First Impressions of China

by Richard T. Stuebi

I just returned from my first trip to China – a whirlwind ten-day tour spanning the cities of Beijing, Shanghai, Guangzhou, Xiamen and Wenling – involving a number of private meetings (some with senior public officials) as well as public presentations at PennWell’s China Power Oil & Gas conference and at a cleantech symposium hosted by the American Chamber of Commerce in Shanghai (AmCham Shanghai) at the annual China International Fair for Investment and Trade.

It is impossible in a brief blog post to give a detailed report on my visit, or to more broadly comment meaningfully about the profound issues confronting the whole world as a result of China’s rise and arrival to world pre-eminence. With this note, I will only attempt to offer some immediately apparent observations related to cleantech issues and opportunities in China that emerged for me from my visit.

Pollution. It is well-known that China is experiencing tremendous environmental challenges, with almost a million Chinese estimated to die each year prematurely from health issues stemming from poor environmental quality. Air visibility can sometimes be less than a mile on what would otherwise be an ordinary hazy humid summer day, although frankly, I was expecting the air pollution to be worse than it was. On the other hand, the water situation shocked me. China’s Ministry of Environmental Protection (formerly known as the State Environmental Protection Adminstration) is said to admit that 60% of the country’s rivers are polluted to the extent that they can’t be used for drinking, and I have heard claims from American sources that a majority of Chinese rivers are so bad that the U.S. EPA would deem their waters to be unacceptable for industrial purposes (much less for drinking). Even at the finest hotels, guests are warned not to drink the tap water, and bottled water is generally provided as part of the room rate. (In case any of you are eating while reading this, I won’t bring up the public toilets.) The other major surprise for me was how much worse the pollution situation was in the countryside than in the cities. Bad air, disgusting water and (especially) litter are much more starkly obvious in the poorer rural areas – a powerful indication of the positive correlation between income/wealth and environmental quality. This reinforced to me how important it is to promote (rather than to retard) economic growth in China, so as to facilitate environmental improvement both for the sake of the Chinese and for the world.

Electricity sector. Although I haven’t investigated in any detail, what I heard suggests to me that the electricity industry in China is on the verge of a financial breakdown, analogous in some ways to the California fiasco of the early 2000’s. Retail electricity prices are subsidized (heavily for large industrial customers), and allowed wholesale prices to generators are fixed. However, coal prices are on the rise, because the mining industry is sufficiently fragmented and privatized that government attempts to set the prices are ineffective. Since the vast majority of the electricity in China is produced from burning coal, the combined effect of increasing coal prices and steady electricity prices is putting a financial squeeze on many generators – so much so that in some cases generator firms are reducing output from their plants. It is unclear how long this can go on before electricity supply inadequacy (already a problem) becomes acute. The financial health of China’s electricity sector ought to be important to the cleantech industry, because a collapse of some type might jeopardize the attainment of the government’s ambitious clean energy aspirations that have been set forth in its Renewable Energy Law.

Manufacturing. In some parts of the U.S. (such as here in Ohio), we like to think we are a manufacturing powerhouse, but China makes us look like pikers. The ascendancy of Chinese manufacturing is nowhere near its peak: with several hundred million people still living in desperate poverty (pre-industrial conditions) in the hinterlands, the prospect of earning US$1000 per year by moving to the city to work in a factory represents a five- or ten-fold increase in income and quality of life. In other words, unless/until fuel prices make transportation of goods prohibitively expensive, stringent emission reduction programs become binding in China to double or triple electricity prices, and/or the yuan-dollar relationship alters dramatically, its huge labor cost advantages can only enable China to further strengthen its already dominant position in global manufacturing – excepting certain niches of production (items with very high shipping costs such as wind turbines, items with limited labor input due to capital-intensive production processes, items still in low-volume early production runs). Outside China, we will generally be relegated to being the technology innovators, the product designers and system integrators, the sellers and distributors, the installers and the service people. Rather than rue that position, let’s embrace it. Because of their production orientation, my speculation is that the Chinese are not so strong in innovation, leaving it to others to be the technology pioneers. After being bombarded by souvenir hawkers and market barterers who make undifferentiated “me-too” offers and compete almost solely on price (or on aggressiveness or loudness), I also conclude that these Chinese will not be the leaders in identifying customer needs as they emerge and evolve, nor in delivering high-value (not price-based) solutions to meet those needs. Those games are for us to play, so let’s go after them.

Capital. It is abundantly clear to any observer on the street that China is awash in money. In Beijing and Shanghai, designer consumer goods and high-end automobiles are not ubiquitous, but they are evident. (In Xiamen, I saw an Audi A8L – a $120,000 vehicle in the U.S. – with police lights on top of the roof. Nice cop car! Does your town have a municipal budget that would support a fleet including one?) I met venture capitalists looking for deals in China, as well as a bevy of consultants who facilitate technology transfer and commercialization into China. However, I didn’t see much evidence of interest in foreign investment by Chinese parties. For the cleantech revolution to be amped up, we need to make the case that this Chinese capital is well-served being deployed outside China – not only for good financial returns, but to generate more future opportunities for Chinese domestic investment.

