Category: Production and ToT

Digitalizing your company in China

Not merely a tech-business

China seems well ahead on the digitization road: use of new technologies in services (e.g. the mobile payments) , use of artificial intelligence and big data analysis in decision-making (e.g. the Court of Hangzhou), consumers’ behaviors (e.g. the shared bikes), public investments (cf VVR’s article on smart energies)… As a consequence many opportunities arise for European tech businesses in China, but not only. In this article, we will look at the transformation in management, business model, and HR policies induced by the digital transition.

According to a McKinsey report, Internet-linked transformation could contribute to an extent ranging from 7% (in the lowest estimations) to 22% (in the highest estimation) to China’s GDP growth through 2025. The main identified sectors where this growth would mostly happen are:

  • electronic consumer goods (with the Internet of Things, the digital media content…),
  • the automotive (with the supply chain logistics, the development of services thanks to connectivity…),
  • chemicals (with better demand forecast, and production planning, improved R&D…),
  • the financial services (with a decrease in non-performing loans, more efficient banking operations),
  • the real estate (with online sourcing and online marketing),
  • healthcare (with better patient-tracking for chronicle disease, e-commerce for OTC).

To be precise, China is more advanced than Europe when it comes to the use of new technologies, in products or services. Yet, China’s digitization of its industry is less advanced and happening now. Thus European companies already present in China, especially SMEs should take this step towards digitization now, in order to lead the coming disruption (gain in productivity, new business model, new relation to the consumer) instead of feeling threatened by it.

Beyond the development of technology-savvy products for customers (which might not be relevant in all industries), digitization can impact your entire organization in the way things are done, from the product development to the interactions with the client, passing by supply chain management and marketing. In China’s coastal area, most of the companies already initiated their digitization: in an EgonZehnder’s survey over a panel of Chinese companies (2016), 70% of the participants declared that their top management was in support of digitization, and half of them mentioned their CEO as the leader of these changes. Digitization is indeed not only about finding the right technologies to improve your activities, it is first and foremost about having the right team: a team that is able to understand and use these technologies, and that thinks according to this new digital paradigm (for instance, it is about definitely giving up paper-printed presentations). Indeed, a complete shift to the digital age can impact as far as your business model. It requires thus strong adaptation abilities from your company, which need to be developed through the right HR policies.

Given the potential scope of this transition, the top management must design, or at least be associated to, this digitization strategy (e.g. Mengniu’s CEO in VVR’s article on new consumption habits). It might mean thinking about a redefinition of your leadership to better foster collaboration, curiosity and learning in your teams. Besides, there a decision to be taken on whether to allocate digitization to one specific department, in which case you should decide precisely which, to centralize it or to externalize it.

Once the strategy is set, it needs to be taken up by management, as they are essential actors for the teams upgrading, and for the transition towards a more collaborative and innovative-driven way of working. In China, we identify training as crucial: it is indeed easier to train people that are already well integrated in your company rather than hiring and integrating new talents (cf VVR advice on recruitment in China). If, after having upgraded the teams, there is still a HR need, you should pay attention to the peculiarities in China regarding this type of recruitment, making it a rather competitive process.

Indeed, digitization is set to happen faster in China than in any other economy. Thus, several observers pointed out a shortage to come in IT and TIC talents. As such, challenges usually encountered when recruiting somebody in China are exacerbated: finding the right person, negotiating a salary, retaining the new employee… As an illustration, salaries for high-skilled tech talents, especially in the coastal provinces and for people speaking good English, are high, even to European standards.

To smooth the recruitment process and guarantee its success, it is of the utmost importance to carefully follow a rigorous recruiting method. That is to say, first, establish with accuracy the real need(s) of your company that the future employee should satisfy. Then, you will be able to write down precisely the job description and the profile you are looking for (a local Chinese, an overseas returnee, a foreigner…) As digitization is a field in evolution, it is no use to look for specific skills, albeit some basic background is of course required, rather you should be looking for potential. More than ever, recruitment is not about finding a good employee, rather about finding the right person to fit in your company and to hold your company’s vision. Here, analyzing motivations, mentality, and solving approach to new problems might be of a good use.

For more details on recruitment, you may refer to our recruitment department.

