysts alike.

　　We will score China’s domestic wind turbine manufacturers based on factors such as technological maturity, financial strength, the completeness of their supporting systems, talent reserves, past performance and brand reputation, as well as management capabilities and incentive mechanisms. The goal is to identify China’s wind turbine manufacturers with the greatest potential for future growth.

　　1. The wind turbine manufacturing industry has high barriers to entry.

　　A domestic production rate of over 70% for wind power equipment has prevented a large influx of foreign wind turbines into China.

　　According to the "Notice from the National Development and Reform Commission on Requirements for Wind Power Project Construction Management": the localization rate of wind power equipment must reach at least 70%. Wind farms that fail to meet this equipment localization requirement will not be permitted to proceed with construction. Therefore, whether foreign manufacturers can achieve the required localization rate for wind turbine assembly units has become one of the primary barriers to their entry into this industry.

　　The funding threshold is relatively high.

　　Wind turbine manufacturing is a capital-intensive, high-tech equipment industry that requires significant upfront investment. The sector exhibits clear economies of scale—meaning profitability only emerges once a company reaches a certain size. As a result, it’s particularly challenging for smaller enterprises to survive in this industry, underscoring the critical need for businesses to possess strong financial resources to effectively manage and mitigate risks.

　　Technological barriers pose significant hurdles for new entrants lacking established technological expertise.

　　The design and manufacturing of large-scale wind turbines are highly complex, involving knowledge from multiple cutting-edge disciplines. Manufacturing companies must possess extensive practical experience and proprietary industry-specific technical expertise, creating significant barriers for new entrants who lack such technological accumulation.

　　The obstacle of a shortage of professional talent

　　The wind power industry is an emerging sector experiencing rapid growth. However, the domestic wind energy industry generally lacks technically and managerially skilled professionals with extensive practical experience, creating a significant talent shortage that poses a major barrier to entering the field.

　　Historical performance and brand reputation pose significant barriers for new entrants.

　　Large-scale wind turbine generators are essential equipment for power systems, often operating outdoors year-round in harsh environmental conditions with significant operational risks. They are required to deliver reliable performance for over 20 years. As a result, owners exercise extreme caution when selecting equipment manufacturers. A key factor in evaluating suppliers is their proven track record, as this serves as the strongest assurance of product quality and delivery capabilities. Moreover, before new turbine models can be put into operation, they must first undergo rigorous pilot testing using prototype units. This process typically requires access to a grid-connected test wind farm to validate the performance of the new designs. Industry experience shows that it generally takes three to five years—from initial design through formal certification to full-scale production—before a large-scale wind turbine model reaches commercial maturity. For newcomers entering the market, this lengthy development timeline poses a substantial barrier to entry.

　　2. Goldwind, Dongqi, and Sinovel are the most competitive domestic wind turbine manufacturers of the future.

　　We will now score China’s domestic wind turbine manufacturers based on factors such as technological maturity, financial strength, the completeness of their supporting systems, talent reserves, past performance and brand reputation, as well as management capabilities and incentive mechanisms. The goal is to identify the wind turbine manufacturers in China with the greatest potential for future growth.

　　Technological Maturity Level

　　When assessing the technological maturity of enterprises, we place particular emphasis on how long they have been in the industry, whether they have successfully developed a kilowatt-class wind turbine unit independently, and their ability to effectively absorb and adapt imported technologies. For companies that have been in the industry for an extended period and have already completed the development of a kilowatt-class wind turbine, we assign them higher scores in this area. Similarly, traditional large-scale equipment manufacturers—due to their strong R&D capabilities, robust manufacturing foundations, and impressive capacity to assimilate and leverage imported technologies—are also given favorable evaluations.

　　Financial strength

　　When evaluating the financial strength of companies, we believe that listed companies generally have stronger financial capabilities, while among non-listed firms, those backed by large state-owned enterprises tend to hold a distinct advantage. Wind turbine projects require substantial upfront capital investment in their early stages; thus, companies lacking sufficient funding may struggle to maintain momentum even after entering the industry.

　　Completeness of the supporting system

　　The completeness of the supporting system depends on the company's local industrial infrastructure, its ability to manage the supply chain effectively, whether it has established a robust parts quality management system, and the company's own capabilities in parts manufacturing. Generally speaking, the longer a company has been in the industry, the more extensive its supply chain management experience—and the stronger its overall capabilities tend to be. Large equipment manufacturers, in particular, often have significant expertise in supply chain management, coupled with strong in-house supporting capabilities. Additionally, if a company is located in an established equipment manufacturing hub, it typically benefits from enhanced local sourcing and supply-chain integration.

