Author: Eric Knight, Oxford University

Chinese companies are using innovative business models to change the cost structures and capabilities involved in delivering renewable energy technology.

Through strategic partnerships with technology-led companies in the US and Europe, they are rapidly reducing the cost of production and effectively entering the value-added parts of the global technology economy.

In the popular imagination, China’s industrial base is largely built on agriculture and manufacturing. This is still generally true. Agriculture employs an enormous proportion of the workforce and vast lands are dedicated to the painstaking process of growing rice or harvesting wheat. More recently, attention has been given to Chinese farmers leaving their hometowns in search of a better life in the city. Many of these migrant workers have moved into manufacturing or servicing China’s immense construction boom. (The Chinese government alone has committed to building 20 new cities a year for the next decade.) But value-added goods and services are an increasingly important part of the Chinese economy — and the renewable energy sector is chief among them.

Many Chinese businesses in the clean tech space are adjusting their strategy in two ways. The first has been dubbed ‘frugal innovation’ by The Economist. Chinese businesses have found ways to make money from manufacturing high-tech goods in a low-tech way. Take BYD, China’s leading battery manufacturer. Over the company’s first 10 years its founder, Wang Chuan-Fu, brought the cost of the lithium ion battery down from US$42 to US$12. He is reported to have taken designs he had seen in Japan and replaced Japanese machinery with the hands of Chinese workers. Wang proved that it was possible to train large workforces to do repetitious tasks with minimal human error.

The significance of ‘frugal innovation’ is that it has enabled Chinese companies to dramatically reduce the production costs of certain clean energy technologies. Wang’s lithium ion batteries now feature in electric cars, which are taking Silicon Valley by storm. In the mid-2000s, when Wang had first proposed his electric car model to auto executives in Detroit, they had laughed at him. Within a few years even Warren Buffett was queuing up to invest.

‘Frugal innovation’ is one trend which is shaping the Chinese entrepreneurial landscape. The other is Chinese businesses ‘leapfrogging’ parts of the traditional value chain. A number of Chinese renewable energy companies have skilfully moved from being low-tech manufacturers to owning intellectual property (IP). They have done this through a process of inorganic growth — acquiring the intellectual property of strategic partners in Europe and the United States, and deploying it via their low-cost workforce.

Skills and training is the main challenge for Chinese companies making this leap. A workforce trained to build steel sheets cannot necessarily manage complex engineering designs. However, a number of Chinese companies have overcome this by training their employees through internships, secondments and knowledge-sharing agreements with strategic partners.

Take the case of Goldwind, China’s largest wind company. Through the 1980s and 1990s, Goldwind was stuck at the low-tech end of a high-tech industry. They were given wind turbine designs and were commissioned to produce component parts at commodity-like prices. Goldwind had the foresight to reposition itself further up the value chain through strategic partnerships. The company sent its most talented employees on secondments to clients in Europe and the United States. In particular, it set up partnerships with REpower and Vensys—two European companies who were leaders in the market. In exchange for well-priced manufacturing contracts, Goldwind made sure its engineers learnt how to design wind turbines from scratch.

The process was extended over a decade. But in 2008, Goldwind raised €41 million (US$53 million) and bought a 70 per cent stake in Vensys. The deal gave Goldwind special access to the European company’s intellectual property — something which was extremely valuable. Instead of patiently originating its own R&D and trialling new designs, it pursued inorganic growth and strategic partnerships. The resulting company had the best of both worlds — lean manufacturing and sophisticated intellectual property.

The leapfrogging model has been seen in other parts of the renewable energy sector in China. Sinovel and Suntech both have close strategic partnerships with IP-led companies in America and Australia respectively. They are ambitious deals and it is too early to evaluate their final impact. But both have taken a strategic approach to developing their employees’ skills.

The implication of these case studies is to rethink how foreign companies partner with Chinese businesses in the renewable energy sector and beyond. Building relationships makes short-term sense. But partnerships have long-term implications — and whom you choose as a partner is strategically important.

China, and Asia more broadly, is more than the engine room for the world’s low-cost manufacturing. Increasingly, it is home to some of the world’s most industrious and well-educated employees. Encouraging their ambitions — whilst retaining the integrity of intellectual property developed abroad — is the real challenge facing us in the Asian Century.

Eric Knight is the author of best-selling book Reframe: how to solve the world’s trickiest problems. He is a Visiting Research Fellow at the University of Oxford and Visiting Research Associate at the Australian National University.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Energy, Resources and Food’.

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