To sum up, digitization is happening in China and it opens new doors for products and services, but it also redefines the organization and the vision of each company. We strongly advise to take these steps now, not in an erratic and reactionary manner, but rather in an organized and well-thought strategy, engaging all departments of your company. Two main impacts are to be forecasted in HR: the upgrading of the teams, and the recruitment of new talents.

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2018 CHINESE PHARMACEUTIC SECTOR AT A GLANCE

China’s 1.4 billion-large population is getting richer and older, creating one of the potentially most profitable market for pharmaceuticals, an industry where Western companies’ R&D has still no Chinese equivalent. In 2016, China becomes the second largest market worldwide for medicines, with a market worth 110 billion USD. Yet, this market is still not mature in many aspects, which causes foreign brands to face many entry barriers and other issues.

In 2020, 18% of the Chinese population will be over 65 years

Life expectancy in China is 78 for women and 75 for men, with around 15% of the Chinese population being over 65 (against 10% in France) and 1.8% over 80 (2017). Forecasts for 2020 are that 18% of the Chinese population will be over 65, and 6.5% over 80. In 2035, Chinese median age should also be higher than the French median age.

Urbanization, sedentarization and enrichment of the middle class

Besides these favorable demographic data, changes in Chinese society also seem to pave the way for pharmaceutical sales. The rising middle class not only has a stronger purchasing power, but they are also living in cities, changing their eating habits and lifestyle. Consequently, today Chinese main health issues, just like the developed countries’ ones, lie in chronic diseases. In 2016, 26% of deaths were due to cancer, 22.1% to cardio-vascular diseases, 20.4% to cerebral-vascular diseases, and 12% to respiratory diseases. Likewise, diabetes prevalence increased to one Chinese in ten, and is still increasing. China also faces infectious diseases like AIDS, tuberculosis, hepatitis, mainly in its Western, poorer regions and the Chinese government is offering substantial funds to help tackle them. Regarding its Eastern part, internationally connected hubs are increasingly concerned with new epidemics risks. Finally, China is chronically short of medicines for rare diseases, pediatrics and infant diseases, market niches for European pharmaceutical laboratories.

79% of medicines are delivered under prescription

Two third of medicines sold in China are chemical, and 13% of them are using biotechnology, mostly bio-similar ones. 79% of Chinese medicines are prescription drugs, thus making doctors the priority target of laboratories’ promotional activities. Most of the prescribed drugs are generics, a sector where local competition is particularly high and low-cost.

Imported medicines are consequently mainly patented drugs.

In the last few years, the Chinese governments and local laboratories have been encouraging the setting of partnerships with Western well-known laboratories in order to develop new drugs.

Major players on the pharmaceutical market are large companies as well as SMEs, foreign companies (for patented drugs) and domestic ones (for generics). The three largest domestic players are Sinopharm, Shanghai Pharma, and Jointown Pharmaceutical Group. Only this latter is a private company and they all benefit from close relationship with hospitals, the main sales point for medicines.

Chinese legal environment in pharmaceuticals is ambiguous and often changing.

A health reform has been under way since 2009. It aims among others at expanding reimbursement of health expenses, thus opening lower-tier cities markets to Western, more costly medicines. Yet, the procedure to added on the list of reimbursed drugs is obscure and favorize de facto domestically produced drugs since it exerts a downward pressure on prices.

China also opened its market to foreign investments in certain health sectors. Besides, similarly to what is seen in the food sector, the government stepped up their inspection procedures to control for the authenticity, quality of drugs, as well as to fight against corruption in hospitals (cf GSK scandal).

Thus, the pharmaceutical sector comes with many opportunities for European companies, provided they find the right way to enter the Chinese market and the right local partners to stay on this market. Indeed, accessing this market is not an easy task as customs duties are high and distribution channels are extremely fragmented, varying across Chinese provinces. One might need up to 6 intermediaries to sell their medicine in certain regions. Consequently, imported drugs loose in competition, as they are substantially more expensive than local drugs.

Registering a new drug in China, and understanding the legislation frame for promotional and sales activities are other serious challenges one can hardly undertake alone. Indeed, these legislations meld in old legislations, temporary measures and new laws together. Besides, if there is a trend towards reinforcing the legislator framework, there is also a trend towards favoring domestic manufactured products, as the government wishes to establish “national champions”, in the bio-similar technology domain for instance. Thus, foreign companies sometimes face differentiated or discriminatory treatment from local authorities.

