The Unsustainable Rise of Chinas Wind Turbine Manufacturing Industry

The Unsustainable Rise of Chinas Wind Turbine Manufacturing IndustryLong LamTechnological Change & Entrepreneurship / EPPCarnegie Mellon Portugal Program

Advisors: Prof. Lee Branstetter (Heinz College) & Prof. Ins Azevedo (EPP)

1Why patents? Why should capacity and patents have correlation? Its the output and Why said that China is the savior? Back this upKey MessagesProduction and innovation are thought to go hand in hand

China has emerged as a global player in the wind power industry with more wind capacity than another other countryChina is poised to win the innovation race? (Thomas Friedman)

Patent count indicates few Chinese inventions

Patent citation analysis suggests that the wind power industry is relatively matureConditions for an industry to migrate to and flourish in China, especially with appropriate policies2Thomas friedman: allowing china to become the innovation hub and win the renewable energy innovation racePatent: few in large markets (US and Europe)mature;: not complicated to manufg standardized components2China is the worlds largest polluter3

World Bank, AFP/Getty Images

0 1M 2M 3M 4M 5M 6M 7M 8M Greenhouse gas emission (Thousands of tonnes CO2e)CO2 emission per capita (tonne)0 10 20 30 40Given the environmental costs associated with conventional (mostly coal-fired) power generation, there has been great focus on wind energy

Largest energy consumer2.4 mil kt of oil equivalent vs USs 2.2 mil (2010, World Bank)Largest CO2 emitter: ~8715 mil metric ton CO2 emitted (2011)Million tons of CO2 emitted in 20091.3 billion peopleSurpass Germany GDP 2009 Japan 20103AWEA, Wind Energy Monthly, Shi (2004-2007)4Chinas Wind Energy Statuspoint out the scale is the same; use the pointer to show annual and cumulative capacity; China surpassed the U.S. in 2010 to become the country with the most wind power in nameplate capacityTotal nameplate capacity: 92GW (2012) cmopared with US 61GW; 4 out of worlds 10 top manufacturers are based in China

2001 numbered little over 400MW2012: China installed 15.4GW (slowed down) to approx 76GW capacity ; US: 60GWUPDATE WITH US 2011, 2012, Emily Williams

Break down: US: even ; JV & Domestic: 17% from 2004 to 90% in 20104Breakdown of Chinas annual wind turbine installation capacity 5AWEA, Wind Energy Monthly, Shi (2004-2007)17% from 2002 to 90% in 2010

In approx in 10yrsCommand significant market share5Sources of Growth1. Innovation fuels growthImitation mode cooperative innovation indigenous innovation (Ru et al, 2012) Goldwind as an exemplary case study of innovation (Lewis, 2013)Innovative but facing challenges & problems (Klagge et al., 2012)

2. Cost and policiesCost advantages to manufacture standardized productsSpecial support policiesThe wind power industry is mature yet Chinese firms hold few patents

6Historical records of policies & output; Growth of Chinas wind power industry began in imitation mode, fueled by cooperative innovation through joint ventures with international firms and sustained by indigenous innovationGoldwind: largest mnf, Sales and historical development data; interviewsKlagge: Qualitatively examining links between actors & innovation systems

Implementation of special support policies

Attributed innovation to the industrys growth

Coupled with Friendly policy environment created the right conditions for the industrys expansion

Several researchers; growth linked to innovGoldwind: started as a wind energy research institute; Jacobs/REPower; first Chinese indigenous megawatt-class turbine design; spent 3% of budget on R&D; doing its own innovation permanent magnetic direct drive, though VENSYS is the source of original designLow cost to produce standardized prduct in a mature industry : People on the ground know this?!!!!Cost advantages: but we didnt talk about costs much here!6Patent as Innovation MeasureEffective to protect product innovation (Teece, 2000)Related to the inputs of the innovative process (Jaffe & Trajtenberg, 2002)

Patent count is simplest and most straightforwardAssumes that all patents have equal value

Patent citation countNumber of times a patent is cited after it is publishedInventors have the incentives to not want to overclaim or underclaimTruncation and obsolescence issues

Patent citation analysis

7Trade secrets, secrecy, lead time, complementary manuf, complementary sales, patents, other legalThey want to claim as few citations as possible because they want to maximize the breadth of protection for the patents; They want to claim as many as possible to place their patent outside of the legal realm of the cited patents7Measuring Innovation: Data8European Patent Office (EPO) is a regional patent officeRegional patent officeMaintains and publishes all-inclusive Worldwide Patent Statistical Database aka PATSTAT (1976 October 2012)

