Could China’s meter roll-out change pricing on a global scale?

By Paul French on May 2, 2012

China's State Grid Corporation is likely to want to see meter prices seriously dropped to match the huge deployment in store for the country. But with more and more domestic and foreign meter players entering the market how will economies of scale be achieved?

 

The news that US NASDAQ-listed Echelon is partnering with China’s Holley Metering to produce smart meters for the 300 million Chinese meter market shows that it may not be so impossible for foreign companies to penetrate the smart grid and smart metering technology market as originally thought. 
 
However, the deal is also of interest as some analysts have asked why China needs a foreign partner to produce low cost smart meters when this should be a specialisation of the Chinese. 
 
Indeed it was expected that lower cost Chinese smart meters made using China’s economies of scale and lower production costs would flood western and other developed smart meter markets. 
 
New pricing in the mix
 
It is generally considered that the State Grid Corporation who is overseeing China’s smart grid and smart metering roll out is demanding meters for under US$50 per unit when in the United States prices are typically around US$150 and in the EU around US$100.
 
The two companies have formed a joint venture in eastern China called Zhejiang Echelon-Holley Technology Co., Ltd. based in the city of Hangzhou.  According to Ron Sege, chairman and CEO of Echelon, the partnership will leverage Echelon's Silicon Valley energy control networking innovation centre and its 20 years of experience with Holley Metering's breadth of metering solutions. 
 
Reportedly, the two companies plan to invest US$4m in the JV, which will be 51% owned by Echelon.
 
Up for the challenge?
 
This is a sizeable investment, but in light of the deployment in store some could consider it modest. China’s State Grid Corp (SGCC) is ambitiously looking to connect approximately 300 million homes and businesses to China’s smart grid over the next five years. As of end of 2011 only 36 million meters have been installed, according to a recent report from Zpryme. 
 
Echelon CEO Sege believes that the company is up for the challenge and claims that, to date, Echelon has connected 35 million homes and 300,000 buildings to the smart grid worldwide.  But these are ambitious targets in China where numbers always count. 
 
Mr Jin Meixing, chairman of Holley Metering, told the Chinese media that he expects the JV to be operational by Q3 of this year and to be producing meters by then.
 
No guarantees?
 
However, it does not appear that Echelon-Holley has any guaranteed contracts for its smart meters from SGCC, effectively the only customer that will be ordering smart meters in China. While there are regional grids, such as Southern Grid in Guangdong province, all ultimately answer to the state-controlled SGCC. 
 
Others are looking to produce and sell smart meters in China. For example, Landis + Gyr signed a collaboration agreement with large and well connected Chinese technology firm, Huawei, to jointly develop smart metering and smart grid solutions. Similarly the Landis + Gyr/Huawei JV is looking to have meters coming to market by Q3 2012.  Huawei was founded as a spin-off from the Peoples Liberation Army.
 
Is it all about cost in China?
 
The primary problem for ventures looking to sell smart meters into China is obviously cost per meter. China offers potentially large installation numbers, but demands a significantly lower unit price than more developed markets. 
 
It seems Echelon is hoping that large unit order numbers combined with being able to utilise meters or metering technology in other large markets that will demand cheaper meters is key to their strategy. 
Echelon has also partnered with the Brazilian metering manufacturer ELO Sistemas Electronicos to license various parts of its technology. Brazil is obviously a highly populous country that is already pegged to have a large demand for smart meters.
 
Echelon’s Sege is hoping to see revenue coming in from the JV as early as 2013. He comments on the Chinese market opportunity: "Obviously it’s a huge market, and we’ve got to find a way to compete in it. This year will see pilots of the technology, as the partnership (Echelon-Holley) seeks approval from SGCC for its technology to be deployed across the country.” 
 
Supply chain spread 
 
The problem for foreign entrants will be just how thin will SGCC slice the metering supply market. Throughout its smart grid roll out SGCC has said consistently that it will use a variety of vendors to supply meters across the country and that local firms would be favoured over foreigners. 
 
Of course companies like Echelon and Landis + Gyr are hoping that joint ventures with local players like Holley and Huawei will see them categorised as local. 
 
There are of course other foreigners looking to get into the market – GE has partnered with the four million populous city of Yangzhou in eastern China to build a smart grid “demonstration center”;  IBM has had an agreement since late 2011 with ENN Group, a Chinese energy provider while America’s Itron has been in China for many years manufacturing and is now looking to sell smart meters, too.
 
However, there are also a growing number of wholly local players who are developing meters for the market - Ningbo Sanxing Electric, Wasion, Hi Sun Technology, Linyang Electronics, to name just a few.
 
These local firms expect to dominate China's smart meter rollout and that will cut into any possible order numbers for a new JV like Echelon-Holley and, of course, any reduction in order numbers will complicate the necessary economies of scale required to get meters out the door for US$50 per unit.