Another challenge is the downward pressure caused by the increase in the number of reimbursed drugs.

Lastly, intellectual property rights protection is still weak or inadequate. As a matter of fact, 17 000 applications for the registration of foreign drugs were left untreated in 2016, which renders complex the planning for the safe launch of a new drug on the Chinese market. Despites the government’s increased efforts, counterfeit drugs remain a lingering issue on the Chinese market.

Demand is growing, and the local offer can not satisfy it

Nonetheless, international companies are looking into the Chinese market and they have good reasons for that. Not only consumers are numerous, but they also ask for better quality healthcare: it appears from a 2014 survey that they are the nationality who care the most for their health, when compared with Brazilians, Russians, Indians, Americans, Europeans and Japanese. Thus, vitamins and food complements’ sales are said to double by 2020 (compared to 2014 sales). This is all the more interesting for European companies since Western drugs are enjoying a good reputation in Chinese consumers’ views, representing security and quality. Moreover, despite the economic slowdown, Chinese are increasingly solvable thanks to the universal medical insurance and the development of private insurances.

Although Chinese workers’ qualifications level improved and large investments are put into research, Chinese laboratories are still lacking R&D capacity. This explains the recent pushes, some of them successful, for partnerships with Western laboratories.

Pharmaceutical companies’ network

In order to overcome the many obstacles seen above, institutional support is precious. Thus, Business France and Biomérieux founded the “French Health Alliance” (Club Santé Chine) which gathers large groups, SMEs, hospitals and the French Embassy, in order to gain visibility on the Chinese market but also to share information. This alliance has four working groups on: hospital design and management, ageing and aged-link dependency, chronic diseases and infectious diseases. Recently, Shanghai received a delegation from Les Pays de la Loire and composed of many pharmaceutical companies, several of them specialized in biotechnology.

Innovation is another strength for the health sector in China

Health applications of Artificial Intelligence is yet another land of opportunities for European businesses. Part of the National Strategy for Development of AI, it is also the targets of recent investments made by Baidu, Tencent and Alibaba, and is the topic of many articles in the Chinese media, sign that it is a priority of the country.

Other distribution channels to satisfy the demand

Lastly, e-commerce constitutes a specific area of potential development for OTC drugs (except from injections) as consumers increasingly use this sales channel for buying drugs too. A 2017 survey found that Internet is a primary source of information when patients look for medical explanation. Thus, not only can SMEs increase their visibility by using this sale channel, but it is also a necessary platform of advertising for any pharmaceutical company, provided publications are bear an informative value.

By Manon Bellon

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CHINA AND SMART ENERGY

Smart energy solutions must be discussed when one tries to understand the current Chinese economic environment. In three of our publications already, we described Chinese engagements in electric cars, green buildings and renewable energies, and we showed the challenges that the Chinese authorities faced to fulfill these commitments.

In this April article, we offer you a critical synthesis of different reports by the National Reform and Development Council of China (NRDC), the World Bank, the US Trade Ministry and other global players. Indeed, we noticed that all these reports coincide in three points: China needs to develop an efficient management system for its energy distribution and consumption, AI technologies can be of some help (see VVR’s article from last month), and whatever happens in China will most probably be of global importance in the domain of energy.

China, a global leader in reducing carbon emissions?

With the Paris Agreement, China definitely took a leading role in the fight against carbon emissions. This strategic choice in terms of international relations, was also dictated by its internal situation, namely the alarming atmospheric pollution rate. China is thus becoming a laboratory of the energetic transition for developing countries: indeed, in 2016, coal was still amounting for 62.6% of China’s energy mix (US Trade Ministry). Besides, Chinese energetic challenges are typical of developing countries: a fast-speed urbanization rate and the development of rural zones, both increasing the country’s needs in energy. These latter increased by 6.6% in 2017, compared to 5% the year before (Global Energy Statistical Yearbook). Overall, China’s energy consumption could increase by 40% on the next 15 years (World Resources Institute).

