User:Anders.sogaard/sandbox

Background
Over the past 30 years, China has experienced an unprecedented growth rate, which for the past decade has averaged 10% annually. China’s target is to eliminate poverty and already millions of people have been lifted out of poverty during the country’s rapid industrialization. The rapid development has taken a toll on the nation’s environment and literally thousands of environmental cleanup projects will be financed in the current 12th Five-Year Plan (FYP) as China shifts to a more sustainable growth. This includes a goal to reduce the annual GDP growth from almost 10% to 7% and comes under clear instructions from the NDRC (National Development and Reform Committee) to the provinces not to seek rapid growth at all costs but to keep the growth rates as set parameters for sustainable growth. In July 2010, the Chinese Ministry of Environmental Protection reported that only half of the water from the country’s major rivers and lakes was safe for drinking, 26.4 percent was seen as fit for agricultural and industrial uses, and 24.3 percent was deemed unusable .Chinese Environmental Minister Zhou Shengxian wrote in a recent essay “The depletion, deterioration and exhaustion of resources and the worsening ecological environment have become bottlenecks and grave impediments to the nation’s economic and social development. It is estimated that the price of the environmental damage annually accounts for 1.3 trillion RMB, equivalent to 3.9% of the county’s GDP. In recent years, the Chinese government has begun to recognize that pollution may impede future economic growth and that the time has come to clean up the environment.

The 12th Five-Year Plan implications for the environmental industry
On March 14, China officially adopted its 12th Five-Year Plan at the closing session of China’s National People’s Congress and Chinese People’s Consultative Conference, the two bodies that convene once a year to determine national policy. To address the ecological crisis it faces, the Chinese government made environmental protection a central part of the 12th FYP that was passed in March and which will guide China’s economical development between 2011 and 2015. A total of 3 trillion RMB has been allocated to environmental protection projects in the 12th FYP and the industry is expected to reach an annual growth rate of 15-20% between 2011 – 2015. Compared to other countries, China has a tradition of reporting its long-term planning, policies and practices. The 12th FYP is a continuation of the 11th FYP (2006 – 2010). The 11th FYP was considered a major policy shift for the Chinese Central Government as it moved away from a focus on “growth at any cost” towards a more balanced and sustainable growth under the banners of “harmonious society” and “scientific development”. The change in leadership in 2012 is not expected to change the targets or the implementation of the 12th FYP as the expected successor Xi Jingping, who will most probably replace President Hu, has announced that he intends to follow the present plan. Three key areas of importance in the 12th FYP are economic restructuring, social equality and environmental protection. Central government funds during the 2011 – 2015 period will mainly be used to support the development of infrastructural and social projects such as ecological and environmental protection. The planned and prioritized environmental protection will be followed by large investments to secure restoration and protection of natural resources such as rivers and lakes. The Ministry of Finance has announced that it will invest over 600 billion RMB over the 2011 – 2015 period specifically in inland dredging, dewatering of toxic sediment, toxic sediment and soil remediation and toxic water cleanup. Soil remediation also receives considerable attention though most of the costs are expected to be covered by private funding (property development projects). A similar approach has formerly been implemented in western countries where the remediation of Brownfield sites has been undertaken by private developers supervised by local governments. Though China has tightened the influx of foreign direct investment (FDI), the 12th FYP welcomes FDI for special and geographical areas, such as western China, and industries, such as the Environmental protection industries. This reduction of pollution and effect goals will create a high demand for technologies and products that will help companies meet the new environmental standards. As a result, international companies with unique, well-proven technologies and solutions will find no shortage of opportunities in China in the years to come. However, even with these opportunities it will not be sufficient for companies to rely only on the strength of their technology or equipment when entering the Chinese market. In order to realize their full potential in the growing market for environmental products and technologies, companies must have an effective market entry strategy. This should include a plan on how to establish a presence in China, provide on-the-ground local sales, business and technical support, build government relationships, bid for projects, conduct demo projects and implement a solution. In addition, they will need to be prepared for the challenges posed by pricing, intellectual property rights, product certifications and operation licenses.

Challenges facing companies entering the Chinese environmental market
China is requesting proven western environmental technologies that have been outlined in the above business areas to make FDI to offer China the outlined services to match the environmental goals and requirements in the 12th Five-Year Plan. Even while there are bright prospects for foreign environmental companies in China, the challenges such as cost, intellectual property rights and product certifications and licenses for operation must be recognized by any environmental business that wants to market its services or technologies in China.