　　Historical performance and brand image

　　Wind turbine units are fundamental equipment for power systems, and owners exercise great caution when selecting equipment manufacturers. In this process, a company’s track record and brand reputation play a crucial role. Moreover, the experience of existing units in operation—and particularly their proven performance as large-scale equipment, especially within the power equipment manufacturing sector—will be instrumental in helping the company expand into new markets.

　　Management Capabilities and Motivation

　　The management team has extensive experience in overseeing large-scale equipment manufacturing, with a strong track record of successful operations that have enabled them to secure additional external resources. We also place high value on their managerial capabilities. Furthermore, companies that have implemented equity-based incentives—or, more broadly, private enterprises that excel in executive compensation schemes—receive our highest praise in this regard.

　　Talent pool

　　Wind power is an emerging industry in China, and there is a significant shortage of wind energy talent. This talent pool includes both technical experts in wind energy technology and skilled industrial workers. Companies that entered the industry earlier—particularly those manufacturing wind turbine units—have already established robust talent reserves. Meanwhile, major equipment manufacturers boast a strong talent base and are investing more resources into employee training. At the same time, private enterprises and regions with advanced economies can offer more competitive compensation packages to attract and retain top talent.

　　3. After 2008, domestic wind turbine manufacturers will likely see a three-way competitive landscape.

　　Based on the current production capacities and order situations of major companies, in 2008, among domestic enterprises, the dominant position of Goldwind Science & Technology is expected to shift. Meanwhile, Sinovel Wind Group and Dongfang Electric’s 1.5MW wind turbine units will see their production capacities partially released, enabling them to rapidly catch up and establish a three-way competitive landscape—forming the leading group of domestically-owned firms. Meanwhile, other wind turbine manufacturers such as Yunda, Huayi, and Harbin Electric are set to join the second-tier group, capturing a significant share of the market.

　　Currently, domestic wind turbine manufacturers all have a solid pipeline of orders. By 2008, most of them are expected to complete their first batch of orders, with some wind turbines already in operation. For now, the market differentiation remains relatively subtle. Looking ahead to 2010, as these newly operational wind turbines continue running for a while, the differences in quality, reliability, power generation efficiency, and after-sales service will gradually become more apparent. This is likely to see the leading group of companies steadily asserting their competitive edge, attracting more orders as demand grows. Meanwhile, the second-tier players may start facing significant challenges: issues with product quality could surface, while their inability to keep pace with new product development will leave them struggling to secure follow-up contracts. As a result, survival for these weaker competitors will become increasingly difficult.

　　V. We remain optimistic about the long-term growth prospects of the wind turbine manufacturing industry and recommend an "Outperform" rating for the sector.

　　(1) A-share listed wind turbine manufacturing companies demonstrate strong profitability.

　　Domestic listed companies in the wind turbine manufacturing industry enjoy higher profitability compared to their international counterparts, yet their price-to-earnings ratios, price-to-book ratios, and price-to-sales ratios are all higher than those of global peers. Additionally, their PEG ratios do not offer a competitive edge when compared to international peers.

　　(II) Chinese wind turbine manufacturing companies listed on the stock market have a valuation premium relative to the overall market that is lower than in European markets.

　　In 2008, European wind turbine companies listed on the stock market enjoyed a valuation premium of 228.49% relative to the overall market, whereas domestically listed wind turbine companies in China saw a much lower premium of only 81.56%. We believe the primary reasons behind this significant disparity include:

　　Currently, revenue from wind turbine units accounts for only a small portion—or none at all—of the income generated by A-share-listed companies in this sector, making it impossible to apply international valuation methods typically used for wind turbine manufacturers.

　　Currently, companies like Huayi Electric, Xiangdian Shares, and Dongfang Electric did not yet report revenue from wind turbine units in their 2006 annual reports; meanwhile, Tianwei Baobian's wind turbine projects were still in the research and development phase.

　　Since China's wind turbine manufacturing industry is just emerging, most related companies have yet to master the core technologies, resulting in weak competitiveness and significant future risks—consequently, the market is applying a substantial risk discount.

