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).