when butterfly meets_wind_fudan university_rubicon team

When Butterfly Meets Wind Strategy Proposal for SK’s Entrance into China’s Wind Market

By LI Guang, ZHAO Tian, ZHU Sheng

School of Management,

Fudan University

Rubicon Team

Outline

Background

Profitability

Market Size

Industry Analysis

Strategy Goal, Goal Decomposition and

Strategy Directions

External

Environment 1 Market Analysis

&SWOT 2 Proposed Strategies 3

Policy Overview

SWOT Analysis

Roles Sites & Modes

Manufacturer Investor

S1: Positioning in

Value Chain

Case Study 1:

AES’s success

in CDM Projects

Case Study2:

How SK entered

Petro Industry

In China

2nd Tier Region Off-grid Power

S2: Combination of

Carbon-free Industry

and Off-grid Power

SK Vision:

Sharing Happiness When

Butterfly Meets Wind

Conclusion: Wind

energy industry is very

promising in China.

Conclusion: SK Energy

could join hands with

players in value chain to

seize great opportunities in

the vast and growing

market.

Outline

Profitability

Market Size

Industry Analysis


Strategy Directions

External



SWOT Analysis

Roles Sites & Modes


S1: Positioning in

Value Chain

Case Study 1:

AES’s success

in CDM Projects

Case Study2:

How SK enter

Petro Industry

In China


S2: Combination of


and Off-grid Power

SK Vision:








market.

Background China is in need of

renewable energies in future.

Wind energy development

is booming around the world.

Wind energy is a promising

industry in China.

Policy Overview

Political will fuels wind

energy industry in China

With modern industrialization

around the world energy crisis is

becoming more and more manifest.

The scarcity of traditional energies

and negative impacts on the

environment is becoming a global

concern.

Proposed Strategy Market Analysis and SWOT External Environment

Traditional Energy

Increasing Demand for Energy in China

Electricity’s Demand Growth, Supply Growth (Net Capacity

Increase) and Generation Hours under Optimistic Expectation

4860

5250

54605411

5221

50155069

5194

5359

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

2002 2003 2004 2005 2006 2007 2008 2009E 2010E

4400

4600

4800

5000

5200

5400

5600

5800

Demand Grow th Supply Grow th Pow er Generation Hours

Source: China Galaxy Securities, 2008 Energy Insight

Background

Negative impacts of traditional energy

CO2 Emission leads to global greenhouse effects.

CO

Incomplete burning of oil and coal,

resulting in toxic gases emission.

SO2

Resulting in acid rain, causing damage to

the eco-system.

Dust Increasing risk of Respiratory Disease.

NOX

Severely poisonous, giving rise to risks of

lung cancer and other diseases

Growing industries along with

economic development in China

strongly carrying the electricity market

forward.

With improved life qualities in China,

living electricity driving the demand

going up.

Economic reconstructions push the

application of renewable energies in

China.

Key Factors Affecting Demand

China is in need of

renewable energies!

Country Share of New Installed Capacity 2008

All Source: World Wind Energy Report 2008, Global Wind Energy Council

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E2010E

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Total Installed Capacity MW Incremental Capacity MW Increment Growth MW

World Total Installed Capacity and Incremental Capacity MW

Wind energy development

is booming around the

world.

Trend of Wind Energy Exploitation around the World

0 5 10 15 20 25 30

USA

Germany

Spain

China

India

Italy

France

UK

Denmark

Portugal

2007 2008

Installed Capacity: Top 10 Countries MW

Background

Worldwide capacity reaches

121,188 MW, out of which 27,261

MW were added in 2008.

Wind energy continued its growth

in 2008 at an increased rate of 29 %.

China continues its role as the

most dynamic wind market in the

year 2008.

Summary


Energies Overview

2000

2010E

2020E

0

20

40

60

80

100

120

140

2005 2006 2007 1H 2008

Wind Others Small Hydro Large Hydro Nuclear Coal

1.18%1.80%

2.08%

0.74%

China Annual Capacity Add Additions

and Wind Energy Growth GW,%

Source: China Galaxy Securities:

Growing Wind Energy

Source: China Galaxy Securities, 2008 Energy Insight

Energy Structure in China

Wind energy is a

promising industry in

China!

