This article is based on a GCiS multi-client report: China Green Building Materials Market Research Report.
The scale of both construction and energy consumption provide unequalled opportunities in China’s green building materials. But a fragmented market and uneven enforcement of efficiency standards in high growth regions is throwing down hurdles for suppliers.
Introduction and definitions
Rapid expansion in China’s construction sector has continued despite the weakened economic activity of the last 12 months; a phase from which we are now unsteadily emerging. During this time Chinese construction growth has been sustained by a massive expansion of state-encouraged debt and state funded projects, allowing the continued creation of much needed offices, factories, residences, schools, hospitals, and public buildings. Commodity costs – especially those related to energy and materials – have dropped from their peak in mid-2008, to levels not seen since the aftermath of SARS, China’s last economic dip. It can now be reasonably asserted that lending in China will begin to tighten and, as global trading thaws, commodity prices will rise. This will have implications for the cost of constructing and running a building, issues which lie at the heart of the green building materials market.
By way of definition, a green building material is one which is designed specifically
to reduce the energy load of a building and/or uses less energy to make than other products in its class. Further, a green building material should be compliant with an energy efficiency design protocol such as LEED, ASHRAE or China’s Evaluation Standard for Green Buildings.
However, in this emerging field where there are no precise or universally used definitions, green building materials are often defined by what they are not. Non-green products have no impact or a negative impact on energy consumption and the environment. While not necessarily polluting, these products provide no measurable green impact to a structure. Non-green products include steel, aluminum, plaster, and types of sealants, cement, and glass.
The Chinese government is shifting toward a greener emphasis of its national development objectives. Its policies are born out of a need to address China’s energy security, thus regulation relating to green
building materials center on energy saving and not other environmental aspects such as toxicity and water conservation. In 1996, a policy was passed regulating the conservation of heating energy for buildings. It states that buildings constructed between 1996 and 2000 should be 50% more energy efficient than buildings built between 1980 and 1981. Buildings constructed after 2005 must increase in efficiency by an additional 30%.
In April 2008, the standing committee of the National People’s Congress published a law
promoting energy conservation and outlining what products must have enforceable regulations and equipment energy efficiency standards. They typically work with the National Development and Reform Commission to set relevant standards and policies which regulate energy conservation.
More recently, China’s RMB 4 trillion stimulus package, in which up to RMB 3 T is to be allocated to construction, includes subsidies and incentives for building developers to use green building materials, particularly those using new technology such as building-integrated photovoltaic (BiPV) panels.
The government is also promoting public education and awareness, market participants see as a crucial long-term driver. Enforcement is, however, uneven: the further away from the tier one cities, the weaker these standards are upheld. Given that China’s construction boom is moving to second and third tier locations, a lack of enforcement may well continue to inhibit the market. Until the regulations are felt, the main impact the government has in the market is through its funding of projects using green technology.
First tier cities Beijing, Shanghai and Guangzhou and Shenzhen (which often is the test center for building technologies) have traditionally been centers of demand. This has now spread to large cities in provinces such as Shandong, Jiangsu, Hebei, Sichuan, Hubei and Hunan, where industry, commerce and higher living standards are proliferating.
In the map of China (see figure 1) the estimated consumption of green building materials by region and by industry is shown. These estimates are based on primary research GCiS conducted on a basket of green building materials (selected to be representative of the multiple budgets, climates and industries that influence demand). China is currently building a significant amount of residential buildings, with such construction is responsible for one in every four Yuan spent on green and deep green building materials.
The northern and eastern provinces of China, where there is strong demand for commercial, industrial and public buildings are the largest, and from the point of view of a high-end foreign supplier, most viable geographic segments. Central China, becoming rapidly more affluent; and Northwest China, with its climatic extremities, are both key growth segments. Also worth noting is South China, which is affluent but due to having been built up before many green technologies arrives remains a small market due to the proportionally lower amount for primary construction in that region. The size of South China’s market seems to confirm the views of many market participants in that there is no sizable retrofit market yet.
Sales of Green Building Materials by Industry and Region
What is the market buying?
“Green” as the marketing concept we see in the West has yet to seriously emerge in China. In a sample of high-end residential apartment brochures, none claim to be a green building, although several use advanced insulation material such as extruded polystyrene, aerated concrete and low-e glass. The same is the case for all but ultra-high-end offices in the commercial sector. The reasons for this are that firstly, there is often a disconnect between the person buying the property and the one using it (and paying the bills), meaning that the marketing language is geared towards an investor; and secondly, that the cost of energy in a building has remained artificially low through de facto government subsidization and, when compared to other rising costs such as food and wages, are of less concern.
