China’s Clean Tech Boom

China is fast becoming a clean technology leader. By 2008, it had become the world’s leading producer of solar panels, and last year it claimed the same title for wind turbines. Investment in clean tech in China in 2009 reached US$34.6 billion, compared with the United States’ investment of $18.6 billion. Bruce Usher, formerly the CEO of EcoSecurities Group PLC, a company that sources, develops, and trades carbon offsets from greenhouse gas emissions reduction projects, and now an adjunct professor of finance and executive in residence at Columbia Business School, has observed China’s growth in this sector firsthand. He grew EcoSecurities (which was acquired by JPMorgan Chase & Company in December 2009) into the world’s largest public carbon credit company. It included a vibrant business in China. Usher spoke with strategy+business in May about what he witnessed, what he learned, and what he sees as the future of clean tech in China and other emerging economies.

S+B: What did you observe on the ground as your business grew in China?
USHER: We opened our China office in 2005 with one person, and by 2008 it was our dominant market; in late 2009 — when JPMorgan acquired EcoSecurities — China accounted for more than 60 percent of our business. At that time I had about 40 people based there, in Beijing and Chengdu. They were highly educated, highly motivated employees. Indeed, they were some of the smartest, hardest-working people I have ever employed, and that says a lot; I’ve had offices in 21 countries.

What we found was that the industrial policy established by the Chinese government through the NDRC [National Development and Reform Commission] was very effective at stimulating development within the private sector. In our case, that meant stimulating the construction of clean energy projects, primarily small hydro and wind projects. Once the policies were in place, the private sector moved quickly. The banking sector tended to be quite supportive as well, in terms of availability of capital and attractive rates.

S+B: What are some of the unique benefits and challenges that China presents?
USHER: Based on my experience watching the way the clean tech industry has evolved in China, I’m convinced that the challenge of reducing carbon emissions is less about innovation and more about implementation. In other words, hundreds of technologies, such as solar PV and wind, exist that are well proven to reduce emissions. But in the U.S., for example, they are not getting implemented, or they are not getting implemented quickly enough. That’s where I was particularly impressed with my experience in China: There was an ability to get things done fast, and on a massive scale.

Because the Chinese government is more involved in industrial policy, it sets rules that are supportive, but that can also be restrictive. For example, the Chinese government set the price at which the developers were allowed to sell their carbon credits under the Kyoto Protocol. So in China, unlike the rest of the world, it was a fixed and not a floating price. This system may not be sustainable in the long run, because ideally you want market prices, flexible supply and demand, and so on. But having the price set at the top enabled things to happen quickly. Other questions had to be negotiated, but we knew what the price had to be. We encountered some other fairly technical challenges working in China, but those were more than offset by the fact that things tended to get done very quickly as long as we worked within China’s strict regulations.

S+B: What does the future of clean technology in China look like?
USHER: It’s not like everything in the energy sector that’s being done in China is good. In fact, the big picture is they’re building massive numbers of coal-fired power plants as well, which produce an enormous amount of pollution, and that’s simply because they have such voracious demand for energy. They have to build these plants, or at least they believe they have to build them, to meet this demand. But the amount of hydro and wind development in China has also been massive for the last couple of years, and it’s very clear they will continue to grow this area in the years to come. The level of expertise coming out of China is only going to get higher. I see enormous development in the sophistication of the products being made in China, and I see more and more local development there, as well.

Looking ahead, something else interesting is happening in China with electric cars and battery technology. The country has experienced rapid growth in transportation infrastructure, and in some ways has a competitive advantage — the U.S. already has an infrastructure based on gasoline-powered vehicles, but because China’s is still developing, it is easier to make the transition to electric. We already see electric-powered two-wheeled vehicles everywhere in China, and I would be surprised if cars were far behind.

S+B: Do opportunities exist for other emerging economies to make a name for themselves in clean tech?
USHER: Emerging economies have one huge advantage over developed countries. To explain, I’ll use a cell phone example. Americans who travel to the developing world are often shocked by how well their cell phones work there. I often get better reception in the most remote developing countries than I do here in New York City, and that’s because these countries went straight to mobile, without a landline step in between. There are more cell phones in Africa than there are in North America today. Now, each subscriber doesn’t spend very much. They’re not going to have an iPhone or a fancy BlackBerry; we’re talking about very simple phones. But cell phone coverage is ubiquitous in the developing world.

So if that can happen in cell phones, there’s reason to think that in clean energy or renewable energy, similar forces may be at work. Because their energy infrastructure is often very poor to begin with, and because there’s rapid growth and demand for energy, developing countries can leapfrog the sort of dirty, traditional energy that we have in our infrastructure in the United States. Similar to the electric car example above, they can go straight from no energy to clean energy, and that’s a huge advantage because clean energy is still more expensive than dirty energy, but incrementally so, and if you’re going from zero to building something, you might be willing to make that incremental investment. Here in the U.S., if we have to scrap our current infrastructure, that’s a huge additional cost. We need to start all over again, and that’s a big challenge.

S+B: Besides China, what emerging economy is making notable progress?
USHER: I think Brazil, where we also did a fair number of projects, is an interesting example. What Brazil’s leaders recognized more than 20 years ago is that their country had a competitive advantage in its ability to produce cane sugar due to geography and expertise, and that it could convert that into an energy product — ethanol — at a competitive price.

Building on that success, I think Brazil is taking some fairly innovative approaches to managing the resources of the Amazon. For many years it was really a question of slash-and-burn and rapid development, and I don’t think any resource protections were in place. But that’s changed pretty dramatically in just a few years. Deforestation still goes on, no question about it, but the rate of deforestation has slowed significantly in the last couple of years, and government initiatives have contributed greatly to this improvement. Now, it’s not necessarily clean tech, but in many ways, it’s addressing a similar problem. It’s addressing climate change in a way that’s specific to Brazil.