Entering the market
As with any company seeking to market and sell its products or services in China, environmental companies must decide on how they will enter the Chinese market. Companies may decide to register their own company in China or engage a consulting or trading company which can conduct sales and marketing on their behalf. They may also choose not to set up a branch at all in China but instead find independent partners. The size and complexity of China’s market makes it very difficult for foreign companies to effectively operate their businesses in China without a full-time presence there. This fact is especially true for companies with advanced environmental technologies, since they will need technical staff to work on their behalf full-time to negotiate and provide technical support for projects, distributors and potential customers. If an environmental company is serious about conducting business in China, it must be willing to commit both the capital and human resources needed to conduct business there. Having one unique environmental technology alone may not be sufficient for the Chinese market.

Government relationships
To do business in China you need on-the-ground presence and the ability to develop relationships with the government. If a company, especially one in the industrial sector, is looking to sell to government agencies, State-Owned Enterprises (SOEs), establishing government relationships is a must. Since many environmental projects involve municipalities or SOEs, “government relationship” is a necessity. To effectively develop relationships with the government it is necessary to have local staff spending time getting to know Chinese counterparts in strategic government offices. Equally important is building a strong, local organization that can undertake sales, technical presentation, execution and follow up operational support of the product or service. If your company is seeking a project in a particular region of the country, it is crucial that you develop strong relationships with local government officials and not only officials on the national level. Even though the central government has called for new environmental regulations in recent years, enforcement on the local level can be inconsistent. It is necessary to understand the requirements of the local government in order to be successful in the bidding process at a later stage.

Project bidding
Bidding for governmental and state-owned enterprise projects is a complex process and companies will almost certainly require their own local staff and a strong network within the government in order to be successful. By developing local government relationships, companies will have a better chance of learning about potential projects. Once the bidding process has begun, foreign companies often have the advantage of superior technologies over their local competitors. The lack of transparency in the bidding process can also prove to be a challenge for foreign environmental companies and having the best technology alone will not be enough. Companies should employ Chinese staff or hire local sales agents to represent them in the bidding process. Such a presence will help demonstrate that a company has the capability to complete a project locally. In addition, local knowledge of Chinese culture and business practices will enable Chinese staff to educate foreign suppliers in the complex bidding process for foreign companies.

Pricing
China is a very price-sensitive market. The advanced nature of some foreign products and technologies mean that their price can be relatively high. While the higher costs of certain foreign technologies will price them out of some Chinese markets, foreign environmental companies should strive to succeed despite the odds. Many Chinese companies are willing to pay a higher price for high quality. In addition, while costs may be too high in some regions of China, in other more developed parts of the country, Chinese companies and SOEs will pay for advanced international products and services. If high prices limit the volume of sales, companies should consider manufacturing their equipment locally. This can be done either by setting up their own production in China or by contracting an Original Equipment Manufacturer (OEM) in China for all or part of their products in order to keep costs to a minimum and therefore be more price competitive in the market.

Intellectual property rights
Just as any company wishing to market its technology and services in China would do, foreign environmental companies should be concerned about intellectual property protection, even though Intellectual Property Rights (IPR) enforcement has improved in recent years, and even if appropriate safeguards are taken, such as trademark and patent registrations, there is still a risk that the technology will be copied. Recognizing this reality and treating it as part of a business strategy rather than a legal issue, is a necessity for environmental companies looking to market their products or services to China. To stay ahead of IPR violations, companies should work to make their products innovative and market-leaders and consider sourcing components of their product to a “basket” of suppliers in order to slow down the process of such IP violations.

Licenses and certifications
Environmental companies may need to receive government certification or approval before their product can be sold in China. If your product requires certification from a trade association or government agency in your home country before it can be sold, it will almost certainly need to be certified by a similar Chinese government agency in China. Given the complexity and length of such applications, once a company has decided to enter the Chinese market, it should determine which certifications, if any, are required for its products and begin these applications immediately. Companies should expect that the application process will not always go smoothly and that there may be delays.

Demonstration projects
As part of the bidding process, companies are often asked to perform demonstration projects. Such projects are usually required when selling to government agencies or SOEs because government officials will want to see evidence that a technology performs well and is fit for purpose before they invest a large amount of public money. In China, such demonstration projects are almost always performed at the cost of the supplier. Although this business practice may be different from what companies are accustomed to at home, companies should realize that it is essential to accept this part of the business process if they want to secure major projects in China. Companies should not underestimate the importance of demos when selling to government-controlled entities and should realize that not participating in this step of the process could result in the loss of major business opportunities.