CHINA: See Change but Sea Change? GlobalGreen Algae, Orbitek Modular Biodiesel Advantage

Something happened this morning that changed my perspective, overturned my plans for the start of today's column, and may (or may not) be an important landmark in the progression of international trade and manufacturing. That's a momentous amount of weight to put on a tiny little email I received this morning, but it really set me thinking. It was not all that different from other email messages I have had over the past few years, yet there was a fundamental difference that was not entirely subtle.

What was different about this email was not that it came from China (the People's Republic of China) although not so long ago such international communication from a "communist" state might have been not only rare but could have subjected me to some government scrutiny. (If anyone reminds me, I’ll talk about the changes to Warrantless Wire-tapping next week.) Nor was it the fact that this email was soliciting importer/dealers to sell manufactured goods from China to foreign markets. The distinctive characteristics were related to two points that, to my eyes, appeared significant: innovation and finance.

On the topic of innovation, these folks were offering products I had never heard of before. They were automobiles of various shapes and sizes, and motorcycles. Now before you snicker that I must have been living in a cave since the 19th century to not have heard about motorcycles and automobiles, that is not what was innovative about the offer. These were vehicles that used a sort of "green" fuel, or at least "clean" fuel. All of the vehicles on offer in this email were specifically designed to run on CNG (Compressed Natural Gas). Now I have been to Beijing, and I assure you that the smog problems there would cause Los Angelino's to cough and choke (I can make such assurances because I lived in Los Angeles at the time. Beijing's dawns were pretty awful atmospheric conditions). So it is not entirely encouraging that the People's Republic of China has innovated this broad range of CNG fueled vehicles. They aren't being offer for export as a result of having a glut of them on the streets of the Chinese capital. Clearly these are a response to the perceived demand in foreign markets. What I am not seeing, by contrast, is any publicity for any such fleet of autos or motorcycles from manufacturers in Italy, France, or Great Britain. The innovation is coming from China first.

Second point of this "green revolution" on the cutting edge of Chinese technology is not the technology itself (for that matter this company also offers to do a retrofit of CNG combustion on existing motorcycles, if that is what you need). The second innovation is the fact that in contrast to the communist government's policy that to access Chinese markets, you must take on Chinese business partners and usually build a manufacturing plant in China as well, these folks are so eager to export their goods and technology that they are offering to help train, build and finance a factory for me. Which is to say, not me in particular, but any recipient of this email solicitation.

I am a student of the adage that, "Those who fail to learn from history are doomed to repeat it." From that perspective, it appears to me that the old "history repeats itself" is entering another iteration. Japan, during the reconstruction following their defeat and surrender in World War II, became known as the source of fast, cheap and shoddy merchandise of nearly every description. Although there have been notable exceptions to the overall reliability of Chinese goods quality recently, the dog food contamination, the toothpaste adulteration, the children's toys containing lead paint, China has become a powerhouse of export while largely skipping the "shoddy goods" reputation in most fields. Unquestionably, some of the tools I have purchased have been "second rate" at best, but for the prices I paid for those one-time or rarely used tools, "second rate" is all I could have expected at those prices regardless of whether they came from China, or the Czech Republic, Laos, or Lapland. But here we have the situation where, again, like Japan in the past, the rapid growth of trade and the accumulation of foreign credit have enabled expansions into foreign manufacturing and financing.

The people’s government (which is to say, the federal government of the People's Republic) has such an excess of capital, that it happily subsidizes loans to the extent that banks in China making loans to businesses have a (some say false) zero default rate because of the government support. The purpose of federal loans is not to achieve a return on their investment. In Beijing, which is to say, all of China, the purpose of the government loans is to build industry and jobs. The whole country is a massive WPA project funded by the export of goods, principally to America. When they want to make money, the government exports the money in the form or low cost purchases of American securities (including the mortgage backed, sub-prime mortgage packages) where even there, the overall return being reduced by defaults that are turning, in recent weeks, into bankruptcies for the firms that package the loans (and resulted in the mini-financial crisis in Europe and worldwide last week) does little damage to the overall rate of return in the massive amounts of debt held by Beijing in foreign capital markets.