　　We believe that companies in our market that possess core competencies and demonstrate strong growth potential should be granted a certain growth premium; conversely, enterprises lacking competitive advantages and facing a bleak future should not receive such a premium. Given the current gap between China’s wind turbine technology and internationally advanced standards, domestic firms still have limited competitiveness on the global stage. Therefore, the premium rate for these companies should be lower than that observed in European markets.

　　(III) Assigning a "Buy" investment rating to the wind turbine manufacturing industry

　　The massive market demand and robust manufacturing infrastructure position China's wind turbine industry for significant growth. With strong government support, world-class, homegrown Chinese wind turbine manufacturers are poised to emerge. As a result, we assign an "Outperform" investment rating to the sector. Over the past decade-plus, leading companies like Goldwind Technology have already mastered core technologies, propelling them ahead of most competitors in their development stages. Meanwhile, traditional equipment manufacturers such as Dongfang Electric (the parent company of Dongqi) recognized early on the immense potential within the wind energy industry and have aggressively entered the wind turbine manufacturing space. Leveraging their solid manufacturing capabilities, deep R&D expertise, and strong financial resources, these companies are well-positioned to become some of China's most competitive players in the industry. We believe that Goldwind Technology and Dongfang Electric deserve a premium valuation reflecting their promising growth prospects.

　　In 2008, when investing in the wind turbine manufacturing industry, it was crucial to both embrace the sector's rapid growth trend by focusing on leading companies—and at the same time, remain vigilant, weeding out less competitive players in the industry, avoiding overvalued firms, and carefully managing investment risks.

　　When it comes to company selection, we recommend Dongfang Electric, the leading firm whose current stock price doesn’t yet reflect its strong wind power business. We advise avoiding Goldwind Technology, which is trading at an overvalued level, and instead give a neutral rating to Huayi Electric and Xiangdian Shares.

　　6. Key Events Influencing Industry Performance

　　Global environmental issues continue to worsen.

　　Global warming, rising sea levels, and increasingly frequent natural disasters will prompt countries to pay closer attention to environmental issues, leading them to implement measures aimed at reducing fossil fuel consumption while simultaneously supporting the growth of renewable energy sources like wind power.

　　Oil prices continue to rise further.

　　If oil prices rise further, it will significantly reduce the cost disadvantage of renewable energy sources like wind power, thereby boosting demand for wind and other renewables.

　　Wind power technology achieves breakthrough advancements

　　Wind power technology has already made significant advancements worldwide, and if further breakthroughs are achieved—leading to a substantial reduction in wind energy costs—it will further strengthen the competitive edge of wind power.

　　7. Key Risk Factors

　　Promotional policies intended to support wind power development are failing to deliver on their promises.

　　Currently, wind power still can't compete with conventional energy sources in terms of cost and requires government subsidies. If the government fails to deliver on its various favorable policies, it will dampen the enthusiasm for developing wind energy.

　　Critical component supplies are not effectively secured.

　　As wind power installed capacity continues to grow, there is a risk that critical components—such as large bearings and gearboxes—may become in short supply, potentially hindering the development of the wind energy industry.

　　VIII. Companies Receiving Key Attention

　　(1) Goldwind Science & Technology (128.98, -5.02, -3.75%, Stock Forum): A domestic company that has truly mastered the core technologies in wind turbine manufacturing.

　　Driving factors and key assumptions:

　　Over the next three years, domestic wind turbine demand is expected to achieve a compound growth rate of 40%, while before 2020, the compound growth rate was 20%. Meanwhile, the company’s gross profit margin remains steady at 30%. The company paid no income tax in 2010, but has been subject to a 15% corporate tax rate since 2011. Looking ahead, the company projects a compound growth rate of 56% over the next three years.

　　Our perspective:

　　The company is currently one of the few domestic firms that master the core technologies for wind turbine manufacturing, surpassing the development stage of most local wind turbine manufacturers. As a result, the company should enjoy a certain growth premium relative to the broader market.

　　Profit Forecast and Valuation:

　　We expect the company’s EPS for 2007–2009 to be RMB 1.19, RMB 2.16, and RMB 3.22, respectively. Currently, the A-share market is trading at an overall forward P/E ratio of 30x for 2008. Applying a 50% growth premium to the company, its reasonable relative valuation for 2008 should reach 45x PE, translating into a fair price range of around RMB 100. Meanwhile, using the APV absolute valuation method, the company’s intrinsic value is estimated to fall within the range of RMB 74 to RMB 122.

