China's unprecedented growth in recent years has come at a terrible price. Two-thirds of its rivers and lakes are too polluted for industrial use, let alone agriculture or drinking. Just 1 in 100 of China's nearly 600 million city dwellers breathes air that would be considered safe in Europe. At a time when arable land is in short supply, poisoned floodwaters have ruined many productive fields. And last year, ahead of most forecasts, China passed the U.S. to become the world's largest source of greenhouse gases.
The immensity of these troubles has produced a result that may surprise many outside China: The nation has emerged as an incubator for clean technology, vaulting to the forefront in several categories. Among all countries, China is now the largest producer of photovoltaic solar panels, thanks to such homegrown manufacturers as Suntech Power (STP). The country is the world's second-largest market for wind turbines, gaining rapidly on the U.S. In carmaking, China's BYD Auto has leapfrogged global giants, launching the first mass-produced hybrid that plugs into an electrical outlet. "China is a very fast follower," said Alex Westlake, a director of investment group ClearWorld Now, at a recent conference in Beijing.
GOVERNMENT SUPPORTUnderstanding they are in a global race, China's leaders are supporting green businesses with policies and incentives. Beijing recently hiked China's auto mileage standards to a level the U.S. is not expected to reach until 2020. Beijing also says it will boost the country's share of electricity created from renewable sources to 23% by 2020, from 16% today, on par with similar targets in Europe. The U.S. has no such national goal.
While most environmentalists applaud these developments, China watchers are voicing two very different sets of concerns. Some question whether China will really stand by its ambitious targets and are worried by signs of backsliding as the recession in China's key export markets drags down economic growth. Another group, interested mainly in America's own industrial future, fears that China's growing dominance in certain green technologies will harm budding cleantech industries in the U.S. After all, China's emergence comes just as the Obama Administration is trying to nurture these same types of ventures, hoping to generate millions of green jobs. Many of these U.S. businesses will have trouble holding their own against low-price competitors from China.
Beijing's green intentions will soon be put to the test. China is in the midst of the biggest building boom in history. A McKinsey & Co. study estimates that over 350 million people—more than the U.S. population—will migrate from the countryside into cities by 2025. Five million buildings will be added, including 50,000 skyscrapers—equal to 10 New York Cities. And as quickly as new offices and houses multiply, they are filled with energy-hungry computers, TVs, air conditioners, and the like, sharply increasing demand for electricity, which comes mainly from coal-powered plants.
Environmental groups say it is therefore critical that Beijing promote rigorous, greener standards. And to some degree, that's happening. A government mandate states that by the end of next year, each unit of economic output should use 20% less energy and 30% less water than in 2005. Portions of Beijing's $587 billion economic stimulus package are earmarked for cleantech. On top of that, in March the Finance Ministry unveiled specific incentives to spark solar demand among China's builders. Included was a subsidy of $3 per watt of solar capacity installed in 2009—enough to cover as much as 60% of estimated costs to install a rooftop solar array.
USING WASTE HEATSteps like these will help Himin Solar Energy Group in Dezhou, Shandong Province. Founded in 1995 by Huang Ming, an oil equipment engineer turned crusader against the use of fossil fuels, the company is the world's largest producer of rooftop piping systems that use the sun's rays to heat water. Its eye-catching headquarters, the Sun-Moon Mansion, showcases these heaters, which Himin cranks out in immense volumes—about 2 million square meters' worth each year, equal to twice the annual sales of all such systems in the U.S. Because its water heaters sell for as little as $220, they are becoming standard in new housing complexes and many commercial buildings across the country.
Broad Air Conditioning, based in Changsha, Hunan Province, is also set to profit as Beijing pushes toward its green targets. By using natural gas and so-called waste heat from other machines and appliances instead of electricity, Broad's big chillers can deliver two to three times more cooling per unit of energy than a conventional unit. In a similar fashion, Haier, headquartered in Qingdao, Shandong Province, combines low-cost manufacturing and a variety of advanced technologies to create affordable, energy-sipping refrigerators and other appliances. During the 2008 Beijing Olympics, Haier supplied more than 60,000 such devices for visiting athletes and tourists to use.
As these and other domestic players bump up against technological obstacles, they can draw on the expertise of many of the world's top multinationals. In return for access to its domestic market, Beijing asks such companies as General Electric (GE), DuPont (DD), 3M (MMM), and Siemens (SI) to share their technology, help upgrade their China-based supply chains, and spread industrial processes to make manufacturing more efficient. These aren't simply green practices, says Changhua Wu, Greater China director of the Climate Group, a consultancy in London that partners with companies to combat climate change. "They're best practices."
