Multinationals Set to Steal the March Over Local Chinese Manufacturers in the Power and Distribution Market

PALO ALTO, CALIFORNIA - Economic and electricity consumption growth, government's interests in renovating and developing power infrastructure, as well as the inflow of foreign funds are likely to strengthen the demand for power and distribution transformers in China and Taiwan. Moreover, China's entry in the World Trade Organization (WTO) and the exceptional performance of the manufacturing sector has further increased power consumption in the country.

"In 2004, China accounted for 41 percent of the global increase in electricity demand," notes Frost & Sullivan Research Analyst Srivatsan M.R. "In the first nine months of 2005, China's electricity consumption increased by 13.9 percent on a year-to-year comparison with 2004 and the residential consumption also rose due to extreme climatic conditions."

The increasing importance given by the two Asian giants - India and China - in building their power infrastructure to cope with economic growth is resulting in a sudden boost in demand for transformers.

However, rising costs of key raw materials such as copper, cold rolled gain-oriented steel (CRGO), and transformer oil are forcing transformer suppliers in China to increase their product prices. This is compelling the local manufacturers to adopt innovative pricing strategies to procure orders without narrowing profit margins.

While local companies are trying to develop inventive marketing strategies, international companies are entering the Chinese transformer market to take advantage of the huge market potential and offer cost-effective products. By large, the multinational manufacturers stand to gain more market shares than local ones because they have better access to capital and technical expertise.

A strategy adopted by these multinational companies for expanding their operations is to develop joint ventures with local manufacturers and address the entire spectrum of the transformer market.

"Multinational companies are even interested in addressing the highly fragmented distribution transformer market, wherein more than 1,000 local Chinese manufacturers hold a sizeable market share," says Srivatsan.

Consequently, the over capacities that may arise due to earlier surplus investments are likely to threaten the positions of a large number of local manufacturers. The economies of scale may also favor multinationals that use China as a hub for their manufacturing activities. Not only do they cater to the growing domestic demand, but they are also exploring export markets such as India, where the demand is growing at a similar pace and is likely to be stable.

"The State Grid Corporation plans to invest nearly $111.42 billion from 2006-2010 to expand the power transmission network across the nation," notes Srivatsan. "This includes the construction of 60,000 km of power transmission lines and a pilot network of 1,000 KV AC lines."

Furthermore, China's electricity consumption is growing across the industrial and residential end-user segments. Besides, the country is focusing on the short-term power shortage problems and long-term infrastructure issues to remain competitive and avoid losing major opportunities to attract foreign investments.