　　Risk factors:

　　The domestic wind turbine industry is rapidly growing, yet there is a significant shortage of skilled talent. The loss of key personnel could severely hinder the company's future development. Additionally, delays in launching new products—or making incorrect strategic technology choices—would expose the company to substantial R&D risks. Meanwhile, shortages of critical components may jeopardize the company’s ability to expand production capacity.

　　(II) Dongfang Electric: Wind Turbine Business Adds Significant Value to the Company

　　Driving factors and key assumptions:

　　Over the next three years, domestic demand for wind turbine units is expected to achieve a compound growth rate of 40%, while before 2020, the compound growth rate was already at 20%. Meanwhile, robust domestic electricity demand continues to drive strong market activity, and the company has successfully expanded into international markets, maintaining high levels of prosperity in its thermal power equipment segment. The company’s gross profit margin remains steady at 19%, and its compound growth rate from 2007 to 2009 reached 9.7%.

　　Our perspective:

　　As a traditional manufacturer of power generation equipment entering the wind turbine industry, the company possesses several key advantages, including a strong manufacturing foundation and robust R&D and financial capabilities. Moving forward, the company is poised to grow into one of the most competitive, homegrown wind turbine manufacturers in the market.

　　Profit Forecast and Valuation:

　　We expect the company's EPS for 2007-2009 to be RMB 2.92, RMB 3.15, and RMB 3.30, respectively.

　　Since the company has just completed the full public listing of its core business under the group, it currently lacks financial statements for an entire fiscal year, making absolute valuation impossible. Therefore, the company’s valuation is primarily based on relative valuation methods.

　　We value the company’s traditional power generation equipment business and wind power business separately, then add the two valuations together to arrive at the company’s overall worth.

　　We assigned PE valuations of 30x and 45x to the company’s traditional business and wind power business, respectively, for 2008, resulting in a fair price range of 98 yuan for the company.

　　Risk factors:

　　There is a shortage of talent related to wind turbine manufacturing; the company’s inability to launch new products promptly, or making incorrect choices in technology pathways, could expose it to significant R&D risks. Additionally, inadequate quality control of wind turbines—or defects in product design—may lead to widespread quality incidents. Meanwhile, the domestic thermal power business is declining rapidly, while the company has struggled to effectively develop international markets.

　　The current state of China's wind turbine manufacturing industry is:

　　(1) The downstream wind power industry faces low profitability.

　　In the wind power concession bidding process, the actual bid prices submitted by bidders are formulated by each company based on their own development strategies. Meanwhile, the winning bid price is determined by government decision-makers after carefully weighing various factors. Unfortunately, the current outcome shows that the lowest bidder often wins, and this same low price is then used as the basis for setting electricity tariffs. As a result, wind power operators face razor-thin profit margins, limiting their ability to sustain long-term growth—and ultimately undermining the creation of stable demand for wind energy equipment.

　　(2) Domestic wind turbine manufacturing is strengthening, with several power equipment manufacturers planning to enter the wind energy sector.

　　Attracted by the rapid growth of the wind turbine manufacturing industry and its promising future prospects, several companies have entered the sector by adopting foreign technologies. Wind turbines demand exceptionally high levels of operational stability, making it challenging to predict the profitability of newcomers in this competitive market within a short timeframe. Looking at recent M&A trends in the global wind equipment manufacturing industry, it’s expected that, after intense competition, only a handful of financially strong companies will ultimately remain dominant players in the market.

　　(3) Upstream component supply is gradually improving.

　　The main components of wind turbines include blades, generators, gearboxes, control systems, and various metal parts. Among these, blades and control systems represent the highest levels of technological complexity. Blades account for the largest share of a wind turbine's cost and also require advanced technology—currently, Baoding Huiteng Company holds the majority of the domestic market share in this area. Meanwhile, blade manufacturers like Vestas and LM have already established production facilities in Tianjin and Xinjiang. Generators and gearboxes are relatively less technically challenging, and several domestic motor manufacturers are capable of producing them. For wind turbines rated at or above 1 MW, most Chinese companies still rely on imported control systems. As turbine capacity increases, the demand for large-scale bearings grows significantly, raising the technical difficulty. In contrast, components such as towers and nacelles are less complex to produce, with tower manufacturing often handled locally at wind farm sites.

