China
In an increasingly connected global community, China is becoming a major
economic and political power. It is a country with skyscrapers and every
modern convenience imaginable. At the same time, however, there is still a
substantial portion of the population that is in serious need of the basic
necessities of life. In such a segmented economic landscape, there is great
opportunity to begin to address the wants and needs of various types of
markets. Availability of light is part of the solution to bridge the gap
between these disparities. There is a diversity of options within China for
various manufacturing, distribution, and marketing models. The hope is that
a considerable understanding of the types of markets and feasible business
options that are available is gained through the information presented this
section.
Source: http://www.chinapage.com/map/peopledailymap.html
- China stretches 5,000 km across East Asia with a changing configuration
of broad plains, expansive deserts, and lofty mountain ranges, including
vast areas of inhospitable terrain
- China can be divided into two parts, the eastern and the western.
- The eastern half of the country is a region of fertile lowlands,
foothills and mountains, desert, steppes, and subtropical areas. Both
industry and agriculture is booming in this region.
- The western half of China is a region of plateaus, arid land, and
deserts. Agriculture is not profitable and it is not industrialized
for the most part.
(CIA World Factbook, 2002)
1.284 billion people (July 2002 est). China is the country with the
largest population in the world, a potentially productive market if
tapped.
- Age structure: Half of the population is under the age of 24, making
education a top priority for the nation. Due to the one-child policy,
however, the young portion of the population will decrease in the
future.
- Rural vs. urban population density:The official urban population of
China is 455.94 million, which accounts for 36.09% of the total
population.
- Corresponding to climate and geography, the urban areas tend to be
along the eastern seaboard, while the more rural areas are toward the
western parts of China.
- The national population density is almost 5 times greater in the cities
than in the western parts of China.
- Cities that have been dependent on state-owned enterprises (SOEs) are
experiencing unprecedented rates of unemployment, but there is still a
rising disparity in the standard of living between the richest and
poorest sectors of the society.
- Regional disparities and rural discontent are now major political
issues in China. The government is announcing initiatives to relieve
rural poverty, but foreign investors have been reluctant to respond to
government exhortations to invest in western China, given the region's
poor links to transportation, distribution channels, and manufacturing
compared to eastern provinces.
(CIA World Factbook, 2002)
The Chinese government is experiencing adequate political stability to
sustain substantial foreign investment. Getting local and national government
approval is necessary to start business interactions, but using the
government as a business partner is not recommended due to their sporadic
control and inefficient bureaucracy. Acquiring government approval can
accomplished in as quickly as six months following the rough outline in the
"Private Enterprise Models" section.
- System of government
- Socialist market economy: government is allowing the economy to
develop in response to real market forces, while leaving large parts
of key strategic industries in state hands.
- Government regulations on businesses
- Foreign entities are prohibited from investing in projects that
endanger state security, harm public interest, pollute the
environment, or endanger human health.
- Heavily regulated foreign investments are projects that have
already been developed in China and projects in industries where the
state is experimenting with foreign investment.
- Encouraged investments include those aimed at developing manpower
and resources of central and western China, those promoting new and
advanced technology, those that increase product quality, conserve
energy and raw materials, raise economic efficiency and alleviate
shortages in the domestic market.
- Attitude toward foreign investment
- Lack of regulations will provide us with some leeway in starting
our business, but will also promote corrupt business practices.
- It takes an Original Equipment Manufacturer from Taiwan one year to
set up shop in China
- Public perception of the government
- The party maintains tight control over life in urban areas and
international trade, however, as distance from the urban centers
increases, the governmental control lessens drastically.
- The general public goes along with governmental policies. There is
occasional dissent behind closed doors about government policies, but
little action is taken.
- Degree of corruption
- Corruption is rampant, although government is tightening laws to
control outrageous offenses. A top government official of Liaoning
Province was executed for embezzling RMB 30 million.
- Business is highly dependent on personal connections (guan
xi). Formal channels are not efficient. Some companies have
employees devoted to fostering these types of relationships in the
governmental and business sectors.
(World Bank, 2001)
The electricity infrastructure can be divided into three parts. Urban
centers tend to have a network that reaches the majority of the population,
but tends to be unreliable. Rural areas along the eastern parts of the
country tend to have access to an electric grid, but electricity is
unreliable and not enough is supplied. Poor transmission of electricity
causes unequal distribution of electricity. In the western parts of the
country, it has been too expensive to build an electric grid.
- China is the second largest energy consumer in the world, following the
United States.
- China's electricity is generated overwhelmingly by coal.
Hydroelectricity, natural gas, and nuclear energy will also become
increasingly important, while the petroleum share declines. There is a
shift, however, to transfer more of the electricity production to
renewable energy.
- China's Tenth Five-Year Plan (2000-2005) calls for increased energy
efficiency that includes green lighting demonstration projects and
renewable resources recovery and utilization industrialization
projects.
- Extensive electrical grid built: China is one of the handful of
developing countries in which a high percentage of people have access to
electricity (World Bank report 1997). The percentage of households in
China with electricity is about 93%. Part of the rapid expansion of the
grid was due to delegating the responsibility of providing electricity
service to local rural power companies. These companies often made local
networks connected to small coal-generating stations and mini- and
microhydropower systems.
- Access to electricity: Approximately 75 million people still do not
have access to electricity from a local or regional grid system. Most of
these people are located in remote provinces and are relatively poor and
can be sparsely distributed. The low demand and the sparse populations
make it very expensive to reach these areas by extending the electricity
grid.
- China can cut some 24 Tera Watt hours of electricity usage by
introducing more efficient light bulbs in its buildings and factories,
enough power for an industrialized city of about seven million people for
a year.
- China has a rapidly expanding market for lamps and lighting equipment
with sales rising 15 percent per year between 1990-1995 which is expected
to continue to grow due to the government's drive to electrify rural
areas.