To return to my subject, the second innovation, beyond the technology was the extension into the financing and construction of foreign assembly factories. Factories where the labor rates almost certainly cannot compete with their own labor rates at home, but which can gain them access to foreign markets with less resistance to the country of origin, or the general resistance to off-shore sourcing for the manufactured parts. This is a move which echoes the strategies so effectively employed by Japanese car manufacturers in expanding their foothold on the North American car market.

Now I grant that the design of the tricycle taxi that they were offering is unlikely to be an instant hit in Manhattan (don't even get me started on the nightmare of taxis in NYC), or Houston. And the current availability of CNG for vehicles would likely make them more attractive as fleet vehicles than consumer owned transportation, but that does open a whole series of markets to potential inroads. Airport shuttle fleets, nursery school mini-vans, non-polluting parking enforcement vehicles (where tricycle designs are already common) and various municipal, state and federal vehicle fleets where getting greener is likely to increase as a priority as the Democratic Party becomes more entrenched over the next decade. CNG buses, like the ones produced by this company are already in "trial" use in many cities, and becoming a standard in certain parts of Europe. Their little 650cc engined mini-taxi shows something of the differences in priorities of a Chinese vehicle maker from one attuned to the North American market. Even the tiny (original) British mini had an 850cc engine standard. (For you young folks, it was an long time ago when the "Cooper" version was the "hot rod" of the family because it had the HUGE, POWERFUL 1000cc motor for racing purposes -- yes, really, I'm not making fun of these tiny and tremendously popular little titans)(okay, a little bit of mockery, but just a snicker worth.) Their web site shows its acceleration of 0 to 100 KILOMETERS per hour as 37 seconds. Such modest performance would be considered to be a embarrassing company secret in the halls of Detroit. However, this little fellow gets 26 miles to the liter. (That's can't be right, can it?) Yup, although my calculations are notoriously, frequently wrong, do the conversions yourself. The China Chongqing BIG Science & Technology (Group) Co.Ltd.'s model "CNG 650cc car" gets 100km on 3.8 liters of "gas". It has front disk brakes and 12 inch wheels, but the puny little fella has about 22 hp and a top speed of 65mph (actually 110kph).

So why has all this, "changed my perspective"? It occurs to me that China is poised for another "great leap forward" (sorry, that has negative connotations from the last time the phrase was used as a Communist government slogan from Beijing, but it is quite literally true this time, I think). If this "BIG Science and Technology Development Group" and their manufacturing divisions actually make the transition to being local manufacturers in some of the emerging countries where labor costs remain modest, then like the Japanese (and to a lesser extent the Koreans) before them, they will be nipping and chipping away at that great American stronghold that used to be a near stanglehold, the world auto market. They are pointed in a direction that better addresses the needs of developing countries, in that, by moving toward CNG, which can be manufactured locally (as MSW landfill gas, or from methanol, ethanol and similarly renewable resources) the environmentally desirable effects of a cleaner fuel will be a strong attraction in the marketplace. Compressed gases, too, look like a step closer to a potential of embarking down the road to hydrogen based vehicles with less resistance along the way. The hydrogen powered cars and trucks may be a long while coming, but unless some radical new motive power becomes available, the long term strategy seems to be flowing inexorably in that direction.

As a nice transition back to the world of biodiesel, Orbitek (formerly known as Biodiesel Technologies Inc.) has announced a deal to put the technology they developed at Cornell University into a jatropha growing operation in Southern China, where they claim the terrain is so rocky and inhospitable that it is unsuited for most other crops. They have hopes of extending this deal to be 100 more such installations, which might sound wildly optimistic, but they also have been thinking ahead and may have what could be a slight competitive advantage. You see, while most biodiesel processor manufacturers do think in modern terms about making modular pieces, and often offer them in "standard" skid mount configurations, Orbitek has gone one better, as the expression goes, because their skid mounted 4 million gallon per year unit fits in a STANDARD SHIPPING CONTAINER. If they have managed to stay price competitive, putting a whole 4MMgy plant-in-a-box is both clever, and a distinct market advantage because it virtually eliminates any question about the deliverability of the technology. If you can get a shipping container to your gate, you can have a biodiesel plant operating in nearly no time (order and manufacturing lag aside).

