Life in the Fast Lane on the China Bullet Train

Reflections on China’s Vibrant Business Culture and the U.S.-China Green Energy Conferences (Part I)

(Click here for Part II: The Cold Realities of Global Warming)

On my way to attend the Third Annual U.S.-China Green Energy Conference I glanced at the Shanghai Daily that I received that morning in my Shanghai hotel.  In the Yangtze River Delta region, an article reported, the Shanghai Railway Bureau plans to invest more than 100 billion yuan (US$14.65 billion) in 2010 alone mostly on high-speed (bullet) trains that travel up to 350 kilometers (217 miles) per hour and will connect the cities of Nanjing, Hangzhou, Ningbo with Shanghai’s Hongqiao airport.  Suzhou has its own bullet train connecting to Hongqiao that has already begun service, and of course the Shanghai MagLev has been running for years now….  Meanwhile, the U.S. has still to complete its first bullet train.  This seems a good comparative metaphor for the widening gap between China and the U.S. and that was repeatedly made visible during my trip this summer to visit the China Sourcing Summit, the Shanghai Expo, both the U.S.-China Green Energy Forum and related U.S.-China Green Energy Conference, with a brief visit to the ChinaBio Partnering Forum (a biotech conference), respectively in Hangzhou, Shanghai, and Suzhou.

Here’s a few more data points on the above story:  The first U.S. bullet train is not planned to be completed until 2017, in Florida, followed by Texas in 2020, and Chicago, Northeast, and California regions in 2023-2025 with a total capital outlay of under US$100 billion.  The Obama administration has earmarked approximately US$8 billion in seed funding.  Meanwhile, China plans to invest over US$300 billion through 2020 on bullet trains, with the first 60 trains mostly manufactured in China under technology transfer agreements with Siemens.  This represents “one of the largest infrastructure projects in history: a nationwide high-speed passenger rail network that, once completed, will be the largest, fastest, and most technologically sophisticated in the world,” according to Fortune magazine.  Apparently 110,000 workers were laboring on a single line, the Beijing-Shanghai route, at the beginning of 2009.  Must be nice to have cheap labor….  Uh, not so fast – on this same trip the Chinese factory worker strikes were in full force.  You know, the ones in which the Honda gear parts workers (Atsumitec in Foshan) successfully bargained for a pay increase of 47%(!).  Wow.  Tell me if that much of an increase might affect your company’s profit margins.  Okay, I know, my Honda will cost more next year, er, next month (week?).  And very likely, most everything else manufactured in China, which is … almost everything else.  Yeah, you’ve heard it before; things are changing fast in China.  But seeing the scale of the development makes a believer out of you.

Segué to the ChinaSourcing Summit 2010 in Hangzhou, sponsored by the People’s Republic of China, the People’s Government of Zhejiang Province, the Hangzhou Municipal Government, China Council for International Investment Promotion, and U.S.-based outsourcing specialists, Technology Partners International, Inc. (TPI).  At the opening “Gala Dinner”, Madame Ma Xiuhong, one of the Vice-Ministers of PRC’s Ministry of Commerce provided the opening address.  She rattled off every statistic on the outsourcing industry in China imaginable.  She knew China’s market and the market internationally forward and back.  You know the drill:  Outsourcing is a US$900 plus billion market, of which China captures approximately US$119 billion, 47% of which is domestic and 29% of which comes from U.S. and EU companies, primarily related to the manufacturing and finance industries with almost 70% in IT-based outsourcing, employing over 1.5 million employees, and growing from 4,000 service provider companies in 2008 to over 9,000 in 2010, etc.  It was obvious that China had decided to prioritize investment in the very promising outsourcing industry, hosting the event to attract MNCs away from India, the offshore market leader, and showcase both the China-based providers’ strengths and those of its impressive infrastructure.  China’s Ministry of Commerce, which was established in 2003, is one reason why China ranks #1 in the global economy. The Ministry of Commerce regulates the domestic market, attracts foreign investors, and helps Chinese businesses compete overseas.  It’s also responsible to manage relationships and agreements with the World Trade Organization and the United Nations on behalf of the Chinese government.  I came away from Madame Ma Xiuhong’s talk with the clear impression that China has a laser focus in achieving its economic objectives.

