Market Research Analyst
Jason is a Market Research Analyst at MaRS Market Intelligence. He assists entrepreneurs and startups in the cleantech, advanced materials and manufacturing sectors access the market insights they require to thrive. He also contributes to researching and writing relevant Market Insights reports. Please click here for more information on Jason.
Associate, Advanced Energy Centre
Pallavi is an Associate at the Advanced Energy Centre (AEC) at MaRS. She works on identifying opportunities and challenges for Canadian innovation in priority international markets. In her role, she also focuses on communicating thought leadership developed at the AEC to the energy community. Please click here for more information on Pallavi.
For many tech companies in the energy sector, China is often seen as having huge export and investment potential. But it is precisely the scale and the added complexities of this market which regularly see China being shunned in favor of doing business in more accessible international markets. There are of course examples of Canadian companies who have experienced great success in China, but these were not achieved without incredible persistence, in-depth market research, extensive planning, solid partnerships and expert advice along the way.
For many companies, the scale and complexity of an emerging market can be daunting and initial contact leaves them with more questions than answers: Is there a market available for their product or service? Do they have what it takes to break into this market? Who can help them access this and make the leap into China?
Through this article series for ExportWise, we will aim to outline some of key considerations for a company thinking of pursuing business in China. We will draw from our own experiences, add expert voices and include advice from Canadian companies already successful in this market.
The first in this series of articles will look at how policy can pave the way to dictating energy market opportunities in China, but can also present some market entry barriers of which companies should be mindful.
At a high level, all signs point towards clean energy export opportunities. China has pledged to more than double its current share of renewable energy generation by 2030. In 2015, the nation invested $103 billion (USD), or 36% of the world total, in renewable energy last year. That’s more than the US, the UK and Japan combined according to UNEP’s 2016 report on global trends in renewable energy investment. In addition, China’s investment in smart grid development is projected to reach $128 billion (USD) annually from 2016 to 2030. But what does a drill down into these targets and projections reveal for a potential exporter?
Know what is driving opportunity
An important aspect of understanding a potential market is knowing what influencing factors are ultimately driving the demand for your technology or service. So where do you start?
In China one of the main drivers of opportunity is undoubtedly government policy. China’s economic development agenda has traditionally dictated its energy policy, with the major policy document being its five-year plans – the current being the 13th, released in February 2016. These plans direct Chinese policy for the next five years and plot out a broad framework for the country’s economic development. They essentially set the tone for direction of future energy sector investment.
The current plan gives a focus to continued restructuring of the economy to be more service oriented, thus moving away from heavy industries and continuing to lower energy consumption. In addition, a target was set to reduce energy intensity by an additional 15% and the introduction of an emissions trading scheme in 2017 also featured. According to the plan, one of the main targets is to double 2010’s GDP by 2020 through “innovative, coordinated, green, open, and inclusive” development. Innovation driven development appears as a key concept throughout, as does inclusivity and the opening of markets to more international participants.
EDC resources to help you export
If these five-year plans set the tone for future energy market potential, then it is looking pretty positive for Canada’s export ready cleantech innovators. China and Canada have also signed a joint declaration on clean technology cooperation, aiming to share best practices and facilitate collaboration between small and medium businesses.
The Chinese government is also viewing Smart Cities as a major approach to hasten “industrialization, in- formatization, urbanization and agricultural modernization”. Real time monitoring and analysis, smart grid technologies and energy management are all areas expected to see growth. A smarter, more connected approach to urbanisation is unsurprising, considering that the number of permanent Chinese residents living in cities is expected to reach 60% by 2020. The smart city development is expected to create opportunities for sensor companies, advanced metering infrastructure, demand response and customer focused energy management companies.
China is actively seeking foreign expertise and collaboration in developing its smart cities. At the second China Smart City Innovation Conference in March 2016, a Memorandum of Understanding was signed between China Centre for Urban Development (CCUD) with the Future Cities Catapult, to foster innovation and remove barriers around smart cities.
