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Greening Business in China

July 11, 2008 // 9:00am11:00am
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By Jing Chen, Kimberly Go, and Linden J. Ellis

In 1995, Wu Daohong founded Beijing Shenwu Thermal Energy Company—a manufacturer and designer of energy efficient industrial combustion and heating furnaces—with a handful of staff and money from his own pocket. Now its patented systems, which reduce carbon emissions by at least 30 percent and recoup costs for consumers in 6 months, are used by 170 Chinese companies—including 70 percent of China's most energy efficient steel producers—with $800 million in expected revenue in 2008. This outstanding growth has been against all odds, for although "green enterprises" represent one of China's fastest growing and most promising sectors, it is also comprised of vulnerable small and medium enterprises (SMEs). SMEs are defined in China as private companies with fewer than 1,200 employees or annual revenue below 120-130 million Yuan. It was not until revenue picked up that Wu was able to get bank loans for his business, and even then investors viewed Shenwu as too risky. Fortunately for Wu, Shenwu was able to secure loans and then connect with the World Resources Institute's New Venture Program, which has since supported the development of Shenwu into the success that it is today.

With 60 percent of China's GDP and 80 percent of its employees, SMEs are the most active sector of the Chinese economy and its fastest growing economic force, with nearly 10,000 new businesses established everyday nationwide. Most SMEs are in coastal areas, as opposed to state-owned companies that dominate remote inland areas. It is to SMEs that the World Environment Center and New Ventures Program—organizations represented at this China Environment Forum meeting—direct their projects.

Greening the Supply Chain
World Environment Center (WEC), a global nonprofit, non-advocacy nongovernmental organization (NGO) based in Washington, DC, supports green enterprise in China with a focus on multinational companies and their supply chains—often made up of SMEs. WEC's mission is to advance sustainable development through the business strategies and operations of member companies in partnership with government, NGOs and other stakeholders. WEC projects aim to understand how a company develops and help them implement a successful sustainable development strategy. WEC currently has 46 global member companies—aiming to reach 70 by 2012—and has worked with such major companies as Alcoa in Eastern Europe, Dow Chemical and Johnson & Johnson in Brazil, and Radison Hotel in El Salvador. WEC is currently under contract to work with Australian auto suppliers and has implemented several projects in the auto sector in China over the last several years.

WEC's President and CEO, Terry Yosie, asserts that some international companies have made a habit of mandating and auditing suppliers to be more environmentally sustainable without regard for the economic benefits of participating in green programs. Such a method is no longer acceptable given the large size and prominence of suppliers. Instead, Terry Yosie stressed that multinationals need to form sustainable development partnerships with suppliers to help build their capacity for more environmentally friendly practices. In trying to build such partnerships with suppliers, multinational companies must take into account whether forming such "green" partnerships reduces costs, strengthens the supplier's competitiveness, improves its manufacturing process, or give them access to knowledge.

As part of their work with multinational companies, WEC initiates such partnerships by extending a formal invitation to suppliers to participate in training workshops. Upon accepting the invitation, each supplier is asked to assemble a core staff team that will build accountability for its performance. The supplier's staff then conducts a self-assessment in which it identifies goals and commits to a timetable that will allow them to track progress. Throughout the project, WEC conducts site visits and assembles midterm reports and workshops to adjust these goals and timetables. The backend of the process is an audit in which customer (e.g., the multinational) feedback provides the basis for deciding whether or not to continue a relationship with the supplier. Finally, a workshop compares a supplier's results to those of other companies and establishes a mechanism to follow-up on attained goals.

As an example, Shanghai General Motors (SGM) approached WEC to green its Chinese supply chain, beginning with eight predominantly Chinese companies. Following the training methodology described above, SGM's business ventures in China multiplied. Beginning in January 2008, WEC helped SGM establish a more extensive training project involving 40 SGM suppliers. Many of these suppliers now are able to quantify their economic benefits from participating in the project. Moreover, SGM has seen concrete displays of commitment from leaders and individual suppliers, a sign suppliers see value in sustainable development. Following the success assisting SGM, WEC is now negotiating with other global companies about launching additional projects in China and other parts in the world.

Yosie remarked that the tasks of any major international organization involved in sustainable developed are: (1) continuously devise ways to make a bigger impact on the global market, (2) observe the development of international policy, and (3) examine how institutions can be designed and managed more effectively. This is particularly true for WEC, which has earned a reputation for continuously reinventing itself throughout its 34-year history. Yosie also noted that, when organizations work with businesses and suppliers in an emerging market, one of the critical factors of success is having an on-the-ground presence. To ensure such a presence in China, WEC recently opened an office in Shanghai and is particularly committed to finding on-the-ground partners that can serve as knowledge bases, such as local university professors and retired industry executives.

Help for the Little (Green) Guy
WRI's New Venture Program launched about 5 years ago and to date has offices in five countries. New Ventures aims to support emerging green SMEs, as well as help retrofit existing SMEs (and large companies) that are not yet green. New Ventures is currently at the first stage: helping new businesses, such as Shenwu, grow. A typical example of New Venture's activities is the energy conservation industry in China—the fastest growing industry in the world and one in which many Chinese SMEs became involved after seeing the high demand for energy efficiency.

According to Ye Weijia, head of the New Ventures China branch, the average lifespan of Chinese SMEs, excluding micro enterprise, is 2.5 years, whereas the U.S. average is 5 to 7 years. The main culprit for this shorter lifespan is serious domestic discrimination toward SMEs. Government support for SMEs in China is minimal, as it often first supports state- owned enterprises. These resources do not compare to those available to U.S. SMEs, which benefit from the Small Business Administration and easier access to bank loans.

Chinese SMEs must overcome the challenges of attracting employees, streamlining management capabilities, and building financial credibility. Ye Weijia noted that educated jobseekers in China tend to seek government jobs, as they are more secure and offer better social benefits. Young people in China also prefer to work with large state- and foreign-owned companies because salaries are up to 30 times higher than those in SMEs. With regards to weak management capabilities, most SMEs start as family businesses, which have to build sustainable management structures once they become larger. SMEs also have poor social capital. Being the least credible of enterprises, SMEs are discriminated against by China's banking system, which loans to SMEs at an interest rate 3 percent higher than what is offered to big companies.

In addition to the above challenges, green SMEs in China also face low public awareness of environmental enterprise, as the public tends to favor cheaper and conventional products. Because sustainable SMEs are a policy-supported rather than a market-demanded industry, investors tend to view such enterprises as too risky. Lastly, the supply chains and material flows for sustainable SMEs are for the large part incomplete. By way of example, in China, 3 million metric tons of available biological waste can be used for energy through a very traditional and efficient process. However, there is currently no distribution system for biological waste in China making it an initially expensive endeavor compared to coal, which already has an established supply chain.

New Ventures works with China's SMEs to build capacity, market their products and business, and establish investors through various programs. One example of the way they support China's green SMEs is work with a company in the Inner Mongolian desert. This company discovered and cultivated a desert bush that can be used as an organic pesticide. Because the organic market in China remains nascent, New Ventures is helping the company access foreign investors and markets.

Greening China's SMEs are important because China's status as the world manufacturing center has resulted in heavy pollution. Industry as a whole in China is less efficient than in developed countries—energy consumption is twice that of Japanese industry. Sustainable SMEs are an opportunity for China to improve this record. China's coal dependency—providing 65 percent of energy—is significant in light of the shortage of energy resources, as well as severe weather that is projected to accompany climate change. It is imperative that China change its development pattern to accommodate these changes.

 

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