An unefficient electric grid

Large Chinese investments have been announced in renewable energies, but worldwide analysts agree on the assessment that nowadays Chinese production in renewable energies is overly wasted because it is not connected to the country’s grid. This grid is a monopoly of two State-Owned enterprises, so it is hardly accessible to foreign businesses. Nonetheless, it is interesting to know that the State Grid Corporation, responsible for 80% of the national distribution system, has published large investments targets in smart meters (they plan to install 280 million of them by 2022) as well as automatization and distribution systems (investments worth USD 7billion by 2020).

Source : International Finance Corporation (World Bank)

Building, work in progress

Thus, green building is a priority of the 13th Five-Year Plan; in theory, half of the new constructions should be “certified” green. However, higher costs and delay in getting the certifications often deter private promoters for engaging in green building. As such, the clients looking for smart grid technologies are often the local authorities: the China Daily reported that 290 cities already launched a smart city project, amounting to 95% of the provincial capitals. These projects are likely to have a global impact: Kuala Lumpur already showed some interests in the Hangzhou’s City Brain (a project launched together with Alibaba and Foxconn). Some nuance needs to be done here: most of the projects we read about are located on the East coast, and especially in Shanghai, Zhejiang, and Jiangsu, as these provinces dispose of the suitable development and urbanization state for such projects as well as financial resources.

70% of the energy in China is going to the buildings today, 60% of which (around USD 100 billion) is wasted because of outdated or broken equipment (China Economic Review). And it just happens that 70% of carbon emissions come from cities, one third of them from the electricity consumed by buildings (NRDC).

The International Finance Corporation (World Bank) identified green buildings as the sector that will receive the most investment by 2030 in China: an amount estimated at USD 12.9 trillion.

All in all, to solve the gap between electricity offer and demand in China, the central government, local authorities, and State-Owned enterprises all turn to smart grid and other smart energy solutions. Both public and private actors in China seek to attract innovative start-ups around events such as Arup’s forum on green building (Shanghai, April 2 and 3) and the Smart Energy China Fair (focusing on IoT) and the Energy Storage China Fair (both in Tianjin, on September 19, 20 and 21). The first one claim to be the locus of discussion on public policies in Shanghai while the other two invite government officials to speak at conferences.

Which place for European companies?

Able to produce equipment at low costs, China is now looking for smart energy and smart grid technologies, which often come from the West. Some American start-ups are thus already present on the market.

Some challenges to the entry of foreign businesses in this sector should be pointed out. Firstly, there is an overall preference for local actors. One reason for that might be the fact that energy is strategic for any country’s government. Secondly, also due to national security concerns, Chinese authorities increasingly require that the data processed in big data technologies should not leave the Chinese territories, obliging foreign businesses to develop facilities in China. Solutions exist to these challenges, one of them is to find a Chinese partner. Lastly, another obstacle might be the lack of unification in urban policy, making this environment complex for a foreign actor not acquainted with the Chinese system to understand. Besides, policies are not always implemented. For instance, the objective to reduce carbon emissions as a part of China’s GDP by 40 to 45% between 2005 and 2020 had to be lowered. In China, terms such as “green” or “environmental” are mostly political or used for communication purpose, and they rarely fit with the European definitions.

Owning innovative technologies, European and French are fit for the Chinese smart energy market. During the Smart Mobility Forum which happened in Marseilles last February, French businesses showed their dynamism and innovative spirit in the domain of smart energy (although the focus of the forum was mostly transportation). Besides, France already stepped in the Chinese market: in 2016, EDF launched a smart energy project with Changfeng Energy for the city of Sanya, to reduce the carbon emissions of this town.

By Manon Bellon

Image credits : www.tm.forum

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ON THE CHINESE ROAD TO ARTIFICIAL INTELLIGENCE

Much has already been written on China’s plan to become an Artificial Intelligence (AI)’s world leader by 2030. These two trendy words also appear almost daily in the Chinese media and political communication. Thus, based on the analysis of governmental plan and the reading of the relevant press, this article seeks to depict today’s actual picture of AI in China; leaving aside announcement effects and articles looking for a mediatic buzz on a topic that both fascinates and worries.

What exactly do these plans contain? How do they impact Chinese society and economy? And which opportunities for foreign – particularly French – companies can be identified today?