China’s Entrepreneurial Formula and Washington Paralysis

With the help of the Ministry of Commerce and similar offices at the regional level, China has very successfully leveraged a pragmatic and opportunistic marriage of its local and national government policy and investment drivers, the research and knowledge incubators of its university system, such as at Tsinghua University and Jiaotong University, together with private industry and venture capital firms to create an industrial strength engine that is hitting on all eight cylinders….Meanwhile (again), the U.S. is still trying to pass an energy bill; actually, it’s now no longer trying to pass an energy bill.  In a recent New Yorker article highlighting the failure of the legislative process in Washington D.C., Washington D.C. correspondent, George Packer, writes, “I was sympathetic to the [U.S. Senate] freshmen because I was kind of a freshman there myself. But I saw through their eyes how little gets done and how unnecessarily sunk the Senate is in its own arcana. I met some very bright and high-minded freshman senators who in a few years are either going to quit or become creatures of the habitat.”  You may have also heard about the comment from U.S. Senate Minority Leader Mitch McConnell in the New York Times, “I am amused with their [Democrat’s] comments about obstructionism,” McConnell said to the Times. “I wish we [Republicans] had been able to obstruct more. They were able to get the health care bill through. They were able to get the stimulus through. They were able to get the financial reform through. These were all major pieces of legislation, and if I would have had enough votes to stop them, I would have.”  In other words, the Republican stated agenda is to obstruct (not reconstruct) any legislation sponsored by the Obama administration.  In the meantime, there is no successful American agenda while China growth spurts ahead in double digit leaps and bounds.  That becomes visibly obvious in touring China’s giant industrial parks that continue to grow even now at a remarkable pace.  What recession?  Here’s the caption from an article in the June 18 edition of China Daily that I happened to pick up during my trip in the middle of the worst U.S. recession since the Great Depression:  “How are China’s ever-expanding small cities coping with the challenge of rapid growth?”  Know any U.S. cities “struggling” with that “problem”?  Keep in mind, most of these ‘small cities’ are all larger than most of the U.S.’s tier one cities, such as Chicago, Houston, San Francisco, Seattle, and Boston.  We haven’t even begun to talk about the really huge metamorphoses taking place in China’s “big cities” except for the bullet trains feeding into them from the ‘small cities’.  With the growing delta in the efficiency and effectiveness of the political and legislative processes between the U.S. and China, it’s become clear that we do have a leader.  China has been quietly out competing the U.S. for years now.  That’s the 500 pound fact that is still not broadly acknowledged in the U.S.

Industrial Parks and Economic Zones

Much of China’s economic development model focuses on economic and trade development zones in the top tier cities within a mixed use development model that function as incubators of various, mostly high-tech, industries.  I’ll highlight one of these zones, Suzhou Industrial Park (SIP), as just one of the examples of the commercial development occurring throughout the tier one and tier two cities in China.  A tour of the park was provided as part of the U.S.-China Green Energy Conference and was also the location of the biotech conference, ChinaBio.  While this park, and Suzhou, may in some respects be unique – Suzhou is probably the second most prosperous city in China after Shanghai (don’t tell that to Shenzhen and Guangzhou in south China) – it’s important to note that SIP is simply one example of a commercial development model that is in its generals replicated throughout the tier 1 and 2 cities.  At this time, there are over 50 such economic and trade development zones, four of which are in Shanghai alone.

 

 

SIP is adjacent to the old Suzhou urban area, the ancient city that Marco Polo visited, which is often referred to as the Venice of the East due to the lakes and canals that comprise much of its geography.  Suzhou area is 8.8 km2   (around 3.4 miles2) with a population of 6.3 million.  Suzhou is unique in that it has one of the lowest density populations of any major metropolitan area in China, around 10,600 per mile2 (4,100/sq. km2); compared to Shanghai with 100,000 per mile2 (40,000/km2).  SIP consists of 288 sq. km.2 (approx. 110 mi.2) next to Suzhou’s urban area.  It is likely one of the longest on-going commercial developments of its kind in China with development commencing in 1994 through agreements between China and Singapore, under the ownership of China-Singapore Suzhou Industrial Park Development Group Co., Ltd, which is approximately 30% owned by a Singapore consortium.  It was also developed separately but in tandem with the Suzhou New District, a 52 km2 (20 mile2) commercial development located on the opposite side of Old Suzhou urban area; both parks competed with one another in the early stages of development, essentially through the ‘90’s.