(Center for Renewable Energy Development, 2001)
The government has been shifting economic responsibility onto the
shoulders of local authorities with the tremendous increase in the number of
small-scale enterprises and light manufacturing. Along with increased foreign
trade and investment, these policy changes have resulted in a quadrupling of
GDP since 1978.
- A gross domestic product of US $5.56 trillion continues to grow.
- As a member of the World Trade Organization, China's ability to sustain
economic growth is strengthened, but at the same time it puts pressure on
the system of strong political controls and growing market
influences.
- Official registered unemployment rate (true statistic most likely
higher): 3.6%
- There are 80 to 120 million rural workers with no permanent work
drifting between villages and cities. Their livelihoods are based on
temporary, low-paying, manual labor.
- In terms of regional distribution, China's coastal areas and big cities
have a high density of high-income and medium-income consumers, while the
middle and western areas have a low density of such consumers.
- There are problems with the collection of revenues from provinces,
business, and individuals.
- The government is attempting to save large state-owned enterprises from
demise by providing subsidies. Even so, these SOE's have trouble paying
full wages and pensions to their workers.
- The deterioration of the environment is a grave economic threat. The
loss of arable land reduces the opportunity for growing development and
sustainability.
(CIA World Factbook, 2002)
In general, users in an urban environment have more access to disposable
income and live under significantly more developed conditions. Energy
efficiency and backup lighting systems would be the focus for these markets
rather than energy generation. Higher prices can be charged here than in
rural areas. While infrastructure is more developed in these areas, overhead
will be more substantial as well.
Composite Character
- Name: Xiao Yao Ming
- Age: 22
- Occupation: low-level government official
- Location: Shenyang, Liaoning Province, Northeastern region
- Income: US $828.84/ year
- Education: The People's Vocational Night School, specialization in
engineering
Source: www.yaomingmania.com/scouting.html
Life Brief
Growing up in an impoverished communist urban setting, consumer goods from
the west were prohibited. Since the liberalization of the economic policy in
China, a huge supply of luxury items have flooded the market to the amazement
of a once isolated population. Ming remembers the winters without food that
he had to endure as a child, even as the standard of living is rising for him
and his family. He is very careful of how much money is spent in the
household, but he also enjoys the benefits of modernized consumer goods that
are now available to him in the department stores and street vendors around
where he lives. Television is an integral part of his family life. There are
no astronomical bills that he needs to pay each month because there is no
chance for him to buy his own house or car. Most of the money is spent on
food, cigarettes, clothing, and his child's educational costs.
Ming bicycles to work everyday along with all his colleagues. Ming is
not expecting to be promoted in his workplace (danwei). Everyone earns a
similar low salary, regardless of the amount of work that is put in. He
has been tempted to open a restaurant with one of his recently
unemployed relatives where the work will be hard, but at least there is
the opportunity to earn much more money. He aspires to move out of his
cramped apartment one day so that his child will have her own room to
study in.
Insights
- The average urban user is extremely receptive to new technology, if it
is proven to be affordable.
- They associate technology with an increased standard of living, our
product could serve as a status symbol.
- The focus is not on developing a career, but rather on improving family
conditions. Our product could be marketed to be an integral component of
those improvements.
- To obtaining the best possible education for his child is a paramount
concern, our product could be connected with reaching that goal.
Living Conditions
- The urban middle class of China is now estimated at more than 350
million people.
- Disposable income
- In 1999, consumption of goods for urban and rural residents,
excluding that for clothing, food, housing and daily necessities,
made up 29.3 percent and 21.6 percent of their total consumption
expenditure, respectively.
- The average amount of space each urban family lives in has increased
from 3.6 square meters in 1978 to 7.7 square meters.
(China Online, 2003)
Local Infrastructure
- Transportation
- Provincial-level and local governments are responsible for their
own transportation and road construction, some with foreign expertise
and financing to hasten the process. Most financing and maintenance
funds come from the provincial level, supplemented in the case of
rural roads by local labor.
- Many companies in urban areas rely on trucks and ocean freights for
transportation.
- During 1996-2000 the nation's entire highway network increased by
18%. China is now the second in the world in terms of total
expressway length.
(World Bank, 2001)
- Manufacturing
- In the eastern regions, facilities can be close to many other
companies who could possibly supply components for manufacturing
conveniently.
- Most LEDs are already being produced in China.
- Vast unemployed rural labor force provides cheap labor for
manufacturing process.
- Distribution
- Supermarkets and school supply stores are potential venues for
distribution. Specialized hardware or lighting stores are not
prevalent because most people live in apartments where lighting
fixtures and building repairs are taken care of by the owners of the
apartments.
- Interior design companies are on the rise in well-off urban
locations where people don't have enough assets to buy houses, but do
have disposable income. These businesses provide design services and
at the same time choose what products will be used in the new
house.
- Street vendors sell low-grade clothing and cheap plasticware.
- Use of Light
- Urban users are extremely receptive to technology, but skeptical
due to the prevalence of low-quality imitation products for sale. We
are assuming that this attitude will extend to lights as well.
- Cost of incandescent light bulbs: ~$0.25/each
- Cost of fluorescent light bulbs: ~$2/each
- Average electricity bill: US $0.042 /kilowatt hour
- Blackouts are frequent occurrences. This is a major complaint for
city dwellers. Energy conserving measures and products are widely
accepted.
Local Politics
- Counties, townships, and villages rarely negotiate directly with the
central government. Provincial offices are mostly responsible for
introducing businesses to specific counties and municipalities.
Recommendations from this level of government are usually followed
without question.
- The use of personal connections is prevalent (guanxi). Most business
and favors are granted through informal meetings at meals and
recreational activities. Personal credibility is key to a successful
business.
- This may be a custom that might be conducive to corruption,
although the connection between the two cannot always be assumed.
- Trust is implied if one is introduced through guanxi because the
recommender of that person's credibility is on the line.
Accountability can be ensured.
- Contacts in government are needed to get project off the ground, even
if communication is limited to the local government. Although there is
receptiveness to foreign ventures and technology, certain distrust is
still exists. If governmental backing is provided in some way,
communication on the local level with may be expedited.