At the Barcelona World Mobile Congress this year, Huawei was showing the world the first car entirely driven by a smartphone, using AI. This smartphone, issued last fall, was qualified as the first smartphone truly using AI. Besides the world reactions to the announcement that a smartphone effectively drove a car on ten meters and avoiding all obstacles on the road, it is interesting to note that China has today become unavoidable in discussing the advancements of AI technologies in the world. As such, Huawei was the first company to appear in a news story broadcasted by a European channel about the World Mobile Congress.

Become a major worldwide leader in AI in 2030

In the last past years, China issued several plans to structure its transition from the world workshop to the world laboratory. Innovation is a central part to the three following plans: Made in China 2025 (2015), Internet + (2015), and the 13th Five-Year Plan (2015) and is further developed in last July’s National Strategy for the development of AI.

The official target is to become a major world player in AI by 2030, with two middle-steps in 2020 and 2025. Eluding the numerous political and strategic objectives, we here explore the economic ones mentioned in the strategy. Indeed, this paper puts forward the figure of a 150M CNY (19,2M EUR) direct contribution to the Chinese economy by 2020 and of 1bn CNY (128M EUR) by 2030. The audit cabinet PwC were more optimist about these figures, forecasting a global contribution of AI to the world economy as large as 16bn USD (13bn EUR) by 2030 with half of it for the Chinese economy.

Privileged sectors for AI applications mentioned in the strategy and in the overall Chinese political communication are production, urban planning, agriculture, renewable energies, robotics, intelligent cars, medical care and national defense. However, the concrete encouraging mechanisms are still not known.

How much AI and which kind of AI is used in nowadays China? We seek here to understand where potentials for further development lie in China; knowing whether China or the US is leading the AI race is a topic for another discussion.

Governmental political and financial support

According to the global media reports and analysis, Chinese assets are: a supportive government in terms of financing and legislation (data protection is almost absent in the Chinese law as it is practiced), wide data resources thanks to a large, diverse and connected population, and scientific talents (20% of the world’s currently trained scientists in AI are Chinese). An interesting feature is that China is apparently better placed thanks to its talent in research on translation and language, due to the complexity of the Chinese language.

Proactive big players

In terms of data, China disposes of its own produced data (thanks to Baidu, Alibaba and Tencent, also called BAT). These data are sufficiently numerous and available thanks to a non-fragmented environment. Indeed, the pervasive application Wechat now counts more than 800 millions of accounts and is used by Chinese people to chat, but also to pay, localize themselves, rent taxis, bikes, order foods… Half of the Chinese smartphones are also equipped with online payment (see VVR article on this topic) and many observers comment on the general Chinese affection for connected objects. All in all, owning these data is a decisive asset nowadays as AI is merely a sophisticated calculating tool which improves through the processing of huge number of data. In other words, data are AI’s food. However, some scientists say they are today able to develop AI systems using simulated data. This would thus reduce in the long-run the advantage of American and Chinese groups who dispose of large sets of data.

China also owns strong calculus systems

Baidu’s image recognition is now more reliable than Google’s (by 0.3%) and Huawei’s last smartphone is equipped with microchips made in China. Yet, Chinese vocal recognition is still not as efficient as the American one; large investments are spent on it.

Investments

Capital is indeed the last trump in that game, and Chinese hand is full of it. BAT all recently made public their development roadmaps for AI. Baidu is investing 3bn EUR in image recognition, augmented reality, and deep learning while Alibaba announced the opening of 8 research centers for AI and quantum computing, an investment worth 15 bn USD (12,7 bn EUR). Baidu is also engaging in the development of self-driving car and made public in that context their will to put their data in opensource, contrary to American uses.

On the governmental side, Beijing made public their intention to invest in universities, incubators, and start-ups for an amount up to 150bn CNY (19,15bn EUR) with the objective of developping Chinese AI systems. More specifically, they announced beginning of this year the creation of a professional park dedicated to AI (focusing on big data, biometric identification and deep-learning) located in Beijing and gathering some 400 companies, an investment worth 13,8bn CNY (1,8bn EUR).

What about foreign companies in China?

Reading these facts, it appears that China is increasingly competitive in AI and intelligent technologies. Nevertheless, opportunities for foreign and French businesses also arise from this evolution: available investments, possibility to come to China, soon available trained manpower, efficient Chinese AI technologies and large data sets if these data are indeed put in opensource. Foreign and French businesses could also play an intermediary role between Chinese products and European business in that sector as The Economist describes the difficulty for Chinese AI to export itself. The coming China International Import Export Exhibition might thus be an interesting opportunity as an entire hall will be dedicated to high-end technology and intelligent equipment. It will take place in November 2018.

