SunSirs: Global Transformer Shortage Widens as China Firms Ramp Up Production and Target Overseas Markets

"The market is in short supply, and our workers have been working until 9 or 10 p.m. for months," Zhang Xiaojin, chairman of Jiangsu Huachun Transformer Co., Ltd. (Jiangsu Huachun, 603097.SH), told The Paper recently, adding that orders will definitely continue to pile up next year.

The end of computing power is electricity, and the end of electricity is transformers. For more than a year, an unexpected "Transformer shortage" has swept the globe, and there is no sign of it cooling down. "In the past, customers often determined the main supplier for the next year in December of each year. Now, at least three months in advance, supply chain strategic cooperation is locked in," said Zhang Xiaojin.

The soaring demand for power in AI data centers, the expansion of renewable energy grid connection, and the explosive growth in energy storage needs have collectively sparked this transformer shortage. "Compared with traditional thermal and hydroelectric power, photovoltaic and wind power require more transformers. Because wind power and other green power transmission distances are long, and they also need to be stepped up multiple times before grid connection, the number of transformers needed increases even further," explained Zhang Xiaojin. In recent years, the annual growth rate of new energy installed capacity in China has maintained a double-digit figure, and by the end of 2024, the cumulative installed capacity of new energy storage in China increased by 130% compared to the end of 2023, leading the global market.

“But the overall market capacity growth is not that fast,” he said, adding that the transformer industry needs technical accumulation and market barriers determine that it is difficult to rapidly increase production in this field. Moreover, as the single unit capacity of new energy and energy storage products continues to expand, transformer manufacturers find it difficult to seize the "heavenly fortune" of this demand surge without new factory investments and equipment upgrades.

To seize market opportunities and alleviate production capacity bottlenecks, Jiangsu Huachun issued 460 million RMB of convertible bonds in July this year to finance the construction of the first phase of the new energy power equipment intelligent manufacturing industry base and the new energy power equipment digital factory and other projects. The first phase of the base has been put into production recently. Such an urgent expansion of production capacity is because its production capacity has limited the acceptance of incremental business and supply capacity. After the production, Huachun's production capacity has been doubled, and the product level has also been leapfrogged.

The mismatch between supply and demand has led to a continuous increase in the global delivery cycle for transformers. "Looking at the situation of delivery from China to overseas, the delivery cycle is about one and a half to two years. If it is overseas capacity, the delivery cycle is even longer. The most tense situation globally may take two to three years to deliver," said Liao Qihua, head of energy transition and new energy industry research at UBS Investment Bank in Greater China, to the South China Morning Post. "Currently, China's transformer market share is not very large in the world, but we can see that the export growth is very fast. According to customs data, the year-on-year growth rate of transformer exports in the first ten months of this year reached about 40%. Don't forget, this is happening in a situation where the industry has been booming for almost two years, and there is no sign of slowing down."

UBS believes that in 2026, the transformer market will continue to be in a high - boom cycle. "From the perspectives of demand and capacity expansion, the boom of transformers can still be maintained next year. In 2027, it depends on the implementation of global AI investment. For now, the situation looks relatively optimistic." Liao Qihua told The Paper.

The performance of transformers has been particularly eye-catching against the backdrop of the strong performance of the A-share power equipment sector. From October 24 to November 10, the phase-on-phase gain of the transformer concept index reached 21.84%, while the gains of the direct current transmission, power Internet of Things, ultra-high voltage, and energy storage concept indices were 10.57%, 8.1%, 7.6%, and 6.01%, respectively.

A telling signal is that just recently, the world’s largest transformer maker and a major supplier of transmission and distribution technology, Hitachi Energy, upped its forecast for market growth, extending the growth cycle for the global grid business from the previously predicted 2030 to 2035.

Faced with the unprecedented super cycle in the power industry, Huachun's further expansion has been put on the agenda. Zhang Xiaojin told The Paper that the demand for transformers in data centers is expected to explode in the second half of next year, "The topic is very hot, but there are not many new data centers that have actually been built, and it takes time to implement." Zhang Xiaojin believes that the market demand for box substations used in conventional charging stations and integrated photovoltaic, storage, and charging stations is about to be released in a concentrated manner, "In the next five years, the existing industry capacity of our company will not be enough to meet the demand. The market demand for box substations for wind and solar power, energy storage, and charging piles, as well as the demand for 110 kilovolt and 220 kilovolt distribution products used in booster stations, will grow by at least two digits every year."

At the moment, the more urgent task than expanding domestic production is to leverage overseas production capacity to win more overseas orders. Zhang Xiaojin showed his travel schedule, which will take him to Spain, Romania and other countries in the near future to inspect and negotiate the establishment of local factories.

The cost of building a factory overseas is high, but the high profit margin is even more tempting. According to the Paper, the price of a domestically produced main transformer in the European and American markets is about four times the domestic price.

"The overseas market is still in the early stages of outbreak. According to our analysis of the overseas division in the past two years, most of the power equipment in the European power grid has been in operation for 40 to 50 years, while in the United States, it is between 30 and 40 years. The design service life of these equipment is about 30 years, and they are all over-time service. Therefore, there is a potential demand for power grid renewal and replacement in these areas, which is the strategic focus of Huachun's overseas layout." He said that the company is not simply selling products, but is exploring overseas markets with an "output model of capital + technology + equipment" to achieve global layout. "We are responsible for outputting technology and training talents, while the other party is responsible for the market and management. The company plans to build at least three overseas cooperative factories in the next three years, with the first choice being the European and Middle East markets, and some cooperation is being talked about."

Several securities firms' research reports believe that the overseas power grid demand is likely to continue to be prosperous, and they are optimistic about Chinese power equipment companies accelerating their global layout.

"The export of domestically produced parts for transformers and gas turbines is worth noting. These two types of equipment have certain technical barriers, and the expansion is relatively orderly, without issues such as domestic competition or price wars," said Liao Qihua.

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