Indeed, this is a market still very much economics-driven. Buyers of green building materials, typically property developers for exotic products such as BiPV or electronic air cleaners, and design and integration companies for more basic things like insulation, glass and concrete, overwhelmingly select a material for its low pricing. This puts green building materials at a disadvantage to light-green or non-green substitutes, especially in China where a huge volume of low-end products compresses pricing all-around. Raw materials suppliers such as BASF, which provides insulation materials, Knauf, a low-carbon drywall supplier and Schott, a low-e glass and photovoltaics supplier are but three examples of German companies that have, and will continue to, benefit from appropriate product positioning.
Buyers in this market are also turning to modular products such as heat pumps and variable frequency drives. In the demand for these, the market exhibits a need for minimal startup costs and a quick payback period. Conversely, demand for high start-up-cost equipment is waning.
What isn’t working (yet)?
Energy management companies, expensive products and some of the more exotic green building materials have yet to succeed in China. Energy management companies (or EMCOs), measure the potential savings a customer can make and then retrofits equipment and takes some of the money a client saves on their energy bill as revenue. The main problem is that there are few if any government regulations and enforcement to support an EMCO in case of a dispute, making savings hard to measure and prove outside of industrial applications. Further, the benefits of a single material or part of a building (for example a façade) are difficult to measure in light of the whole. However, once the retrofit market will open up and, if the current regulations are enforceable, EMCOs should become viable.
Other constraints that EM/ESCOs face are the same as those of the whole green building materials industry, namely: a low demand for retrofit (many of the installed green building materials are relatively new and have a long lifetime), and the fact that those that arrange the purchases of the building materials are rarely the same group that pay the energy bills.
How do foreign companies succeed here?
The total building materials market is estimated by the Ministry of Construction to be worth around RMB 2.25 trillion in 2008. Of this very large number, only around 10-15% of the total market is a viable (in terms of pricing) for foreign suppliers, and a smaller portion still, around RMB 107 billion, is spent on green building materials.
While RMB 107 billion is certainly nothing to sniff at, it’s important to realize that this is an intensely competitive and, in places, highly fragmented series of sub-markets. All of the major international suppliers are here and several state-backed domestic stalwarts have emerged to lead the market. Most of the green building materials in China are made locally, with the exceptions of some very high-end products such as certain coatings and filtration devices.
Successful foreign-invested enterprises (FIEs) all have good channel management, relationships with contractors, integrators and have channel alliances with some Chinese suppliers. Good channel management means an optimal number of channel partners who have been developed incrementally over time, with the sufficient training in a target product’s technology and installation, carrying appropriate complementary products (which may be supplied by a domestic company) and are managed such that there is minimal overlap with other channel partners.
Good relationships with conduits like contractors and integrators are important as these parties are influential in deciding what type of products a purchaser buys. As many parties, particularly property developers, do not use detailed cost curve analysis, the recommendation of a qualified and trusted third party is of monumental importance in this market.
Where is the market heading?
A visit to any of China’s second and third-tier cities shows that the country is still in the middle of a construction boom. The inflating costs that the Chinese face to both build and occupy these buildings will encourage a greater focus on energy savings in general, and on products that are easy to install and have a short term payback in particular. In terms of architecture and design, Chinese design and building authorities are not great risk-takers (excluding some national signature projects) and any green building material introduced to the market will have to gain the acceptance of the designers, engineers and contractors before they are accepted by developers. This will rely on precedence and transparency, both of which will take time to develop in China.
Despite the size, double-digit growth and strength of the fundamentals, China will not become the home of green buildings overnight. Primarily, there needs to be a more detailed definition of what a green building is. For this, the full adoption of a standardization system that incorporates locally used product standards like Energy Star, comparable with international standards like LEED should occur. Enforcement of existing regulations must spread to China’s growth markets, which will require the buy-in of local officials. Finally, China-specific products and solutions need to be further developed. The focus of these should primarily be on short term, value for money and marketed pragmatically, not using the ‘save the planet’ emotional appeal, which sees limited success in developing markets.
German translation of this article was published in Aktuell Asia, September 2009 (translated by Konstantin Reinfeldt).