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May 17, 2012

The Messy Path to Clean Energy

In an industry infamous for losing money, Wanxiang America may have stumbled on a winning strategy: partnerships.

Sharon Kahn

As US solar companies fade like dying embers, it’s time for a reality check. “The solar industry is screwed up,” said Pin Ni, president of Wanxiang America Corp. at the 2012 Sir Gordon Wu Distinguished Speaker Forum at Columbia Business School. Most players in the field, he said, “don’t have a business. They have a dream.”

Illinois-based Wanxiang America, like its Hangzhou, China-based parent company Wanxiang Group Co., is both a major auto parts supplier and a manufacturer of clean energy products, ranging from wind to high-efficiency batteries to natural gas and solar. Despite the fact that Wanxiang entered clean energy almost by accident when the parent company bought several assets from the Chinese government in 1995, the business has become very profitable, insisted Ni, who shared Wanxiang’s secrets of success.

Buy rather than create. Instead of developing technologies and projects from the ground up, Wanxiang America looks for added value by buying some companies and entering joint ventures with others. “We look for each side to bring something unique, situations where one plus one equals more than two,” he said. An example is Wanxiang’s relationship with Smith Electric Vehicles, a US-based producer of electric trucks and busses. In February, Wanxiang made a $25 million equity investment in Smith and entered a joint venture to develop, manufacture, and commercialize all-electric school busses in China. Ni is counting on the US company’s technology and the Chinese company’s local knowledge to add up to more than the sum of the two partners’ parts.

Be ruthless in cutting costs. Ni indicated that Wanxiang’s acquisitions often focus on slashing expenses. For example, when the company bought a supplier on the verge of bankruptcy several years ago, it renegotiated union contracts. Cost savings resulted not only in profit margins high enough to sustain the business, but the division was also able to lower price tags to meet competition — and save jobs in the bargain. “We’re not an industry that can afford to fly first class,” said Ni. “Knowing we have to fight for every penny brings focus so efficiencies don’t get lost in bureaucracy.”

Spread yourself around. Partnering also allows Wanxiang to be active in a number of technologies. “By combining our resources with others, it lessens the financial burden for both of us,” said Ni. “We don’t yet know which technology will become obsolete and which will win, so we try to be active in all of them.”

Ni said new industries sometimes offer money-making opportunities in unlikely places. In the case of Smith’s school busses, Wanxiang is counting on the fact that busses don’t run during peak energy hours and can be charged at night when energy is cheap. The arrangement will allow the venture to sell some of the busses’ excess energy back to the power grid. “It’s not a guarantee of success,” he said, “but it increases the likelihood.”

Make the government your partner too. Wanxiang America has worked with numerous local governments as it built solar projects in the U.S. For example, it received more than $4 million in federal American Recovery and Reinvestment Act funds to build the Rockford (Illinois) Solar Project, the largest photovoltaic solar development in the Midwest.

But it’s crucial that your financials can hold up without government funds. “The [US] Department of Energy’s money is half gone,” warned Ni, adding, “If you rely on government support, you’re not a business. We have to build companies that can survive independently.” With that reality in mind, he also advised against borrowing too much to make up for government shortfalls. “The fundamentals are the same as in every other business,” said Ni. “Don’t get lost in a dream.”

Ni acknowledged that the clean energy business is still nascent. With economies of scale, he expects prices will eventually fall and customers will become more plentiful as they focus on the potential cost savings and advantages of clean energy. Meanwhile, though, clean energy companies “have to prepare for bad weather ahead,” he said. Although joining with the right partners can increase chances of success, “if you’re not prepared to lose money,” said Ni, ”don’t invest in this business.”

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