Inefficiencies. Centrally-planned economies (e.g., the former Soviet Union) are legendary for begetting ridiculous systemic inefficiencies. The Chinese economy is quite a bit different – the central government indeed establishes absolute policies, but only at a very general level, providing minimal specific guidance and instead allowing individual actors almost complete autonomy to comply within the bounds of what’s permitted – but the inefficiencies are nevertheless astounding. I speculate that the inefficiencies are driven more by the explosive growth of the economy – averaging a mind-boggling 9.9% per year for a 30 year period since 1978 – which propels businesses and individuals to act quickly, with much replication and little reflection or innovation. A vivid illustration of this is the abundance of highly inefficient mini air conditioning units (rather than more efficient central air conditioning systems) in relatively new high-rise buildings, presumably because they’re cheap and quick and easy to replicate. The resulting inefficiencies also reach into the social realm: schedules are set late, remain fluid and dynamic up until the event, and tardiness is common. The Chinese way of doing things thus requires some acclimation for those of us accustomed to considerable structure and discipline.

Urban mobility. Reflecting the economic explosion, people are constantly trying to get somewhere. Even though the big cities (especially Shanghai and Beijing) have reasonably well-developed public transportation systems (including modern subway systems), and even though the per capita level of car ownership in China is only less than 10% of what it is in the U.S. (reflecting the amazing fact that private auto ownership was forbidden in China until the mid-1990’s), traffic is truly chaotic in urban areas. It is said that there used to be bicycles everywhere in China, and while many still remain (often abiding by well-designed separated bicycle lanes), many bicycles appear to have been replaced and superseded by electric scooters that are clean and silent. (By the way, the silence isn’t always a good thing, as any aimless and unattentive walker is under a constant threat of being steamrolled by an aggressively-driven scooter stealthily zooming in from behind.) It appears to me that “rules of the road” is an oxymoronic concept in China, as vehicles undertake passes in the most imprudent circumstances and drive on the left or on the right almost on discretion. (Of note, traffic lights are world-class: many have timers indicating the number of seconds remaining for a green light or red light.) Taxis are about as ubiquitous as two-wheeled vehicles and are unbelievably cheap – an hour ride of perhaps 30 miles might cost the equivalent of US$20 – but you’ll never complain about a Manhattan cab ride again. As a consequence, drivers and pedestrians alike must be vigilant to protect their lives. And, it is a good thing for all concerned that foreigners are not allowed to drive; when you rent a car in China, you also get a Chinese driver, who is well-accustomed to seeing driving behaviors evidenced in the U.S. only at race tracks and demolition derbies.

Air service. Air travel in the U.S. has nothing on China. I was impressed with the very new and modern airport terminals in all of the cities I visited. The primary domestic airlines (Air China (LSE: AIRC), China Southern (NYSE: ZNH), etc.) have thoroughly modern Boeing (NYSE: BA) and Airbus fleets – no Soviet-era Tupolevs here anymore, no reason to worry about making it alive to your destination. Fares are reasonable – and they still serve meals (though Chinese airline food is no better than the U.S. airline food of days past).

Language. I am no linguistic expert. I struggle with English, and my high school experience in studying French convinced me that I do not possess the language gene. But, since it doesn’t use an alphabet and is incredibly reliant in verbal communication upon imperceptible shifts of tone, Chinese (Mandarin) is a whole ‘nother level of challenge. I am not raising this issue as an interesting or amusing tangent, but rather because the language barrier (and overcoming it more satisfactorily) will be truly fundamental in determining the future success of Chinese-American relations. As the work of Maturana and Varela shows compellingly, humans live in language: that is, they make assessments of the world and create new possibilities only through language. Without sharing a language, it is simply not possible to come to agreement on the current situation or to invent directions for beneficial action. In my time in China, I experienced a deficit of good translators – more properly termed, interpreters – who were strong in both Mandarin and English, and who were also knowledgeable enough about the subject matter to convey the fully nuanced intentions of the speaker. (To illustrate, I would hear a Chinese speaker utter 60 seconds of Mandarin, and the English translation would hesitantly be passed on, usually some banal statement like: “China uses a lot of energy”. Come on — I know in his minute of talking he must have said something more insightful and detailed that that!) If we’re going to enable massive/rapid cleantech transfer into and adoption within China, there’s going to have to be an order of magnitude expansion of cleantech-knowledgeable people that also possess high degrees of English-Mandarin fluency.

As Mark Twain once was alleged to have said (though in actuality the maxim was coined by the French philosopher Blaise Pascal), “I have made this letter longer than usual, only because I have not had time to make it shorter.” I apologize for my rambling incoherence. I’m still digesting what I observed from my first visit to China, with an aim towards developing and executing an approach to work more systematically with/in China on cleantech opportunities. The above is merely my first transcription of my emerging thoughts. I don’t know what it all means yet, but I do know that there’s something pretty important in here somewhere.

One final anecdote to wrap up: during my trip, I had the pleasure of being able to connect personally with the U.S. Assistant Secretary of Commerce David Bohigan, as he happened to coincidentally be leading a group of U.S. business people on a clean energy trade mission to China and India. As Mr. Bohigan noted to me, the relationship with China and the need for clean energy will be the two most dominant forces shaping the U.S. economy in the 21st Century.

So, at least one bit of clarity has so far pierced the fog in my mind: it is incumbent upon the U.S. cleantech community to engage meaningfully with/in China, as it is there that the largest opportunities both for wealth creation and for environmental improvement lie.

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc.

3 replies
  1. Eric
    Eric says:

    I found your post enlightening and informative. I work for a company that purchases quite a large amount of it’s materials from China and had heard some of this from my boss. Still, your post also had a practical viewpoint and not one so

  2. Christine Lu
    Christine Lu says:

    You would have been a great addition to our upcoming China 2.0 Tour which covers the Clean Tech sector in partnership with JUCCCE (Joint US-China Cooperation on Clean Energy)Thanks so much for your insight and if you're able to make the China Energy Forum in November, look forward to seeing you there.Christinefounder, The China Business Networ k

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