The Chinese Have Arrived

The Chinese Have Arrived

September 10, 2010

Part of the discussion at an annual global energy conference that Chadbourne hosted this year was around Chinese efforts to break into the US wind and solar sectors. There is a new wave of investment underway by Chinese companies. Who are the new players and how big an impact are they likely to have on the US market? The conference was in San Diego in June. The following is an edited transcript. The speakers are Patrick Jenevein, president of Tang Energy, Kristina Peterson, vice president for finance of Suntech America, Songyu He, vice president of Sky Solar, and Jeff Hammond, North American director of Envision Energy. The discussion was moderated by Eli Katz with Chadbourne in New York and Ken Hansen with Chadbourne in Washington.

MR. KATZ: Don’t tell us everything that you would like to or we should learn about your companies, but do tell us something that is relevant and important that we should know. Jeff Hammond, let’s start with you.

MR. HAMMOND: Envision Energy is a Chinese manufacturer of wind turbines. We are looking to come into the US and Canadian markets. We are based in Shanghai.

MR. HE: Sky Solar is an established global solar PV power plant developer, investor and operator. We have been in Europe for the last five years and just entered the US market. We will focus on utility-scale PV project development, financing and construction contract work in the US. 

MR. JENEVEIN: Tang Energy makes blades for wind turbines. We are the second biggest blade maker globally, and we are using those profits now to build wind farms in the United States.

MS. PETERSON: Suntech is the largest PV crystalline silicon solar panel manufacturer in the world. We have been in the US market for four years. We operate in 13 countries, and we now have almost 70 people in the US. We expect to open a factory in Arizona by the third quarter this year and to have about 90 employees there.

Attraction

MR. KATZ: Songyu He, what makes the US renewables market attractive to Chinese investors?

MR. HE: Economics. The pure size of the potential market attracts us. We think state renewable portfolio standards will continue to push the market to develop further, helped by the federal and state financial incentives.

MR. KATZ: Patrick Jenevein, does the US wind market look as attractive for Chinese investors?

MR. JENEVEIN: We are attracted because of the size of the market and buying power are huge. Economics are a big part of it as is a hoped for constancy.

MR. KATZ: Kristina Peterson, how does the world’s largest solar panel manufacturer see the opportunities and challenges in the US market?

MS. PETERSON: I think, like Songyu said, the economics are indisputable as a percentage of total power generation done by solar. Germany is the largest market in the world with 5.7% of its total production. After that is Spain. After that is California with 4.7%. To give you a sense of scale, in past Aprils, the California solar initiative has usually done about 20 megawatts of deals. This last April, it was 133 megawatts. That is huge.

MR. KATZ: Jeff Hammond, how about drawbacks? If you compare the US to Europe, what are some of the drawbacks to investing in the US?

MR. HAMMOND: The main challenge for us is familiarity. The US capital markets need to know us and our turbines. It takes time in a new market to get everyone comfortable with our technology and our ability to execute.

MR. KATZ: Those of you who are also in Europe, does it feel different when you are investing there than here and, if so, how?

MR. HE: The biggest difference is the financial incentives here. Because government support for solar is in the form of tax credits, just like the US developers, we will need to partner with a tax equity investor. We don’t have that impediment in Europe where the market relies on feed-in tariffs.

MR. KATZ: So it is more complicated here to transact deals, but it is still attractive enough to bring in Chinese capital.

MR. JENEVEIN: The US is still a growing market when Europe appears to be melting down. There is also a push, which is $2.4 trillion dollars of foreign currency reserves in China that have to be invested somewhere. This presents a huge challenge to Chinese leaders because there is only one real place at the moment to put all the dollar reserves and that is into US Treasury bonds. To the extent that China can shove dollars into wind or solar projects in the US, it can earn a higher return, although the idea of the Chinese making money seems to upset a few politicians in New York, not to name Chuck Schumer specifically. Unfortunately, the message our partners in China hear from Chuck Schumer is American senators do not want Chinese to make money.

Anti-Chinese Sentiment

MR. HANSEN: Well we were not going to stay away from the geopolitical for long. Jeff Hammond, maybe you can talk specifically about the Schumer incident. The Senator complained that projects that use equipment made outside the United States should not qualify for stimulus dollars. How does a Chinese company deal with that sort of sentiment?