- Work environment (danwei)
- Determines the housing conditions of employees by providing loans
for apartment rentals and purchases. People with seniority get
priority in obtaining newer and more spacious housing. This is a
frustrating process in which urban young people rarely have the
opportunity to live on their own.
- Position held for life if working for a government branch.
- In state-owned enterprises and governmental branches, salary is
stationary despite the amount of energy an individual devotes to his
or her job. For small businesses and vendors, the opposite is true.
It will only survive if the entrepreneurs are willing to sacrifice
all their time for it.
(Oi, 1999)
Economic Conditions
- Income levels
- With consumers' purchasing power reaching an estimated 5 trillion
yuan (US$605 billion), the Chinese market for consumer goods shows
great potential.
- High-income consumers have an annual disposable income per capita
of 18,840 yuan (US$2,279). There are 14 million such consumers,
accounting for 3.5 percent of the total population.
- The second group of consumers has an annual disposable income per
capita in urban areas, or net income in rural areas, of between 6,000
yuan (US$726) and 7,000 yuan (US$847). There are a total of 130
million households included in this group.
- Low-income consumers comprise those with an annual disposable
income per capita in urban areas, or net income in rural areas, of
2,000 yuan (US$242). They have an annual household income of between
7,000 yuan (US$847) and 8,000 yuan (US$968). There are a total of 689
million people in this group.
- The fourth consumer group has an annual per capita income is about
700 yuan (US$85), and annual household income is below 3,000 yuan
(US$363). This last group consists of those individuals who still
worry about basic necessities such as food and clothing and includes
30 million urban residents who suffer from such problems.
- Methods of acquiring goods
- As permitted individuals and collectives gained greater freedom to
engage in retail, service, and catering trades in both rural and
urban areas, there has been an expansion of retail sales with the
rapid rise of collective and individually owned retail
establishments.
- In the 1980s urban areas also saw a revival of "night markets,"
free markets that operated in the evening and offered extended
service hours that more formal establishments could not match.
(World Bank, 2001)
Social Structures
- Family
- There is usually 1 child per 2- parent household
- Energy of the family is centered around the child's education and
well-being.
- Grandparents are usually close by and are integral in the
development of the child.
- Community
- The streets are always swarming with people. Neighbors often have
to share one kitchen and bathroom between three families. Under these
crowded conditions, the need for community is often lost. Family ties
are much stronger.
- Senior citizens tend to develop a communal bond as a result of
morning exercise classes and other leisure activities available for
each neighborhood.
- Education
- Urban parents are especially concerned with their children's
education and eventual careers. The difficulty is that such jobs are
limited, competition is intense. Many of the dynamics of urban
society revolve around the issue of job allocation and the attempts
of parents in the better-off segments of society to transmit their
favored position to their children.
- There is an intense competition to get into the best colleges.
Although the percentage is increasing, only 40% of all high schoolers
are able to get accepted into any institution of higher
learning.
- Literacy rate ( age 15 and over can read and write ): 81.5%
(Zhang, 2003)
Local Environment
- Urban refers to an area characterized by a relatively high degree of
specialization in occupational roles, many special-purpose institutions,
and uniform treatment of people in impersonal settings.
- To obtain legal status as an urban dweller (renkouhu) in China
is highly coveted. There is massive trend of rural populations seeking
work in the cities.
- Chinese cities contain a high proportion of workers in factories and
offices and a low proportion of workers in the service sector. Workers
enjoy a high level of job security but receive low wages. Many Chinese
urban women are in the work force because one income is not enough to
support a family.
- Formal administrative routes are not utilized to establish ties within
and outside of the government, as well as with other companies. As a
result, most Chinese factories employ full-time "purchasing agents,"
whose task is to procure essential supplies that are not available
through the cumbersome state allocation system.
Labor Market
- Low labor cost, but not the lowest compared to other developing
countries (such as Indonesia)
- Minimum wage in Guangdong Province: 450 yuan/month, but average salary
given is 600-700 yuan/month. (Personal Interview)
- Workers in foreign companies are usually from rural areas. They work
for 2-3 years and are housed in company dormitories.
Composite Character
- Name: Lee Xia Huang
- Age: 16
- Occupation: Teacher
- Location: Shuixuan Village in Guang Xi Province, southern region
- Income: 2300 yuan ($287.87) / year
- Education: Primary school, some secondary education
- Family members: 4
- Distance to nearest city: 2 days walk
- Primary method of transportation: walking
Source:www.brucedale.com/ China Northwest.htm
Life Brief
Lee went to the country to teach at a rural school shortly after finishing
his secondary education due to the high unemployment rate. No one else wanted
to teach in this rural and unprosperous village but Lee volunteered because
he knew that this was his best chance for doing any kind of work. He was only
sixteen.
He teaches at a pseudo boarding school with minimal electricity and two
lightbulbs which are used very sparingly. His students from the surrounding
village tend to sleep at school because their homes are a long distance away.
The fact that extremely poor families board their children at primary school
demonstrates the importance placed on education. Lee lives with his students
in the school.
In the school house and in the village his word is law, amongst his
students at least. His students do everything he orders them to do. In the
city, child laborers make two yuan a day, a tempting offer that causes many
children to leave school before their required nine years of education are up
to work in the city in order to support their families. In these cases,
extreme poverty preempts the usual importance placed on education. Lee, along
with the other people in his village, is a shrewd negotiator especially when
it comes to money. His students, due to their poverty, haggle over everything
and see opportunities everywhere to earn money. They are forced by their
environment to be entrepreneurs. His family owns a bicycle, a radio, a sewing
machine, and a television set, and a wristwatch.
Insights
- Teachers have a position of high respect in rural villages. Their word
is highly respected and often obeyed, second only to the village
leader.
- Education is considered very important. Survival, however, comes first
in rural environments.
- Entrepreneurial spirit is strong.
