Partnering in China's Environmental Market

PARTNERING IN CHINA’S ENVIRONMENTAL SECTOR Prepared by GCiS China International Services under contract to the U.S. Department of Commerce U. S. DEPARTMENT OF COMMERCE International Trade Administration Washington, D.C.: 2001 Partnering in China’s Environmental Sector—– Library of Congress Cataloging-in-Publication Data Partnering in China’s environmental sector / prepared by GCiS China International Services, under contract to the U.S. Department of Commerce. p. cm. 1. Pollution control equipment—China. 2. Pollution control equipment industry—United States. 3. Investments, American—China. I.GCiS China International Services. II. United States. International Trade Administration. HD9718.C62 P37 2001 382.67’373051—dc21 2001039878 The full text of this report is available on the International Trade Administration’s Internet site at www.environment.ita.doc.gov. Reprints on paper or microfiche are available for purchase from the National Technical Information Service, 5285 Port Royal Road, Springfield, VA 22161; www.ntis.gov. Federal Recycling Program Printed on recycled paper. –—ii U.S. Department of Commerce, International Trade Administration Contents Executive Summary .—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.v 1. Introduction .—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.— 1 The Environmental Market in China .—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.— 1 —Status of the Market .—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.— 1 Notes on Methodology .—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.4 2. Strategies and Paths of Entry for U.S. Companies in China’s Environmental Sector .—.—.—.—.—.—.5 Options for U.S. Companies .—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.5 Market Activity in the Sector .—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—16 Strategic Issues in the Chinese Environmental Market .—.—.—.—.—.—.—.—.—.— .—.—.—.—.—. .—22 The Potential Impact of the WTO .—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.26 3. Profiles of Companies, Industry Zones, and Environmental Organizations .—.—.—.—.—.—.—.—.— 30 Domestic Environmental Companies .—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.30 Industry Zones .—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.41 Environmental Organizations .—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—44 Appendix: List of Contacts .—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—47 Companies .—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.47 Government Bodies and Non-Government Organizations .—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.49 Other Useful Contacts .—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.—.52 Partnering in China’s Environmental Sector—–iii Abbreviations ADB Asian Development Bank MOC Ministry of Communications AGSR AquaGuard Spill Response MOFTEC Ministry of Foreign Trade and Economic Investment APC air pollution control n.a. not available ATL advanced trade liberalization NEPA National Environmental Protection Agency BOD biochemical oxygen demand NPC National People’s Congress COD chemical oxygen demand PCB polychlorinated biphenyl CRAES Chinese Research Academy for Environmental Sciences POU point-of-use DAF dissolved air flotation system RMB yuan renminbi (Chinese currency) DOC U.S. Department of Commerce SEPA State Environmental Protection Administration EPEDC Environmental Protection Engineering Design Certificate SETC State Economic and Trade Commission ERM environmental resource management SOE state-owned enterprise Ex-Im Export-Import Bank of the United States SSCRP Shanghai Suzhou Creek Rehabilitation Project FE foreign enterprise TRIM trade-related investment measure GDP gross domestic product VAT value-added tax GIS geographic information system WB World Bank HR heat resistant WOFE wholly owned foreign enterprise HVAC heating, ventilation, and air conditioning WTO World Trade Organization HWM hazardous-waste management Note: Unless otherwise noted, dollar figures given are IDA International Development Association U.S. dollars. The exchange rate for the Chinese yuan, or RMB, has been calculated at 8.3 to the U.S. dollar. JV joint venture –—iv U.S. Department of Commerce, International Trade Administration Executive Summary Opportunities and Options reluctant to purchase the goods or services of foreign environmental companies. U.S. companies are at a par- There are two sides to China’s environmental market. ticular disadvantage compared to their European and On one side is a large and growing market, created by Japanese competitors due to the greater quantity of soft tremendous environmental problems. Everyone acknowl- money available to the latter through national loans and edges that China has deep environmental problems, and grants. the government has taken action. It has closed factories The accession of China to the World Trade Organiza- that pollute excessively and, to some degree, has enforced tion (WTO) would create more opportunities for foreign its growing body of regulations. This has been coupled companies, from tariff reduction to investment rules, but with ambitious environmental spending plans, which aim this is hanging in the balance and will certainly not make to reduce pollution and at the same time to grow the do- the market for any foreign company. In sum, there is both mestic environmental industry. opportunity and steep competition in this market. There While these activities are relevant, they do not directly are opportunities for U.S. companies, and more will open translate into tremendous opportunities for foreign up, but the market needs to be well understood and ap- companies in this market. On the other side of the coin, proached intelligently. growth is still rather slow, price competition is great, and There are numerous legal and operational options for most domestic end users—industrial or public—remain foreign companies to participate in China’s environmental Table Ex.1. Advantages and Disadvantages of Various Market Vehicles Vehicle Advantages Disadvantages Local production Can accept payment in RMB Requires investment Can (maybe) compete better on cost Could require higher operating costs Closer to end user, faster delivery, other benefits Potential dangers in technology transfer Many options for manufacturing JV Partner may provide some benefits Possible theft of technology May be easier to get investment approval Must run business with partner More difficult exit strategy WOFE* No partner; a free hand in the market No assistance from partner Direct Imports Easier to protect technology Cannot accept payment in RMB Lower costs all around May face import restrictions Less risk; exit strategy easier Products will likely cost more Representative Cost-effective way to enter market Only cost-effective relative to other direct-import office Can understand market better before options setting up production Operating costs for China presence Agents/Distributors Very useful for broad footprint of end users Dangers in losing control of marketing Can provide service Not applicable for all products Franchise No need to be in China Risk of technology theft; very difficult to monitor/ control; little recourse in disputes Direct Sales (no No need to be in China Operationally difficult; applicable to products with distributors or small end user footprint representatives) *Not an option for engineering companies and manufacturers in those industries that have particular protection (such as steel). Partnering in China’s Environmental Sector—–v industry. It is important for U.S. companies interested in Type of End User this market to understand these options and their respec- End users in the Chinese environmental market vary. tive advantages and drawbacks. They are assessed in this The greatest distinction is between domestic end users report and summarized in Figure 2 (page 6). (companies and the government) and foreign companies In general, the decision to invest in manufacturing is operating in China. U.S. companies should have some closely related to the type of product involved and the idea as to which of these will likely be their target market technological sophistication of such products. If a and how best to target them. company’s products utilize more common technologies, or if they have viable domestic competitors, then local Investment Vehicle manufacturing becomes a must in many cases. In the There are several legal investment options for foreign environmental industry, this can go either way, as the companies in China’s environmental industry, all of range of design and manufacturing technologies in the which are reviewed in this report. U.S. companies should industry is very large. be aware of these options, their advantages and disad- If a company’s product occupies a critical niche and vantages, and the operational considerations they entail. is not manufactured in China, then it is usually advisable to develop the market on the basis of import sales. When Macro Issues and Trends domestic competitors are able to enter the market effec- tively or a strong foreign competitor begins domestic Companies should keep an eye on three issues in production, then the investment/production decision can particular: China’s potential accession to the WTO, the be re-evaluated. It is a common perception of companies strength of the Chinese economy and the pace of reforms, that they cannot enter this market incrementally or that and potential flotation of the yuan. All of these can have they have to start big in order to show their “commit- significant impact on the industry, and all

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