By Tom Thorp, Managing Director of Foresight Metering
The smart meter industry continues to grow and the demand for meters begins to focus not just on quality but on volume and cost as well, the market is faced with the decision of whether manufacturing off-shore, specifically from China, is really a viable option.
Chinese manufacturers have caught on to the increasing demand in Europe for smart meters in the coming decade and driven by the EU 2020 mandate, with 9 countries deploying smart meters to 80% of their populace in the next four years, have stepped up to the plate in a big way. Chinese meters are easily the cheapest in the market (without reducing reliability or functionality) and as component costs fall and technology continues to improve, the price of meters coming from Chinese factories will likely come down further. In 2012, over 70% of meter shipments came from China, however; many Energy Retailers in the UK marketplace have not so far been able to get comfortable with the quality of meters that are arriving. With that, the warranties and contracts that accompany the meters in question are also under heavy scrutiny.
The solar industry encountered a very similar debate five years ago. For years, the only credible PV components were made in Germany and the Netherlands, and once Chinese manufacturers came in with a similar product questions arose over quality and warranty. However; Chinese government regulation drove the need for quality PV at scale, providing manufacturers with an opportunity to refine their models in a market where they were almost guaranteed custom. With the rationale that a product that is produced in large quantities to serve the local market is likely to be of good quality, it only took one or two UK solar farm owners to trial a few Chinese-made panels on their sites to be assured of the quality. You’ll now find that the majority of panels on sites across the UK, and indeed Europe, are manufactured in China. We anticipate a similar pattern with smart meters over the coming years.
The State Grid Corporation of China has invested billions of dollars to date in smart metering for its own customers, so with the mandated roll-out of SMETS2 smart meters to move into full swing in the UK later this year, we think it is only a matter of time before the industry follows the solar PV journey and the big players begin to take steps in trialling Chinese-made meters due to the competitive pricing that they offer. If this happens, the Chinese are set to become a dominant player in the smart meter market in the next three to five years.
The considerations that all purchasers should take into account when entering into contracts with manufacturers remain the same across many markets and many geographies. These factors fall into four categories; the Business Environment, Supply and Demand, Support Systems and Cost Competitiveness.
The Chinese Business Environment especially with respect to manufacturing can offer the efficient and hassle-free setup of new capacity, along with providing security against political and economic upheaval. In this environment there is readily available low-cost financing, enabling production to start with shorter lead times than would be required with a plant elsewhere.
Supply and Demand is a critical factor and perhaps one that China is best suited to fulfil. In the case of smart metering, close to 50 million meters will be required over the next five years from the UK alone, and one must question whether the UK has the national capacity to cater to that need. China, on the other hand, has the people to execute the manufacturing activities and access to innovators. The Chinese manufacturing industry is world class with processes and technologies that are transferable to ensure manufacturing efficiency, productivity and the ability to meet the demand of purchasers; but also with the facility and resource to continually develop and disrupt the norm.
An increasingly important measure of a meter manufacturer is the post-production Support Services that they offer their clients. This can come in the way of logistics and delivery support or flexibility, or could be call centre helplines for product problems. The nature of the smart meter industry will mean that product engineers will be required on the ground in the UK for installation and maintenance, and also to work on offering an integrated platform for the smart meters in each house.
Post-production Support Services also include the protection that is offered through warranties and contracts. Unlike with products created in the UK or even the EU, purchasers are not protected within China by UK law and the question raised is whether the protection offered is sufficient for all key stakeholders including energy suppliers, MAPs and installers.
Cost Competitiveness is another facet in which China dominates over many countries. China benefits from low input costs such as a cheap labour market and low material costs due to the sheer scale. Production line efficiency will encourage faster turnarounds on initial products or replacements and lower initial costs will increase the flexibility of manufacturers to offer those replacements or make changes to products. Chinese manufacturers also have a reputation for flexibility in design that traditional UK manufacturers do not have. This is partly as they do not have the burden of heritage and the UK family business sentiment attached to their product, but also because their systems and processes are flexible enough to be adaptable to a change in model or design at reduced cost.
However; regardless of this cost competitiveness, can purchasers be assured of quality at this lower cost? China has in the past had a reputation for cutting corners to deliver on cost competitiveness, therefore compromising the integrity of the product. Smart meters need to function on a wall for a minimum of 15 years, and in the case that they fail, within the first five years, must be covered by warranty and compensation for extra costs such as those of installation.
Purchasers need to be confident that the accuracy and sustainability of these meters remains high throughout the product life. This is crucial as energy suppliers are taking the data from these machines and billing people on that basis – if meter measurements are out by even a fraction during manufacturing, significant problems can be encountered and costs borne throughout the life of the meter. As a protection to the industry and clients who are billed according to the data provided by the meter, strict testing regulation is in place.
Chinese meters are coming. We believe that within 12 months, a significant number of Chinese meters will be installed. It is purely a question of ‘when’ as evidenced by at least one of the "Big 6” energy suppliers currently testing Chinese meters as part of their assessment process.
The next five years will be critical for Chinese smart meter manufacturers to be able to demonstrate why they are as robust, reliable and future proof as their tried and tested competitors. If purchasers can get comfortable with the reliability of warranties and guarantees that Chinese manufacturers offer, and the quality of the products delivered, the Chinese could well become the new world leaders in the business of smart metering.