From “China Needs” to “Needs China”
- An Interview with Mr. Paul Hanrahan, President & CEO, AES

Let Chinese Companies Help Us Open Overseas Markets

MC: The Chinese government once encouraged foreign capital to flow into China’s power industry, and foreign capital accounted for about 15% of the total investment in the industry during the late 1990s. However, foreign capital began to withdraw from China’s power sector beginning from 2003. It is said that foreign capital account for less than 1% of China’s power market currently.

As we know, AES invested in and built 9 power projects in China in the late 1990s, but from 2002 suddenly stopped investing in China’s power infrastructure. What caused you to change your decision?
Paul Hanrahan: I lived in China for several years during the 1990s, throughout which we built 9 power projects in multiple Chinese provinces and municipalities - mainly coal-fired power plants. The total capacity of the 9 power projects reached 2.8 MKW, where we were always the only foreign partner.

Today’s market is greatly different from that of 1990s, when we just entered China. At that time China was short of funds and power. China needed foreign investors like us who could bring funds and expertise in power project management.

However, the power market conditions have changed now, and today China has enough funds and five power groups of her own. In addition, China also has many strong power companies. Therefore, China now requires foreign investors to have both funds and skills or technologies. AES has its own management experience, management mode and values, so China needs all these to a certain extent.

AES’ presence in over ten counties is also needed by Chinese partners and companies. They want to leverage AES’ footprint, experience and projects in China and worldwide to meet the demands of local and overseas development.

MC: In addition to the changes macro-economic development brought to companies, the coal price has continued to increase in China since 2003. However, the increased price of electricity cannot offset that of coal price. It is more difficult for foreign-invested power plants to afford the loss compared with their local counterparts. This is the reason why many foreign energy companies withdrew from China. However AES didn’t take a large-scale withdrawal action. How about the current operation of these power plants where AES invests? Will you also withdraw your investment there?
Paul Hanrahan: In terms of coal supply, our power plants are mainly coal-fired, specifically pit-mouth power plants (Pit mouth coal-fired plants are close to the mine and need to consume a great deal of coal, otherwise the coal must be transported by railway or sea). The coal reserve is sufficient, so even the snow disaster that occurred in South China not long ago didn’t cause a great effect on us.

MC: It seems not easy to invest in China’s power industry now compared with the late 1990s. Another big change on the market is that in some areas of China, Northeast China for example, there is an energy surplus. It is very difficult for foreign capital to be involved in the construction of power grids that are urgently needed by China. China leaves less and less opportunities for foreign capital to enter the market. Facing this situation, do you think that there are still opportunities for foreign capital in China?
Paul Hanrahan: You can see that the capacity has greatly increased in recent years in China. While Chinese equipment manufacturers improve their productivity and capacity by introducing advanced technologies. We will be more competitive in overseas projects if we can work with Chinese design institutes, equipment manufacturers and even construction units.

In fact, our purchase of low-cost and reasonable-quality products in China is also beneficial to our overseas projects. That means Chinese companies are helping us exploit overseas markets. For example, China fosters over 700, 000 power engineers each year, while the number is only 70,000 in US. If we can take China as a base and develop our own project design and construction teams, we can meet AES’ demands in China and worldwide.

In addition, the Chinese companies who want to implement projects in other countries often have no an understanding of the local environment, regulations and policies. Therefore, they usually need a partner who has enough understanding of local conditions. We can provide information they don’t know to assist their overseas development.

China has the potential to become AES’ global base

MC: As the Chinese economy continues to grow rapidly, its energy market is always attractive. When foreign capital withdrew from China’s power market, we also observed some interesting changes occurring at AES. For example, AES opened a new office in Beijing, and established a new department. What is the position of China in your global presence? How will AES adjust its pattern based on your cooperation with Chinese companies?
Paul Hanrahan: The structure of our Chinese company is similar with that of AES’ headquarters. In addition to our core power team, AES China also has dedicated teams for clean energy, carbon emission reduction, CMD(Clean Development Mechanism), as well as special teams for project design and construction. Moreover, we also have special personnel who are considering participating in other infrastructure projects.

I have worked and lived in many places, which allows me to have a greater understanding of China and even Asia. Now it is generally believed that China is the center of the global power market. From this perspective, China has the potential to become AES’ global base, and this is also in line with our pattern. In addition to meeting the demands of our power projects in China, our construction team also hopes to leverage Chinese design, Chinese equipment, Chinese components and Chinese construction units to serve AES’ projects in over ten countries.

We have our own traditional power projects, basically coal- or gas-fired projects. In addition, we are recently accelerating our step in developing power projects using clean energy and renewable energy to deal with global warming.

Another situation has also had a great effect on our strategy, i.e. the rapid economic development in China and Asia, including that of the Middle East and Africa. Considering this situation, we regard China as an important market because we will not only continue to expand our business in China , but also surround our projects in China to support those in other Asian countries and worldwide. For example, China has expertise in project design, equipment manufacturing, construction etc., and one of our strategies is to go outside China together with our Chinese partners for overseas development.

MC: From investing in China to “going outside China together with Chinese partners”, does this mean AES needs to adjust its customer relations. As I know, most of the Chinese companies that cooperate with AES are state-owned, and their policies are not flexible. Do you think your new operation ideas can be accepted by the mainstream companies in China’s power industry?
Paul Hanrahan: We feel happy that we have engaged with so many good partners throughout our more than ten years in China, including Datang Group, Shangxi International Power, Jiangsu Guoxin Group, China Power International etc. Our partners also include some specialty or investment companies at provincial or local levels. Additionally, we also have many contacts with Chinese power design organizations, including China Power Engineering Consulting Group Corporation. China has rich experience in waterpower, and we also have good cooperation with Chinese waterpower design organizations.