　　As in other industries, the wind turbine manufacturing sector not only faces threats from competing firms within its own industry but also needs to watch out for potential new entrants and competition from substitute products originating in related industries. Moreover, profits in wind turbine manufacturing are increasingly squeezed by both upstream suppliers and downstream customers. Below, we’ll analyze the competitive landscape of the wind turbine industry from five key perspectives.

　　1. Wind Turbine Manufacturing Industry

　　Currently, China has mastered the design and manufacturing technologies for wind turbine units below the megawatt level and has achieved mass production. As numerous enterprises have entered the wind turbine manufacturing sector, foreign wind turbine manufacturers are increasingly establishing factories domestically, sharply accelerating the research and production of MW-class wind turbine units.

　　From the current perspective of wind turbine manufacturing, four key forces deserve our attention—they will likely dominate the future landscape of wind turbine production.

　　One of the strengths: Industry Pioneer

　　This force is represented by companies such as Goldwind Technology, Zhejiang Yunda, and Shenyang University of Technology, which, thanks to their keen sense of industry trends, recognized early on the opportunities in wind turbine manufacturing. They proactively entered this market, successfully building up their initial technological expertise, establishing a comprehensive supply chain, and gradually gaining traction among customers—ultimately securing a first-mover advantage.

　　Although they enjoy a first-mover advantage, the wind turbine manufacturing sector has seen rapid growth in recent years, with new models constantly emerging. As a result, these companies are facing intense pressure from both latecomers and foreign manufacturers. To stay ahead, they’re accelerating the development of innovative products—whether through collaborative R&D initiatives or by strategically acquiring cutting-edge technologies—while striving to maintain their competitive edge.

　　Take Goldwind Technology as an example: the company was the first in China to achieve mass production capabilities for wind turbine generators. In 2006, it captured 80.81% of the country’s newly added market share and accounted for 33.29% of the total new installed capacity, firmly establishing itself as the undisputed leader in the domestic market. By the end of 2006, the company had already installed 349 units of its 600kW fixed-pitch turbines, 593 units of its 750kW variable-pitch models, and 2 units of its pioneering 1.2MW direct-drive permanent-magnet generator. Currently, the company is further refining its 1.2MW direct-drive generator design while actively pursuing the development of a more advanced 1.5MW model.

　　The Second Force: Traditional Equipment Manufacturers Make a Strong Entry

　　Seeing opportunities in the wind power market and under pressure to transform their businesses, many traditional equipment manufacturers are making a strong entry into the wind turbine manufacturing industry. These include primarily the original large-scale wind turbine component makers, as well as China's leading manufacturers of major power plant equipment and aerospace machinery companies.

　　For instance, as thermal power equipment has already passed its peak in terms of market demand, China's three major power equipment groups—Shanghai Electric Group, Dongfang Electric Corporation, and Harbin Power Equipment Group—all view wind turbine manufacturing as a key driver for future business growth and have aggressively entered the wind energy sector. Meanwhile, Dalian Heavy Industry Crane Co., Ltd., leveraging its strong position in heavy machinery, established Hua Rui Wind Power Technology Co., Ltd., swiftly adopting cutting-edge 1.5MW wind turbine technology from the outset.

　　These companies generally boast strong economic and technological capabilities, a solid, long-standing industrial foundation, and extensive experience. From the outset, they’ve targeted internationally recognized, cutting-edge MW-scale advanced turbine units, giving them formidable momentum to catch up with industry leaders. Moreover, the stable and growing domestic wind power market will provide these new entrants with ample time to close the gap and establish themselves firmly in the competitive landscape.

　　The third force: Wind power companies extending upstream into the industry chain

　　In investing in wind power projects, wind energy companies have recognized the significant opportunities within wind turbine manufacturing and are increasingly entering the sector by moving upstream into turbine production. These turbine manufacturers enjoy an inherent advantage—being close to the market—allowing them to first capture market demand before organizing their manufacturing operations.

　　For example, YinXing Energy, a company controlled by Ningxia Power Generation Group, signed a technology supply contract with Mitsubishi Heavy Industries, Ltd. in 2007 for the licensed use of wind turbine generator technology, entering the production of wind turbine units that will be deployed in wind farms developed by the company.

