Press & News
China's Surprising Growth Puts Stress on Its Grid (published July 9, 2004 Wall Street Journal)
DONGGUAN, China -- More than a year ago, when local officials began shutting off electricity to manufacturers in this southern Chinese city one day each week, Paul Goodman altered the production schedule of his shoe factory and hoped officials would resolve the power shortages. Instead, the outages increased to twice a week. Then in May, Mr. Goodman says, he was informed that power would be axed during peak hours five days a week.
"We almost had a heart attack," says the Californian, whose DFP Shoe Co. employs 2,000 people making high-heel shoes and other women's footwear for department stores in the U.S. and Europe. With so little electricity trickling in, "we decided to make our own," he says. Now, a big generator rattles all day at the factory, gulping down diesel and pumping out watts needed to keep the production line moving. The hitch? It has raised his manufacturing costs roughly 5%.
So far, such costs aren't being passed on to retailers or consumers. But the power shortages that were once an occasional nuisance have become so widespread and persistent in China this summer that businesses across the country are fumbling for strategies to cope. In the process, many say they face rising costs as production is delayed and money is forked out for generators and fuel.
Makers of everything from lawn chairs to liquid-crystal-display monitors have shifted production to nights and weekends, as officials enforce brownouts during peak daytime hours. All but seven of the country's 31 provinces and major municipalities are experiencing shortages, including acute shortfalls in the manufacturing zones surrounding Shanghai and Guangzhou. Even the capital, Beijing, has announced that more than 6,000 local factories will be closed for weeklong "high-temperature holidays" this summer to avoid overloading the grid. The city's hotels have been asked to keep room thermostats set above 79 degrees Fahrenheit, and staff are required to take the stairs.
The outages are a reminder of the role Communist-style central planning still plays in the power sector -- and of the blunders that can result. To build any decent-size power plant in China requires central-government approval. But in the aftermath of the 1997-98 Asian financial crisis, Beijing was loath to permit massive investment into new electricity infrastructure given how the country's economy appeared to be on a trajectory of moderate growth. So, in 2000, in a gray brick building on the west side of Beijing, officials at what was then called the State Development and Planning Commission drew up a five-year plan that envisioned electricity demand rising by less than 7% annually.
When demand jumped by more than 15% in 2003, they were blindsided. An investment boom, sparked in part by China's entry into the World Trade Organization in 2001, has propelled the country's economy beyond even the most optimistic official projections. Some of the hottest destinations for money -- the steel, nonferrous-metals and cement industries -- also happen to be among the most energy intensive. Those three industries, together with chemical manufacturing, suck up 29% of the nation's electricity, says Hu Zhaoguang, chief economist of the State Power Economic Research Center in Beijing.
The government has rushed to bridge the gap between supply and demand, approving so many new power plants that their combined capacity will be about 150 gigawatts, nearly twice the generating capacity of Britain. But Beijing says it could take until mid-2006 before enough plants are completed.
While Chinese companies supply many power turbines, their low-tech models produce modest amounts of electricity, so the country has been soliciting bids from foreign companies to supply new technology. General Electric Co. and Japan's Mitsubishi Heavy Industries Ltd. recently won contracts to provide 23 turbines to about a dozen utilities building plants in China. GE valued its contract at about $900 million. Germany's Siemens AG has installed the main components for 16 coal-burning plants, along with gas turbines for four plants. In fiscal 2003, its sales in China for these and other projects totaled €120 million ($148.4 million), excluding joint ventures.
"The country is becoming a market economy, but planning still features relatively strongly in the power sector. Now these two trends are in conflict," says Han Wenke, deputy director general of the Energy Research Institute, a part of the National Development and Reform Commission, the new name for the government body responsible for energy planning.
That conflict is being felt by factories nationwide, including thousands of foreign-invested enterprises that constitute the muscle behind the Pearl River Delta, China's biggest export-manufacturing region. Charles Hubbs, a U.S. businessman who owns medical-supplies maker Fortunique Ltd., says that in 15 years in China he has never experienced anything like the current power shortages. The government in the Guangzhou suburb of Panyu officially cuts power to his factory one day a week, but "that's just the beginning," he says.
During hot weather last week, he was required to shut down production for three days. Each outage forces him to halt machines that normally run around the clock in making disposable protective sheets for medical instruments and microscopes. Besides the lost production time, "we lose raw materials that get stuck in the machine when the power is shut off," he says.
Like countless other factory owners, Mr. Hubbs has been waiting months for delivery of a power generator. "I wish I were in that business," he says.
Cummins Inc. of Columbus, Ind., is in that business, and "it's been a perfect storm for guys like us," says John Watkins, president of the company's East Asia operations. Sales in China this year have more than doubled in dollar terms, he says, adding that he expects to sell thousands of generator sets this year. Demand has driven prices for used machines to nearly the same level as new ones, he says.
And outages are costing managers more than just money. Early one morning, Mr. Goodman, the shoe-factory manager, stands at the front gate of his factory and gazes at the school across the street. "It's going to start up any minute now," he warns. At the stroke of 8 a.m., martial music begins blaring from loudspeakers at rows of schoolchildren doing calisthenics -- and directly into the windows of the dormitory where his workers are trying to sleep.
Before the power outages, people hardly noticed the music. But with electricity in tight supply during the day, Mr. Goodman has created a night shift to meet sales orders. Workers on the late shift are supposed to be asleep at 8 a.m., but now are awakened daily by militaristic renditions of "It's a Small World." The repercussions are being felt on the factory floor. "We just noticed the production going slower; they'd be too tired," says Mr. Goodman, who is running his generator full-tilt in order to move as many workers as possible back to the early shift. "It becomes an overhead cost, like anything."