Living Conditions
- 80% of China's population is living in a rural region.
- The average amount of disposable income available: between 1,000 yuan
(US$121) and 10,000 yuan (US$1,210).
- The average living space for each rural citizen has increased from 8.1
square meters before 1978 to 20.5 square meters.
- The ability of peasant families to supplement farm income has been
undermined by a sharp decline in new investment into rural enterprises,
and layoffs by existing firms. Chinese statistics show that in 1997 the
number of registered enterprises in rural areas dropped by two million
and the number of employees dropped by 4.58 million.
- The option of migrating to the cities has been cut off by the record
levels of urban unemployment. It is believed that up to 15 million rural
immigrants have returned to their villages and towns of origin.
(CIA World Factbook, 2002)
Local Infrastructure
- Distribution
- Some villages have local grocery stores.
- They are usually located near a larger township that have larger
department stores and markets.
- Transportation
- The use of tractors is common for traveling between different
villages. Not much time is spent outside of one's own village. Many
people get to town by bus. Due to the exorbitant prices charged by
this service, such trips are extremely rare.
- Dirt roads usually lead up to the villages and are accessible by
car.
- China's transport system is inadequate, especially in rural and
western areas of the country, but large sums of money are being spent
on upgrading it. The backbone of the system remains the railways,
which carry over one-third of cargo and passengers. This means that
travel within the country is still difficult, but transportation of
goods between cities is reasonable.
- Electricity
- Electricity costs on average: $0.032 per kWh
- The cost of electricity is highly variable. Some regions pay as
much as $0.40 per kWh.
- The use of incandescent bulbs very common ($0.25/each)
- The use of TV incurs the most costly energy item.
- Some villages use small hydropower plants, but these are more
expensive than the costs of conventional forms of fuel.
- Manufacturing
- Some precedence for manufacturing in TVEs (see Section 4 below)
Local Politics
Economic Conditions
- Net annual income per rural resident reached up to 2,253 yuan
(US$265)
- Local expenditures
- Most of the cash income goes to paying taxes for raising crops and
using land.
- Cash is received in lump sum after selling the harvest crops once to
a few times a year. Money is hard to come the rest of the year.
- Methods of acquiring goods
- Supplementing these retail establishments were free markets in
which private and collective businesses provided services, hawked
wares, or sold food and drinks. Peasants from surrounding rural areas
marketed their surplus produce or sideline production in these
markets.
- In rural areas, supply and marketing cooperatives operated general
stores and small shopping complexes near village and township
administrative headquarters. These businesses were supplemented by
collective and individual businesses and by the free markets that
appeared across the countryside in the 1980s as a result of rural
reforms. A smaller variety of consumer goods was available in the
countryside than in the cities.
Social Structure
- Family
- Average of 3 children due to lax regulation of one-child
policy.
- Extended family usually live in separate houses, but are within
close vicinity of each other.
- Community
- Village leader makes all important decisions with the input of some
of the elder members of the community.
- Villages are tightly knit. Oftentimes, everybody in the same
village is related because they all share a surname.
- Many villages consists of only the elderly, women, and children
because many young men have gone to towns and cities in search of
jobs and money.
- Education
- Children are usually able to attend elementary school.
- Unless the village is of substantial size and depending on the
proximity of the village, students usually have to walk a fairly long
time to get to school.
- Less number of children are able to attend junior high and high
school because of increased fees and inaccessibility.
Local Environment
- The degree of isolation of villages varies.
- For the most part, villages are located within 2-3 days walking
distance to a larger township.
- Many on-grid rural areas are located in the mid-eastern part of China
where mountainous regions prevent communication between villages.
Labor Market
- There is a 20-30% unemployment rate. Governmental work projects don't
provide jobs, only namesakes to say that they are still employed.
- An increasing number of young, single women are migrating to the cities
to work as nannies for well-off urban dwellers, factory workers in joint
venture/foreign companies, and starting their own street vendor
business.
The off-grid rural user has even less resources at her disposal than the
on-grid rural user. Usually in these regions, the government has overlooked
the potential for development due to the remoteness of the location and low
population density. There is no electricity available in these regions; our
product must come equipped with its own energy generation system. In many
cases, lighting and access to electricity will be a secondary concern to
obtaining an adequate amount of food.
Composite User
- Name: Zhou Li-de
- Age: 25
- Occupation : farmer
- Location: Gansu Province
- Income: 200 yuan ($24) / month
- Education: went to elementary school; can generally read only simple
words
Source:www.humnet.ucla.edu/people/carleen/ mongolia/culture.html
Life Brief
Zhou Li-De lives in the province of Gansu. It is one of the four
western-most provinces in China, which are Gansu, Inner Mongolia, Qinghai,
and Xinjiang. These four provinces also are among the poorest in the nation.
While she is part of the 43.5% ethnic Han majority, over half the population
is made up of ethnic minorities. Zhou works as a farmer with her husband, but
due to the poor condition of the soil, she is only able to harvest enough to
feed her own family. Cash is extremely rare to come by. There are some people
in her village that own TV sets, but they are usually the local government
officials. Finding enough food is a struggle for her and her family; lack of
electricity is a secondary concern. She would like her children to become
educated, but she needs their labor during harvest time. She will not have
enough money to send them to junior high school. No one that she knows has
ever gone to a college.
Insights
- Alternative forms of payment may have to be considered for off-grid
farmers because of the lack of disposable cash. Bartering and trading are
more common ways in which this segment of the population obtains
goods.
- Unlike in other parts of the country, education of children may not be
the first priority for parents due to the lack of resources.
Affordability is an even more important factor in marketing in this
region than education.
- Many of the off-grid users are nomadic. These people usually have more
access to capital than the more sedentary farmers. Portability is a key
issue.
Living Conditions
- Like 90% of the population in Gansu, Zhou is a farmer, and makes about
200 yuan (US$24, 8.60 yuan = US$1) per month. In the other three
provinces above, the population is more likely to be herders.
