Environmental Technologies Industries
||Environmental Technologies Industries
|China Environmental Export Market Plan|
|Chapter 7 - The Environmental Services Sector|
Chapter 7 - The Environmental Services Sector
The services sector is among the most challenging sectors in China's environmental market to enter successfully. To a great degree, the sector remains the territory of anointed domestic institutions, monopolies, and those with ties that can only be developed over a long period of time. All services requiring official approval at any point, such as EIAs and engineering services, must be conducted through an appropriately licensed institution; such licenses are not available to non-Chinese operators, making cooperative initiatives requisite for all foreign investors. Additionally, service providers, with the exception of consultants, are required to operate in-country, through either a JV or a WFOE.
Likewise, the sector remains hostile to anyone without a sound, in-depth understanding of both Chinese business culture and China's environmental sector. Past business experiences in China clearly indicate the complications and barriers that all foreign investors doing business in China face. In the environmental services sector, many of these complications are compounded, making extensive in-country experience an arguably more valuable asset than extensive environmental industries experience. Environmental service providers who have been successful in other parts of the world are cautioned against believing that directly transferring service models from elsewhere to China will be categorically successful. It is not unreasonable to assume that non-environmental companies already operating in China that wish to expand their scope into environmental services may have more potential for success than foreign environmental service providers wishing to expand their operations into China.
Although China needs progressive, efficient, and innovative management, service providers offering standard, boilerplate initiatives will not be successful. Generally speaking, the Chinese have a well-founded understanding of basic environmental services; what are needed are high caliber solutions custom designed to meet the unique and complex needs of China. Providing such innovation requires an in-depth and accurate understanding of China's development goals, environmental situation, institutional and regulatory structures, and business culture, which again requires long-term and profound China experience.
While there is no formula for success in China's environmental services sector, several points should be considered: entering the sector is a long-term prospect, requiring years of experience and laboriously cultivated working relationships; innovation is an absolute must, and all innovation must take into account the particular needs of China's unique situation; successful navigation of China's bureaucratic apparatus can be difficult, certain players are to be avoided while others must be courted, an appropriate approach is critical yet difficult to determine; and it is easy to develop a bad reputation in China and difficult to mitigate the effects of a bad reputation after acquiring one, so service providers absolutely must deliver.
Institutional and Structural Points
Registration Requirements for Service Providers
Foreign service providers are able to establish operations in China through WFOEs, JVs, or representative offices. Normally, the lowest-risk and least costly option for small to medium-sized companies is to establish a representative office to oversee marketing and provide a base for operations until enough familiarity is gained to move toward a WFOE or JV. While representative offices have some disadvantages related to restrictions on the signing of contracts, on the direct provision of services, and on the exchange of currency, many small companies have been able to establish firm foundations by operating in China under this category and then moving on to other legal entities once they better understand the market conditions. Such entities have historically been either an equity JV, in which an international company forms a new Chinese-registered entity with a local partner, or a contractual JV, which is usually task or project specific and requires little financial investment. Both these types of legal entities have advantages and disadvantages that need to be thoroughly understood, with the assistance of competent legal counsel, before a decision is made. Finally, in recent years international companies have been able to establish service/consulting WFOEs in certain areas of China, thus circumventing the need to partner with a Chinese entity except for specific projects. While these legal entities make management simpler and more transparent, they are costly to establish and may be unable to obtain requisite professional licenses and permits that allow the direct provision of environmental services.
Registration of a WFOE, JV, or representative office is a routine, yet at times lengthy, legal process in most areas of China. The majority of the services that can be provided are for multinational companies or multilateral agencies that seek international services of a standard not yet available in China. However, any activity regulated by Chinese law that requires a specific permit, such as undertaking an EIA, laboratory services, engineering design, process fabrication, or equipment installation, requires teaming with a local entity holding an appropriate license. In some cases, even the services provided by a foreign entity in partnership with a local entity are not accepted; thus, the services need to be subordinated to and under the title of the local entity. Foreign consulting service providers are also allowed to offer consulting services via cross-border delivery, but all other service providers must operate in China or through a local partner.
