Yes, Virginia, China Will Make Your Business a Winner

It isn’t uncommon for a theme or a trend to dominate how investors and analysts view a particular sector. For instance, when barriers to interstate banking were lowered, then dropped, bank consolidation was all anyone seemed able to think about, even though there were other important developments in the industry. During that era, at McKinsey, a slide show made fun of typical presentations to banking clients. One had a cartoon of an a school of little fish fleeing an enormous fish with a wide open mouth and sharp teeth. Caption: “Citibank is about to enter your market.”

But while some banks were gobbled up by bigger ones, it was often because it served the executives to do so, rather than because it was a business imperative. Well-run small banks can do well; in fact, beyond a not-very-high threshold, banks do not show economies of scale (it may be that the diseconomies of scope outweigh the scale advantages within particular activities).

Similarly, in the dot com era, even stodgy industrial companies would feel compelled to show that they were somehow taking part of this (the seemingly) earth shaking change.

The rising influence of China is another sea change that investors and companies can nevertheless overdo. This tidbit comes from Andrew Kaplan, a hedge fund manager who focuses on the technology and alternative energy sectors:

From American Superconductor’s June quarterly earnings call, 7/30/09:

In 2008, China grew its installed base of wind turbines to about 12 gigawatts of power and early this year declared that it intended to add another 10 gigawatts or more in 2009…more recent reports state that China may exceed 150 gigawatts by 2020. To put all those numbers in perspective, one gigawatt is enough electricity to power…about 3,000,000 Chinese homes. It’s quite clear that the opportunity in China is tremendous and we are definitely taking advantage of the situation.

The 150 gw number by 2020, while it seems large, would be largely achieved if China kept its pace of wind installations flat with its 2009 number (10 gw).

China’s population is 1.3 billion. At current growth rate, population will be 1.4 billion in 2020.

Average household size in China (blended avg of urban + rural) is 4.0.

So in 2020 there will be 350 million Chinese households.

Given that 1 gw of wind can power 3,000,000 Chinese homes, 150 gw of wind will be able to power 450 million Chinese homes.

So in 2020 wind will account for 129% of Chinese household electricity use.

That’s all. You may now return to regularly scheduled programming. (and, yes, I know that households are not the only consumers of electricity. But, believe it or not, wind is not the only source of electricity in China).

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  1. MarcoPolo

    Not sure where I saw it and can’t verify it either, but I read someplace that China consumes 1 in every 5 tires it produces.

  2. Chris M

    One note about wind power: 1GW of wind capacity doesn’t mean 1GW is available 24hours/day. The wind has to be blowing! I’d guess 1GW would put out something like 0.1GW on average.

    1. Andrew kaplan


      The fact that wind is intermittent is captured by something called the “capacity factor,” and is already included in the calculation. If wind blew 24×7, 1 gigawatt of wind capacity would generate 8760 gwhours/annum of power, or 8.8 bn kwh. That’s about 7-8x what you’d need to power a million chinese households.

  3. Peripheral Visionary

    I think one of the most important facets of the “China story” that has been missed has been the extent to which Western business investments have been responsible for powering the Chinese economy. The race to build a presence in China–profitable or no–has led to enormous infusions of capital, with little accountability attached.

    I’m just not sure how long that can last. My inclination is to think that, with the economy slowing down, multi-national corporations will dramatically slow down the rate of investment into China (and will start asking for returns on investment), with unpleasant results. China may be attempting to compensate for that slowdown by pushing credit expansion through the system, but that is an approach which first Japan and now the U.S. is coming to discover as having limitations.

  4. Stelios Theoharidis

    Is this a joke? We have to remember the energy use between households and industry in China is much more imbalanced than the western world. Seeing is we are importing quite a bit of their energy in our products and quite a bit of Chinese households are still energy poor (eg 207 million living on $1.25 dollars a day in 2005).

    But if that isn’t enough for you from Forbes:

    “China’s total electricity production capacity reached 792.4 gW at the end of 2008; the 12 gW of wind capacity accounted for about 1.5% of that. However, in terms of actual power production, wind turbines generated 13 million megawatt-hours of electricity last year, only about 0.4% of China’s total energy supply, based on Citigroup data. Citigroup also estimated about 30% of wind power capacity in 2008 was not connected to the electrical grid.”

    As standards of living grow in China then energy consumption per household is likely to grow significantly. If standarsds of living grow of course, I’m expecting quite an asset bubble over there, massive issues related to inequality, a large non-performing loan problem with their state owned banks, and a looming demographic issue due to the 1 child policy. They seem to be fudging quite a bit of their numbers anyway.

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