The SIP itself consists of six different zones, including hi-tech, clean-tech, recreation and tourism, services, and science research.  The park promotes services and manufacturing not associated with heavier, industrial manufacturing.  Promotion of industries associated with a cleaner footprint and “sustainable export-driven development that relies on education and technology” is a recurring theme for these industrial parks and tech zones.  The science research zone includes a 1 km2 (235 acres) area known as BioBay that is targeted for “biotech companies, R&D enterprises, and professionals throughout the world” with a goal to “encourage and support the development of a modern bio and nanotech industry in Suzhou.”  By end of 2009, 79 Fortune 500 companies have made investments in SIP, and SIP generates approximately 16% of Suzhou’s estimated RMB740 billion annual GDP, or around RMB120 billion (approx.US$20 billion annually).  Supposedly, Information Journal of France dubbed SIP as the China Silicon Valley.  Suzhou is home to some 19 colleges and universities, again not unlike other major cities in China, with over 180,000 students.  Average annual wages in Suzhou have increased from RMB 23,108 in 2003 to RMB 40,261 (US$5,890) in 2009, representing almost a 75% increase in six years.

On my way back to Shanghai from Suzhou, I was able to get a lift from one of the bio-tech entrepreneurs attending the ChinaBio conference at a posh boutique hotel in BioBay.  He keeps his car parked at Hongqiao airport and commutes to Suzhou, about 50 miles away, and flies back and forth between his company’s headquarters in San Diego where his family also lives.  He recently moved his company’s Shanghai offices to Suzhou so that his highly educated employees could afford to purchase a home.  He said that Shanghai real estate had appreciated by about 700% since 2000.  Suzhou has appreciated dramatically as well, but not as much as Shanghai – his employees could still purchase a home and ride a bike to work whereas a home in Shanghai – if one could afford it — would often require a 1-2 hour commute each way.  Moreover, to encourage him to relocate his company offices from Shanghai, the municipal government offered an incentive for one year to each of his employees, adding around US$440 to their monthly paycheck (US$5,280 annualized).  Excuse me?  Uh, how often do you hear about such an incentive in the U.S.?  How about never.  And by the way, that’s like doubling their first year’s paycheck based upon average per capita wages in Suzhou.

China’s Environment and the U.S.-China Green Energy Conference and Forum

 

China’s growth and development has not come without a cost, primarily that of environmental degradation.  I’m looking out over the magnificent Suzhou Industrial Park from a glorious twenty story rooftop view.  And I can’t see the sun.  Maybe it’s just a cloudy day.  But no, during my entire two-week trip in the Yangtze River delta cities of Shanghai, Hangzhou, and Suzhou, no sun.  Maybe a half mile of visibility.  China has powered its development primarily on coal – approximately 80% or more of all of China’s power plant energy comes from coal.  Think late 19^th century London for all of China’s tier 1 and tier 2 cities.  The projections include decreasing reliance over an extended period of time – until in 2050 reliance on coal will, finally, only be 50%.  Uh, 50%?! For a nation that annually contributes almost 25% of GHG in the world, 50% still represents – let’s do the math – approaching 12.5% of the GHG in the world – in 2050, down from about 20% today; no doubt the GHG emissions generated from energy production don’t represent China’s full GHG emissions, but still, that’s like saying there’s no end to increased global warming in sight.  Not addressing China’s polluted waterways for the moment, and notwithstanding the fact that approximately 12 of the 20 most polluted cities in the world are located in China, if you can’t solve China’s coal, you can’t solve global warming.  That said, it was remarkable to me how little was said about that at the green energy conferences.  That’s really China’s 500 pound gorilla in the room that no one is talking about.  To be sure, the U.S. is not far behind, with around 50% of its power plant energy coming from coal today.

At the conferences (I’ll refer to the Conference and Forum together as the “conferences”), several Chinese presenters referred to the environment degradation that legitimately needed to be addressed as an “impediment to China’s economic progress.”  And the conferences’ focus was primarily on the burgeoning green-tech industries that have the potential to drive major economic growth across both the U.S. and China, such as wind, solar, green development and green cities, smart grid technologies and infrastructure, electric vehicle and bio-fuel based transportation, and venture capital investment related to such technologies.  So it being understood that the focus of the conferences was on development of these industries across both China and the U.S. which would help, though not necessarily be intended to solve, the climate change crisis the world is now facing, these conferences provided an incredible amount of information for companies that are interested in “cross pollinating” technologies and know-how between the U.S. and China.  The conferences were jointly sponsored with support from the Chinese government and private enterprise, under the leadership of the U.S.-China Green Energy Council (UCGEC).

The UCGEC is a 501(c)(3) non-profit NGO registered in California and based in Silicon Valley with a mission to promote and strengthen collaboration in green energy/clean tech innovation between the U.S. and China and has sponsored two prior conferences in 2008 (Beijing) and 2009 (Palo Alto).  One of UCGEC’s strengths is having a deep network of Chinese business relationships in China’s green energy business community along with the capability to match those relationships with strong support and participation from the Silicon Valley and China- based investment communities.

