In this episode of China Money Podcast, guest John Barnes examines investment opportunities in China's drive to achieve a more sustainable and greener growth. In particular, he explains the enormous potential of wastewater treatment businesses in China, and why many green tech companies might fail as the industry consolidates.
Listen to the podcast or read the excerpt below.
Q: First, give us a brief definition of “sustainability”, particularly relating to your work at PWC?
A: Sustainability is all about building a sustainable business. It’s not an add-on. It’s not a separate thing that companies do. It’s about looking at every facet of all business operations and looking for ways to make operations more sustainable.
We work with companies at a high level, looking at how they can build sustainable programs within their daily operations: from looking at their core products and services to the carbon footprint and life cycle analysis of their products.
Q: When we look at China where the policy and business environments are very different, what specific areas (under the sustainability umbrella) do you see opportunities?
A: Given that the Chinese government has made a commitment to switch the economy way from high-energy, high polluting industries, the potential sectors to watch would be renewable energy, energy efficiency improvement technologies, environmental protection technology and equipment, water management, waste water treatment management, etc.
There is a word of caution here. Just because it’s green, doesn’t mean it will grow. (For foreign investors), clearly you need to do your homework. A lot of things have a green label, whether they are green or not, who knows. Some of these technology companies in renewable energy and wastewater management will eventually fail.
Q: In those sectors you just mentioned, wastewater treatment for example, any specific technologies that would be the most relevant?
A: With wastewater treatment in China, the government has said that it would have a wastewater treatment plant for all its major cities. The government has already built thousands of wastewater treatment plants around in China.
In China, there are a successions of quite small water treatment plants. You need engineering technology but also technologies to monitor the levels of toxins in the water and be able to add things that would break down the solids and wastes.
There are two sorts of plants in China, the government-owned and also private ones. The private wastewater treatment plants are licensed by the government and have contracts with the government to treat specified amounts of wastewater for a certain price. They will have certainty of their revenues.
The biggest costs are electricity and staff. The electricity is fixed by the government. So for example, if you run a water treatment plant heavy at night, then you will be more efficient. Obviously, all the (Chinese) companies are looking for foreign companies with the technologies to make their wastewater treatment process more efficient and more cost effective.
Q: Do you have any estimate of the pace of future growth in wastewater treatment in China?
A: The issue we have in China is that the price of electricity and water is set by the government, so there is less opportunity for companies to shop around for efficiency. Over time, as China grows, these fixed prices will be freed up. Whether it’s three to five years, I don’t know.
At the moment, wastewater is a safe bet because you know what your costs are and your revenue. However, the profitability is not that high. But as time goes on, as the market frees up, there will be more opportunity to make a greater return.
For example, you go to different cities and you will find different operators running different plants. There are not many operators operating more than two or three plants. We need consolidation in the market so that people can benefit from the economy of scale.
Q: You mentioned profitability is not high. How low is it right now?
A: I think it’s about seven to ten percent return on the private ones. The public ones are probably at five percent return on investments.
Q: With this kind of return, is it really attractive for foreign companies to come to China?
A: People come to China because other people are doing it. If you think you are going to come to China to make a fast buck, you should think again.
Five to seven percent it’s not huge, but in this market, it’s not bad either. The only way I can see is up as the market consolidates and as regulatory policies ease.
Q: What pitfalls should investors be watching out for, and a word on the lessons learned from previous mistakes?
A: I want to propose eight steps to succeed in China.
1, Find a reliable local partner; 2, Use consultants; 3, Don’t rely entirely on Guanxi; 4, Do homework and due diligence before jumping in; 5, Be flexible and patient; 6, Bring your first-rate technology; 7, Protect your intellectual property rights; 8, Have a good business model.
Q: Lastly, what’s your outlook for the sustainability/green sector in China?
A: We will see continued emphasis and focus on the renewable energy sector. China has developed its own carbon-trading scheme, which will again push companies to be more energy efficient.
There will be lots of new businesses with “green” labels (coming into the market), and a lot of traditional businesses will embed these concepts into their general business operations. So we will see lots of businesses reinventing themselves along the sustainable practice principle.
Our Guest Today:
John Barnes is a partner at PricewaterhouseCoopers Consultants (Shenzhen) Ltd. Based in Beijing, Mr. Barnes leads PwC’s sustainability and climate change services across Hong Kong and China, where he and his team help address issues including sustainability strategy; sustainable supply chain and life cycle analysis; and environmental and social due diligence.
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