For some services, such as those provided by analytical laboratories, it may be prudent to consider establishing a facility in a bonded zone. These zones, which were primarily developed as export-reprocessing zones that would create jobs and generate revenue without entangling operators in customs formalities, are being increasingly used as bases for certain categories of operations in China. For example, an analytical laboratory wishing to establish operations in China may find the barriers to importing the necessary specialized analytical instrumentation into China prohibitive. But by establishing a base in a bonded zone, the laboratory can bring analytical samples from the mainland into the zone, complete the analysis there, and generate results, avoiding the levies associated with bringing the equipment into the country and bypassing the cost and logistical difficulties of shipping samples overseas.
China's environmental services market potentially requires a very broad range of services. However, lack of awareness, protectionism, and opting for conventional engineering solutions currently make the reality of the market quite narrow and limited. As awareness progressively increases in the government and industry sectors, much of the initial need is filled by local environmental institutes and private companies that generally have good engineering skills but lack innovative solutions. Thus, the market is increasingly open to service providers in the fields of environmental impact assessment (in conjunction with local institutions), energy efficiency, water recycling and reuse, waste-to-energy solutions, integrated environmental systems, ecological water treatment methods, waste reutilization, and a range of services classified as cleaner production and sustainable development services.
The market for the above services has grown significantly in the past five years. While the body of environmental regulation has increased greatly, enforcement has not. Environmental protection in China is primarily driven by economic and profit considerations, not by regulation. Because of this, business development strategies must always focus on increased efficiency and profitability, with increased environmental protection as a side benefit. Because many of these solutions fall outside the bounds of normally recognized possibilities in China, the basic concepts must often be communicated and demonstrated in the form of case studies presented in seminars, so that detailed economic justifications are made. However, if approached properly, this strategy can be quite fruitful, as most Chinese managers see environmental protection as an added expense that is required to be put at the end of a dirty process. If an alternate vision of efficiency and process reengineering is presented, particularly in a scheduled format in which the initial investment is minimized, significant interest can be generated.
Generally, U.S. service providers and technologies are respected in China for their professional and timely delivery. A further recognized advantage is the robustness of U.S. technology and services compared with their European and Japanese counterparts. However, several barriers put U.S. service providers at a disadvantage. Foremost among the barriers is the lack of a meaningful U.S. bilateral aid program to China. While most other industrialized countries support their national environmental markets in China through provisions of tied aid, the lack of such a program from the U.S. normally disqualifies U.S. service providers in favor of those bringing bilateral aid with them. This problem is further exacerbated by the lower priority given to U.S. vendors and service providers in multilateral aid programs as a favor to providers from other bilateral aid donors. A further disadvantage often cited by Chinese decision-makers is the often tumultuous political relationship between China and the U.S., when U.S. goods and services are procured, it is uncertain whether delivery can be completed or after-sales service can be guaranteed, in light of the frequent threats of sanctions.
Additionally, some barriers faced by U.S. companies and service providers are self-inflicted. A lack of understanding of Chinese business practices and sensitivities, unfamiliarity or impatience with the time-consuming process of relationship building, dependence on overseas Chinese expertise (which is often resented) rather than local professionals, and a lack of understanding of laws and regulations all contribute to the creation of misunderstandings and frustrations.
Many of the barriers that U.S. investors face are the same ones that all foreign investors face, providing a relatively level playing field from the perspective of China-sourced complications. Many companies say that the single biggest barrier that limits U.S. competitiveness in relation to that of other foreign service providers is the lack of a U.S. government bilateral assistance program. Bilateral institutions such as the Canadian International Development Agency (CIDA) and Germany's GTZ can exploit mechanisms that allow them simultaneously to act as development consultants to the Chinese and to lay groundwork for private companies (from their respective countries) to win contracts; in some cases, they are able to tie large sums of multilaterally sourced funding to companies in their country by entering into co-financing operations. The return of the U.S. Trade and Development Agency to China is a positive first step; however, the absence of the U.S. Agency for International Development (USAID) is a glaring vacancy in the realm of bilateral operations in China.