Advantages of Wind Energy

Background

China’s electricity demand

growth (9% to 10% annually)

has created a capacity gap.

Wind is evolving as one of

China’s top four technology

options for new capacity.

With coal-fired electricity

prices rising, wind is becoming

more cost-competitive.

Reliable, affordable and clean.

Immense storage, easy access,

and low marginal cost. .

Wind projects under stable

policy frameworks are less

affected by the credit crunch than

higher-risk investments.

Wind energy is the answer to

both the environmental and

financial crisis!

2010E


2006.1

Renewable Energy Law

Established the framework of the

national exploitation of clean energies. 3

principles on wind were proposed:

Implement fixed pricing to wind electricity

power.

State Grid unconditionally purchases the

wind electricity. Price gap would be shared

among the grid.

The state establishes fund to support wind

power development financially.

2006.10

NDRC Move

(National Development and

Reform Committee) improve the

standard of subsidies and lower

the qualifications of the

companies to acquire loans from

the bank and funds.

2007.8

Market Open Policy

Long-term planning for the

development of renewable energy

Make the wind power market more

competitive and open.

Take advantage of coastal areas and

inland wind resource.

Targeting at a capacity of 5 MkW and 30

MkW in the year 2010 and 2020

respectively.

To form the wind-power center in several

provinces such as Inner Mongolia, Jiangsu,

Shandong and Liaoning.

2008.1

Price Reform

NDRC set the bottom line for the

auction price of biding for the

permission to exploit wind energy

to avoid malign competition and

attract more foreign investments.

2008.4

Financial Support

The Ministry of Finance further

reduce the tax imposed on the

wind-energy companies.

National Customs cut down

tariff on importing advanced

wind power technologies and

equipments.

Political will in

China is striving

for propelling

wind-power market

Policy

Political Will Fuels Wind Energy Industry in China


Outline

Background Strategy Goal, Goal Decomposition and

Strategy Directions

External



Policy Overview

Roles Sites & Modes


S1: Positioning in

Value Chain

Case Study 1:

AES’s success

in CDM Projects

Case Study2:

How SK enter

Petro Industry

In China


S2: Combination of


and Off-grid Power

SK Vision:



Conclusion: Wind


promising in China in

future.

The wind energy market in

China is vast, exploitation

remains unbalanced

Price of wind energy will

become more competitive in

near future.

Overview of different

players in the value chain.

Profitability

Market Size

Industry Analysis

SWOT Analysis

Market Size

Chief Distributions of Wind Energy in China 107W

Year 2007-08 Installed Capacity Increments 106W

Source: China Investment Annual 2005

Inner Mongolia

Xinjiang

Heilongjiang

Gansu

Jilin

Hebei

Shandong

Jiangxi

Jiangsu

Guangdong

Zhejiang

Fujian

Hainan

0 2 4 6

Inner Mongolia

Liaoning

Hebei

Jilin

Heilongjiang

Jiangsu

Gansu

Xinjiang

Shandong

Guangdong

Fujian

Zhejiang

Hainan

3.9

2007

2008 Increments

Source: China Wind Energy Association 2009

2.6 1.3 0

Chief Distribution and Exploitation of Wind Energy in China

0

5000000

10000000

15000000

2000 2001 2002 2003 2004 2005 2006 2007 2008

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

Total Capacity MW Total Grow th

Source: China Wind Energy Association, Century Securities

Fastest Growing %

Hainan 568.97

Zhejiang 311.04

Liaoning 142.52

Inner Mongolia 138.93

Hebei 126.00

Tier 1 Tier 2

Current Exploitation

Energy Distribution

China’s wind power resources mainly

distribute in the eastern coastal areas

and “Three-North Region”-- Northeast,

North China and Northwest.

Inland wind resource is larger than

that of coastal areas. The risk of

onshore investments are lower than

those of offshore projects

China’s Total Installed Capacity and Total Growth

The wind energy

market in China is

vast, exploitation

remains unbalanced.

Investment on Wind Energy has been

increasing exponentially in China at

nationwide scale.

The wind resources of eastern coastal areas

remain unexploited compared to the “Three-

North Region”.