- Gansu Province has long been considered one of the poorest in
China.
- Farmers are often not as wealthy as cattle herders (nomads)in the
region. This is because herders have an advantage of both higher incomes
due to the demand for meat in urban areas, as well as their liquid assets
in the form of cattle that they can sell. This advantage of both income
and assets is relevant in terms of an individual's ability to pay for
renewable energy systems.
- Zhou currently uses a stove for lighting at night. She wishes she had an
electric light for financial, educational, and health reasons.
(Chan, 2000)
Local Infrastructure
Local Politics
- Local government officials carry great political and economic power;
some disconnect from central government.
| |
National |
Gansu Province |
Inner Mongolia Autonomous Region |
Qinghai Province |
Xinjiang Autonomous Region |
| Population (millions) |
1,236 |
24.9 |
22.6 |
5.0 |
17.2 |
| Density(people per square km) |
129 |
55 |
21 |
7 |
11 |
| Rural per capita net annual income (yuan) |
2090 |
1185 |
1602 |
1321 |
1500 |
| Han nationality (%) |
94 |
43.5 |
80 |
42 |
38 |
Economic Conditions
- Income Levels
- The following gives an overview of the four western-most provinces
of China, where electricity is the most scarce:
- Method of Acquiring Goods
- The availability of credit in remote areas is often very poor. The
purchase of photovoltaic systems without credit requires households
to have 1,000-2,000 yuan (US$120-220) in hand, and most agree that
this can be a major stumbling block to the promotion of systems.
- Many people in these areas are familiar with credit, however.
Between 30-40% of households have experience with taking credit from
rural banks, credit unions, or other sources.
- Most of these loans are taken for business purposes, such as buying
equipment or for other seasonal purposes. There is also much informal
credit. In Inner Mongolia and Qinghai, neighbors and relatives
account for about a quarter of all loans taken by rural households in
these two provinces.
- It is interesting to note that many PV systems have already been
sold in these provinces on a cash basis. The PV company with largest
market share sold 3,500 in 1995 and 7,500 units in 1997. The most
common system generates 20W, and can power two lights and a
radio-cassette for four hours, and costs around $120-200.
(Yang, 2003)
Social Structures
- Sedentary villagers have a similar structure to on-grid villagers.
- Nomadic users travel in groups of extended families. 6 or 7 families
travel together to town every 3-4 months. For the rest of the time,
families are isolated from each other.
Local Environment
- Farming is a poor source of income due to arid conditions that leads to
inferior quality soil.
- This part of the country has been neglected in the government's plan
for development.
Labor Market
- Most villagers are farmers. It would be possible to train villagers for
manufacturing.
- Nomadic people depend on yak herding as a source of capital, meat, and
clothing. They sell yak products at the market in local townships. May
not be willing to give up way of life to become settled.
Township and Village Enterprises (TVEs) offer a unique opportunity for
manufacturing and retailing LED lighting at the local level. TVEs are defined
to be rural, non-agricultural, non-State enterprises that are collectively or
privately owned. This business structure is analogous to a corporation owned
and managed by the local township or village. The highest agricultural
incomes were earned by suburban units that were able to sell produce and
sideline products in the nearby cities. Household incomes depended on the
number of workers in each household and the household's success in holding
down production costs and in supplying goods and services to local
markets.
Primary Objectives
- To achieve full employment for the entire village.
- This objective is so important that the leaders of a community will
not even consider expanding their home TVEs until everyone in the
village is employed.
- One downside to the village-centric mentality is that capital is
kept local, which makes financing new ventures difficult.
- Banks seldom provide seed capital for rural locations. When they
do, the money is loaned to nearby businesses.
- Increase local government revenue.
- Increase rural non-farm employment Increase rural income.
- Typically revenues from TVEs fund
- Local public good production
- Subsidies to agriculture
- local government
Because TVEs generate a considerable amount of income at the
township/village level, there is a strong incentive for local governments and
residents to ensure their success.
Characteristics
| Owners |
Local Residents |
| User Rights |
Local governments and residents |
| Extractor Rights |
Local governments and residents |
| Seller Rights |
TVEs are non-sellable, non-transferable and non-heritable |
- TVEs are more decentralized than state organized enterprises. For
example, most TVE managers are given considerable autonomy over daily
operations.
- TVEs are most common where community government power is strong and
where the level of development is low.
- They have a better chance of succeeding if funding is provided at the
local level.
Less Red Tape
The chain of command is reduced because TVEs are mainly under the
jurisdiction of the local government. Directly interfacing with the local
government leaders may be a way to avoid a myriad of red tape.
Strong Competitive Pressures
Community members as owners have incentives to insure that their TVE
performs well. For example, they are more willing to give up short-term
dividends for long-term growth.
A common practice is to give managers bonuses for meeting certain
pre-determined performance indicators. Bonuses may also be related to how
one's own TVE compares to other TVEs, thus increasing competition and driving
productivity up. Because the manager's wages are kept low so as to maintain
equality in the work place, these bonuses may become a significant percentage
of their salaries. Furthermore, managers are not guaranteed lifetime
positions.
Workers generally try to work harder and for longer hours than their
peers. Managers typically choose people from the village he trusts.
Flexibility
Small size allows for flexibility to react to market changes and
capitalize on opportunities quickly
Disadvantages
- Lack of technological know how
- Lack of labor skills
- Lack of managerial skills
- Low education levels of staff
- No access to bank loans and government supports
- Small sizes prevents economy of scale
- Corruption
Many of the disadvantages of TVEs stem from the lack of skill or the lack
of oversight. A possible solution might be a hybrid TVE/franchise model where
we play the role of the franchiser. By providing training, a franchiser can
increase the productivity and streamline the operations of a TVE.
Furthermore, the franchise model provides a vehicle for oversight to reduce
corruption. This type of relationship preserves the advantages of TVEs while
reducing their disadvantages.
