Sinohydro Group is a Chinese State-owned enterprise that operates in the hydropower-engineering and construction industry. It was incorporated in 1950 by the state, and its base of operations is in Beijing, China. The company has a history of developing large scale hydropower infrastructures and is one of the largest companies operating at the intersection of engineering and construction. The company has amassed a significant market share in hydropower construction; it leads other companies with a market share of 65% (Hydropower, 2021). The company is the subsidiary of the Powerchina, a wholly-owned state corporation, manages the affairs of the Sinohydro group. Sinohydro has 482 projects under construction in 72 countries, boosting the contract value of $43 billion. Porter’s five forces model is an appropriate analytical tool to evaluate the threats a group faces and the opportunities it can potentially explore.
Competitive Rivalry in The Market
The company operates in the specialized market segment, which is both specific and competitive. Chinese construction companies are among the biggest globally, and therefore it is the highly competitive sector of the economy. Sindohydro’s significant competitors are Keppel, China Shenhua Energy (CSE) and China Energy Engineering (CEE). Sinohydro is part of one of the largest groups in the industry, Powerchina; in 2020, the company reported $53.3 billion and earned a profit of $1 billion (Forbes, 2021). Moreover, Powerchina was placed at 157th rank in Fortune Global 500 companies. Keppel made a profit of $484.4 million and $5.8 billion and in revenues (Forbes, 2021). In the same years, CSE reported revenue of $33.9 billion and profit of $5.2 billion (Forbes, 2021). CEE, one of the giants in the development sector, made a profit of $685.7 million and reported revenue of $39.3 billion (Forbes, 2021). The presence of massive private and public sector organizations with financial strength makes the sector highly competitive.
Threat of Substitutes
The threat of substitutes is high when better alternatives are available, and consumers are interested in the product. The product offers a better price with at same or better qualities in the power generation and the development industry. The threat seems too low due to the unavailability of the natural substitute. The better alternative is the alternative renewable energy resources. The state owns 90% of power generation companies and development companies (Perkowski, 2011). Therefore, it makes it difficult for the companies to do anything other than the government’s policy. These companies face a threat from the renewable energy companies. But that is a better alternative to fossil fuels based power generation; renewable energy sources complement hydropower. It is the most effective energy production source that, for a long time, it has the most negligible carbon footprint in terms of generation; thus, it is an acceptable source of a generation as we advance. As there are no natural substitutes exist for hydropower, the companies associated with this industry, in any capacity, construction, manufacturing and installing of electrical equipment’s face a low threat of replacement in the foreseeable future
The Threat of New Entrants
The threat of new entrants depends on the underlying factors such as capital required, regulatory requirements, political risk and environment to foster growth. The energy sector is usually under the government’s control because of its national importance, and in China state controls the generation, distribution and construction of the electric setup. Another caveat is the strict regulations; China holds everything from the state level and has a centralized control mechanism. Capital is another major obstacle; the need for high capital to enter the industry deters future aspirants. The cost of capital and the market power of incumbents act as a deterrent for the newcomers (De Valence, 2003). The established incumbent with expertise and experience also demoralize the newcomers. Observing all the factors, it seems the threat of new entrant is low.
Bargaining Power of Buyers
The buyers’ power depends on the underlying factors such as buyers’ concentration, competition in the market, and available alternatives. The buyers for the construction company in the electric sector are the distribution companies and generation companies. The government centrally controls the whole industry through a state-owned corporation; the construction contracts are awarded in the house or to the state organization. These transactions are strictly state business, and buyers have moderate bargaining power—the buyers for the generational and distribution wings would-be consumer. China has a Tiered Electricity Pricing (TEP) model, which is inefficient due to a lack of user awareness and unreasonable tiered pricing standards (Wang et al., 2017). Therefore, consumers hold low bargaining power. Overall, buyers can exercise moderately to low bargaining power depending upon the circumstances.
Bargaining Power of Suppliers
Suppliers’ power in the industry depends on the industry’s state and factors such as the importance of supplies for the buyer’s supplies chain, concentration of suppliers, nature of the product offered, and the competition in the industry. There are two primary sources of supplies: raw materials and skilled labour. The large-scale construction companies have achieved vertical integration and can rely on themselves for the majority of supplies. Due to the scale of the business, they often have to procure outside their supply chain. They mitigate the supply chain risk by diversifying suppliers and maintaining multiple sources. As a fact, over-reliance on one basis or a consortium of suppliers increases the risk to an unacceptable level (Dada et al., 2007). Skilled labour is another essential supply because construction quality and efficiency depend on it; however, they hold higher bargaining power as they are vital to business. Overall, suppliers have moderate bargaining power.
References
Dada, M., Petruzzi, N. C., & Schwarz, L. B. (2007). A newsvendor’s procurement problem when suppliers are unreliable. Manufacturing & Service Operations Management, 9(1), 9-32.
De Valence, G. (2003). Market Structure, barriers to entry and competition in construction markets, knowledge construction. Proceedings of the Joint International Symposium of CIB Working Commissions: W55, W65 and W107, Department of Building, National University of Singapore, Singapore, 819-827.
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Forbes. (2021). China Shenhua Energy. Available at: https://www.forbes.com/companies/china-shenhua-energy/?sh=472c56fd239e
Forbes. (2021). Keppel. Available at: https://www.forbes.com/companies/keppel/?sh=453de74d481a
Forbes. (2021). Power Construction Corporation of China. Available at: https://www.forbes.com/companies/power-construction-corporation-of-china/?sh=35dadead74cc
Hydropower. (2021). Platinum Corporate. POWERCHINA. Available at: https://www.hydropower.org/our-members/powerchina
Perkowski, J. (2011). Cracking China’s Power Sector. Forbes. Available at: https://www.forbes.com/sites/jackperkowski/2011/01/12/cracking-chinas-power-sector/?sh=6d1cbd5e1a8e
Wang, C., Zhou, K. & Yang, S. (2017). A review of residential tiered electricity pricing in China. Renewable and Sustainable Energy Reviews. Volume 79, 2017, Pages 533-543, ISSN 1364-0321, https://doi.org/10.1016/j.rser.2017.05.097