China’s current commitments to climate change mitigation are ambitious. China has set 2030 targets to;
- lower the carbon intensity of GDP by 60% to 65% below 2005
- increase the share of non-fossil energy carriers of the total primary energy supply to around 20%
- increase its forest stock volume by 4.5 billion cubic meters, compared to 2005 levels
- peak CO2 emissions by 2030 at the latest
In the energy sector, the government has ambitious targets for clean energy. The country aims to have renewables provide 15% of total primary energy consumption by 2020, and 20% by 2030. The renewable target is expected to lead to a huge surge in renewable capacity. Investment in clean energy is expected to be around RMB 4 trillion by 2020 (CAD 790 billion), presenting a wide range of opportunities. The wind, biomass/biofuel, solar photovoltaic and solar thermal energy, and hydrogen and fuel cells subsectors, have the most significant near-term commercial potentials.
The government is focused on increasing energy efficiency in the industry sector, aiming to upgrade old and inefficient technologies. Initiatives such as Top-1000 and Top-10,000 programs were successful in reducing total energy usage in top energy consumers in energy intensive sectors such as cement and steel making. Another focus is on making buildings greener. Green buildings are being promoted through policy instruments such as economic incentives, however high capital costs remain a barrier for wider adoption. These policy-led initiatives have helped create opportunities for efficient new technology deployment, energy efficient appliances, energy modelling and energy management services in both the industrial sector and residential sectors.
Along with renewable energy and energy efficiency targets, the introduction of market mechanisms for pricing energy and attracting private investment will have a sizeable impact on opportunities for cleantech companies in this market. The market mechanisms being introduced, such as liberalisation of power markets, are expected to generate opportunities for foreign companies to participate, which to this point has been heavily regulated and controlled by the government.
An important point to note is that, due to these positive signals from the Chinese market, companies from all over the world are interested. There is intense international competition in seeking opportunities in the Chinese clean tech market. Thus, it is vital for a foreign company to do thorough market research, identifying niche opportunities and local partners.
Know the policy barriers
When conducting your market research, investigate how supportive or inhibitive policy will be for technology in the Chinese market (both nationally, provincially and locally). The above demonstrates that there are clearly some good market signals generated by government policy in China, but there are also some potentially inhibitive policies that exporting companies should also be aware.
Protectionist policies are put in place by the Chinese government to prohibit international investment and participation in some markets in favour of local industries. Since the entry of China into the World Trade Organisation in 2001, the liberalization of China’s trade environment has come a long way. That being said, there are still a number of prohibited and restricted industries. Certain sectors, such as the manufacture of new-energy power generation equipment and parts or finished components for power generation in renewable energy, have foreign investment limited to join ventures. The manufacture of biofuels, such as ethanol, requires the Chinese partner to hold majority share.
Local competitive advantage
Local competition is strong and often one step ahead. Domestic companies are more attuned to anticipating policy modifications. For example, engine manufacturer Weichai Power developed engines pursuant to the European Union (EU) III emission standard before China introduced the national III standard in 2009. Hence, Wenchai managed to outpace its competitors and take more than 40% of the Chinese market for trucks over 15 tons and 80% of carriers used their engines. This success is a direct result of their ability to anticipate regulatory change.
Furthermore, it is important to understand that China is not just one large, homogenous market. Though federal policy creates the overarching framework for energy use and infrastructure development, provinces and municipalities are usually in charge of implementation on the ground. Each province is different, with its own challenges and needs. Being fully cognizant of this duality is imperative for creating successful ventures in China.
For any Canadian company interested in exporting to China, it is clear that policy will be a significant underlying driver for many of the opportunities available in this market. The potential for further development of renewable energy, energy efficiency and smart grid technologies is evident. Although it is good to be aware of the undercurrent influence policy plays for exporting companies, this is just scratching the surface on the factors that Canadian companies should be considering before embarking on this market.
In the next article of this series, we will explore some key questions a company should ask themselves when deciding if they are ready to take on the Chinese clean energy market.