Electric Vehicles

While worldwide GHG emissions from transportation are only around 15% to 17%, much of the global warming discourse is focused on transportation.  Even though the transportation sector includes the very important areas of mass transit, intelligent transportation systems and bio-fuels, the buzz around electric vehicles (EVs) gets the most attention.  For example, the 2010 Berkeley-Stanford CleanTech Conference elected to focus its agenda on “Electric Car 2.0, Who Will Win the Race.”  And China is host to some of the major alternative vehicle conferences and manufacturers, including perhaps the largest EV conference, the Electric Vehicle Symposium, that it will host this year in Shenzhen, China in November, and the Asia Green Vehicles Summit 2010 will be held in Shanghai from October 20th– 22nd.  Similarly, the conferences elected to focus on EV technologies within both the U.S. and China, and contrasted the unique market characteristics of each country.  The table below underscores important market differentiators which will affect the nature and rate of EV development in each country.

U.S. & China EV Market Differentiators

	Market Characteristic	U.S.	China
1.	Charging Capability	In garage at home	Residential charging not feasible
2.	Auto Industry Maturity	Mature (100 years)	Just beginning to scale
3.	Commute Demand/Miles per drive	Auto is commute vehicle of choice; 80% commute less than 40 miles/day	Used more frequently for personal use and less for work commute
4.	Need for extended trip transport (200 to 1,000 miles)	Periodically needed	Rare — mostly in-city or next-city trips
5.	Mass transit options, local and extended	Limited and slow	More developed and faster
6	Vehicles per capita	1:1(246 million cars)	1:70   (20 million cars)
7	Government Policy	Market driven; limited incentives	Strong government support; various policies; liberal incentives
8.	Short-term source of electricity	Fossil-based & hydro-electric with focus on renewable generation	Coal
9.	Vehicles sold in 2009	10 million 27% decrease	10 million45% increase
10.	Projected demand by 2025	300 million units (estimate)	250-300 million units
11.	% of total GHG emissions from transportation	30%	5%-10% (estimate)

 

One differentiator is that most Chinese residents live in highly dense multiple-unit residential complexes whereas the single family detached dwelling is most common in the U.S.  The latter makes it very easy to charge an EV in one’s garage, whereas charging multiple EVs could cause a serious electrical capacity challenge for China’s residential complexes.  This will drive the China market to more quickly adopt and standardize upon a common charging station infrastructure to support EV battery charging.  This approach also works in China’s favor due to a more centralized policy structure for mandating a common charging standard.  In March of this year, the UCGEC sponsored a seminar by Zicong Xie, one of China’s leading EV industry visionaries, entitled an “Overview of China Electric Vehicle Development and Business Model Innovation”.  Essentially this model advocates standardized and replicable charging stations where the battery technology and cost is equated with the fueling component of vehicle ownership rather than the up front capital costs of ownership.  In this manner, batteries could be leased with the cost spread over the life of the battery.  In addition, older battery technologies could be more easily replaced by swapping out the lease on the battery.  This also makes the initial cost of ownership more affordable and creates more of an “apples-to-apples” comparison between EV and gas-powered vehicles.  This is not unlike the model advocated and being popularized by Better Place founder, Shai Agassi, who has raised over US $335 Million in venture capital to launch its business model and supposedly is in discussion with up to 25 different countries.

Because most Chinese auto owners’ driving is in-city, the driving range will be more limited making it easier to utilize an EV with a range of less than 100 miles, and charging stations will likely be easier to deploy within the limited footprint of the city.  Finally, because the Chinese auto market is still in its infancy, it’s easier to leap-frog the legacy petroleum-based infrastructure that has developed over the last century in the U.S., and promote the EV infrastructure for consumer use, thus preserving shrinking oil resources for more critical industrial applications.  Currently 50% of China’s oil use goes to feed its transportation sector.  Provided that China is successful in implementing such an EV infrastructure, EV adoption in China could outpace that of the U.S., due to the strong Chinese economy, and the fact that its costs of production for its local auto industry, such as BYD for example, will likely be lower than in the U.S.

