China's water problems are by now very well known, as are its air-quality problems. Abundant in coal resources, China relies on coal to fire approximately 70% of its electricity-generating capacity and is rapidly catching up to the United States in its greenhouse gas emissions. China is also the world's second largest importer of oil, and car ownership doubles at a rate of every two years, BBC News reported late last year. The World Bank claims that China is home to 16 of the world's 20 most polluted cities.

Keenly aware of these problems, the Chinese government has been aggressively pursuing a variety of initiatives to clean up its environment, spending billions of dollars in the process. Key air, water and solid waste laws have been in place for several years, and in January of this year, China's State Environmental Protection Administration (SEPA) elevated efforts to enforce those laws—for example, by halting about 30 construction projects because they violated mandatory environmental impact assessment laws, according to the U.S. Department of Commerce's Office of Energy and Environmental Industries (OEEI). China's Clean Production Law, which took effect in January 2003, encourages industrial facilities to conserve energy, use cleaner energy sources, use raw materials more efficiently, and develop recycling programs. A new Law on Renewable Energy, currently under development, would require power companies to purchase electricity from renewable sources.

In a well-publicized declaration, the government has vowed to make the 2008 Olympics in Beijing the "greenest" ever, and the city expects to spend a total of about $12 billion on environmental cleanup in preparation for the games. As for China's environmental market overall, SEPA estimates that $14.9 billion was spent on environmental projects during 2002, and that the environmental technology market will grow at a 30% rate annually out to 2010.

OEEI estimates that the total annual market for environmental goods and services in China stands roughly at $32 billion today, including $19.3 billion in the water/wastewater sector, $9.5 billion in the air-quality sector, and $3.2 billion for solid and hazardous waste management. OEEI, which has an active match-making program to support U.S. firms that are trying to serve the Chinese market, says that U.S. environmental technology exports to China increased by 125% from 2002 to 2004, from $754 million to $1.7 billion. By equipment category, monitoring and analysis systems led the way at $782.8 million in sales during 2004, according to OEEI.

By media, OEEI finds, China and its foreign lenders still spend much more money on water-related projects than on air- and solid waste-related initiatives. Water tariffs are rising to support funding demands, and cities are levying wastewater surcharges. Municipal solid waste management is an emerging priority for SEPA as the volume of waste grows 9% annually.

Key market developments of recent note include the revision of China's Clean Air Law, which is now designed to restrict annual sulfur dioxide (SO2) emissions to 10-million tons until 2010 in the nation's "acid rain" and "SO2 control" zones. OEEI forecasts an enormous market opening up for flue-gas desulfurization (FGD) equipment as a result of this initiative. China also plans to invest $36 billion to construct 2,000 municipal sewage treatment facilities, as well as the associated pipeline network, to meet mandates in China's 10th Five-Year Plan.

Several of China's cities and regions have distinct environmental initiatives requiring substantial investment. Using a loan from the Asian Development Bank, Hebei Province will undertake a major wastewater management project that is designed to reduce water pollution and protect the region's water sources. In 2003, the city of Shanghai embarked upon a hospital waste disposal project under which it planned to tender about $3 billion in contracts over five years for the collection, transport and disposal of hospital wastes. The Beijing Nangong Medical Waste Treatment Center began operation in 2004, and upon the expected completion of the second phase of this project later this year, the center's capacity will increase from 15 tons to 30 tons per day.

Internal and external lending agencies are providing a substantial amount of funding for projects in China. The China Development Bank has signed a cooperation agreement with the government of Liaoning Province, under which the bank will provide a $6.05-billion soft loan and a $121-million technical assistance loan to underwrite the rehabilitation and revival of an industrial complex in Liaoning. ADB will provide a $35-billion loan to support clean energy projects in Gansu Province, while the International Finance Corp. agreed in June 2004 to provide $30 million in financing for China Green Energy Ltd., a concern established to develop and operate power projects nationwide. Also in June 2004, the World Bank approved a $128-million loan and a $10-million grant from the Global Environment Fund (GEF) to finance the Guangdong Pearl River Delta Urban Environment Project.