MR. HAMMOND: The truth is there is a mix of components in any wind farm from both the US and abroad. That’s just the nature of our global economy. For example, at a minimum, the towers and blades tend to be made in the US and the construction jobs to build the project, and the longer-term jobs to operate it are here. We have a master service agreement with LM Glasfiber, one of the leading blade manufacturers. We look to source many of our components from the US. I think the criticism was unfair and somewhat biased and, shockingly enough, it was probably driven partly by politics. For us, I think we are coming in with a very clear message: we are here to bring quality investment into the US. We intend to highlight the benefits and to work through the challenges. For me personally, as an American, I come with the perspective that every turbine I can get in the ground is one more step toward national energy security.

MR. HANSEN: Kristina Peterson, I see you nodding.

MS. PETERSON: The United States is the third largest market for us after Germany and Spain. The key aspect of solar is it brings a lot of jobs for the construction trades, installers, electricians, civil works. It’s unfortunate when the politicians label it “Chinese investment.”

MR. HANSEN: Is there really such a thing as a Chinese company? Some of you are widely held companies with shares issued on the public stock exchanges. Your operations are global. However, I suppose you remain Chinese multinationals in the same way that General Motors or General Electric are American multinationals. How do you approach being perceived as a Chinese company in a market where that probably is not the leading selling point?

MR. HE: I am not sure it is a disadvantage at the level where deals are done. We are talking to many local developers who see the Chinese background as a positive. To them, it means a good supply chain and the ability to pull off large deals. Having a track record of five-plus years in Europe also lends credibility.  

MR. JENEVEIN: We actually use an approach that Rigdon Boykin, a former Chadbourne partner, and Kerin Cantwell, a current Chadbourne lawyer, both of whom worked in your Hong Kong office, recommended years ago. We have a Chinese name for our Chinese company, and we have English names for our companies that are doing work in the United States. The English names are Gallop Power and Soaring Wind Energy, and they both have connections in the Chinese language to Tang, which can mean soaring or it has the same character for gallop.

MR. HANSEN: So you Anglicize the names just like the Japanese car companies do. 

MR. JENEVEIN: Only with Chadbourne advice.

MS. PETERSON: It is a global marketplace with a global supply chain and global capital flows. We went public on the New York Stock Exchange in 2005, and a large part of the 66% of our shareholders that are in the US are institutional investors. Does that make us Chinese? Our chairman is an Australian citizen. We have a global management team of which I’m the best representative of the Chinese management.

MR. HAMMOND: We have our design and engineering and research centers in Denmark. We have manufacturing facilities in Zhengzhou Province in China. We have development activities here in the US and western Europe and Australia. Although we don’t try to downplay our Chinese heritage, we are a global company. All foreign manufacturers entering the North American market tend to follow the same pattern. Do they some projects using their own equipment to prove the technology works. They then make some sales that are sourced from their existing supply chains overseas after which they migrate into a North American supply chain. We are going to create American jobs and energy security. We don’t downplay it at all. We’re quite proud of it.

MR. KATZ: How about partners? Patrick Jenevein, have you considered partnering with US or European companies as you pursue opportunities?

MR. JENEVEIN: Absolutely. We are based in Dallas, Texas. We don’t go across the Trinity River into Fort Worth without a partner. Local partners bring more expertise than your balance sheet can ever afford.

MR. KATZ: Doesn’t it also bring conflicts of views, management challenges?

MR. JENEVEIN: Sure. That’s true of any relationship. My dear wife would tell you I’m still working on some of those skills after so many years. [Laughter]

MR. HANSEN: Is there a level playing field at this point for Chinese companies investing in the United States?

MR. HE: I think so, at least from what a new entrant like us can perceive. That may be a more useful question to ask more established companies like Suntech.

MS. PETERSON: When you asked us this question in a prep session, each of us said, “No.” There is a love-hate relationship between the US and China. The United States needs China to finance our budget deficits, but at the same time, Americans worry about the speed with which the Chinese economy is developing and that China is becoming a regional and global political power. It is something that we have to accept. We are very active in the Solar Energy Industries Association, which is the largest solar lobbying group. My boss is the chairman of SEIA. We deal with it. It has been a factor in our decision to set up a manufacturing facility in the US. In a sense, we are leveling the playing field for ourselves.

MR. HAMMOND: It is improving. The recent lifting of import tariffs on some components coming into China was a favorable development. Quite frankly, many of the people in this room are very influential on these issues, as the US capital markets have a stake in globalization.

MR. HANSEN: Kristina Peterson, what about the way China treats US and European companies investing in China? How important do you think that is to the opportunities Suntech will have outside China?

MS. PETERSON: China is fertile ground for lots of US companies. For example, Buick is the best car brand in China. The renewables sector is relatively new in both countries. Both are still trying to figure out the best way to support it.