Statistics
- In 1996, the average size of a township enterprise was 73 employees per
firm
- For a village enterprises it was 26 employees per firm
- Typically pay the highest salaries to their marketing staff, 10x that
of the average worker
- TVEs currently account for 1/3 of Chinese exports (Competition,
incentives, and productivity in Chinese township and village enterprises,
Nugent)
TVE development has been uneven in China. Eastern provinces located near
the coast have seen rapid growth while western China has lagged behind. There
are a number of reasons for this: agriculture is more developed, credit is
more available, and distribution networks are more extensive in the east. The
upside is that the national government wants to encourage investment in
under-developed areas in the central and western provinces.
- High TVE Output: Liaoning, Hebei, Shanxi, Shangdong, Hnan, Jiangsu,
Zhejiang, Fujian, Guangdong, Hainan, Beijing
- Medium TVE Output: Heilongjiang, Jilin, Inner Mongolia, Gansu, Ninxia,
Shannxi, Hubei, Anhui, Jiangxi, Hunan, Guangxi
- Low TVE Output: Xinjiang, Qinghai, Tibet, Yunnan, Guizhou
(Davosta, 2001)
Equity Joint Ventures (EJVs)
- Common, preferred manner in which foreign companies enter the China
market.
- Advantages
- Exploits market knowledge, preferential market treatment, and
manufacturing capability of the Chinese side along with the
technology, manufacturing know-how, and marketing experience of the
foreign partner.
- Profit and risk sharing in a joint venture are proportionate to the
equity of each partner in the joint venture, except in cases of a
breach of the joint venture contract.
- Period of operation limited to a fixed period of time from thirty to
fifty years. In some cases an unlimited period of operation can be
approved, especially when the transfer of advanced technology is
involved.
- Share holdings in a joint venture are usually non-negotiable and cannot
be transferred without approval from the Chinese government. Investors
are restricted from withdrawing registered capital during the life of the
joint venture contract.
Wholly foreign-owned ventures (WFOs)
- The Chinese government has no share holdings and has no control over
investors' capital.
- A prospective foreign investor must submit a report to the local
authorities on the planned project, including its size, purpose, products,
technology, land-use requirements, etc. Rely from local authorities
supposed to be in 30 days.
- Must file environmental-impact assessment
Domestic Private Enterprises
- Starting in the mid 1990s, local township and village governments began
to promote private enterprises by either leasing or selling TVEs. A
number of factors caused government officials to turn toward private
enterprises as an alternative to publicly owned enterprises.
- As more and more TVEs were established, it became harder for the local
government to maintain oversight. Because the authorities only really
wanted to keep a close eye on the businesses that have the most potential
impact, they relaxed their control over enterprises that did not meet
these criteria.
- The expansion of competing rural enterprises decreased profit margins,
which directly decreased government revenue. As a result, it became more
costly and less profitable to maintain public enterprises.
- Repayment of debts incurred by bankrupt TVEs became the responsibility
of the local governments, who grew tired of bailing out failed
ventures.
Although public enterprises became relatively more expensive to maintain,
they were still crucial at the local level because of their socioeconomic and
technological impacts. This somewhat explains why local governments starting
promoting private endeavors. At the same time, local governments provided
assistance and guidance for local entrepreneurs thus creating a sort of
symbiotic relationship between the two parties. The governments are a
valuable resource for:
- Technical help
- Market information
- Obtaining funding
- Networking with contacts
- Incentives
- Exemption from rural household obligations such as performing
community service and paying local taxes
- Tax reductions
- Financing
- Profits from TVEs are redistributed to other TVEs that need
increased funding
- Borrowing from collective members using bonds, saving schemes,
and/or selling shares to workers
(Jiang and Shanhe, 2001)
National Renewable Energy Labs
(http://www.nrel.gov/international/china/default.htm)
- The National Renewable Energy Laboratory (NREL) has been assisting
China in renewable energy development since 1995 through pilot projects,
training, market and business development, and resource assessment.
- Since NREL focuses on market assessment and research, partnership
opportunities with NREL include working with existing pilot projects in
China or establishing new pilot projects.
- Strengths
- Leverage existing knowledge of NREL to better understand the end
users of our lights.
- Possible distribution channel of lights, possibly as a replacement
for current fluorescent lights.
- Existing partnerships and relationships with Chinese government and
partners.
- Weaknesses
- Must compete with Chinese suppliers who provide all the equipment
in the comprehensive package of PV cells, lights, and radios.
- Must convince NREL and associated organizations that the value of
LED lamps justifies the higher cost, and that the end user will be
able to afford this incremental cost.
- LUTW may lose some control as to the final decision-making as to
where the lights go.
PV system integration companies
(http://www.nrel.gov/china/pdfs/commercial_pv_china.pdf)
- By the end of the first half of 1998, the number of PV system sales
companies connected with research institutes that were supported by the
state exceeded 50, and some private companies were selling PV systems
commercially.
- There is a whole street of PV system companies in Qinghai Province.
There are more than 10 PV system sales companies just in Xining, among
which there are 5 or 6 private companies, owned by former employees of
the Research Institute of Solar Energy of Qinghai.
- Possible partnerships include serving as a supplier to these PV systems
to replace their incandescent or fluorescent bulbs.
- Strengths
- These local companies have a wide sales distribution network and
close relationship with the users.
- The initial costs would be much lower, since the distribution
channel and sales infrastructure is already in place.
- Weaknesses
- It is difficult to distribute to each local company individually;
may be difficult to manage orders.
- There is a loss of control of who finally gets the light, and at
what price our lights are sold.
World Bank/Global Environment Facility (GEF) Project
(http://setc-gef.newenergy.org.cn)
- With financing of $35 million U.S. from the Global Environment Facility
(GEF) and $100 million from the World Bank, the project will construct
190 MW of on-grid wind power generation capacity and distribute 200,000
sets (10MW) of PV home systems in remote areas of Qinghai, Gansu, Inner
Mongolia, and Xinjiang using the remaining $20m in grants from the
GEF.