Let's do a quick math exercise (okay, you math-o-phobics can skip to the next paragraph if you must)! 4 MMgy means that assuming a somewhat "standard" yield on your jartropha bushes of about 2 liters per bush per year, and non-crowded spacing of 1,100 bushes per acre (about 2,700/ha), or about 580 gal/ac or 1425 gal/ha. Assuming you can wholesale your resulting biodiesel for US$ 2.00/gal on world markets (although that's not likely the actual financial result in this case, because half the raw jatropha oil is, in fact, already committed to be shipped to Japan for processing into biodiesel), that's a respectable US$ 1,160/yr/ac or US$ 2,850/yr/ha. Now, based on some data I dug up on the net agricultural labor was about US$ 600/ha in the year 2000. The Southern part of China (though probably not this rocky part referenced in the Biodiesel Magazine article) tends to have the highest cost of labor of any region in China (op.cit.) about US$ 1.22/day, and this report also cites that the average hectare has about 3 workers on agricultural land. Even assuming that this poor land supports only 1 worker per hectare, if that worker is the primary wage earner in the family, 2000-2001 wage rates put that family in the $445/yr range of income. Not exactly a "living wage" in any developed country. Let us assume that the most recent 7 years in China have brought at least 150% inflation of agricultural labor rates. That puts our Chinese farm worker (about 47.5% of which were women according to the 2000 survey data, either spouse being about equally likely to find "off-farm" employment) at an income level of about US$ 1,100/yr. You can see where, at prevailing wages and land/labor densities it can be quite profitable to grow jatropha and process it into biodiesel in China.

But that brings me to my next point which is where we shift gears to a political discussion. This Week with George Stephanopolous interviewed Congressman Dennis Kucinich who was full of energy and getting big applause earlier this week at the Democratic Candidates debate at Soldier Field in Chicago before an audience reported to be 17,000 members of the AFL/CIO. (Senator Joe Biden joked on The Daily Show with John Stewart that Stewart's show had better ratings than all the Republican and Democratic debates combined.) But Congressman Kucinich promised that if he were elected President that it would be an administration in which trade would be based on principles of human rights and fair labor practices. Even if he gets the AFL/CIO nod for President he is unlikely to become the candidate for the Democratic Party. But it IS IMPORTANT to hear his voice. In much the same way that Senator Biden has been the "voice of reason", the only one with a real plan for Iraq (a tripartite confederation that balances the major ethnic and religious factions), so, too, Congressman Kucinich is voicing the central principles of fairness that inspired and fired the generation of the '60's and 70's. Chances are good that the introduction of jatropha curcas on the marginal and barren ground of Southern China will, in effect, multiply the amount of land under cultivation by as much as 500 to 1000%. If the world is going to be a better place, we need to see that this doesn't become a 90% for the corporate interests, 10% for the local population division of the prosperity. Jatropha curcas is a rather low maintenance crop. It is somewhat labor intensive in the harvesting, though with mechanized crushing not a large overall labor component in the production cost to raw oil. And again, the processing is rather simple as industrial processes go, so the use of the modular biodiesel plant will easily amortize its capital costs in 5 to 7 years. Our one agricultural laborer should, in fact, be able to be the principal source of labor for 10 hectares. Under the assumption that one of the objectives of globalization is not merely the enrichment of the rich but the empowerment of people everywhere, we should be able to see that agricultural worker's earning power increase by 9 fold. 900% of US$ 1,100 is US$ 9,900/yr. which would represent a "decent living" in most parts of the world including the Westernized World.

Admittedly even by modern Chinese standards that amount is far from "rich." I have nothing against getting rich myself, or for anyone else to do so, so long as taking the "it is glorious to get rich" slogan from recent PRC government publicity campaigns in the proper context. In the PRC milieu it means that by "getting rich" we also enrich society as a whole, and our community and country, too, in the process. Yes, some of the scary terrorist organizations have fired a religious fervor to bring their followers blood to the boil, and to keep their basic motivations simmering, but the underlying cause of terrorism, worldwide, is not religion and religious differences, it is the economic disparity that we have created between the "have's" and "have not's". The Chinese farmer earning US$ 9,900 a year, who just bought his new Toyota Yaris (quite possibly made in Shanghai in the near future) and is sending his daughter to university might have some remote possibility of becoming a convert to some [other?] religion, but he is not about to strap on a suicide belt of explosives to try to right the injustices of the world.