Although World Bank- and ADB-led projects drive a part of China's environmental market, the U.S. Trade and Development Agency (TDA) has also gotten into the act, providing more than $10 million in funds for various environmental projects. These include the establishment of a chemical/hazardous material emergency response system in Tianjin, the setup of an environmental monitoring project in Jiangsu Province, and the construction of a major wastewater treatment plant on the Yangtze River in Chongqing.
 

JOIN THE THRONG

To say the least, then, the Chinese environmental market is an eye-catching one for U.S. environmental firms, perhaps more so than the market in any other country outside the United States. Of course, U.S. firms are not alone in targeting China: the French firms Veolia and Suez dominate the water market there, and competition from European Union, Japanese, Canadian and Australian firms is generally strong. In addition, the home governments of these firms' home countries often provide stronger support than U.S. firms receive from their government.

Many of these governments provide low-interest soft loans with extended repayment terms, sometimes up to 40 years, and a significant amount of this work goes towards the development of the policy infrastructure that's required to make environmental improvement possible. OEEI reports that the Italian government is subsidizing a two- to three-year, 30-million-Euro (about $38 million) grant for environmental projects in China, while the EU is subsidizing a five-year Environmental Management Cooperation project to the tune of some 18-million Euros. The government of Canada is providing $6 million and $8 million, respectively, for two five-year projects that are designed to help China develop integrated policies that link sustainability imperatives with economic and social development goals.

Financial backing by your home government isn't necessarily what makes a run at the Chinese environmental market go, according to Bill Stead, a senior vice president with responsibility for international business development at Earth Tech (Long Beach, Calif.; www.earthtech.com). "I discount the government support that other companies from other countries get. At the end of the day, you have to be smart enough to operate on your own," he says, adding "the most beneficial support we can get is political."

Within the past eight years, Earth Tech has built a business in China that employs approximately 1,000 people, virtually all Chinese nationals, at three water facilities—projects that amount to about $200 million in aggregate value to the company. The projects consist of a sewage treatment plant in Guangzhou, controlled by Earth Tech on a design-build-finance-operate (DBFO) basis, as well as a water concession serving about 200,000 people in a municipality east of Beijing and a water treatment plant upgrade in the city of Tianjin.

As a subsidiary of Tyco International, Earth Tech was able to provide financing for these projects, which Stead describes as absolutely critical to establishing a business in China. "If we couldn't provide financing, we wouldn't be there," he remarks. Stead comments that the U.S. concept of selling man-hours "is not applicable to any extent in China. People there want complete solutions, for a fixed price."

Also essential was establishing a local presence with Chinese nationals representing the company. "It's a real tough market," says Stead, whose company opened up a rep office in 1997. "You and I will never think like the Chinese. It's a huge barrier to doing business. You have to have on your staff Chinese people who have lived in America for awhile and have gone back, and can operate cross-culturally."

Going a similar route was SonTek Inc. (San Diego, Calif.; www.sontek.com), a maker of water velocity measurement equipment. SonTek identified China's enormous market potential during the late 1990s and, in 1999, hired a Chinese-American engineer to build "applications interest" in China, according to International Sales Manager Chris Ward.

"We go to these trade shows in our market, which are small and focused," Ward recalls. "We get Chinese people coming by every now and then, and one was a Chinese-American who worked for a consulting firm in the states. He said, there's a need in China, and we can sell your products there." SonTek hired an American ex-patriot in China in 2001 to build a distributor base, and since then, SonTek's parent YSI Environmental has facilitated the opening of several sales offices.
 

