Clean and green China

China is emerging as fertile ground for green investment. The Asian nation needs Canadian technology. But not for much longer.

Explosive growth has come with disastrous costs to China’s water, air and land, leading critics to perceive that the country of 1.3 billion people is toying with environmental collapse. But the country’s leaders acknowledge environmental degradation poses risks to China’s citizens, its economic prosperity and, ultimately, its political stability — but they also have the clout to do something about it. That’s why China is now emerging as fertile ground for green investment.

“In the last eight months, China has put more money to work fostering clean technologies than any other country on the planet,” says Dallas Kachan, San Francisco–based managing director of the Cleantech Group, which tracks investment in clean technologies globally. The G20 nations have committed US$2.6 trillion in economic stimulus, a paltry $400 billion of it directed toward green-related initiatives. China? It’s spending US$221.3 billion — about 38% of its US$586-billion stimulus package announced in November. A particular focus: water distribution and wastewater treatment infrastructure. In the past three months of 2008 alone, China spent an estimated US$17 billion in economic stimulus, 10% of it on energy-saving and ecological projects. “China has not only more funding,” says Kachan, “but it also has a six-month lead-time on spending this money.”

And there’s more coming. China is reportedly working on a separate stimulus plan targeting the renewable energy industries, particularly the battered solar sector, which has been collapsing in the wake of oversupply and sharp price declines. China’s 2006 Renewable Energy Law requires 15% of the country’s energy mix to come from renewable energy sources by the year 2020, and the country plans to invest $180 billion in renewable energy by then. Some local governments have already created incentives for solar companies.

Canadian companies in most sectors have traditionally been slow, ineffectual or outright absent securing a foothold in the massive Chinese market, but China’s growing demand for green solutions to colossal infrastructure challenges in water, energy, transportation and urban development is creating another round of opportunities. David Fung, CEO of ACDEG Group, a holding company based in West Vancouver that has a variety of long-standing private business interests in China, says the recent stimulus spending is acting as a catalyst for green initiatives. “It has opened up the market and created budgets that were not available previously,” he says. “Everybody is scrambling in.”

And Canada, finally, is beginning to pay more attention. Last November, the Canada China Business Council and five provincial premiers conducted a joint trade mission, with Ontario’s Dalton McGuinty leading a delegation focused on clean technology. In April, Canada’s minister of International Trade Stockwell Day undertook a trade mission to China to strengthen ties that have weakened under Prime Minister Stephen Harper.

And a few Canadian clean-tech companies are making inroads. Trojan Technologies, a London, Ont.–based subsidiary of Washington, D.C.’s Danaher Corp., has sold more than 100 UV water treatment systems into China using a local distributor. (It also maintains several of its own offices for sales and service.) “We’ve seen a couple of projects come through over the last several months that, we are told, are a result of the stimulus money being applied,” says Trojan president Marvin DeVries.

Similarly, Zenon Environmental, based in Oakville, Ont., had begun selling its water filtration membranes into China before being acquired in 2006 by General Electric’s Water and Process Technologies division. That deal has only improved the Canadian technology’s prominence in the market. (GE, a prominent multinational in Chinese environmental sectors, in November opened an expanded manufacturing and assembling plant in Wuxi for its water filtration technologies.) And Vancouver’s Westport Innovations (TSX: WPT), which develops technologies to convert engines to clean-burning natural gas or hydrogen, has two joint ventures underway in China.

Greener forms of construction are also an opportunity. During Minister Day’strade mission, Genesis Worldwide (TSX: GWI), a developer of light-steel technology based in Mississauga, Ont., signed a strategic business alliance with China Perfect Machinery Industry Corp. Ltd. that makes Genesis’s technology the product of choice for the Shanghai commercial real estate developer’s six-storey-and-under market. “What we think this relationship will do is trigger some potential licensees into getting a licence, because they now have a target customer,” says Vince Mifsud, president and CEO of Genesis. “We’re exporting knowledge and know-how, and we’re teaching steel manufacturers how to apply that to their local market.”

The deal is a first for Genesis in China, where it began last year trying to license its light-steel manufacturing system. Industry analysts predict the total output volume of steel-frame construction will increase 6%–7% annually through 2020. And the Chinese Ministry of Construction is requiring that by 2010, new construction projects target a 50%–65% reduction in energy consumption — two trends that play well into Genesis’s green building technology.

Of course, China can quickly become a dominant global exporter in any industry. David Fung has witnessed it before in market segments such as forest products or electrical power generation equipment. “Right now, the Chinese capability in clean-tech is rudimentary,” says Fung. “But if we sit back, I think in 10 years time, with the number of engineers they’re graduating, they’ll overwhelm us if we do not learn to manage this emerging Chinese resource.”

In other words, the Chinese opportunity for Canadian clean-tech companies can turn into a competitive threat if it’s not immediately seized.

China’s solar industry, despite its price gyrations, is a good example of how quickly the country is already turning itself into a clean technology powerhouse. The Cleantech Group’s Kachan, who originally hails from Toronto, notes that the world’s top photovoltaic manufacturers were from Japan, Germany and the U.S. up until eight months ago. But last fall, China’s Suntech Power Holdings (NYSE: STP) surpassed them all, and now ships more photovoltaic modules than any other manufacturer in the world.“There was no Suntech until 2001,” says Kachan. “In seven years, this company has gone from nothing to being the world’s largest manufacturer.” There are now more than 100 photovoltaic manufacturers in China, all started up within the past three years.

The wind-power industry may be on a similar trajectory. China requires 80–100 gigawatts of additional power per year to sustain its economic growth, and approximately 70%–80% of that power is expected to come from coal. For a country as gusty as China, wind farms may offer a solution. By 2010, 12 to 15 megawatts of wind power will be developed, and over 100 gigawatts by 2020 — at a cost of more than US$140 billion. Driven by government incentives, a domestic industry is ramping up. In 2006, there was a handful of domestic turbine manufacturers, but as many as 60 new manufacturers have entered the market since then.

“China will start exporting wind turbines, which will put pressure on the international turbine manufacturers,” says Gerald Page, a Beijing-based Canadian financier for renewable energy projects in emerging markets. He’s watched the market unfold since 2005 when he began developing a wind farm in Inner Mongolia, a project now on hold due to the high hurdles placed in front of foreign developers, especially in terms of financing requirements. “It’s a big boys game now. Shell is out, BP is out, and there will be some other guys pulling out soon, because they just can’t compete,” says Page. Some domestic incentives are overt, others are unspoken, he says.

But Page says there are many opportunities for Canadian expertise — mining and oil and gas technologies, water treatment and wastewater management, solar-panel manufacturing systems, electric metering and smart-grid technologies, energy storage, technologies for electric vehicles.

Fung agrees. “The market is just opening up. And I don’t think it’s too late at all for Canadian firms,” says Fung. “ Our future [with China] has to be what people in Hong Kong have learned, that you don’t go and compete with the Chinese, you go and manage the Chinese,” says Fung. “But if our companies stay home, they will face the furor of the rising Chinese competition within the not-too-distant future.”