BHEL's Power Struggle
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Image: Amit Verma
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PREMIUM ON DELIVERY Li Qi of Dongfang says the only advantage that the Chinese enjoy is prompt delivery
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he senior managers of a three-year-old thermal power plant in North India say that the Chinese equipment they installed has been giving them trouble due to low quality. They are not alone. Around the country, power plants have claimed that they bought cheaper Chinese boilers, turbines and generators in preference to Indian equipment only to see them malfunction too quickly.
On the surface, it looks like a demand for better quality. But look closer and it is clear that a quite different battle is brewing. It is one way the local industry is reacting to the Chinese invasion into the country’s power equipment sector.
But not everyone is unhappy. Take Lanco Infratech, in the power business for more than two decades. It has enough confidence in its Chinese suppliers to have them equip half its requirements for the next four years. Lanco is clearly not the only one vouching for the viability of Chinese equipment. Between 2004 and 2007, firms in China accounted for equipment in 18 power plants in India.
The debate over the quality of Chinese equipment is a side show to the main drama — the rapid entry of Chinese firms that has seen the state-owned market leader Bharat Heavy Electricals Ltd. (BHEL) losing ground.
India’s power sector was dominated by state firms for long. BHEL was the equipment supplier and the National Thermal Power Corporation (NTPC) was a dominant force in power production. But today a host of new entrants, such as Reliance Power, Adani Power and Lanco, are serious players.
Over the past five years, private players have been increasingly moving away from the state behemoth because of its low production capacity, delayed delivery performance and cost factors.
The reasons for importing equipment from China are simple: They are cheap and are delivered on time. But there is one factor that clinches the deal for the Chinese. They bundle their equipment with easy financing from large Chinese lenders. The cocktail is simply irresistible for the Indians.
As India steps up the rate at which it adds power generation capacity to fuel an economy growing at 9 percent, there may be room for both Indian and Chinese players. But it will be interesting to watch how Indian companies, especially BHEL, fight to regain their primacy on their home turf.
Why Cross the Great Wall?
The rush for equipment from China was triggered by the massive expansion plans for power generation in India. The country’s demand for power is expected to increase by 315,000 MW by 2017, requiring an investment of $600 billion (Rs. 2,580,000 crore) if the economy continues to grow at 8 percent, a McKinsey report said in 2008. At present, India has an installed capacity of 144,565 MW. Indian power manufacturers did not have the required capacity to meet this rising demand.
A senior manager with a Gujarat plant which has bought equipment from China says it had become difficult for companies to deal with BHEL as they were rarely on schedule. “The Chinese, because they do their business on a massive scale, are better able to stick to the delivery schedule. That makes a huge difference for us,” he says, adding that the quality of Chinese equipment is vouched for by the fact that they dominate every stream of the equipment business worldwide.
In a conventional plant using BHEL equipment, for every unit of power the producer needs to put in Rs. 2 as fixed cost and Rs. 1.2 as fuel cost. Power generation companies try to reduce the fixed cost as much as possible. For instance, reducing the fixed cost from Rs. 2 to Rs 1.4 or Rs. 1.5, which is possible with Chinese equipment, makes the scenario very competitive and power producers can win bids.
The Chinese have another ace up their sleeve: The ability to provide cheap financing for the equipment they sell. Financing is a problem because regulations require power generation companies to have a debt equity ratio of 30:70. If someone like Reliance wants to expand their capacity by thousands of megawatts over the next two or three years, it is difficult for them to raise so much money at a high interest rate. Therefore, they look for alternatives.
In order to lend teeth to their equipment suppliers, Chinese banks have stepped in to lend to Indian power sector majors. Last December, Reliance Power struck a deal for $1.1 billion (Rs. 5,000 crore) in loans from three Chinese banks — Bank of China, China Development Bank and the Export Import Bank of China — and the loans are tied to procuring equipment from Chinese companies. Lanco Infratech decided to tie up around $2.64 billion (Rs. 12,000 crore) from Chinese lenders.
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