To sum up:

The various governmental publications lead us to expect a rise in the already abundant public and private investments for AI. The target of these investments are the development of AI technology and its applications in the following sectors: production, urban planning, agriculture, renewable energies, robotics, intelligent cars, medical care, and national defense. France made known its will to cooperate with China specifically in AI and according to the rhetoric used in governmental publications, China doesn’t wish to restrain this domain to its national businesses. Today, we can mostly assess Beijing favorable policies for the coming of foreign talents. Besides, research centers announced by private and public actors are not operating yet. Therefore, immediate opportunities for foreign and French businesses mainly lie in the needs that Chinese companies might have in terms of AI, or on the contrary, in the technologies that these companies might have developed.

By Manon Bellon

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RENEWABLE ENERGIES

China bites off more than it can chew

When it comes to renewable energies, China seems to be insatiable.

In a decade, the country has become the world leader in renewable energy production, surpassing the United States last year, according to the latest BP Statistical Review of World Energy. China is currently contributing about 40 percent of the global growth (more than the entire OECD), providing the main source of world growth in hydro and nuclear power. In 2015, China has become the world’s largest investor in renewable energy, spending a total of $103 billion and currently account for 36 percent of the world total according to the United Nations Environment Program’s annual report on global trends in renewable energy.

In order to meet 20 percent of China’s needs by 2030, China wants to invest about three times more (around $370 billion) in solar, wind, hydro and nuclear power generation by 2020, creating 13 million jobs in the sector, announced the National Energy Administration (NEA). China added 35 gigawatts on new solar generation in 2016 alone, which is almost equal to Germany’s total capacity. Every hour, China erects another wind turbine and installs enough solar panels to cover a soccer field, according to Greenpeace Beijing. And if it complies to the 13th Five Year Plan, by 2020, China is expected to install 340 GW of hydropower, 200 GW of wind, 120 GW of solar power, as well as 58 GW of nuclear capacity and 15 GW of biomass. The country has, thus, become a major manufacturer and exporter of renewable energy technology, supplying about two thirds of the world’s solar panels and producing nearly half of the worlds’ wind turbines.

Too much clean energy wasted

This commitment aims to reduce the role of coal, China being the largest emitter of carbon dioxide in the world, and to ease the severe air pollution that kills an estimated 1.1 to 1.6 million of its people every year. However, the country needs to overcome important issues to no longer rely on imported fossil fuels.

China is, in fact, is finding difficult to use all its new electricity, to the point the National Energy Administration (NEA) has to ask the local authorities in six Chinese provinces to stop authorizing the construction of wind turbines on their territory. In 2016, China’s wind curtailment rate – which means that wind energy that could have been generated and used but wasn’t – reached 17%, i.e. more than double what it was two years before. Meanwhile China’s solar curtailment rose by 50% in 2015 and 2016. This is a serious challenge for China. A considerable amount of clean energy that should be replacing coal-generated power is wasted.

A more flexible grid

One can justify this trend by the fact that currently wind turbines are mostly installed and connected to the grid in the sparsely populated northwestern provinces in China. And because of a lack of transmission lines, diffusing this energy to the highly-populated coastal areas is problematic. But it does not explain it all. For the NEA, China’s electricity grid needs to be more flexible for the power grid to operate properly. The amount of electricity that is supplied must perfectly match the load on the system. Improving flexibility would help the grid to manage the variable renewable energy due to different wind speeds or sunlight levels for instance.

It is crucial to identify new uses for the renewable energy produced in China’s northern provinces as well. One promising approach would be to use wind energy to help fulfill the region’s extensive heating needs. The NEA encourages natural gas production and pumped hydro storage as an ancillary service and cleaner and more efficient substitute to coal-fired powered plants. In addition, the NEA supports the creation of direct markets for renewable energy. Renewable energy generators would then be empowered to sell electricity directly to those who need it. That would provide an additional outlet for their electricity if the grid cannot take it all.