GE, for example, has transferred expertise to Chinese partners in everything from wind turbine construction to the building of low-pollution factories. At the Beijing Taiyanggong power plant, waste heat from the combustion process is recycled, resulting in around 80% efficiency, more than double the rate of most conventional power plants in the U.S. The bulk of GE's sales of turbines for power plants in China are the ultra-efficient models. David G. Victor, a Stanford University professor who has studied China's electric grid, says some of the coal plants being built there are "much more advanced than those we see in the U.S."
Wal-Mart Stores (WMT), which buys some $9 billion worth of goods in China each year from some 20,000 vendors, infuses its supply chain with the latest ideas about energy efficiency. For example, Chinese factories that work with Wal-Mart are obliged to track vast quantities of data on energy use and make the information available for audits. "Many Western companies can't track their own energy consumption," says Andrew Winston, consultant and co-author of the book Green to Gold.
TORPEDOING U.S. SOLAR?China's early achievements in cleantech owe a lot to collaborations such as these. The benefits: China cleans up its own pollution, and the government-backed initiatives in solar and wind help drive down the cost of renewable energy systems in countries around the world.
But there is a downside. The rock-bottom prices for made-in-China green technology could make it impossible for cleantech ventures in the U.S., Europe, or Japan to compete. How, for example, will they go up against Suntech Power, based in Wuxi, Jiangsu Province, the world's lowest-cost manufacturer of standard solar panels? The U.S. boasts plenty of advanced technology. But any efforts by Washington to nurture this sector could be quickly undercut by a flood of Chinese-made solar panels. Such a deluge is likely if there is a big increase in public subsidies for rooftop solar systems. "What [that would] do is create 10,000 Chinese jobs," says Roger G. Little, chief executive of Spire Corp. (SPIR), a leading U.S. maker of manufacturing equipment for photovoltaics. "If we import all the [solar] modules, it will obliterate U.S. manufacturing" in this area.
A similar scenario exists in the much heralded area of electric vehicles. BYD, headquartered in Shenzhen, started selling its first plug-in hybrid, the F3DM, last year. It beat Toyota (TM) and General Motors (GM), both of which are developing such "plug-ins," and hit the market with a price tag they probably can't match: just $22,000. Henry Li, a BYD general manager, says the company will roll out a version of the car in the U.S. in 2011. Chevy's answer to this car, called the Volt, is expected to cost about twice as much and won't be out until next year.
How did BYD pull off this coup? Part of it is just being the new kid on the block. Today's automobiles, with their advanced combustion engines, are the most complex mass-produced goods ever made, assembled from thousands of highly engineered parts provided by a web of suppliers. It's difficult for a Chinese startup to compete on such a sophisticated playing field. But the emergence of a new, green-vehicle category clears the way. BYD was able to break in by leveraging its background as a battery maker. When it ran into technical hurdles, the company could draw on a deep pool of inexpensive, well-trained talent at China's top engineering schools. BYD is also a leader in pure electric vehicles, the logical next step. The government is now putting some muscle behind BYD's push. It is heavily subsidizing electric-car sales in about a dozen cities—in a stroke, making China the world's biggest market for such advanced vehicles. Its goal is to boost domestic output of battery-powered vehicles to a half million per year in 2011.
How Washington and the beleaguered U.S. auto sector might respond to a wave of inexpensive electric vehicles from China is difficult to predict. And it is also unclear how China's cleantech efforts in cars, energy, and other areas will be affected if key markets such as the U.S. and Europe don't recover quickly from the recession. Chinese makers of solar photovoltaics, including Suntech, export about 98% of their production. They have been battered this year by a collapse in demand in Germany, Spain, and Japan, China's top markets for solar gear. Suntech's factories are currently running at half of last year's capacity.
Even inside China, academics and business executives say Beijing needs to do more to bolster cleantech initiatives and make them recession-proof. For example, without better information on how such policies as the current Renewable Energy Law are to be enforced, "many of the terms are meaningless," complains Himin's Huang. And even when the terms are clear, companies don't always adhere, says Zhou Weidong, the Guangzhou-based China director at the Business for Social Responsibility, a global consultancy promoting sustainable business practices: "Paying penalties is cheaper than complying with the law in many areas."
At times, it seems as though Beijing is pedaling in the wrong direction. Late last year, China's Environmental Protection Ministry loosened review standards on potentially polluting industrial projects. In an economic crunch, "environmental protection is downplayed to second, or third, or even fourth priority," observes Guo Peiyuan of SynTao, a corporate social responsibility advisory firm in Beijing.
While acknowledging there has been some backsliding, most China watchers say the government is unlikely to stage a full-throttle retreat. Too much of its export growth is contingent on meeting strict environmental regulations. And Beijing recognizes that Chinese society can't tolerate much more environmental degradation. The World Bank estimates damage from pollution—everything from decimated fisheries to premature human death—saps nearly 6% of China's gross domestic product each year as well. For economic reasons alone, it will be difficult for China to turn back the clock.
with Charlotte Li and Pete Engardio
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