Chinese Companies Climb Learning Curve on How to Deal With the West

clean tech investmentSHANGHAI — On a foggy afternoon in early 2012, Kenn Ross heard his cellphone ringing. He picked it up, and that was the beginning of a multimillion-dollar dialogue.

“We know that your company helps form acquisitions between Western firms and players in China. Do you have relations with providers of solar technology, coal gasification technology and other renewable energy technologies?” a Chinese man asked over the phone.

The man was calling from a Chinese state-owned mining company headquartered in Inner Mongolia, Ross recalled. Like many state-owned companies here, the mining company has operations worth tens of billions of dollars. But regardless of how wealthy they are, Chinese companies often lack the cutting-edge technology needed to run their operations with less energy and lowered emissions.

So they come to Ross, who specializes in matchmaking between Chinese money and clean technology in his homeland of the United States. Ross and his company — Shanghai-based Hao Green Energy — helped the Chinese mining giant approach an American coal gasification technology firm, meet with them in Beijing and eventually fly to the United States to see with their own eyes how the technology has been deployed on the ground.

Chinese executives were pleased with their findings, according to Ross, and they are now negotiating a deal with the U.S. firm.

This is one among many Chinese companies that in recent years have begun to open their wallets for Western clean technologies. Their buying spree has raised eyebrows about China’s influence on the West’s high technology, but many believe political concerns and other obstacles can’t stop the rising Chinese efforts to upgrade their business and build global market reach.

“For specific clean-tech industries, the most effective way Chinese companies now see for improving their technology capability is through acquisitions and technology licensing,” said Zhuo Zhang, a research associate of Boston-based Lux Research. “There will be no slowdown in this for any industry regarded as strategic in Beijing for which domestic technology capability has opportunity for improvement by looking overseas.”

Besides taking Western clean technologies back home, Chinese companies have also played a bigger role in selling their own brands abroad. China’s solar panel producers have expanded manufacturing facilities into North America. Chinese turbine makers have built wind farms across Europe. Last year, Chinese investors backed up a Texas-based carbon capture and storage project that is vying to be one of the world’s earliest commercial demonstrations of the technology.

Moving ‘higher in the value chain’

The project is expected to capture about 3 million tons of carbon dioxide annually from a coal gasification plant near Odessa, Texas. The captured carbon will then be injected underground to push 7 million barrels of oil out of nearby oil fields every year. The Export-Import Bank of China is the sole financial lender of the $2.5 billion project.

“For a commercial project like that, there is certain guarantee for their investment return that’s much better than China investing in U.S. Treasury bonds,” Ming Sung explained about the bank’s motivation to get involved.

Sung is chief representative in Asia for the Clean Air Task Force, a Boston-based group dedicated to reducing atmospheric pollution. He knows Beijing’s desire for the U.S. technology that can boost oil output while mitigating carbon emissions. He said the Chinese hope to use the Texas project as a kind of learning curve.

“Chinese companies have recognized they can’t succeed in the long term if they only compete on price. They all understand that if they are going to survive, they need to move higher in the value chain,” said Benjamin Cavender, associate principal at the China Market Research Group in Shanghai. And one way to do so, Cavender said, is to gain advanced technology by acquiring foreign firms.

Even for a few industries where China already leads the global race, there is still an appetite for foreign firms. China’s top solar panel producer, JinkoSolar Holding Co., for one, is in talks with a domestic bank to get $1 billion credits for its Swiss subsidiary to expand its overseas presence, partly through acquisitions.

It is an ongoing move in what amounts to a solar trade war. Already, the Obama administration has slapped punitive tariffs on Chinese solar cell imports for what it said were unfair subsidies and sales of goods below the cost of making them. The European Union last year followed up with similar investigations against all Chinese solar products. Many believe the resulting ruling will not favor the Chinese.

To avoid more blows, Chinese companies are responding with various strategies.

“We invest here and create jobs in front of your door, so approve us” goes one strategy, according to Haibing Ma, the China program manager of the WorldWatch Institute, a Washington D.C.-based independent think tank focusing on sustainable development research. “Paving a tariff-free road to overseas markets with foreign subsidiaries” is another.

Some deals are win-win

Some Westerners find this good news. Wind farm and solar project developers in Europe and North America are old friends with Chinese companies, for the simple reasons of lower-cost Chinese equipment and their ability to bring lower-interest project financing from Chinese banks.

Western clean-tech startups have greeted deep-pocketed Chinese investors, too, as local funding dried up during the recent economic recession. And states and counties also began rolling out the red carpet for Chinese companies’ contribution to jobs and tax revenues.

For instance, to support China’s ENN Group in building a solar farm, Clark County in Nevada sold 9,000 acres of public land in 2011 to the Chinese company at a price of $500 per acre, even though the market price for that land was at least $3,000 per acre.

While Uncle Sam has approved some deals, others provoked strong reactions. That includes when Chinese-owned auto parts manufacturer Wanxiang America Corp. last year won the bidding for A123 Systems Inc., a bankrupt firm that produces advanced batteries for electric vehicles.

Because the Michigan-grown battery maker had been awarded millions of dollars of government grants, U.S. critics worried about some of A123’s taxpayer-funded technology winding up in the hands of the Chinese.

Some attribute such an attitude change to the presidential campaign season, when politicians in the United States traditionally play tough on China. But Julian Wong, a California-based former adviser to the U.S. Department of Energy, expects to see this resistance on a more regular basis.

“It doesn’t matter whether this is a presidential election, or governor’s election or mayor’s election, every year is an election year. So both [U.S. political] parties will look for a scapegoat, and China happens to be the scapegoat for the politicians,” Wong said. He added that there is also rising concern about whether made-in-the-USA and owned-by-China clean technologies will eclipse the competitiveness of American firms.

Others invite a ‘cultural clash’

So far, Wong and others say, little is known about whether Chinese companies have benefited from their activities in the Western clean-tech field, as many deals are still in the early stage. But what is clear is a long list of challenges for Chinese companies that venture abroad.

According to a recent survey from the European Union Chamber of Commerce in China, Chinese companies have suffered from red tape with both governments on cross-border transactions. They have also struggled to deal with national security reviews in the United States, because of a lack of workable guidelines. Sometimes, Chinese companies find it hard to seal a deal because their reputation for not respecting intellectual property rights scares away potential Western partners.

The intellectual property fear will fade away if the acquisition targets the whole Western firm instead of a single technology, but Chinese buyers are often hesitant to do so, said Ross, the matchmaker between U.S. technology and Chinese money. As he explains, many Chinese companies buy the technology to answer the domestic demand and therefore feel no need to keep an operation abroad. In addition, some companies are already getting tangled up in troubles at their overseas subsidiaries.

Recently, Ross spoke with the Netherlands office of a large Chinese private-owned renewable energy business. He was struck by how often Dutch employees’ call for transparency involved talks behind closed doors in their Beijing headquarters. The result, Ross says, is that resignation letters keep piling up in the Netherlands office.

“It’s really a sort of cultural clash,” he added.

In the 1990s, when Japanese and Korean companies flooded the United States, Ross witnessed how they ran into the same problem but soon solved it by localization. He said it might be more troublesome for Chinese companies to do so, due to their lack of a tradition of adapting to other cultures, though there is little doubt about their ability to eventually achieve their goal.

“I’m positive that China’s efforts to go global in clean technology will become more nuanced, mature and accepted as time goes on,” Ross said.

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