The markets of Tier-2 districts, with more

potential to develop, grow much faster than

that of Tier-1 districts.


Profitability

Estimated costs of Wind and Coal Energy

0.5

0.4

0.7

0.6

0.3

0.2

0.1

0 2000 2005 2010E 2015E 2020E

Wind Energy Coal

Source: Wind Energy 12 in China, China Galaxy Securities

No. Name of wind plants

Highest

Price

Yuan

1 Inner Mongolia ZhuRihe Wind Farm 0.609

2 Inner Mongolia Shangdu Wind Farm 0.609

3 Hebei Zhangbei Wind Farm 0.984

4 Xinjiang Danban City No.1 Wind Farm 0.533

5 Liaoning Donggang Wind Farm 0.915

6 Zhejiang Cangnan Wind Farm 1.200

7 Hainan Dongfang Wind Farm 0.560

8 Guangdong Nanao Wind Farm 0.740

9 Shanghai Chongming Nanhui Wind Farm 0.773

Average Price 0.769

2nd

Tier

1st

Tier

The price of grid-connected wind electricity is

greatly affected by the government’s policies.

Price Differentiation and Cost Trends

The price of grid-connected wind

electricity by province (Highest)

Current Pricing and Cost

In the current market the average price of

electricity generated by wind farm is still higher

than that of coal. The price disadvantage is the

main barrier constraining further development of

wind energy market.

Future Prospect

In 2020, the estimated cost of

wind electricity the cost of coal

electricity, which will stimulate the

widespread application of wind

power.

The application of CDM in joint

venture projects could make wind

electricity more competitive by

generating extra revenue from

CERs. Price of wind energy

will become more

competitive in near

future.


Industry Analysis

Turbine Manufacturers

Brand

Manufacturer

Capacity

(kW)

% of

domestic and

joint venture

capacity

% of

increased

total

capacity

Sinovel

华锐 1402500 29.71% 22.45%

Goldwind

金风 1131750 23.98% 18.12%

DEC

东汽 1053000 22.31% 16.86%

Increased market share of Domestic and Chinese-

foreign joint venture turbine manufacturers in 2008

Brand

Manufacturer

Capacity

(kW)

% of foreign

owned

capacity

% of

increased

total

capacity

Vestas 599700 39.30% 9.60%

Gamesa 508300 33.31% 8.14%

GE 145500 9.53% 2.33%

Increased market share of foreign owned turbine

manufacturers in 2008

Brand Market status Main focus

Guodian

(Longyuan)

A specialized wind power

development company

owning the largest shares

of installed wind power

capacity in China.

Three North Region, Southeastern

China. Case study: Jiangsu

Rudong Wind Power Concession

Project

Datang

Rank No.2 in China wind

market ownership. With

great impact in the

Northern China electricity

market.

Northern China. Shanghai. Case

Study: Shanghai Donghai Bridge

Offshore wind farm.

Huaneng

The largest independent

electricity generator in

Asia. With solid

government background.

Inner Mongolia, Shandong,

Sichuan, Guangdong, Case Study:

Huaneng Zhaobei Wind Farm

State Generators

Top 3 State generators in wind market

Summary of turbine manufacturers in China

Sinovel, Goldwind and DEC

capturing more than 57% of the

market. Vestas, Gamesa and GE

dominating among foreign

manufacturers.

With ambitious wind targets,

state generators are

harnessing strong capacity

and political will to carry the

market forward.

All Source: China Wind Energy Association

While turbine assembly

manufacturing booming, key

components witnessing shortage.

Chinese OEMs to dominate

supply market in the long term.

Foreign entrants are

seeking a foothold through

near-term partnerships, with

exploration targeting long-

term pipeline activations.


•Success in Korea Bellwether in the industry of Jeju Island, South Korea.

Achievement in various energy fields around the world.

•Green Ocean Strategy. Bring happiness to people by implementing SRI in green

energy field.

•Robust Financial Ability Fortune 500 Company and high reputation in China.

•Expertise Several wind blade patents, goals to become one of the

largest wind machine manufactures in the world.

•Localization Localization of the business in China to be improved,

developing coordination with the domestic companies and

local government.

