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QUARTERLY UPDATE

SHANGHAI, CHINA
SUMMER, 2008

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RENEWABLE ENERGY

June, 2008

CHINA’S ENERGY CHALLENGES


China’s recent ventures into the new and renewable energy sectors are propelled
by the need to achieve total ‘energy security’. Dependence on foreign oil
coupled with a heavy reliance on coal threatens China’s monumental growth and
vacillating environment. Fearing an energy crisis, power shortages, and backlash
from rural communities left without power, Beijing has began to embrace, among
numerous other projects, renewable energy development.

China’s energy demands are nothing new, but they are increasingly becoming
more urgent for Beijing. Chinese President Hu Jintao, at the APEC meeting last
September in Australia, aired the CCP’s energy imperatives, “We should ensure
that both production and consumption are compatible with sustainable
development. We should optimize the energy structure, promote industrial
upgrading, develop low-carbon economy, build a resources-conserving and
environment-friendly society and thus address the root cause of climate change.”
President Hu’s statement not only respects the APEC agenda but clearly
demonstrates Beijing’s approval for alternative energy developments.

Currently 70 percent of energy consumption in China derives from coal; by 2030


optimists would be
lucky to see this level China understands the energy
dip to 60 percent. challenges it faces and in turn has
China’s recent State looked towards renewable energy
Council Information to alleviate oil dependence.
Office, White Paper on
Energy (December 26, 2007), stated that they rank third in coal reserves with
1,034.5 billion tons. Add this to the estimated 2.5 years it takes to build, from
conception to construction, a fully operating coal plant and you can see the
implications. However, China also knows that coal reliance adversely affects the
environment—which in turn leads to social disharmonies.

CHINA’S GOALS
China’s goal, by 2020, is to have 15 percent of the countries primary energy
stem from renewable sources. Beijing, via recent law (Renewable Energy Law,
enacted January 2006), deems hydroelectricity, wind power, solar energy,
geothermal energy, and marine energy as verified renewable energy sources.

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Nuclear power, due to the hard to place waste it creates, cannot be considered
truly sustainable while hydropower by 2020 is estimated to be almost fully
exploited. Projects, funding, and interest in the renewable energy sector center
around wind, biomass projects, and, to a lesser degree, solar power.

A quick look at the hard numbers illustrates both the Central government’s and
private businesses’ interests. A recent (spring, 2008) report, issued by the
National Industry and Commerce Joint New Energy Business Association,
estimates that 76 billion RMB (10.4 billion USD) was invested into China’s new
energy and renewable energy industries in 2007. Nearly half (48 billion RMB~
6.56 billion USD) of the estimated investments funded wind power and
hydropower projects. Solar, bio, and methane, energy companies invested
roughly 26 billion RMB (2.8 billion USD).

The 2006 Renewable Energy Law, championed among international


environmentalists, promises tax incentives and rebates for firms pursing
renewable energy initiatives. China understands the energy challenges it faces
and in turn has looked towards renewable energy to alleviate oil dependence.
International and domestic companies alike recognize this need and, supplied
with innovation, favorable tax policies, and a nod from Beijing, the wind and
solar energy sectors have taken off.

China’s deft maneuvers in the renewable energy sector have lead World Watch
(a prominent environmental research group) President Chris Falvin to state,
“…China will be number one in less than three years in every renewable energy
market in the world.” China’s renewable energy sector expanding at a
break-neck pace even though China will likely surpass the US in carbon emissions
in a decade’s time. China strives to capitalize on renewable energy sources—for
both ‘energy security’ and environmental causes.

The following will examine China’s key renewable energy sectors, their current
status, future goals and challenges, and the companies that drive them.

WIND
Over the past year wind power has been the best performing energy sector. The
result: companies and governments from around the world are expected to
spend as much as USD $150 billion on wind power projects over the next five
years. Vestas Wind Systems (Denmark) and Iberdrola of Spain will lead wind
project spending as international lawmakers provide financial incentives for wind
power—a non polluter, comparatively inexpensive, renewable energy.

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Wind power companies across the board have seen profits inflate. Gamesa
Corporacion Technogica, a Spanish turbine manufacturer, which primarily sells
parts to China, Spain, and the US, has increased its value by more then two thirds
since 2006.

In 2005 China was the worlds 10th producer of wind energy. Fast forward two
years—China ranks number five globally in wind energy production and experts
predict China will attain the number one status (currently held by Germany) by
2020. In 2007 alone China created 1,300 megawatts of wind power—the
equivalent energy output of two average size nuclear power plants.