- The project began in early 1999 and will last for five years. At
present, 17 companies have already been selected for World Bank
projects.
- Strengths
- The $20m in grants from the GEF ear-marked for the PV home systems
would pertain most closely to our group. These home systems would
most likely contain some sort of lighting, and LEDs could be a
suitable alternative to current sources of lighting.
- Existing network of contacts and distribution channels would be
invaluable.
- Weaknesses
- The project has already selected 17 companies for their project.
Three years have already elapsed since the commencement of the
project. There may be quite a bit of inertia to stick with the
current 17 companies, and the barriers to entry as a supplier may be
high.
The Sustainable Village
(http://www.thesustainablevillage.com/)
- A social enterprise with profits going to sustainable development
projects in developing countries.
- Services they provide are:
- Networking for microenterprises
- Catalog of village products made by microenterprises all over the
world
- Website targeted at non-profits and for-profits who are seeking
business advice to establish operations in the developing world
- System design and engineering of sustainable development
projects
- Supply of equipment and parts for renewable energy systems
- International delivery system that helps organizations get products
and equipment to remote locations
- Provides installation services as well as training to villages
- Strengths
- They can provide us with a means of an affordable delivery system
to remote locations.
- With extensive knowledge in renewable energy technology they will
both be able to understand and improve upon our technological
specifications.
- Having the ability to provide installation services AND training,
their infrastructure provides leverage to our operations.
- The mission seems in line with what we are striving for in helping
developing countries, profits are not the first priority.
- They have the ability to provide future assistance to the
microenterprises that results from our project.
- Credibility has been established within the international community
after 36 years of operations.
- Weaknesses
- Being a very large organization, they do not specialize in one
particular area.
- Contacts in the specific provinces that we are interested in might
be lacking.
Light Up the World (LUTW)
- Quality control
- Approves overseas operations
- Obtain discounts from suppliers
China headquarters
- A partner of LUTW on the ground in China
- Might be an NGO, government organization, or research organization
- Manages the micro-enterprises
- Provides training, loans, and lights to the village businesses
Possible Locations (Provinces):
- Henan
- Anhui
- Hubei
- Zhejiang
- Hunan
- Guangdong
- Jiangsu
- Shandong
Reasons for Picking These Locations
- Many off-grid users in densely populated area
- Currently, power is generated at the village level through
pico-hydro.
- Pico-hydro is dependent on seasonal variations and may often be very
expensive for the end user. A renewable, cheaper light source might be
attractive.
- These provinces are located near urbanized centers which facilitate
transportation, distribution, and manufacturing.
- Urbanized centers are surrounded by poor outlying villages that do not
have access to electricity
- We have contacts in some of these provinces that might be able to get
us into contact with people on the ground.
- Result: A diversity of rural areas are chosen. While many regions in
the east are electrified, there are pockets of villages where development
has been slowed down by their harsh economic conditions. While isolated,
they are within close distance to manufacturing and distribution centers
in larger towns. In the western regions, electricity is a rare commodity.
While transportation and distribution may be more difficult, the impact
that our product would make on the lives of the potential users outweighs
these challenges.
Manufacturing
Manufacturing facilities in China will be a good option to take advantage
of. Assembly of the product can take place in one of the factories in a
relatively urbanized area with transportation of finished product to a rural
area.
Distribution
Distribution has been one of the most perplexing problems. The team has
found it extremely difficult to find information about distribution in rural
China. More eastern provinces such as Anhui, Henan, Jingxi, Hunan, and
Guangong are easier to distribute to. The layout of the typical town is like:
"An urban core contains administrative offices, factories, warehouses, retail
outlets, schools, hospitals, and a power station. "The urban core is
significantly urbanized. Many modern conveniences can be found there. Many
manufacturing industries are located in the core. "(Walder, 1998).The
disparity between the urban core and the surrounding villages is tremendous.
Some families struggle to feed themselves while other families have modern
conveniences. The closeness of roads and modern conveniences makes
transporting goods to and from the poor villages in these provinces easier.
Distribution in the more Western portions of China will be a challenge.
Nomads are often on the move, but they do occasionally stop at nearby towns
to buy and sell goods. The best way to get into contact with these users
might be a proactive approach such as setting up a micro-enterprise in a town
that is frequented by nomads.
Marketing
The following discussion presupposes that the goal of LUTW is to market
its lights in rural locations that are either off-grid or that have
unreliable or expensive sources of electricity and to nomadic population in
Western China.
Demonstrations
A large investment on the part of the consumer is needed when they
purchase the light. It is understandable that many of them will be hesitant
to buy a product from an organization that they are unfamiliar with. This
mentality is especially true in China since rural populations are sometimes
taken advantage of by companies that want to make a quick profit.
Furthermore, imitation lights are almost certain to pop up. The credibility
of LUTW and the utility of its products should be obvious to the end user.
One way to establish this credibility and to convince potential users of the
viability of our product would be to outfit a building in a village with LED
lights for a brief period of time. The building could be a
micro-enterpriser's house, a public building, or a local store. This
marketing technique will generate type in the village and concretely
illustrate the benefits LED lights can bring.
Emphasizing Education
Education is an important value in Chinese society, but as a cultural
tradition and as an avenue to a better life. Parents want their children to
obtain a good education to increase their standard of living. However, often
this is impossible since the children need to help work in the fields during
harvest season. The team discovered, during interviews with experts of
Chinese society however, that education will not be a large enough inventive
for the poorest of the poor. Other concerns are more important. However, in
areas that are relatively better off, increased education can be advertised
as a benefit of the light.
Utility Lights
A light can help bring in extra income or protect investments. For
example, a large percentage of rural villagers supplement their income with
household handiwork. A light can increase their working hours. Also,
agricultural lights can be useful during harvest season. These lights would
have to be portable and heavy duty.
Radio
Because nomadic people are often on the move, the best way to advertise
to these users is through radio. Populations in Western China use radio as
the primary source of entertainment. They power the radios with batteries.