In addition, for our only wind power project that is under construction, our partner is Guohua Energy Investment Company, a subsidiary of Shenhua Group. We also have contacts with primary wind power equipment manufacturers in China to discuss whether we can use their equipment in the future.

MC: Energy diversity and the use of clean energy, which you proposed, are facing a test in China. I believe that the clean energy business you are focusing on is also facing a test, i.e. the price of clean energy is higher than that of coal-fired power. Thus, power companies are not willing to purchase clean energy, and the clean energy industry is facing a challenge. This seems to be the same issue as why foreign capital withdrew from China, that the end price cannot provide strong support for continued business. Do you worry that you would also have to withdraw your investment in China?

Paul Hanrahan: Whether it is wind or PV power, the cost of equipment for clean energy will decrease as the output increases. The price increase of fuels, including oil, natural gas, coal etc., will also lead to an increased price of electricity. This increase will relieve the high cost of clean energy to a certain extent.

In addition, many countries encourage investors to invest in clean energy projects by providing favorable policies, including subsidies. These can also increase the percentage of clean energy in power projects.

Boss’s Anecdotes

Do you have an education background in military school?
I graduated from US Naval Academy and Harvard Business School.

What is your most special career experience?
I was a commander on a US Navy fast attack submarine USS Parche.

What is your advice for young people?
To find a job, learn Chinese first.

In what country’s offices do you often recommend AES’ young employees to work?
Strive for a job in China, otherwise you will fall behind.

Where did you gain your impression to China?
I lived in Beijing for 2 ~3 years.

MC’s Comments

Circuitous tactics for entrance into China

Under the glorious sunshine in Beijing, Mr. Paul Hanrahan was making a simple conversation with Chinese friends in standard mandarin. Mr. Paul Hanrahan particularly likes Chinese. Ten years ago, Mr. Paul Hanrahan was sent to China by his headquarters together with his peers in the power industry. As AES’ global president who started his successful career in China, he has always a great passion for China.

Foreign capital has always had an awkward status in China’s infrastructure sector. During the period when China sought fast development of its infrastructure, a great amount of foreign capital flew into China and occupied a favorable position in a short time. However, when their percentage reached a certain threshold, the government narrowed the door and introduced new policies. Thereafter, there were several rounds for foreign capital to flow into China’s infrastructure sector, followed by a lull.

Mr. Paul Hanrahan has a great understanding of China. He established all his power plants with their first round of investment at places close to coal mines and with favorable railway transportation, rather than sites where power resources were quite rare. Thus, they could purchase coal at a lower price. When the Chinese government started to restrict power pricing by implementing a Coal-Power Pricing policy, the foreign companies that positioned their power plants at the wrong places finally could not afford their financial losses and left China. Even for AES, because of the increased price of coal in China, the gross profits of its power plants in Asia decreased $ 8 million in 2007, which was a sharp contrast to AES’ good performance throughout the whole year.

Policy risks are a bottleneck for all foreign companies that want to seek development in China. It has not been wise to choose to invest in infrastructure entities.
Mr. Paul Hanrahan is always finding opportunities to cooperate with China’s large state-owned enterprises, which can minimize the losses caused by policy risks. However, it is not easy for a large state-owned enterprise to open their doors to foreign capital, and many foreign companies have failed in China.

Perhaps global energy companies should think about China with a different perspective. According to traditional logic, the most direct way of making money is to sell energy to an energy strapped China. However, the Chinese government is already wise to this and permits domestic enterprises to make money from their own country. After having a thorough understanding of this, Mr. Paul Hanrahan began to think about China in a reverse way –China already has technologies for advanced power generation equipment production. One of Mr. Paul Hanrahan’s choices is to build China as AES’ intermediate station and profit from China’s equipment manufacturing industry.

A small thing aroused his thinking.

AES has power plants in nearly 30 counties all over the world. Mr. Paul Hanrahan found that even if AES placed a purchase order with a famous foreign brand, the equipment would possibly be manufactured by Chinese companies. China’s equipment manufacturing industry already has a greater influence in the world than that of some European countries, such as Italy, and taking a top-three place worldwide. In comparison, the products from China are cheaper.

It would be better to establish its own manufacturing center in China to secure AES’ demands of power equipment in other countries. Now, AES has found a good seller in China with AES as the buyer with the biggest demands. Mr. Paul Hanrahan changed his way of thinking. In the past he thought of how to make money in China, now he is considering how to let Chinese brands help him make money.

In addition, Mr. Paul Hanrahan doesn’t keep his eyes on those semi-monopoly sectors in China’s power market any more. Instead, he chooses to build power plants with new energies under full competition. It has been not so easy to make money in China. AES has changed from an industry where it could enjoy monopoly profits to a business sector where the competition is strong. This further reflects foreign companies’ respect to the business rules of China – in the future you should operate your business in China by wisdom, rather than privilege and monopoly.

The international energy magnates are reluctant to leave China , so they have to operate their own business in an alternative way.

Mr. Paul Hanrahan’s biography:
AES’ Director, President and CEO since 2002.

Previously AES’ COO and EVP, responsible for business development and management in Europe, Asia and Latin America.

President and CEO of AES China Generating Co., Ltd ( listed in Nasdaq ) in late 1990s.

Director of Corn Products International, Inc since 2006.

Worked for US army prior to joining AES.