•Policy The regulation of foreign capital to enter the energy industry

•Market Share Insufficient infrastructure and facilities in China compared

with the professional wind power companies, such as GE,

Vestas, etc..

Strength Weakness

Opportunity •Demand An answer to the world energy crisis and China’s rapid

development

•Competitor The low quality of domestic wind-energy investment

companies.

•Nationwide Support Attention of government on the clear energy and favorable

policies towards .

Threat

•Financial Crisis Financial Crisis world widely impairs the process of huge

investment for lack of the liquidity.

•Entrance Cost High cost of the wind power and subordinated negotiation

power when coordinated with State Grid.

•Technological Uncertainties Some pending technological problems such stabilization of

the grid due to the high levity of wind power.

SWOT Table


Outline

Background

Profitability

Market Size

Industry Analysis

Strategy Goal, Goal Decomposition

and Strategy Directions

External



Policy Overview

SWOT Analysis Roles

Manufacturer? Investor?

S1: Positioning in

Value Chain

Case Study 1:

AES’s success

in CDM Projects

Case Study2:

How SK enter

Petro Industry

In China

SK Energy could expand

his roles in the value chain

and create additional value.

Conclusion: Wind



future.






market.

Strategy goal, goal decomposition and strategy directions

Goal To enter China’s wind

power market and explore

“Green Ocean” strategy by

investing in wind energy

market of China.

To cut down the cost

and gain a higher profit

To choose a niche market

to enter and boost its share

(Social Responsibility

Investment) To secure its

position as a top global “Low

Carbon, Green Growth”

company, to create and share

happiness with Chinese people.

Market

Profitability

SRI

To Be a Pure Turbine Manufacturer or a

Wind Farm Investor?

To find a new wind-farm new potential

areas and model

Criteria Evaluation

The difficulty to

enter the market The Current Market Share

The technology

advantage

The number of core technology

patent main turbine manufactures

The trend of the

market

development

The share of different types of the

turbine company in different years

•The exploitation of wind-resources is

unbalanced.

•The current prevailing grid-connected model

has faced with a lot of problems such as high

cost, difficulties to sustain the stabilization of the

grid and so on.

1.Goal Setting 2. Decomposition

of the Goal 3. Strategy Directions


Proposed Strategy 1: Positioning in the Value Chain

A turbine manufacturer or a wind-farm investor?

0%

20%

40%

60%

80%

2004 2005 2006 2007 2008

Domestic(Joint Venture) Foreign Investors

Wind Equipments Market Share in China

(Domestic and Foreign Investors)

The market share change for foreign

manufactures is declining in recent years and

domestic companies have lead the turbine

manufacturing industry.

Rank Institute Name Patent

Numbers

Original

Country Business Realm

1 GE 211 U.S. Electrical

Manufacturing

2 Mitsubishi 211 Japan Electrical

Manufacturing

3 (Person) Wobben Aloys 141 Germany

Wind Power

Generation

Equipments

4 Vestas 93 Denmark

Wind Power

Generation

Equipments

5 REpower System 63 Germany Wind Turbine

6 LM Glasfiber 56 Denmark Turbine Blade

7 Siemens 48 Germany Electrical

Manufacturing

8 Ebara 47 Japan Fluid Conveying

Equipment

9 Fuji Heavy 47 Japan Electrical

Manufacturing

10 Gamesa 52 Spain Wind Turbine

Top 10 Institutes (People) with Most Patents in Wind

Energy Technology in DII Database

SK doesn’t have a technology advantage when competing with these

industry leaders.

It is not the proper time for SK to

become a turbine manufacturer in

China. SK could use its great

capital power to invest in the

construction of wind farms.


Source: DII Database

Va

lue

Ch

ain

Po

sit

ion

ing

State

Generators

Chinese

Developers

Foreign

Entrants

State

Generators

Chinese

Developers

Chinese

Developers

Foreign

Entrants

Local players

seeking

technical

expertise

The Clean Development

Mechanism (CDM) is an

arrangement under the Kyoto

Protocol allowing companies

from industrialized countries to

invest in projects that reduce

emissions.

By applying CDM joint

venture projects on clean

energies become possible in

China.

