HOLIDAY READING: Can AMSC Recover From Alleged IP Theft by China’s Biggest Wind Company?

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Can AMSC Recover From Alleged IP Theft by China’s Biggest Wind Company? “An important litmus test for future energy cooperation between China and the West”
Herman K. Trabish, November 14, 2011 (Greentech Media)

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Though Chinese courts will make the final determination, the confession and conviction of a former employee of AMSC subsidiary WindTec for intellectual property (IP) theft and collusion with Sinovel, China’s biggest wind manufacturer and the second biggest in the world, make it difficult to discredit AMSC’s version of events.

“Consider the evidence,” said AMSC President/CEO Dan McGahn of the company's cumulative $1.2 billion case against Sinovel. “We have hundreds of emails and messages between senior-level Sinovel staff members and our now-incarcerated former employee.”

The messages, McGahn said, show Sinovel requested the stolen IP and that senior-level Sinovel employees knew the IP was obtained illegally and would damage AMSC. And there is physical evidence: signed contracts with Sinovel and related parties promise the employee more than $1.5 million, and emails contain the actual IP transfer.

“We will share with the courts,” McGahn said, “evidence from multiple wind farms in China demonstrating that Sinovel has been utilizing this stolen software to upgrade its wind turbines.”

Meanwhile, AMSC is fighting for its life. In the second quarter (2Q) of fiscal year 2011, which ended September 30, revenues were $20.8 million, barely twenty percent of the $98.1 million for 2Q 2010.

On the hopeful side, the figure was more than twice Q1’s $9.1 million.

“The year-over-year decline is due primarily to a lack of revenue from AMSC’s former customer, Sinovel,” AMSC admitted.

But, perhaps more importantly, “The quarter-over-quarter increase was driven by solid growth in both of the company’s reporting segments (wind and grid).”
AMSC is fighting back in the business and legal arenas.

In the legal arena, it is pursing suits worth more than $1.2 billion.

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“We filed for arbitration with the Beijing Arbitration Commission,” McGahn said, “seeking nearly $70 million in compensation” and requesting the courts to enforce existing contracts worth “over $700 million.”

In Beijing and Hainan Province, AMSC is bringing “two civil suits for copyright infringement,” McGahn said, against “Sinovel, a wind farm developer that is using turbines containing our stolen IP, and Guotong, a company that Sinovel has invested in to manufacture systems that compete with our own.” In these cases, AMSC wants cease-and-desist orders and $6 million in damages.

Finally, a trade secret case against Sinovel and members of its senior-level staff in the Beijing Higher People’s Court seeks more thsn $450 million in damages.

“Each of our cases has been accepted and proceedings are expected to begin later this year,” McGahn said, adding that the AMSC suits are widely seen as “an important litmus test for future energy cooperation between China and the West.”

In the business arena, AMSC is restructuring and divesting across the board. It estimates balance of cash, cash equivalents, marketable securities and restricted cash will exceed $75 million at calendar year-end. “We believe we have sufficient cash,”said Senior Vice President/CFO David Henry, “to fund our operations and capital expenditure requirements for at least the next 12 months.”

In 2Q 2011, McGahn said, the company “got back to growth” and “significantly lowered our headcount and our cost structure.” The company’s leaders “dealt with our new financial reality by streamlining and flattening our management.”

It also terminated its proposed acquisition of The Switch, a Finnish engineering company, at a cost of $20.6 million.

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The economic environment is still challenging, but, McGahn said, “The wind power and power grid markets will continue to attract tens of billions of dollars in annual investment,” adding: “AMSC is well positioned to benefit.”

A new report from Pike Research affirmed this. “Overall capacity will continue to rise at a healthy pace,” the report said, and “by 2017 wind power installations will represent a $153 billion global industry, up from $77 billion in 2011.” In that period, the wind industry’s cumulative new investment is expected to total some $820 billion.

Having learned its lesson from the Sinovel incident, AMSC is developing customer diversification. Whereas Sinovel was over 70 percent of AMSC’s revenue, no company now represents more than about ten percent.

In 2Q 2011, AMSC retained wind turbine manufacturing customers (Inox Wind in India, Doosan Heavy Industries in Korea and Dongfang Turbine Company in China) and grew its superconductor business (in South Korea with Korea Electric Power Corporation and LS Cable & System, with the U.S. Department of Energy and partners Nexans, Siemens and Air Liquide, as well as with the Department of Homeland Security and partners ConEdison and Southwire).

Baird Equity Research noted that AMSC faces “significant challenges.” The wind business, it said, continues to drive the company's growth. Superconductor projects are in the pipeline but won't be major contributors until after 2012. Baird noted other concerns, including “limited visibility into Asian operations,” a “declining cash position,” potentially faltering government subsidies and “risks associated with international operations.”

One factor could be determinative. The plundering of AMSC’s IP was driven by Sinovel’s urgent need to adapt to China’s new, more rigorous grid standards. AMSC’s technology was clearly deemed invaluable for compliance.

This suggests that if AMSC can win its right to compete in the Chinese courts, it has the right technology to be strongly positioned to rise again in the business arena.

“To put it mildly, my first full quarter as CEO was eventful,” McGahn said. “Certainly more hard work lies ahead,” he added. “But, I can assure you, we’re up for the challenge.”