Chinese Money

MR. KATZ: Songyu He, how much Chinese money do you think there is in the United States in renewable energy and where is it coming from?

MR. HE: That’s a big question, and I am not sure I have any more insight than anyone else. At least so far as I have seen for Chinese companies, we are the only pure developers here. There are some manufacturing companies like Suntech that are trying to do a mix of development and manufacturing.

MR. KATZ: So there are many Chinese companies that are trying to sell their goods in the United States, but is there a lot of pure investment capital?

MR. JENEVEIN: Absolutely.

MR. KATZ: Where is it coming from?

MR. JENEVEIN: Some from the national banks. Some from our partners. We have partnered with aviation companies in China for years, and they have ambitions of competing against Boeing, Airbus and GE all at the same time.

There is an awful lot of cash, but there is a dearth of process. The Chinese companies partner with others. A large Chinese bank just formed a strategic relationship with Rabobank. We have made blades in China, sold them in China, built up a strong balance sheet, but we need to expand because we are still second biggest and that is just kind of galling to be second biggest for so long. To become number one, you have to offer financing assistance.

MR. KATZ: Who is the biggest?

MR. JENEVEIN: LM Glasfiber. Jeff Hammond was just bragging . . . .

MR. KATZ: Is there a good example of another industry that has come out of China and expanded successfully in the US? Can you think of any?

MR. HAMMOND: Consumer electronics.

MR. HE: But I don’t think even that one could be compared to the solar industry. If you go to the big trade fairs — Intersolar, Solar Power International — about 20% to 25% of the exhibitors are from China.

MR. HAMMOND: China has done the same thing in electronic components, but it is all hidden behind a Dell name or somebody else’s brand. 

MR. HANSEN: Patrick Jenevein made the point that there is not only pull to the US market, but also push given the volume of dollars looking for a place to invest. When the time comes to look for sources of external capital, is the presumption that you should tap Chinese debt and Chinese equity? Is there a presumption that you stay at home?

MR. HAMMOND: The Asian capital markets make more sense for us in the short term until we become better known in the US market. It has to be a two-stage process. It’s China first, maybe broaden to other areas of Asia, and then move toward capital markets in the US and Europe. 

MR. JENEVEIN: Also keep in mind that the Chinese are as unfamiliar with the risks in this market as US investors are about new Chinese entrants and, for that reason, Chinese tend to prefer initially to put in capital in the form of debt.

Challenges

MR. HANSEN: Thinking about how you folks do business in the United States, I’m assuming a lot of this has to be approved back at Chinese headquarters. What are the hardest things to explain to them about the US market?

MS. PETERSON: I think they get it. Our CFO used to be head of Deloitte in China; we don’t have any illusions about what are the pros and cons of operating in the United States. However, the US is more complex in terms of financing. When you have a feed-in tariff that is effectively a sovereign credit of a double A rated country, it is very easy. Complexity is the price of admission to the US market.

MR. JENEVEIN: We had our top management team in the States in November when the Cielo-A Power-Shenyang wind project was announced, and Senator Schumer attacked it — this is going back to an earlier question — and the experience is still a little raw for us. Our Chinese management team heard what Senator Schumer said. The anti-Chinese sentiment stung. The hardest thing for foreign investors to figure out is whether the US provides a stable enough environment in which to invest. As a proud American, it embarrasses me to have the welcome mat tarnished by such behavior.

MR. HAMMOND: From the standpoint of execution and development of wind farms in China compared to the US, there are various shoals to navigate in the US: the political environment, the power markets, 51 different state and federal regulatory regimes and the complexity of the financing structures. There is a learning curve that new Chinese companies must move up when they come to the US. The level of due diligence here and in Canada is much more comprehensive than in China. It takes longer to do transactions. We partner with US groups that know the market and help guide us up the curve.

MR. JENEVEIN: That’s a really good point, Jeff. Who owns the land in China? Everybody owns the land, so you go to the land bureau to find out who gets to use it and how. Here you have to negotiate with a bunch of different families who are spread out over a wide area. That is difficult and expensive.

MR. HANSEN: Jeff Hammond, if you were to identify just one big difference in the business culture within a Chinese company versus a US company, what is it?

MR. HAMMOND: Their focus. Chinese managers do their homework. Their focus, their energy and their aggressiveness stands out to an American working for a Chinese company. Their plans are well thought through before they are implemented. Chinese wind companies are hungry, and they are growing more rapidly than US wind companies.