In the Spring of 2008 the National Development and Reform Commission (NDRC),
one of
Simply put there aren’t enough wind China’s top
turbines to meet demand—a demand that economic
has escalated due to China’s recent planning
renewable energy priorities. agencies,
raised the
bar—they want to produce 100,000 megawatts of wind energy by 2020 from
its initial goal of 20,000 to 30,000 megawatts. The recent revisions have
established energy conservation as a central State policy and for the first time
career advancement for local government officials is tied to achieving energy
conservation goals.

Global demand for wind turbine equipment is great and supply is becoming
increasingly scarce—driving up prices and concerns. Simply put there aren’t
enough wind turbines to meet demand—a demand that has escalated due to
China’s recent renewable energy priorities.

Unfortunately for China, and the world, its ability to produce wind energy
equipment is lacking. In 2006 China produced enough wind turbines to generate
only 540 megawatts (that’s roughly 300 average-sized machines) of energy,
only half of what the country demands per year.

China’s domestic market although still not strong contains a few companies that
are looking to enter the global market. China High Speed Transmission
Equipment Group, a Chinese company focusing on the gearbox manufacturing for
wind turbines, works domestically but plans to quadruple production and
compete internationally (namely with Siemens and Hansen Transmissions) in two
years.

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Worse yet China relies on importing key wind-turbine parts which further
pressures the global supply of wind technologies. Beijing, in an effort to support
the country’s growing domestic wind turbine manufacturing industry, will refund
value-added tax and cut tariffs on wind-turbine parts. The government
legislation helps Chinese turbine makers dismiss tax obligations so they can be
more competitive in global bidding for wind turbine components.

Chinese wind power companies also receive privileged treatment under China’s
Renewable Energy Law. Large scale projects, producing a capacity that exceeds
100 megawatts, receive substantial government support. Customs tax and VAT
are waived on imported equipment and operators have the right to agree to
long term purchase agreements with local power grid thus guaranteeing
revenues.

China’s wind energy demands are ambitious and create both international
competition and praise. Companies like General Electric, Vestas, Gamesa, and
Vensys, to name but a few, are paving the way for wind projects in China.
Growth and profits in the wind sector will likely continue in China as government
legislation and demand outpace supply.

For a large proportion of companies established or establishing operations in


China, remote regions in the north (Xinjiang Province or Inner Mongolia) provide
a consistent supply of wind, but not people. Finding suitable candidates to lead
and organize a wind farm in distant regions proves challenging for most
organizations. Relocating a Chinese candidate from a one city to another,
especially to a lesser developed one, is difficult and remains mostly a short term
solution.

Although the candidate pool continues to mature, the growth of the industry in
China has outpaced it. New and existing firms struggle to find key talent for
technical positions because they demand a combination of technical experience
and English skills that are often scarcer in remote regions in China. Companies
have had and continue to invest in candidates with less experience and
qualifications and train them while providing them with strong support from the
head office.

SOLAR ENERGY
It is estimated that China’s vast tracts of open land soak up some 2,000 hours of
sunlight per year (the equivalent of 1,700 billion tons of coal) —more then any
other region in the same latitude. China has the space and the sun to meet their
energy goals, but the tangible and intangible costs for undertaking such an

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initiative would be numerous.

The NDRC estimates solar power will generate 300,000 kW by 2010, up from
70,000 kW in 2005, it cannot compete with other renewable energies like wind
and hydro power because the sector is still technologically underdeveloped and
material and production costs remain high. Furthermore, the industry struggles
to achieve economies of scale with little adoption and implementation in China
leading most solar panel manufacturing companies to export the majority of their
products.

There are more than 150 Chinese companies producing photovoltaic (PV) cells
(cells that convert light into energy) and they produce a third of the world’s solar
cells. 90% of solar products in China are exported because, until very recently,
demand at home has been scarce. The global market for solar panels and cells
has grown at a 38% compound annual rate since 2001 which has contributed to
global shortages of polysilicon—a key ingredient for photovoltaic cell
production.

Currently, China depends on imports of raw materials and exports finished


products. This gives
foreign firms like
Chinese support for solar energy Wacker Chemie,
remains tepid because of the high Mitsubishi Materials,
costs and underdevelopment of the Sumitomo Titanium,
industry. and select others
(manufacturers of polysilicon) a significant amount of control over the direction of
the domestic solar PV industry. Chinese PV manufacturers are competing with
electronics and chip manufacturers, whose products also use polysilicon, for
limited supply. This forces them to submit to high raw material costs undercutting
most existing labor or tax advantages.