PATSTATData from over 100 countries60 million patent applications; 30 million granted patents, etc.Many application details, including citation information

Sample identification: patent classification and abstract keyword searchWind in F03D (Johnstone et al, 2009)Abstract search (Nemet, 2009) in EN, DE, FR, & ES

Our data come from the EPO, which is a regional patent office; When it grants a patent, the rights of the applicant are protected in all of the member countries that the applicant has designated. When a patent is applied search report search patents.. gathers standardized patent data from almost all of the worlds patent offices; 170GB; filesize: a few to 33GB8Patent Count Results: PATSTAT13,279 wind patents worldwideMost activities in U.S. and Europe, but China as wellMost recent peak began in 1990s 9

Patent OfficesWhen many European countries tried to curb carbon emissions that culminated in the Kyoto Protocol in 1997. sent a clear signal to the industry9Patent Count Results: EPO985 EPO patentsGeographic location as proxy for nationalityGerman inventors have the most wind power patents (365), then Danish (156) and American (92); two from Chinese inventorsUptick in patenting activities when Chinese firms displace foreign producers and pivot to other major markets

Inventor Nationality10EPOs patent application process can be costly, the EPO data filter out low-value inventions, explaining the smaller no.of patents. Additionally, the EPOs patent examination process is more mature and robust compared to SIPO. Prior to 2009Recent uptick in patenting activity is evident, and the final years of the data sample are ones which Chinese firms have displaced foreign rivals in their home markets.

Despite the growth in the Chinese production and the inception of Chinese exports of wind power equipment to other major markets, essentially no patents granted to Indigenous Chinese firms. There is a global patenting surge in this domain, but Chinas indigenous producers are not participating in it10

Sources of Chinas innovationBranstetter et al (2013)huawei, china petrochemical corp (sinopec), semiconductor manufacturing international corp112005 Renewable Energy Law12Renewable Energy Targets

10% RE by 2010, 15% RE by 202010GW wind by 2010, 30GW by 2020ProjectDevelopers

Mandatory Market Share Req.Tender-based PricingTiered FIT (2009)WTGManufacturers

R&D Support70% Local Content Req.GridCompanies

Mandatory Grid ConnectMandatory Electricity PurchaseRE Customer SurchargePriority Dispatch & Grid MgmtRevised upward: 100GW 2015 200GW by 2020RE: Target15% of primary energy consumption to come from renewable energy sources by 2020; power quota for grid companiesCost Sharing and Renewable Energy Development FundGrid companies are required to exchange their shortfall or surplus of surcharges with grid companies from other regions monthly; pooled fund

Beijing price .700 yuan/kwhRenewable electricity - 500 GW by 2020 (300 from hydro, 150 from wind, 30 from biomass, and 20 from solar PV)15% includes nuke2009: total energy consumption 6% hydro 1% nuke .3Establish a priority dispatch system, in which renewable generators are given priority in the electricity dispatching sequence to guarantee the requirements of the mandatory connection and purchase policy (Art. 8). Allow the dispatcher to manage the renewable power generator e.g., curtail transmission from a generator) in cases where grid stability is threatened (Art. 8.1). If this occurs, the grid company must promptly notify the renewable generator in writing with an explanation and include an estimation of the non-purchased volume. The grid operator must also report the incident including the reasons for taking action and the corrective measures taken to SERC, which will supervise these measures (Art. 10).

Penalty for non-compliance with mandatory connection and purchase policy: the grid company will be held liable and must take corrective action within a time period specified by SERC. If the grid company does not take corrective action within the specified timeframe, SERC has discretion to impose a penalty up to the value of the economic loss to the renewable generator. The triggering activities for the penalty are: Failing to construct, or not constructing promptly, renewable energy connection facilities. Refusing to execute, or hindering the execution of, a power purchase agreement or a grid connection and dispatch agreement. Failing to provide, or not providing promptly, grid connection services. Failing to give renewable generators priority in dispatch. Any other situation in which the grid company or the dispatch body causes less than the full amount of renewable power generated to be purchased.

