In Depth May 14, 2009, 5:00PM EST

Can China Go Green?

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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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Aston is Energy & Environment editor for BusinessWeek in New York.