The Permitting Negotiations

are usually local, complex and

highly project-specific.

Foreign entrants seeking

cooperation with the state

generators under momentum

policies.

State Generators and

Chinese Developers lack of

expertise and advanced

technology.

Consultancy through value

chain is in need on issues like

site acquisition, components

manufacturing, CDM applying.

Foreign players

seeking vertical

integration(ownership

limited to 49% for

CDM qualification)

SK Energy could expand his

roles in the value chain and

create additional value.


Site

Acquisition

Technical

Development

Permitting

Negotiation Financing EPC Operation


State Generators


Case Study 1: AES’s role in a CDM Projects


Project Title: Guohua Hebei Huanghua 49.5 MW Wind Farm

Project (Phase I)

Completion Date: 24th December 2008

What SK

may do

Project

Process

Outcome

About: AES operates

132 power generation

facilities worldwide.

Investor

Equity share: 49%

Guohua ASE

(Huanghua)

Wind Power

Co. Ltd.

Consulting

Merrill Lynch

Commodities

(Europe) Ltd.

Project Guohua

49.5 WM Wind

Farm Project

(Phase I) GE, Vestas, Datang

Completion date: 12-24-2008

Invest via CDM Turbine Supplier Funding

Wind Energy Sells to

Yearly Capacity: 99,160WMh North China

Power Grid

•33 wind turbines with the unit capacity of 1500kW and total capacity of

49.5MW.

•Generating greenhouse gas (GHG) emission reductions by avoiding CO2

emissions from traditional energy, and will contribute to sustainable

development of the local community and the host country by reducing

green house gas (GHG) emissions of 106,647 t CO2 per year.

Financial Indicator for the Proposed Project

IRR (Total Investment)

Benchmark Rate = 8%

Without CDM Revenue 6.24%

With CDM Revenue 9.58%

All Source: United Nations Framework Convention on Climate Change

CDM is a good way for foreign entrants to

invest in the wind energy market in China

which would greatly reduce the cost.

AES

Company


Case Study 2: SK successfully

knocked the door of China’s

Petrochemical industry

Background:

•Petrochemical industry is the core and strategic industry that Chinese

government always wants to keep strong control of it, which impeding the foreign

energy companies’ entrance.

•SK tried hard to enter the China’s Petrochemical industry, finally succeed via

the relationship of Sino-South Korea relations.

SK’s Trial

SK’s Good Relationship with Governments

Studied the planned

Petrochemical

programs in China,

Seeking more

commercial

opportunities.

2006.4

Negotiated with

Hubei Province

Government on

the 0.8 million

tons Ethylene

projects.

2008.5

No break-

throughs were

made

1990

Firstly settled its

business in china

1992

Establishment

of diplomatic

relations. SK

as a bridge.

2008

The director of SK

accomplished the South

Korea president’s official

visit to China several

times.

What Can We Learn?

well

preparation

and careful

planning

good

relationship

and

coordination + = Win-win solution for

wind energy in China!

Good relationship and

coordination play an

important role in the trial

of SK to knocks the door

of China wind energy!

Connecting

two countries

Other competitors

competed for the

projects 0.8 million tons

Ethylene projects

in Wuhan


SK Energy, Sinopec

Joint Venture

35% Equity

Before 2006


South Korean

President’s official

visit to China to , SK

got approval of the

project.

2008.5.27

Outline

Background

Profitability

Market Size

Industry Analysis


Strategy Directions

External



Policy Overview

SWOT Analysis

Sites & Modes


S2: Combination of


and Off-grid Power

U-Eco Cities in Northern

and Southern China

Conclusion: Wind



future.






market.

Proposed Strategy 2: Site Acquisition and Mode

Site acquisition: Tier-1 Vs. Tier-2

2-tier areas are more

competitive than 1-tier

areas.

Mode: Grid-Connected Vs. Off-Grid

Grid-Connected Mode

More prevailing, applied in most of

current projects.

Wind electricity should consolidated

to the State Grid.

Difficulty to maintain the

stabilization of the grid

High cost (0.5-0.6 yuan/kWh)

Off-grid mode is more

promising than grid-

connected mode.

