Letter to the Editor: The Perils of Chinese Biodiesel Producers

By William Kao | May 11, 2009
Recently I contacted a biodiesel service provider wanting to buy their test kits and get more technical details on their other products. However after several tries-and your introduction-there was no reply. This is not unusual, in fact, the silence or cold shoulder treatment from 'foreign equipment and technology suppliers' is something I expected and have become use to. It is a fact that Chinese buyers have been burned by many American and European suppliers. I know of several horror stories myself. From simple things like a water separator, to living things like jatropha saplings, or extremely complex things like a biomass thermal power plant, Chinese partners have consistently ripped off their 'foreign' suppliers so much so that it is almost expected of them. It has happened so many times across all industries it became an industry of it own, and I am sure a GDP can be calculated.

One common mistake, however, that all 'foreign' suppliers make is that they believe they need a powerful state-owned Chinese partner to sell their technology or products here.

The reality is, these powerful entities are responsible for more 'ripping off' than private Chinese businesses. Often it would start with the 'foreign' technology suppliers being contacted by an influential Chinese individual controlling several large businesses and well-connected to the Chinese leadership. These are often some officials' family member or childhood friend. They have plenty of 'Guanxi' (influential connections or relationships) as everyone in the world has come to know the term. Everyone knows, however, it is good to have lots of it, but no one seems to understand what it is or how to use it.

Really it is no different to the rest of the world, but when it has a Chinese name it is "oriental exotic" with a mystic aura, and people go all bananas over it. When the suppliers are invited to visit China, they go wild when they're shown large factories, army of employees, number of real estate projects and number of 'unrelated' businesses this person 'owns'.

He would then host dinners with armies of government officials-with names they cannot pronounce and titles that need a degree to understand-and our suppliers are more than impressed. The knock out punch would be a trip to the Great Wall or the Forbidden City, after which the suppliers leave with their heads in the clouds thinking they have sure access to the massive Chinese market.

An influential individual, however, is not bound by any contracts, and for tax or other reasons, his name is not on any of the businesses he 'owns'. These influential people will only invest their 'Guanxi' into this partnership, not cash. If the arrangement proves to be unprofitable, the Chinese partner withdraws all support, along with 'Guanxi,' converted shares and the 'foreigner' is left with nothing. On the other hand, if it is profitable, the Chinese partner will always make more profit selling copies on his own, and the 'foreigner' is still left with bananas. Since the Chinese courts confuse even the most scientific minds, the 'foreigner' should be happy that he has anything and just move on.

What does this have to do with me? Well, for those working hard to develop a new industry in a 'developing' world like China, we are left without access to the outside world.

Although it's cheaper and easier to do things here, working in developing countries means access to only very limited resources. Since we need to develop the whole industry vertically, our resources are spread even thinner. For my biodiesel business, I am forced to build my own collection system as well as develop sorting and pre-treatment mechanisms for a large variety of feedstock because local suppliers either don't know how or don't care to sort feedstocks.

I have to develop and experiment with every detail of production technology because I cannot buy ready-made products from the U.S. Conversely, I have to find alternative equipment and adapt it to biodiesel applications, build a sales network and promote renewable energy. In addition we have to build a completely vertically-integrated business because there is no specialization and lack of economy of scale. Often we turn to western technology suppliers to solve a specific problem when we have exhausted all local options.

In this case, I contacted a U.S. company to inquire about their post-treatment filter. Buying a ready-made solution to solve a problem is something that any other biodiesel producer can do by picking up the phone or sending out some e-mails. Living in China, however, means I cannot even find out specifications to know whether it will work or not.

Often they ask me to work with their licensed sellers.

However, these middlemen are interested in sales and often have no idea about technology or the basic concept of the design. For example, I recently purchased a coalescer.

Having faith in the technical expertise of this company I gave them my specifications. They consulted their U.S. offices, and returned with a design and demanded 100 percent payment upon order. Due to regional sales issues, I placed my order through a trading company in Shanghai. I waited three months for delivery on very expensive, high-tech equipment, which to my surprise came with a two-page instruction booklet. Furthermore, it did not work. I had to apply and wait two more months for on-site technical support, which never solved the problem and the company offered nothing else to get the equipment up and running. So now I am left with two steel tubes, a bunch of membranes and 350,000 RMB cash gone. I would have been better off with bananas.

Working in China has its benefits. Tougher operating conditions means things that systems built in developing nations will work everywhere else in the world because they are designed to tolerate greater variables. Low-tech solutions coupled with high-tech parts in a development market generate the greatest benefits. Renewable energies in developing countries are viable options, whereas in developed countries they are costly replacements or alternatives. So those of us working in developing countries need all the help we can get.
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