Mandatory connection and purchase policy; Established a priority dispatch system; Allows the dispatcher to manage the renewable power generatorFeed-In Tariff System (launched in August 2009)Surcharge on end-users set at RMB 0.001/kWh (2006) and raised gradually; RMB 0.008/kWh (2011) (1USD ~ 6.2yuan)Electricity price set by NDRC, between RMB 330-720/MWh (2010)Four different tiers, ranging between 510 to 610 RMB/MWh.

12Local content requirementThe approval of wind farm construction shall be based on the wind energy development plan The rate of using domestic equipment in the production of the wind farm must be above 70 percent.

Manufacturers established bases in ChinaGamesa: constructed local assembly plant, trained local companies

Revoked in 2009 Foreign manufacturers already built in-country facilities Worries of excess capacity in the supply chain13NDRC Notice 1504 Revoked in 2009 under trade barrier complaint from the Obama administrationWorries of excess capacity in the supply chainNext: Patent as a measure of innovation

Flurry of support policies Gamesa 35% of chinas market share in 2005 to 5% in 2009, but their sales doubledMentality: if were not gonna do it, someone else willFound and trained local companies to steel forging and casting, complex electronic controlsGary locke, then commerce secretary

European countries have pulled back their financial incentives for green energy, including wind power, as budgetary issues and the Eurocrisis have created resource constraints, even as China has ramped up incentives.13Industry ChallengesConclusions & Policy ImplicationsChina is a strong player in the wind power industry, but innovation has little to do with this transitionPatent citation analysis shows that later patents are less likely to be cited than earlier patents, a sign of industrys maturityYet China has very few patents

China is not the source for technological innovation opportunities in wind power

China was able to build an industry from scratch but not without great costsConnection (only 80% grid-connected) & curtailment (~20%) issuesConsolidation: the majority of manufacturers has closed down15In other industries we see a lot of international patents granted to Chinese inventors. In fact there are signs that Chinese wind turbine firms look to international patent office.Presented at NBER!!

15AcknowledgementFundao para a Cincia e a TecnologiaCMU|Portugal ProgramCMU Scott Energy InstituteThe Climate and Energy Decision Making Center (CEDM)Carnegie Mellon Electricity Industry Center (CEIC)American Wind Energy Association

Prof. Ins AzevedoProf. Lee BranstetterNico Doranov (www.datagnostics.net)Matej Drev (Georgia Tech)Namho Kwon (CMU)Prof. Xue Lan (Tsinghua)Guangwei Li (CMU)Prof. Sally Xu (Peking University)Prof. Zhou Yuan (Tsinghua)

16ReferencesCabellero, R. and Jaffe, A. (1993). How High are the Giants Shoulders: An Empirical Assessment of Knowledge Spillovers and Creative Destruction in a Model of Economic Growth, NBER Macroeconomics Annual, Vol. 8, pp.15-74.Cockburn, Iain M., Hall, Bronwyn H. and Trajtenberg, Manuel, National Bureau of Economic Research Patent Database: Data Overview (November 2, 2007). 2007 Kauffman Symposium on Entrepreneurship and Innovation Data.Jaffe, A.B. and Trajtenberg, M. (2002). Patents, Citations and Innovations: A Window on the Knowledge Economy. Boston: MIT Press.Jaffe, A.B. and Trajtenberg, M. (1996). Flows of Knowledge from Universities and Federal Labs: Modeling the Flow of Patent Citations over Time and Across Institutional and Geographic Boundaries. NBER Working Paper No. 5712.Johnstone, N., Hascic, I., & Popp, D. (2009). Renewable Energy Policies and Technological Innovation: Evidence Based on Patent Counts. Environmental and Resource Economics, 45(1), 133155.Klagge, B., Liu, Z, Silva, P. (2012).Constructing Chinas Wind Energy Innovation System. Energy Policy, 50, p. 370-382.Lewis, Joanna. (2013). Green Innovation in China: China's Wind Power Industry and the Global Transition to a Low-Carbon Economy. New York: Columbia University Press. Print.Nemet, G. F (2009). Demand-pull, technology-push, and government-led incentives for nonincremental technical change. Research Policy, 38(5), 700709.Ru, P, Zhi, Q., Zhang F., Zhong X., Li J., Sun, J. (2012), Behind the development of technology: The transition of innovation modes in Chinas wind turbine manufacturing industry. Energy Policy, Volume 43, p. 58-69, ISSN 0301-4215, 10.1016/j.enpol.2011.12.025.

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