China partnerships are essential
In the U.S. and Europe, government involvement in cleantech often gets put through the wringer with grumbling over where and how funding is allocated or frustrations over unpredictable pendulum swings in policy signals. Kachan & Co. has been vocal in advocating smarter government support for cleantech—reducing financial support to specific “chosen” technologies while focusing more efforts to define achievable standards, codes and green targets—and then standing back while industry and private enterprise do their job in deciding the technologies and solutions that work.
For cleantech vendors and investors in China, ‘government’ isn’t a bad word, it is an essential partner. Major sectors urgently needing and attracting cleantech are largely state-owned, with western and private participation subject to central government direction. According to Shanghai-based Patrik Lund, Asia head for Energy and Industry with global environmental engineering group MWH, the challenge, and driver of much complaining from the cleantech world in China (both western and Chinese), is at the local level and the ambiguity and inconsistencies in the myriad ways provincial and local governments interpret policy or in questionable transparency in how they implement their administrative and approval procedures which decide access to opportunities.
As an example, regulations and procedures set by Chengdu to meet or exceed a emission reduction target for example might dictate a far different strategy than a similar project in Hangzhou that is pursuing the same target. As Lund explains, “cities can be at different stages of development, rely on different industrial bases, or have different constraints—say water in the north versus lack of usable land in another region. Therefore they will have different priorities and, quite reasonably, differing perspectives in how they can meet a national target.”
Relationships with relevant local officials and well connected state-owned or private companies and economic development zones have to be evaluated and developed for western firms to make progress. Even in sectors and segments where foreign-direct investment is encouraged, ostensibly giving western firms complete legal and administrative access to markets, local partnerships are still necessary. Direct access does not remove any of the tedious work required to move forward, for example useful information, necessary approvals, sales and supply channels, support services. These channels are fragmented, can rely on rock-solid personal connections, and may be subject to administrative barriers favoring local competitors.
For cash-strapped and under-resourced SMEs with limited bandwidth to accomplish these tasks alone, essential partnerships very often also include knowledgeable and reputable intermediaries (whether Chinese or western-invested) on the ground that are plugged into the relevant local sector channels and decision makers.
China competitors have the home-court advantage
Western cleantech companies will generally face three classes of potential competitors in China: Other western firms developing and selling similar (high-tech, high performance, high priced) products and processes; Chinese incumbents or companies quickly bringing substitutes to markets (usually lower price, less performance); and customers and partners (Chinese and/or foreign-invested) who develop into competitors.
Canadians have quality innovation and high performance solutions to offer. The ‘hardware’ portion—generic components, supply logistics, or manufacturing infrastructure for example—can be localized very well to drive out costs and certain higher functionality that the market won’t pay for. Your Chinese vendors and partners can do this well and will compete (either with you, or amongst themselves) for this part of the business.
The Canadian firm’s valuable competitive advantage will be in the ‘software’ contribution such as essential IP and regular upgrades, highly specialized management skills, or unique support service expertise. This proprietary value is what China mainly wants (and in many cases why China is receptive to working with you). If your customers and partners become able to deliver the ‘software’ without your input, they may soon be competitors.
Central policy is clear on attracting advanced western technology that benefits China. Very often, and especially in industries that are slowly opening up to direct foreign investment and participation, market access is tied to trade-offs of technology or knowhow transfer to some degree. A relevant example involves the Strategic Emerging Industries (SEIs) program.
China’s Strategic Emerging Industries (SEIs)
|Energy Saving and Environmental Protection|
|Advanced Equipment Manufacturing|
|Next Generation Information Technology|
The seven SEIs are advanced, knowledge and tech-centered industries (each of which have relevance to cleantech) with state-level support for preferential tax, fiscal, and procurement policies. The aim is promoting investment into higher-value technologies that improve industrial efficiency, clean-up the environment, create jobs, and most importantly, develop advanced knowhow for Chinese firms to be able to compete, and lead, in these relatively new industries still with no (or few) global leaders in place yet. Chinese partners will be thinking long-term of how they can achieve these SIEs goals with your technology and knowhow, and not necessarily with you.
China’s SEI policy goals. Source: U.S.-China Business Council, 2012
The issue for westerners is to carefully balance their own business priorities (protecting core IP and accessing markets) with Chinese partner goals. MWH’s Lund, who has worked with multinational and Chinese energy and resource giants for over 15 years, recommends two approaches: “Always aim to upgrade your own IP, be it technology or services, and align Chinese partners with clear incentives to protect your IP as the most direct way to reach their goals.” If not, your partners will quickly begin finding ways to replace you or compete with you, “which is not something unique for China, but what you would expect in any competitive business environment”, according to Lund.
Having the patience, management capacity, strategic flexibility, and the budget to understand and carefully manage the simultaneous rewards and risks in the constantly interacting markets-partners-competitors playing field may well be a prerequisite for success.
This is the second article (the first article is here) in a multi-part series by Kachan & Co. in which we identify a range of opportunities, discuss common risks, and suggest a few tips that Canadian cleantech companies interested in China might well consider. We hope you find these insights useful.
Jim Mahoney is Managing Director of China at Kachan & Co. and a former Managing Director-China for Cleantech Group. He has lived and worked in China for 18 years advising and managing western SME investments and operations in China. He can be reached at firstname.lastname@example.org.