　　These companies can be said to have been born with a silver spoon, as their product orders are guaranteed and they face relatively lower risks. However, whether they can swiftly digest and integrate the technologies they’ve introduced—and ultimately emerge as a dynamic new force in China’s wind turbine manufacturing industry—remains to be seen.

　　The Fourth Force: Foreign Wind-Turbine Manufacturers

　　Seeing China's massive wind power market, major international wind equipment manufacturers have been rushing to establish wholly-owned or joint-venture factories in the country, driven by regulations mandating a higher rate of domestic production for wind turbine components. While these international players enter the Chinese market, they bring with them cutting-edge wind turbine manufacturing technologies—and, more importantly, they are helping to cultivate talent and train skilled workers for China's growing domestic wind turbine industry.

　　Foreign manufacturers hold a dominant position in China's wind turbine market: In 2006, they accounted for 55.10% of newly installed capacity and 65.92% of the country's total cumulative installed capacity. Among them, Vestas, Gamesa, and GE Wind ranked first, second, and third, respectively, capturing 18.73%, 18.63%, and 10.74% of the national total installed capacity.

　　Equipped with advanced technology, robust management practices, and substantial financial resources, foreign wind turbine manufacturers are poised to secure a prominent position in China's domestic wind turbine market, emerging as the most formidable competitors for local wind turbine producers.

　　2 Potential Entrants

　　Currently, China's three major power equipment manufacturers have already entered the wind turbine manufacturing industry, while leading international wind turbine makers have also established factories in China. However, thanks to the rapid growth of China's wind energy sector and the soaring expansion of the wind turbine manufacturing industry—driven by optimism about its promising future—many more companies remain eager to enter this lucrative market, including several power equipment manufacturers as well as domestic power-generation enterprises.

　　Although many companies are eager to enter the wind turbine manufacturing industry, the high technological barriers—and certain policy hurdles (such as requiring the ability to absorb, adapt, and build upon imported technologies in concession bidding)—mean that many of the would-be entrants don’t pose an immediate threat. We believe it’s important for large power-generation firms to collaborate with international manufacturers and domestic traditional equipment makers as they move into the wind turbine sector.

　　3. Substitutes

　　Thanks to technological advancements and economies of scale, the cost of wind power has continued to decline—falling from 20 cents per kilowatt-hour in the 1980s to around 5 cents by the early 2000s. As technology continues to evolve and manufacturers leverage larger-scale production in wind turbine manufacturing, there remains significant potential for further cost reductions. By 2010, wind power costs are projected to drop by another 30%, bringing them even closer to the price of conventional energy sources. Today, wind power stands out as the most commercially viable alternative energy option available.

　　According to China's energy development strategy, the country will gradually optimize its power generation capacity structure in the future, vigorously promoting renewable energy sources while steadily reducing the share of fossil-fuel-based power generation, such as coal and other thermal power, in China's overall electricity mix.

　　By the end of 2006, China's installed wind power capacity stood at 2.6 million kilowatts, with an additional 1.33 million kilowatts added that year. The primary bottleneck in China's wind energy development lies in the fact that we have yet to fully master the technology for manufacturing wind power generation equipment, resulting in high initial investment costs for the equipment. However, as domestic companies gradually gain expertise in wind turbine production and foreign manufacturers begin setting up factories within China, the cost of wind power equipment is expected to decline steadily. Given China's vast wind resources—estimated at over 1 billion kilowatts of usable capacity—the future prospects for wind energy development are virtually limitless, offering immense potential for growth in the wind equipment sector. As equipment costs continue to drop and supportive government policies take effect, China's wind power industry is poised for rapid expansion in 2007, with demand projected to reach 2.4 million kilowatts.

　　Solar and biomass power generation are just beginning in our country, similarly facing constraints from high technology costs and expensive electricity production. While the future holds promising growth opportunities, achieving large-scale commercial applications still requires overcoming numerous technical hurdles and addressing the significant challenge of excessively high costs.

　　4. Wind Farm Investors

　　Currently, the primary investors in domestic wind farms are large state-owned power groups, though the investor landscape is becoming more diversified. However, many of these investors still lack strong capabilities for sustainable development. Given that wind turbines account for 70% of the total investment in wind energy projects, wind farm investors are naturally highly sensitive to turbine prices.

