How to Make Chinese Economies of Scale Work

Sean Lockie
China’s sheer scale has the capacity to astound in much the same way America has.

That might sound obvious when earlier this year it was announced the Chinese economy would soon overtake the US to become the world's biggest, but it really is an amazing place. Having recently returned from Shanghai where I have been working with the UKTI and the Chinese government to improve the country's environmental performance, I can testify to how urgent this need is. Yet I was still taken aback by the scale. One of the factories we visited had over 500,000 motors at one site alone.

In just a few years the country has become the world's largest manufacturing base. It is currently the world's largest consumer of energy, with demand growing at 5.6% p.a. This is primarily fuelled by industry and manufacturing which accounts for 70% of total energy consumption. Yet this rampant and economically desirable growth has come at a serious cost. That cost is conservatively estimated at £112bn each year when you factor in poor air quality, polluted rivers, ill health etc.

There are a variety of factors beyond just capital costs which are driving this escalating impact on life in China. These drivers include the costs associated with poor health, impacts on productivity, the regulatory burden (with much higher tax requirements), plus of course customer demand with its own attendant costs. But can China (and other countries) pay for all the energy needed for this huge amount of manufacturing while these drivers are constantly pushing up the costs? In a word, yes. Countries such as China can pay for projects which clean, repair and enhance the environment just from the savings alone made from waste.

Countries such as China can pay for projects which clean, repair and enhance the environment just from the savings alone made from waste.

My colleague and sector leader for industry and pharmaceuticals in Asia Pacific, Barry Piper, has worked in the country since 1995 and has witnessed many times that when China has to make an important decision, things tend to move extremely quickly. For example, China has just implemented a new year energy plan, with the aim of reducing consumption per unit of GDP by 16% to 2015. It has formed a National Development and Reform Council to look at some 100,000 projects across 14,000 industrial organisations to help the country achieve its energy goal.

It is these projects I have been working on with the UKTI and the Chinese government, to select a pilot to become a successful model to showcase the energy savings which are possible. The pilot is a test case for successful collaboration between China and the UK, with the overall goal of transforming an existing facility into an exemplar of clean, energy efficient production. The aim is to showcase what can be achieved and inspire Chinese firms to adopt such transformations.

Many companies think energy savings mean capital expenditure, whereas what is often most important to change is poor management.

However, the success of the project for China will not just hinge on improving technical aspects of buildings and energy processes, but also the mindset of factory managers. Many companies think energy savings mean capital expenditure, whereas what is often most important to change is poor management. There can be a simple disconnect between who pays the bill (the finance manager) and who uses the energy (the operations or FM manager). A new paradigm of 'resource scarcity', 'waste as a resource' and 'the polluter pays' needs to become ingrained in personnel for projects to really succeed.

Even though China's environmental problems are acute, there is now a real drive to solve these problems whilst still ensuring the economy prospers. There is also a real opportunity for UK firms to help make this happen.