Image credits: Michal Strba

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CHINA’S AMBITIONS FOR A NEW SILK ROAD

Restoring the Silk Road. On May 14th and 15th, China held its first international forum devoted to the One Belt, One Road (OBOR) project, bringing together some 100 country representatives in Beijing. Launched by Chinese President Xi Jingping in late 2013, the initiative aims to revive the ancient Silk Road, a huge network of land and sea trade channels used by China to connect with Europe, the Middle East and Africa via Central and Southeast Asia. China, the second – biggest world economic power, wants to further develop commercial activities and relations between Eurasia and Africa through the construction or modernization of energy and transport infrastructure.

A Far-Reaching Project

The initiative is titanic, including within its scope more than 68 countries with 4.4 billion inhabitants and around 40% of the world’s GDP. Nearly USD 1 trillion of investment has already been pledged by development banks such as the Asian Infrastructure Investment Bank (AIIB), to finance roads, rail, energy and port projects, including a railway linking London to East China, and a string of sea ports connecting Southeast Asia to North Africa. China, for its part, made available USD 40 billion of initial capital through its “Silk Road Fund”, to which should be added a supplement of about USD 15 billion, as announced by President Xi at the Summit.

Geopolitical and Economic Risks

In addition to outlines yet to be defined and benefits yet to be determined, the initiative also presents risks. According to a report published on April, 10th 2017 by the Chinese Academy of Social Sciences (CASS) and the rating agency “China Bond Rating”, the development of OBOR could be notably influenced by geopolitical events. Indeed, disturbances linked to terrorism, corruption and independence movements along the trade corridors constitute risks for OBOR. Furthermore, the implementation of the initiative depends on the application of good governance practices in the countries where OBOR infrastructure is being constructed. CASS experts are also concerned that protectionist trends in the United States and Europe will affect other parts of the world and weaken the whole project.

In its report of January 2017, the rating agency Fitch warned of risks in the financing of OBOR projects for Chinese banks. In addition, while acknowledging that these investments will improve and modernize infrastructure in the various Asian countries involved in OBOR through China’s technical funding and expertise, Fitch had doubts about the ability of Chinese enterprises to adapt and operate in the countries concerned. To reduce these risks, Fitch advocated greater EU involvement in the initiative to reassure the international community of the business logic of OBOR projects.

Jean-Pierre Raffarin, former Prime Minister and representative of France at the OBOR Forum in Beijing, along with several other notable experts, will discuss these issues regarding the Belt and Road initiative on June 12th, 2017, from 8:30 am to 10:30 am, at the MEDEF premises (Main employers’ organization in France) in Paris.

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China’s growing electric vehicle market

Foreigners hit speed bumps.

China is expected to reach 7 million new energy domestic vehicle (NEV) sales by 2025, according to Beijing’s 13th Five-Year Plan, finalized in 2015. Chinese NEV sales – the term China uses to refer to battery-electric vehicles, plug-in hybrids and fuel-cell cars – totaled 951,477 units between January 2011 and December 2016. These figures, which include passenger cars and heavy-duty commercial vehicles, have already made the Middle Kingdom the largest electric vehicles (EVs) market in the world, with 37.7% of global sales in 2016.

To address China’s dependence on oil exports and severe air pollution due to an overuse of coal as a main form of electricity production, the government announced in 2010 a trial program to provide monetary incentives for NEV automakers in five cities. The amount of the subsidies stood at 30 billion RMB (USD 4.4 billion) in 2016.

To further boost NEV sales, the government is luring Chinese consumers to adopt electric vehicles by promising charging stations. Beijing plans to install 400,000 charging points in the capital city by 2020. NEV consumers also benefit from central and local governments via cash subsidies, free parking spaces and free license plates.

Sales down in early 2017

After several car makers were fined for defrauding the subsidy program, Beijing enacted a new subsidy policy in August 2016, where only qualified manufacturers are eligible to receive NEV subsidies moving forward. More than a third of Chinese manufacturers, which fail to meet the policy’s qualification standards, are expected to be left out. The Ministry of Industry and Information Technology (MIIT) also recently announced a restriction on the granting of licenses to new electric vehicle (EV) startups, limiting the number to just 10 per year.

Reduced subsidies and new policies caused he stock of EV sales to slump in January 2017, compared to a year earlier. Sales of NEVs dropped 74 percent to 5,682 unites, according to the China Association of Automobile Manufacturers (CAAM).