Alternative routes do exist and they rely less on polysilicon and more on new
technologies. Domestic Chinese firms, notably Suntech Power and Yingli, are
exploring ‘thin film’ technologies that require little to no polysilicon to wean off
high priced imports. Solar thermal technology is another solution for the tight
polysilicon supply situation. However, the solar thermals exciting possibilities have
only began to be explored in China.

Beijing is unlikely, in the short term, to help domestic energy companies invest in
top grade polysilicon development projects. Today China uses solar power
mainly to power remote and sparsely-populated rural regions that are not

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connected to power grids. It proves more economical then developing power
stations in far flung provinces like Tibet, Qinghai, or Xinjiang. Still, solar energy is
challenging to maintain and material shortages plague output results, leaving
many villages and townships with flickering hope.

Chinese support for solar energy remains tepid because of the high costs and
underdevelopment of the industry. China’s Renewable Energy Law mandated the
state grid allow 100% feed-in for electricity from renewable sources, as well as
implement set feed-in tariffs (born by end users). Feed-in tariffs are structured
to encourage swift adoption of renewable source by grid operators and also
make renewable energy and equipment manufacturers more efficient and
profitable. While specific tariffs have been set for bio-mass and wind power
projects, tariffs for solar energy have not been. The NDRC is looking at the long
term potential for solar energy and does not see solar energy as an immediate
priority as it is expensive and unwieldy due to material and intellectual
shortages.

Solar electricity generation has brought together Chinese companies and


international partners to build production lines and introduce new technologies.
China’s solar power sector is still young and many Chief Engineers at Chinese
solar companies have benefited from international study, work experience and
research. However, internationally trained talent, with appropriate qualifications,
are few in number as the market grows.

BIO FUELS
China is the world’s third largest oil consumer, after the United States and Japan,
and imported a record 36.38 million tons of refined oil in 2006. China’s
dependence on imported oil has pushed Beijing to develop and produce liquid
biofuels like ethanol and bio-diesel on a large scale. By 2020 China wants to cut
usage of refined imported oil by 10 million tons—nearly a quarter of its
consumption—and replace it with biofuels. Using crops and excrement from
China’s country side to develop biofuel projects will not only help meet growing
energy demands but will rejuvenate rural economies. Biofuels, according to
Chinese authorities are ranked the most important energy source after coal, oil,
and natural gas.

Although controversial, opening and developing biofuel plants are also expected
to cut carbon emissions. If China’s 11th Five Year Plan goal of producing 5.5
million kilowatts of biofuel energy is met, an estimated 2,200 tons of carbon
dioxide emissions will not be released into the atmosphere. However, biofuels
present challenges. In a recent World Economic Outlook (2007) the International

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Monetary Fund expressed worry over as increasing competition between biofuel
materials and food consumption for agricultural products will drive up crop prices.
The worry is China, already the third ranked leader in biofuel production, will
invest in too many biofuel projects and drive up domestic and global food prices.

Beijing, recognizing the potential danger, requires that every new and
expanding biofuel operation undergoes assessment and authorization by the
NDRC.

Currently China has dozens of biofuel companies—rank among them is Hainan


Zhenghe Bio, Sichuan Guchen Youzhi Chemical, and Fujian Zhuoyue New Energy.
Since 2006 biofuel plants, from private, state-owned, joint venture, or
foreign-owned enterprises, have sprung up from Shanghai to Xinjiang. These
plants mainly convert rapeseed oil and imported palm oil into biofuels while also
working, to a lesser degree, with used cooking oil and assorted vegetable oils.

The increased demand for ethanol and biofuel material has prompted China to
look overseas for material and production opportunities. Biofuel material, mainly
produced in China, is also primarily imported from South America—namely
Brazil. The China National Offshore Oil Corporation (CNOOC) in 2007 is
investing USD 5.5 billon in an Indonesian based project that will produce
biodiesel from palm. Increasingly international biofuel projects are stimulating
trade and creating dynamic opportunities.

Government subsides and encouragement for biofuel projects will make China a
leader in the biofuel industry and the sector will likely become one of Chinas
core competencies. Rising food prices and the threat of decreased biodiversity
make biofuel production risky—if not truly renewable. Forests, hosting a wide
array of plant and animal life, will be ploughed over for biofuel crops while
escalating food prices could prove perilous as 1.3 billion people need to be fed.
Problems exist but Beijing will continue to aggressively produce enough biofuels
to wean off foreign oil and cut down on carbon emissions.

RENEWABLE ENERGY SECTOR CHALLENGES


While China’s actual renewable energy improvements and advances remain
questionable, the fact is obvious that the government is highly motivated to
support the global Environment movement. Candidly announcing its own
environmental ambitions, while creating subsides and tax incentives for
renewable energy projects, China clearly indicates its support for the sector.
Beijing’s actions encourage continued foreign investment from countries that are

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committed to environmental protection, as well as the continued development of
a new industry in China.

