Go Abroad or Go Bankrupt

By Ross Douglas

Since starting the Global Decarbonization Expo (GDE) I’ve been learning as much as possible about the cleantech industry. With my family heading off to Italy to see the inlaws, the October holidays were a perfect time to visit Chinese companies. I've just spent 10 days in China visiting 20 companies and 10 factories; and meeting with 50 entrepreneurs and managers in Shenzhen and in Guangzhou, the capital of Guangdong province.?

Guangzhou

In Guangzhou I visited WeRide the day before their Nasdaq IPO (“The World’s First IPO of Universal Autonomous Driving”). There I met with Dr Yong Gessner, who spent most of his life in Germany and now heads up WeRide’s international business development. According to Yong, With Western countries concerned about China’s dominance in new vehicle technology, a high-profile brand is not necessarily the best strategy, but partnering is. Instead of investing in hundreds of foreign offices and public relations teams as Uber did, WeRide is partnering with local companies, as they have done with Renault in Paris.?

Shenzhen

Shenzhen is one of the world’s most successful economic experiments. In a wide-ranging chat about China’s history, the CEO of Skyworth told me that Shenzhen has France to thank for its success. (Skyworth started making television sets in the late 1980s and now has a turnover of more than 50 billion Yuan manufacturing home appliances, electric vehicles and commercial and industrial renewable energy systems.) In 1919, Deng Xiaoping graduated from the Chongqing School and travelled to France with 80 classmates to participate in the Diligent Work-Frugal Study Movement, a work-study program. His reason for making the trip? "To learn knowledge and truth from the West in order to save China." During his stay in France he worked in a number of factories, including Renault, where he discovered the efficiencies of capitalism.

When Deng Xiaoping came to power in the late 1970s, he opened the country up to foreign capital and technology, with the aim of transforming China from a conventional communist economy into a global powerhouse. Shenzhen, a fishing village of some 40,000 inhabitants, was chosen as a special economic zone (SEZ) because of its proximity to Hong Kong. Some forty years later and Shenzhen is now home to 17.5 million people and world-leading companies such as Huawei, Tencent, DGI, BYD and Sensetime.?

Go Abroad or Go Bankrupt

I heard the maxim “go abroad or go bankrupt” numerous times during my visit. In China the competition is ferocious. All companies have access to the same supply chain, the same subsidies and the same talent. To survive you must beat out other world-class players purely on quality of product and on price. Every factory I visited first took me to their R&D facility, with explanations of how each machine works. At ShineYoung, which makes battery storage systems and is largely owned by CATL, I saw hundreds of engineers working in the test laboratory. The CEO explained that they employ 350 postgraduates to focus on R&D, out of a team of 1,000 employees, at a monthly cost-to-company of around €3,000 per engineer . This is one of the ingredients of China’s manufacturing dominance: cost-effective R&D departments that drive innovation, a far more important success factor than cheap labor or government subsidies.??

I also spent some time with the head of international business for Hans Laizer, a company founded in the 1980s to manufacture lasers that etch barcodes onto products. (They now make the entire production line for the manufacturing of solar panels, EVs and batteries.) Neo, who recently spent two years at Oxford university and is a member of the Communist Youth League, explained that Hans Laizer’s vision is to be the global leader in their sector. This is to be achieved by eliminating – or virtually eliminating – labor on production lines. I asked if he had sold any production lines to Europe’s 40 odd gigafactories; he responded that their first is for the $8 billion CATL factory in Hungary.?

On my final day in Shenzhen I met up with a young American venture capitalist called Taylor who studied autonomous vehicles at a Boston university and then raised a fund from high-net-worth families to invest in autonomous tech. It soon became apparent to him that China is where it’s at; after the covid pandemic he upped sticks and moved to Shenzhen’s Nanshan district. He took me for a walking tour of the city, pointing out robotaxis, delivery robots and food delivery via drones. It made me think of that famous William Gibson quotation, “The future is already here – just not evenly distributed”. Taylor told me there are over 100 AV companies in China and that securing an operating permit takes only ten minutes. It is hardly surprising then that China has issued 16,000 licences for testing autonomous vehicles. He explained that Chinese companies such as BYD, Huawei and Xiaomi – to name a few – are integrating renewable energy, battery storage, electric and autonomous vehicles at scale. The smart money – which includes Taylor’s fund – says that the combination of these technologies will greatly reduce costs and emissions for transportation and logistics.?

Till now Chinese companies have followed this playbook: innovate and lower prices; once the product and price is right, look for distribution agents in foreign markets; if that works, open foreign offices. But now that the West is having second thoughts about free trade, the playbook has changed. Chinese manufacturers have now set up factories in Vietnam and Mexico to access the US market, and in Hungary to access Europe. CATL and BYD are building factories in Hungary and there are now 17 flights a week between Budapest and Chinese cities to accommodate demand.?

Europe needs to rethink its green growth strategy; going it alone is not working. For example, Northvolt lost a €2 billion output deal with BMW, who opted to go with Korea-based Samsung SDI. The reason is that BMW did not trust the quality of batteries from the Swedish manufacturer.?

In 2017 all Shenzhen taxis were fully electric BYD vehicles. Every time they charged, BYD collected the data from the battery management system, feeding it through to their R&D team which has 110 000 engineers today. Given Shenzhen’s extraordinary density of talent and resources, and given the completeness of its supply chain, Europe will find it near impossible to compete with “the Silicon Valley of hardware”. (This mirrors Europe’s challenge in competing with Silicon Valley itself.)?

Fortunately, beyond tariffs and subsidies there is an alternative path for Europe. Chinese companies, such as WeRide, are open to partnerships to access the European market.?

According to Mckinsey, reaching net Zero would require an estimated $28 trillion in clean technologies over the next 30 years for Europe. The upside is that these technologies would reduce total system operating expenditures by €260 billion per year, which is about 1.5 percent of the EU’s GDP. Cheap, reliable cleantech hardware from China will open up all sorts of new opportunities for European businesses as they would halve electricity bills, transport costs and CO2 emissions. While it is tempting to chase all opportunities along the greentech value chain, European companies need to see where the highest margins are and where they have a competitive advantage. Financing and installing solar panels is a better business than manufacturing them is just one example. European energy companies are uniquely positioned to finance and install Chinese solar and battery storage in Europe, Africa and elsewhere in the world and the quickest way for Europe to be more competitive is by reducing energy costs to align with those in the US and China.