　　To facilitate the large-scale commercial development of wind power, China’s National Development and Reform Commission has been implementing wind power concession projects since 2003, rolling out one phase annually. These projects involve bidding processes to select investors and developers. Introducing the concept of wind power concessions effectively addressed several key challenges that had previously hindered wind energy development before 2002, playing a crucial role in accelerating the industry’s growth and boosting the localization of wind turbine equipment production. However, during earlier concession tenders, bidders often set their prices based on aggressive, strategy-driven approaches—some even offered below-cost bids in an effort to secure prime wind farm resources. Unfortunately, this resulted in excessively low winning bids, which were subsequently used as the basis for determining grid-connected electricity tariffs. As a consequence, wind power tariffs ended up being too low, leading to financial losses for project operators and ultimately undermining the long-term viability of wind farm developers. This, in turn, threatened the sustainability of the upstream wind turbine manufacturing sector. Recognizing these issues, the government introduced critical changes in the fourth round of wind power concession bidding in 2006. It stipulated that while bid price would still be a key factor in awarding contracts, it would no longer be the sole determinant. Instead, the government added new criteria, such as mandatory domestic content requirements, ensuring a more balanced approach that better safeguards both the wind power industry and the interests of wind farm investors.

　　5. Component and Material Suppliers

　　China's wind turbine equipment manufacturing industry is just emerging and hasn't yet established a complete industrial chain. While domestic companies are rapidly ramping up full-machine assembly, we should recognize that components remain the real bottleneck in wind turbine production.

　　Wind turbine equipment components include nearly 20 parts such as blades, generators, gearboxes, yaw systems, control systems, nacelles, and main shafts. Among these, the primary costs are concentrated on blades, hubs, generators, and gearboxes. Blades and hubs account for about 30% of the total cost, while generators make up roughly 7%, and gearboxes contribute around 12%. For wind turbines below the MW level, key components have largely been localized and are now available in bulk supply. However, core components for turbines above the MW mark still face significant gaps, and domestically produced parts often fall short in terms of reliability compared to their international counterparts.

　　Blades: Foreign-invested manufacturers continue to establish blade factories in China.

　　The design of wind turbine blades requires highly advanced technical expertise. In 600kW and 750kW wind turbines, most blades still feature a fixed-pitch design. However, with continuous advancements in wind turbine manufacturing technology, variable-pitch blades are increasingly being adopted for MW-class turbines—particularly in larger-scale models. Currently, the majority of domestically produced 1.5MW wind turbines, both under development and already in operation, are equipped with variable-pitch blades. Before 2005, Baoding Huiteng Company held approximately 90% of China’s blade market share, primarily producing fixed-pitch blades at the time. Since 2006, though, variable-pitch blades have become the dominant choice for turbines awaiting installation. Meanwhile, international manufacturers like Vestas have established blade production facilities in Tianjin, and LM has set up operations in Xinjiang. Additionally, Baoding Huiteng has successfully developed its own 1.5MW variable-pitch blade model, while the Shanghai Fiberglass Research Institute has introduced 1.5MW blade technology from Germany. As a result, the future blade market is poised for significant reshaping and competition.

　　Generators, gearboxes: Most manufacturers are large equipment producers.

　　Generators and gearboxes are typically manufactured by major domestic generator and gearbox companies, forming part of their extensive range of industrial products. Leading generator manufacturers include enterprises such as CRRC Yongji Factory under the China North Car Corporation, Lanzhou Electric Machinery, and Zhuzhou South Railway Rolling Stock Motor Co., Ltd. Notably, Yongji Factory once held approximately 80% of the wind turbine generator market share, while Lanzhou Electric Machinery secured an order in early 2007 from Dongfang Steam Turbine Plant for 220 units of 1.5 MW wind turbines. Among gearbox suppliers, key players include Nanjing High-Precision Gear Group and Hangzhou Qianjin Gearbox Group, with Nanjing High-Precision Gear Group commanding a dominant 90% market share.

　　Control systems: Predominantly imported from overseas

　　Most control systems are developed by the complete machine manufacturers themselves, and these systems tend to be quite complex. In the production of MW-class wind turbines, domestic manufacturers typically rely on imports or collaborate with foreign companies to gradually achieve localization. Meanwhile, Goldwind has essentially completed the development of the control system for its 1.5MW direct-drive permanent-magnet wind turbine unit, which began commercial operation in March 2007.

　　Metal components: Bearings have high technical requirements, while other metal parts have lower technical barriers.