Why would anyone want to make Chinese agricultural workers "rich", even at the US$ 9,900 annual income level? Well, think about how inflationary that would be on the current economics of Chinese exports. If agricultural workers can earn that kind of wages, purchase those substantial amounts of goods, enjoy that kind of middle class life style, won't that zeitgeist infect the Chinese population as a whole? Wouldn't you expect that the (currently) unconscionably cheap labor market that makes China such an manufacturing and export powerhouse today would fade just a little? Wouldn't you expect that imports into China might expand a bit? These days, US$9,900 would hardly be a comfortable living for a single woman with two children in Chicago, but neither is it starvation if she lives in rural Pakistan, or Bangkok, or Sao Paulo, or a farm in Costa Rica.

Okay, before I forget, I mentioned last week that I bought some stock in a "green" company. The company is Global Green Solutions. I liked what I saw of their "vertigro" system to cultivate algae in a greenhouse environment. That's not the most profitable way to grow algae, but they do have a system that actually multiplies the area of cultivation beyond the available footprint of the building. The "vertigro" system consists of (relatively low cost) transparent containers hung vertically, though which nutrients, carbon dioxide and water are slowly circulated. Because they are quite tall, but only a couple of feet between rows, they actually provide more growing space than if they were just in troughs on the floor. The system is actually rather like a fairly typical greenhouse operation for cut flowers or tomatoes or cucumbers. The growing happens vertically, which is pretty normal for plants with complex structures of stems and leaves, but not so for single cell, simple plants like microscopic algae.

I admit I feel a certain, quirky, extra affinity for the folks involved with this company because when I received an email from one of them it contained a "calculation error" (or two). I called the company to let them know, at which point it turned out that the gentleman who sent me the file had apparently used a "pre-publication" version. The charming young lady I spoke with, named Aman, had the correct version on her computer already. Of course, my modest little purchase of their stock won't send shockwaves through the market, nor to I mean to taut their stock here. I just was impressed enough with the system they put together to think that there is likely a future for these guys, and I hope to be a part of it.

Well, like I said, it was just kind of one of those twist-of-fate things that sometimes feel like they are fated to happen. You know, like that sign that says: "DYSLEXICS OF THE WORLD UNTIE!"

Maggie and I rented a DVD recently that was very unusual. I cannot say that it was completely wonderful, though Dustin Hoffman was his usual amazing self in this costumed drama where his wigs and powered punim are a joy to behold. The movie was entitled "Perfume" with the subtitle "The Story of a Murderer". I think it was supposed to be a horror film. It wasn't very frightening. It was the story of an amoral man operating outside of society, driven by a desire to achieve a kind of transcendence. I am tempted to say that it was a story of an ignorant man so focused on his own ambitions and desires that he failed to recognize the value of life itself. If that were the case; it was a classic tragedy. In any event it was thought provoking, with a lot of 3 second shots of naked dead women. So, as long as you are not frightened by naked people or thinking, it is possible you could enjoy it too.

My traditional, end-on-a-positive-note subject is another movie we just saw in the movie theatre (Canadian spelling, American theater). Maggie is not fond of children, so it was, shall I say, unpleasant, for her in that environment. Screaming kids, running kids, whining kids EVERYWHERE, but the movie was TERRIFIC. I highly recommend and suggest you be sure not to miss, RATATOUILLE. The animation was amazingly good 3D work from Pixar (makers of Toy Story, Finding Nemo and others), the timing of the humor was fantastic, and the story was delightful. Even the ending was unexpectedly upbeat (I should have known, based on their previous films). Apparently the publicity appeals to very young children who are too young to have the self-discipline for a long time seated in the dark, so I would suggest you might want to catch a later showing if you are going to see it in the theatre. On the other hand, if you can wait for the DVD release, I swear, only the most curmudgeonly among you could fail to love it.

Love,

Stafford "Doc" Williamson