Proposed Strategy 2: Site and Mode Selecting

Off-Grid Mode

More and more mature

Serves directly for the large scale

industry base

Increasing Government Attention

Low cost(0.05-0.06 Yuan/kWh)

Tier-1: “Three North Areas”

Market is relatively saturated.

Increasing rate reaching bottleneck

Disadvantageous Price

Lack of Industrial Integration

Tier-2: “Costal Areas”

Market is relatively saturated.

Increasing rate reaching bottleneck

Disadvantageous Price

Lack of Industrial Integration

Advantages


1

2

Shandong

Northwestern

Hebei Base

Middle-southern

Liaoning Peninsula

Base

Combine the off-grid wind-power industry with the

development of Tianjin Binhai New District and the strategy

of Revitalizing the Old Industrial Base in Northeast China.

Reduce the CO2 and other toxic material emission.

Built Farms

Farms

Under-Construction

The market is

incompletely exploited;

SK has an opportunity to

seize!

Hebei

Liaoning

Tianjin

Why Bohai-Rim District? 1

Integration of Off-Grid Wind Power with

Revitalizing the Old Industrial Base

U-Eco City in

Northern China

Long history of industries development, mainly

energy-hungry heavy industries

Firm support from the local government

Sound foundation of wind-power development

0

10

20

30

40

50

60

70

80

2000 2001 2002 2003 2004 2005 2006

Hebei Liaoning Shandong

’97-’06 Bohai-Rim District

Wind Energy Installed Capacity 104W

Booming Capacity 2

3

Steel, Raw material,

Petroleum Fine Chemical,

electrolytic aluminum,

Chlor-alkali, seawater

hydrogen manufacturing

industries. Important ports

as Qingdao and Dalian.

Eastern Shandong

Peninsula Base

Proposed Strategy 2: The Combination of Off-Grid Wind Power with Two Industrial Bases

Proposed Strategy 2: Off-Grid Wind Power in Bohai-Rim Industrial Bases


Zhejiang

Jiangsu

Combination of Off-Grid Wind Power

with Yangtze Delta Carbon-free Industrial Base

Shanghai-

Southern

Jiangsu Base

Northern

Zhejiang

Costal Base

Northern

Jiangsu Base

Combining off-grid

electricity with

carbon-free energy-

hungry industries

in Yangtze Delta,

develop the eco-

tourism.

Anhui

Jiangxi

U-Eco City in

Southern China

The increasing demand for energy

Rich wind resources and off-coastal land that

remain unexploited.

Good Policy Environment

The Yangtze River Delta boasts the advantage

to solve the technology and capital problems

Why Yangtze River Delta?

Built and Under-Construction Wind Farms in Yangtze Delta ’07

Current Status of Exploitation

Farm Numbers Turbine

Numbers Capacity %Nation

Shanghai 3 38 27.24 2.63

Jiangsu 3 244 85.80 8.30

Zhejiang 2 264 23.33 2.26

Total 8 546 136.37 13.19

Built Farms

Farms

Under-Construction

2 1

3 The market is

incompletely exploited;

SK has an opportunity to

seize!

Proposed Strategy 2: The Combination of Off-Grid Wind Power with Two Industrial Bases

Proposed Strategy 2: Off-Grid Wind Power in Yangtze Delta Industrial Bases


Newly chemical

industries such as

Chlor-alkali Industry,

seawater hydrogen

manufacturing,

electrolytic aluminum

and steel, Power

Machinery industries.

Integrating the

shipbuilding, steel,

machinery industries

Experimenting u-Echo city

with combined application

of wind energy and IT

technologies.

U-Eco City

Realize SRI by enhancing

China renewable energy

development. CDM is the

main method.

SRI

Active part in Green Ocean

Strategy supporting energy

solution for in remote areas.

Green Ocean

Strategy

Lower the carbon-dioxide

release and achieve green

growth in electricity

generating.

Low Carbon

Using off-grid wind

electricity supporting

energy-hungry industrial

bases in China.

Off-Grid

Integration

Vision

Thank You!

LI Guang, [email protected]

ZHAO Tian, [email protected]

ZHU Sheng, [email protected]

School of Management,

Fudan University

Rubicon Team