It’s often easy to overlook the notable fact that China already has in operation the largest number of EV’s in the world, estimated to be 120 million.  That’s the estimated number of e-bikes in use today in China.  Almost every other country, unless you count the entire EU, has less than 2-3 percent of that number.  The e-bike has become the de facto vehicle of use in China, and is a match-up of the ability to navigate China’s congested and often labyrinthine urban pathways with China’s per capita incomes, i.e., that most of China’s residents are unable to afford an auto.  Moreover, conventional motorcycles and scooters are now often banned in large cities due to noise and heavier emissions associated with their 2-cylinder engines and fuel.  In an interesting twist, e-bikes’ popularity is now spilling over into the West, primarily into the EU, and is also beginning to take hold in India where the fumes from its motorized scooters and scooter taxis is almost unbearable. There have been a couple of problems with the e-bikes in China leading to their being banned in certain cities from time to time.  The fact that they are silent and use the bike lanes normally utilized by non-motorized bikes and even pedestrians has caused safety issues.  Much of China restricts the speed of e-bikes to be limited to no more than 20 mph.  In addition, to date, according to David Goodman of the New York Times, 95% of China’s e-bikes utilize a lead-based battery representing 20-30 pounds of lead over the lifetime of a typical e-bike, some of which is released into the atmosphere.  That’s almost 1.5 million tons of lead related to e-bike batteries.  Fortunately, lead batteries are beginning to be replaced by lithium battery technology.  This highlights the importance of recycling practices.  China’s e-bike phenomenon underscores the unique market dynamics and differences between the U.S. and China.

One other aspect of the EV sector presented at the conferences was that of battery technology.  Two interesting presentations on battery cell technology were presented.  One was by Beijing-based CNano Technology founder and manager, Dr. Richard Qi, who introduced the higher performance of lithium iron phosphate batteries using carbon nanotubes and resulting in over 30% greater power density with a 25% reduction in battery internal resistance, making the batteries more powerful and safer (lowering the temperature) at the same time.  Dr. Michael Wang, CEO of Global Super Power (!), presented on the advantages of single cell large-capacity solid lithium polymer batteries for EV use.  This was new technology and IP that could improve upon the small capacity “in series” lithium battery pack in current use today.  China remains the leader in battery manufacture and appears to be taking the lead with respect to battery IP innovation.

EV Buses

 

One of the success stories of the conference was the match-up that developed between U.S.-based and leading EV and Hybrid EV (HEV) bus manufacturer, DesignLine Corporation and a local Chinese bus manufacturer, Higer Bus Company, Ltd. based in Suzhou.  Higer is one of a half-dozen major bus manufacturers in China and produces approximately 15,000 to 20,000 buses annually for about 56 different countries.  During the conference, DesignLine board advisor, Richard Cantwell, entered into discussions with both Higer and the city of Guangzhou who needed to purchase over 100 clean fuel/EV buses before the end of 2010.  Guangzhou has an incredible air pollution issue and is working very diligently to redevelop its city to include green corridors and other green city design elements through a master plan designed by the San Francisco-based architecture firm Heller Manus and lead architect Jeffrey Heller who also made an appearance at the conference.

During the conference, news articles surfaced about the EV buses that were deployed for use at the Shanghai World Expo.  Apparently the EV buses’ performance was compromised by the high summer temperatures shortening the charge duration of the buses’ batteries.  The shorter battery life and range resulted on some days in longer wait lines at the bus stops.

Mr. Cantwell indicated that DesignLine buses were deployed in Abu Dhabi, UAE, and were impervious to the Shanghai temperatures and with double the distance per charge of the Expo buses, with ranges of 100 miles per single charge.  EV buses are a green technology that has developed sufficiently to pencil out now, subject to the initial capital outlay.  Here’s a base line for the business case:  (i) fleets of traditional diesel buses require 1 mechanic per 3 buses whereas DesignLine’s EV buses require 1 mechanic per 15 buses resulting in reduced maintenance costs up to 50% (and noise pollution reductions of 35%); (ii) DesignLine HEVs show 34% improvement in miles per gallon and 41% decrease in maintenance expenses; (iii) the HEV buses are expected to last twice as long as a regular bus; (iv) the HEV’s possess only 5% of the carbon footprint and emit 98%less nitrous oxide and 36% less carbon monoxide emissions than a conventional diesel bus and the EV’s have zero CO2, sulfur dioxide, nitrous oxide and particulate matter emissions with no internal combustion engine resulting in less vibrations, quieter operation, better passenger satisfaction, and no oil changes or overhauls; (vi) these savings resulted in a payback in 6 years or less for the additional capital outlay.  A major aspect of the EV bus technology is not merely the battery technology, but the proprietary software technology utilized to integrate the vehicle mass and energy systems to maximize energy efficiency, dubbed by DesignLine as its “Vehicle Management System.”

This potential match-up of U.S. innovative technology with lower cost and on-shore manufacturing capability of a local bus manufacturer held promise for producing a win-win transportation solution for one of China’s tier 1 cities.

Next Installment:  Part II, Wind, Solar, Smart Grid, and The Cold Realities of Global Warming.

© Nick Sarkisian