KEY POINTS FOR CANDIDATES:


Take the initiative to improve your English. Combining your
technical know-how with strong English communication skills can open
entirely new and more senior level positions. Regardless, English
communication skills are transferable and beneficial at both Chinese and
foreign companies.
Consider being location flexible. Companies are usually hard
pressed to locate talent in more remote cities. The opportunities for
advancement in remote or developing cities are usually greater and
experience will undoubtedly help you develop professionally.

As China’s main advantage continues to be low cost production a number of


foreign firms invested in developing ‘green technologies’ and in ‘run off’
industries will continue to migrate East. Economic policies and incentives initiated
by the central government are an encouraging sign that China is willing to play
its part while achieving a degree of ‘energy security’ and without hindering
economic activity.

The current and pledged continuation into segments of the renewable energy
sector guarantees challenges and opportunities at every level. As with any firm
just entering the China market many are seeking out expatriate staff for key
senior positions as a short term solution. These individuals bring with them key
technical knowledge and a depth of experience being typically from companies
and locations that have been longer invested in environmental protection.
However, their ability to develop relationships with regulators and government
officials at every level, as well as to show flexibility and adapt to an industry
environment whose policies and regulations that are still developing will be an
important factor in their and the their firm’s success in China.

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KEY POINTS FOR CLIENTS:
Develop a strong and savvy recruitment and retention team that
understands the issues faced in developing markets. Ensure that they
recognize what the key drivers and incentives are for employees unique
to those locations.
Never underestimate the pervasiveness of the government and
regulators in China and the importance of building positive relationships
at every level. If the head of your organization cannot do this, then
someone close to the top should. This will ensure you remain close to the
issues and have insight into changes that affect the industry.
A young industry naturally begets a young candidate pool. They
are well educated and have strong skill sets that can be further
developed. People oriented managers - not just project oriented
managers – have never been more important. Ensure that both your
expatriate and local management team has experience in developing
people.
Consider making retention a KPI for the management team if it is
not already.

The future of the renewable energy industry shows promise as a large pool of
entry level talent is being groomed to rise to the ‘next level’. Usually armed
with post graduate degrees from foreign institutions or reputable Chinese
universities in scientific and technological fields, these young talents are able and
eager to help firms straddle the cultural divide by using their imported
knowledge and practices and adapting them to the ever changing Chinese
market.

CONCLUSION
China’s ambitious renewable energy plans are creating exciting environmentally
friendly projects all while protecting China against potential energy shortages.
China’s goals are prompting a flurry of international and domestic business
activity to meet new demands. Each renewable energy segment is equipped with
its own challenges and opportunities but the sector collectively faces talent
shortages. As the renewable energy segment expands the number of qualified,

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technologically able, leaders remains stagnate. Forward looking renewable
energy companies looking to capitalize on China’s energy goals must plan for
staff shortages and turnover, create active recruitment and retention programs,
and seek out people oriented (not just project oriented) managers to help build a
solid organization. Head offices, recognizing how integral developing nations
are to their success and the challenges that exist in these markets, would be wise
to drive these initiatives and programs throughout their organization.

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About Foster Partners:

Foster Partners is a global retained executive search firm focused on senior level
leadership for U.S. and European multi-national companies. Foster Partners U.S.
Headquarters is located in New York, New York. China Headquarters are located
in Shanghai with operating offices in Beijing, Guangzhou, Nanjing, Ningbo and
Hong Kong. Further Asia operating offices include Kuala Lumpur and Ho Chi Minh
City.

About FP Selection:

FP Selection is principally focused on recruiting high caliber, middle level managers


for US and European multi-national corporations entering the China market and/ or
that have existing operations in China with plans for further expansion. China
Headquarters are located in Shanghai with further operating offices in Beijing,
Guangzhou, Nanjing, and Ningbo.

About Penrhyn International:

Our international partnership with Penrhyn International (www.penrhyn.com) has


been ranked amongst the Top 15 retained search firms globally. Penrhyn was
started in 1979 and today our partners are in Argentina, Australia, Belgium, Brazil,
Chile, China, France, Germany, Italy, Japan, Malaysia, The Netherlands, Poland,
Spain, Sweden, Switzerland, United Kingdom, United States of America & Vietnam.

For more information regarding Foster Partners, FP Selection or Penrhyn


International visit our website www.fosterpartners.biz or contact,

Julie Tam
Tel: 86 21 6288 3628
Email: Julie.tam@fosterpartners.com.cn

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