GROWING NATIVE CAPACITY

Earth Tech's Stead reports that his company hopes to close two or three new water concession deals within the next 12 months, but he suggests that the window of opportunity in China is rapidly closing to outsiders, as Chinese companies increasingly develop the capacity to serve this market. "We are seeing the emergence of large Chinese companies entering this space," he warns. Chinese construction companies are already active in the Middle East, and some of the large Hong Kong and Shanghai companies "are breaking away from their former government companies and are setting up in the water and environmental business very rapidly," Stead observes. "In the long run, we will see some Asian companies, mostly Chinese, as major players in this business."

On the equipment side, Earth Tech finds buying locally as increasingly important as well. "Most products we can buy in China," says Stead. "There are some foreign specialized pumps and so forth that we bring in, but generally, to compete in China, you have to know how to buy in China. The appetite in China for international expertise is declining. The window of opportunity that existed over the past 20 years is gone. There have been so many trips by Chinese people internationally that they are getting a lot more confidence in their ability to do things on their own."

 

In contrast with the West, where people are very busy and want to reach the deal quickly, in China, there are hosts of people seemingly "with tons of time to talk to you." emissions.

OEEI affirms that, although U.S. environmental technologies are perceived as innovative and state of the art, they are also viewed as expensive. This perception, combined with the relative lack of financial aid from the U.S. government, has historically hampered market entry for U.S. technologies and products, according to OEEI. And as Bill Stead remarks, "value doesn't count. China, unlike many countries, is totally driven by cost."

Even if foreign equipment and technology were to remain welcome in China, there are many challenges to overcome for firms that want to be successful there. Quite apart from tariffs ranging from 5% to 35% on imported goods, OEEI has identified numerous non-tariff barriers as well. For example, government purchasing practices are occasionally discriminatory, as is the assessment of fines and fees by local governments, which often hold joint ventures and multinational corporations to higher environmental standards than they do for Chinese firms.

OEEI also has heard reports indicating a certain amount of harassment of importers—that is, through onerous labeling and certification requirements and delays prompted by the influence of competitors on corruptible officials. And as for intellectual property, the Chinese government has simply not stepped up to the plate to enforce existing regulations, by many accounts. Of course, there is also the requirement to broker U.S. imports through local representatives or sell indirectly through multilateral projects or foreign-funded investment schemes. OEEI recommends that U.S. firms interested in selling into China establish a "well-managed, legitimate joint venture" or a "wholly owned foreign enterprise," but executives with experience in China report that even these options are difficult and don't uniformly lead to positive experiences.

Then there are simply matters of culture and bargaining style, which differ radically in China from those with which U.S. executives and sales personnel are most familiar. Notes SonTek's Ward, there are many middlemen involved in a potential deal, and there is an emphasis on "theory over practice," which is to say that "a lot of folks like to look at the science and understand how a technology works, but then it seems to be hard to install and implement." Striking the deal means "getting down to the meat and potatoes," Ward stresses. In contrast with the West, where people are very busy and want to reach the deal quickly, in China, there are hosts of people seemingly "with tons of time to talk to you... You're trying to get down to what you can actually do for them as opposed to talking to all these theorists."

The decision-making process is old-fashioned and less structured than that in the West, Ward continues. He describes the process as more "feudal," with directors in charge of the process flexing their prestige and placing little emphasis on the fairness that a structured procurement process would provide. Then, of course, there's the challenge presented by the final negotiation itself. Chinese negotiators "expect you to bargain," Ward notes. "The culture is built around this, and in fact, the tone of the language changes when it gets to the bargaining stage. You have to take the hard line, especially when you get to price. You have to demonstrate strength. If you cave in right away, you look weak."

So, with a growing native capacity to provide environmental goods and services, assorted tariff and non-tariff barriers, and a substantially different culture, China might seem a place to avoid. But then there's that environmental market—$32 billion today, growing at 30% annually for at least the remainder of the decade. One thing to remember is, with China striving to join the community of international commerce, both the opportunities and the challenges can change rapidly. As Earth Tech's Bill Stead puts it, "anything you say about China today will be out of date two years from now."