The downsides of China’s supportive policies are emerging in the form of overcapacity and imperfect competition. More than 200 Chinese NEV manufacturers have thus entered this market to date, producing more than 4,000 licensed NEV models. Another hurdle to a mature market is that low-cost, low quality NEVs dominate. Sixty percent of China’s NEV market share belongs to low-cost cars, whereas less than 20 percent of the market share belongs to high-end ones.

Domestic suppliers in favor

One can only wonder what opportunities foreign eco-friendly carmakers have left in a very protectionist country, where the Chinese automotive brand BYD has been topping the segment sales for several years. Surprisingly, some do exist. Volkswagen recently signed a joint-venture agreement with Chinese manufacturer JAC Motor to mass produce 8 new EVs in China by 2020. Tesla Motors also is in talks to set up a factory in Shanghai.

Opportunities exist in power battery manufacturing as well. This key component of EVs has begun a period of rapid growth and strong demand for lithium-ion batteries. Last year, changes to Chinese legislation allowed foreign firms to set up wholly-owned electric vehicle battery manufacturing plants in free-trade zones in Shanghai, Guangdong, Tianjin and Fujian.

On a less positive note, while China seems to gradually open-up its EV battery market to foreign companies, conditions still favor domestic suppliers. In June 2016, MIIT left some prominent foreign companies off a list of battery manufacturers approved to receive government subsidies, including Samsung and LG, which have been manufacturing batteries in China for many years. Exclusion from the list means that from January 20 18, manufacturers of EVs using batteries made by manufacturers not included on the approved list will not be eligible for government subsidies.

Even if still booming thanks to government subsidies, the future of China’s NEV market remains uncertain and challenging.

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CHINA LEADS IN GREEN BUILDING

China is the world’s largest green building market. With more than 1 billion square feet of certified green, sustainable building space, China has now surpassed the United States. It only took China half the time – about 10 years, compared to the US. China aims for a 50 percent commercial green building rate by 2020, as part of its pledges under the Paris Climate Agreement. If it reaches that goal, about half of green building space in the world will be in the Middle Kingdom.

For green building certification, China uses one domestic and two major Western standards : the China Three Star Standard, the Leadership in Energy and Environmental Design (LEED) standard from the US, and the Building Research Establishment Environmental Assessment Method (BREEAM) standard from the United Kingdom.

The Value of Sustainability

Those three competing standards have their limits. With increasing urbanization – 300 million more Chinese people are expected to live in cities in the next 15 years – more green buildings will be needed. What is crucial now is thinking of green buildings in terms of sustainability.

Construction decisions made in China are often based on short-term costs instead of long-term savings from energy efficiency. Despite initiatives to improve energy efficiency, such as the Chinese Ministry of Housing and Urban-Rural Development’s building energy efficiency label, these programs are still voluntary for the majority of buildings and will unlikely reduce energy consumption in China on a large scale.

Furthermore, the standards should develop new indicators on responding to climate change, such as total CO2 emission reduction or the carbon footprint of one building. The standards should take into account China’s vast territory and differentiated climatic zones. It is difficult to apply standards without considering the local situation.

The cost of green building techniques can represent between 10 – 30% in extra building costs. This remains a significant barrier for further adoption. Even if the Chinese government intends to subsidise around 40 – 50% of the additional building costs through a series of regulations and policies, most of the time, subsidies go straight to public buildings and (Chinese national) buyers of residential units. It is often faster for public buildings to get certification than for private construction. As a result, more than 70% of green buildings in 2013 were public buildings.

The Need for Western Technology

Besides the adoption of green building techniques, China has also seen a surge in ‘eco-city’ development in recent years. One of the best known is an area near the port city of Tianjin. Built in partnership with Singapore’s sovereign wealth fund, the project plans to transform a former uninhabitable swamp into a residential area for more than a million people, as a satellite ‘eco-city’ of the municipality.

More than 100 such eco-projects are scattered throughout China, mainly aimed at establishing new cities of 250,000 to 500,000 people. These cities do create potential showcases and opportunities for Western technologies in a country hungry for foreign know-how. Yet, since green buildings are closely defined by standards, only materials and solutions that contribute to the certification score will have the chance to enter the Chinese green building market.

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