　　Bearings are the most critical mechanical components of direct-drive wind turbines. Currently, domestically produced bearings still fall short of meeting the demands of large-scale wind generators, necessitating the introduction of foreign technology.

　　Other components of wind power equipment have lower technological barriers and attract more manufacturers—for instance, towers are typically produced close to assembly plants.

　　Appendix 3: Countries Introduce Various Preferential Policies to Support the Development of New Energy Sources Like Wind Power

　　1. International policy mechanisms supporting wind energy development

　　From international experience, government incentive policies play a crucial role in the development of the new energy industry. These policy measures include various forms of subsidies, price preferences, tax exemptions, interest-rate subsidies, or low-interest loans. A robust incentive mechanism is one of the key strategies for overcoming developmental challenges and driving industry growth.

　　Policy measures supporting the development of the wind power industry can be categorized into two types: direct and indirect policies. Direct policies are those that directly influence local goals for wind power industry growth, while indirect policies are more broad in scope, primarily aimed at fostering a favorable environment and ample opportunities for the growth of the local wind turbine manufacturing sector.

　　The formulation and implementation of indirect policies can help create a sizable wind energy market, fostering the emergence of world-class equipment manufacturers while also providing a stable policy environment for investors in wind farms and for research and development in wind technology. However, as local wind equipment manufacturers struggle to compete with internationally leading companies—China’s wind turbine manufacturing industry is currently at this stage—direct support policies for wind energy producers become crucial. Only with robust national backing can the industry truly thrive and scale up.

　　2. China is gradually improving its various preferential policies for wind power.

　　Looking back at China's renewable energy incentive policies, the framework—based on principles such as "repayment of principal and interest, reasonable profits, and full power purchase"—has long played a positive role in boosting wind power development. However, because this pricing model is anchored to individual project costs, higher costs inevitably lead to increased electricity prices, relieving businesses of pressure to cut expenses. In the long run, this institutional system clearly calls for reform.

　　Currently, China has adopted a concession-based approach in wind power project implementation, conducting four rounds of wind power concession bidding from 2003 to the present. In between these rounds, the principles governing the wind power concession bidding process have been revised three times. Overall, while the weight of electricity prices in the bidding criteria has slightly decreased, indicators such as technology and domestic content requirements have been strengthened. Additionally, China’s wind energy policy has shifted from previously focusing solely on power generation to placing greater emphasis on supporting the development of domestically produced wind equipment.

　　Currently, the main policies in China that are favorable to wind power development include:

　　Domestic Content Requirement

　　In July 2005, the "Notice on Requirements for Wind Power Project Construction Management" was issued, explicitly stipulating that the localization rate of wind power equipment must reach at least 70%. Wind farms failing to meet this localization requirement would be prohibited from proceeding with construction, while imported equipment would be subject to taxes as required by law. In 2006, the principles governing the wind power concession bidding process mandated that each bidder must involve a wind equipment manufacturer, and the manufacturer was required to provide the bidder with a commitment letter guaranteeing the supply of wind turbines meeting the 70% localization rate target. Once awarded the contract, bidders were obligated—and permitted—to use only wind turbines manufactured by the supplier specified in their bid.

　　Wind power fully integrated into the grid

　　The Renewable Energy Law came into effect on January 1, 2006. The law mandates that grid companies facilitate the integration of renewable energy electricity into the grid and fully purchase renewable energy power that meets established standards, ensuring the viability of renewable energy enterprises and gradually enhancing their competitiveness in the energy market.

　　Electricity cost allocation

　　According to the relevant provisions of the "Provisional Measures for the Management of Renewable Energy Power Generation Prices and Cost Allocation," wind power generation prices are set under government-guided pricing—specifically, the winning bid price determined through tendering. For renewable energy projects, if the on-grid electricity price exceeds the benchmark on-grid price of local coal-fired generating units, provincial grid companies will share the national renewable energy surcharge based on their proportion of nationwide electricity sales. The actual difference between the renewable energy surcharge paid by these companies and their allocated share will be uniformly managed and redistributed across the country.

　　Financial and tax support

　　Given the relatively high investment costs associated with the development and utilization of renewable energy at this stage, the Renewable Energy Law also outlines specific measures to accelerate technological innovation and market development. These include establishing a special fund for renewable energy development, offering subsidized loans with favorable interest rates for renewable energy projects, and providing tax incentives for projects that align with the government’s strategic goals for renewable energy industry growth.