Micro-Enterprise
The most important component of the business model is how the village
micro-enterprise connects with the end user.
The village micro-enterprises act as the final leg between the product and
the end consumer and would be responsible for local marketing, retailing, and
providing after-market services such as charging and maintenance. The
advantages of using rural enterprises are that LUTW can sidestep the Chinese
national government in most cases and go straight to the local governments.
The most important advantage is that village entrepreneurs have an incentive
to insure that their local micro-enterprise performs well. The national HQ
can further the competitive spirit by giving incentives for meeting certain
performance indicators. However, micro-enterprises lack labor, managerial,
technical skills, and seed capital. This is where the role of the national HQ
becomes very important; it provides village micro-enterprises training and
loans while maintaining a certain degree of oversight. This type of
relationship preserves the advantages of village enterprises while reducing
their disadvantages.
Micro-Enterprise Operations
- Local salesman (similar to a milkman) in charge of marketing and
retailing product
- Door-to-door soliciting
- "Demo house"- outfit public space with LED lights as demonstration to
other villagers
- Provides maintenance services
- Perhaps even provide other value-adding services
Our decision was to focus on both the off-grid and on-grid users, but not
the urban market. We wanted to concentrate our efforts on a region that would
immediately benefit from the product, essentially in an at attempt to fulfill
the mission of lighting up the world.
Off-Grid
Independent Salesman and Battery Charger Model
This is a version of the salesperson model in the General Business Models
section.
- The salesman and the battery/charger person are two different
people
- The salesman travels to different villages to sell his light. While he
is there, he trains a battery/charger person in the village.
- Problem areas
- Transportation for the salesman will be difficult. He has to be
able to transport approximately 100 units to the target village.
- LUTW will need to coordinate the activities of all the salesman to
avoid overlapping sales region.
- Off-grid populations suffer from lack of disposable income and
unavailability of cash. People who need charging might have to pay
the charger through non-cash methods.
- Battery/charger person makes very little per year. The
battery/charger person might actually have to be a village store.
Combined Salesman and Battery Charger Model
This is a version of the salesperson model in the General Business Models
section.
- The salesman and the battery/charger person are combined into one
position.
- A single person or store will be responsible for selling the units and
providing services to the village. Every village or two will have their
own local LED store.
- Problem areas
- The salesman is now working in a much smaller sales region and
therefore will sell much fewer units a year.
- Income primarily comes from charging after the village has been
saturated with units.
- A possible solution may be to have a village store be responsible
for retailing and services.
On-Grid
Small Store Model
This is a version of the small store model in the Genera Business Models
section.
- Traveling salesperson sells units to on-grid villages
- No charger person will be used because they will not be able to compete
with the cost of electricity and make a decent profit at the same time.
However, a store can take on charging responsibilities to generate a
small amount of additional income.
- The primary advantage of the unit will be to reduce the amount of
electricity used
- Problem areas
- This model has does not include local generation of wealth.
- High initial cost of the unit. Break even point for the user will
be 7+ years.
Income
- Average rural person makes per year: $305.41 (2260 yuan)
- Average urban person makes per year: $878.38 (6500 yuan)
Lighting Unit
- Lamp
- LED (4 Per lamp) $0.50 / LED: $2
- Fixture: $1
- Battery
- Cost: $0.50
- Estimated battery life: 2 years
- Variable cost: $0.25 / year
Cost to produce one unit: $3.50
Price charged per unit to the salesmen: $4.00 (29.6
yuan)
Salesman Numbers
Revenue
- Total days spent working on a village: 20 days
- Average size of a village: 500 people
- Percentage of the village that buys a unit: 20%
- Average customers per village: 100 people
- Price charged per lamp: $5
TOTAL REVENUE PER VILLAGE: $500 (3700 yuan)
Expenses
- Total cost per village ($4/lamp): $400
- Transportation costs: $20
TOTAL EXPENSES PER VILLAGE: $420 (3108
yuan)
Profit
- Number of villages per year: 12 villages
TOTAL PROFIT PER YEAR FOR THE SALESMAN: $960 (7104
yuan)
Battery/Charger Person Numbers
Charging Revenue
- Total number of customers: 100 people
- Half need charging a day: 50 charges/day
- Price per charge: $0.005 (0.037 yuan)
- Average revenue per day: $0.256
REVENUE PER YEAR FROM CHARGING: $93.44 (691.46 yuan)
Battery Revenue
- Batteries sold per year: 100 batteries
- Cost per battery: $0.50
- Profit Margin: 10%
- Price sold per battery: $0.55
REVENUE FROM BATTERIES: $55 (407 yuan)
TOTAL REVENUES: $148.44 (1098.46 yuan)
Expenses
- Solar charging unit: $100
- Assume replacement per 10 years
- 4% interest rates
- Solar charging unit / year: $12.33
- Maintenance and service per year: $40
- Overhead: $10
- 100 Batteries: $50
TOTAL EXPENSES: $112.33 (461.24 yuan)
TOTAL PROFIT FOR THE BATTERY/CHARGER PERSON: $36.11 (267.21
yuan)
Electricity Cost Analysis
- Average price per kHW: $0.04
- Power consumption of lamp: 4W
- Hours used every two nights: 8 hours
- Total kWH per two nights: 0.032 kHW
- Cost of electricity used per two night: $0.00128 (0.009 yuan)
Assume the charger prices his electricity at the same price:
- Total number of customers: 100 people
- Half need charging a day: 50 charges/day
- Price per charge: $0.00128 (0.009 yuan)
- Average revenue per day: $0.064
REVENUE PER YEAR FROM CHARGING: $23.36 (172.864 yuan)
Assuming the cost of the charger per year is: $12.33
PROFIT PER YEAR FROM CHARGING ALONE: $11.03 (81.62
yuan)
Section 1: Introduction
Section 2: General Country Information.
Section 3: User Information
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Section 4: Business Information for China
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Jiang, Patrick Wong.
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12-17.
Section 5: Business Models