WTO and Environmental Services
With China's accession to the WTO, foreign service suppliers now may establish a commercial presence in China and provide environmental services in the form of joint ventures with foreign majority ownership permitted. Language in the U.S.-China bilateral agreement indicates that China's environmental services commitments cover sewage, solid waste disposal, cleaning for exhaust gases, noise abatement, nature and landscape protection, and other environmental protection services, yet they do not cover environmental monitoring or pollution source inspection.
Although foreign service providers are generally kept out of environmental monitoring and pollution source inspection, foreign firms are contracted to provide such services on an adhoc basis. CH2M Hill, the U.S. company that carried out air-monitoring operations in Sydney prior to the Olympic Games there, has been contracted to perform air-monitoring operations in Beijing as it prepares for the 2008 games.
Capacity and Awareness Building
One of the single biggest breakdowns in China's environmental protection apparatus today is a deficiency of capacity and awareness. As discussed elsewhere in this document, many local EPBs lack clarity regarding how best to approach the diverse and complex environmental problems within their jurisdictions, industrial leaders lack vision regarding the possibilities for clean production and eco-efficiency, and the dearth of comprehensive solutions that can benefit both the environment and the economy sometimes makes environmental protection a secondary priority after economic development. Foreign investors might want to consider marketing equipment and carrying out consulting operations in China through a method that disseminates information in regard to these deficiencies. Investment packages might also include components that seek to implement corporate and industrial training, eco-efficiency capacities, health and safety management, and other initiatives that cover both environmental and economic needs. A number of Chinese companies already recognize economic benefits through efficiency and sound management. As China's socialist market economy continues to develop, the need for such efficiencies is increasing, as are the demands for companies and consultants that can provide the means to achieve them.
A successful strategy used by several service providers entering the Chinese market employs market-entry companies to introduce potential partners or projects to prospective service providers. This allows a foothold to be gained with a low financial commitment or risk. Conversely, several U.S.-based associations and market-entry groups have attempted to help their clients enter China with the aid of U.S.-based or U.S.-educated Chinese professionals. Overall, the success rate of such efforts has been low, as the value of market-entry consultants lies with their local presence and contact network.
Below, two specific approaches are presented that may be considered by a group of service providers working through an association or consortium with a well-established office in China.
Specialized Representation Associations
Foreign investors seeking to operate in China might benefit from the development of a number of specialized, privately operated associations that simultaneously function as monitors for business opportunities in China and as foreign technology and services sources. In addition to helping form partnerships between end users and suppliers, the associations might facilitate legal, administrative, and logistical consulting. Specialized associations might represent particular U.S. industries in China's environmental sector as a whole or direct attention toward particular industrial sectors in China with environmental needs. A strong need currently exists for an association that monitors opportunities and facilitates participation in multilateral and untied bilateral assistance operations. Such an association should not only monitor for opportunities and keep its constituents informed of potential projects at the very earliest stages of assessment and development, but should also develop the capacity to facilitate viable bidding for such projects, a task that is difficult, particularly for small operations and firms with no experience in doing so.
The Consortium Approach
Because of the logistical and financial constraints of operating in China, as well as the increased capacities resulting from the pooling of experiences and strengths, foreign investors may find it beneficial to enter the market via a consortium scenario. Consultants and other service providers can work together to offer complete packages of planning, design, financing, engineering, implementation, and long-term operation management and training. Service providers with a clear understanding of the needs discussed in the introduction of this chapter might be in a position to play the invaluable role of bringing together the most appropriate players for a particular project and then bridging the gap between those players and the domestic entities. It goes without saying that the central organizers of such a consortium must have extensive and profound experience not only in the environmental sector but in China as well.
The services sector in China presents many opportunities and challenges to U.S. service providers. On the one hand, U.S. services and technologies are respected, yet on the other, they are at a distinct disadvantage compared with many Western countries due to a lack of bilateral funding and the tumultuous political relationship between China and the United States. A bilateral environmental program in China would help level the playing field with other Western countries and encourage Chinese entities to consider U.S. vendors for projects. U.S. companies also need to take a long-term view of the Chinese market and establish long-term representation that actively markets and builds alliances on their behalf. In the case of small and medium-sized companies unable to afford an in-country presence, associations or consortium relationships should be considered as a method of market entry.
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