China’s Water Service Market

Opportunities and Pitfalls for German Companies

Master's Thesis, 2007

82 Pages, Grade: 1,0 A


Table of Contents

Table of Figures

Abstract (English)

Abstract (Chinese)

1. Introduction

2. Literature review

3. Business environment of the Chinese water service market
3.1. Market definition
3.2. Dynamic development of the Chinese water service market
3.2.1. Political Development
3.2.2. Economic development
3.2.3. Social development
3.2.4. Technological development
3.2.5. Legal development
3.2.6. Ecological development
3.3. Competitive situation and rivalry
3.3.1. Firm strategy, structure and rivalry
3.3.2. Demand conditions
3.3.3. Related and supporting industries
3.3.4. Factor conditions

3.4. Summary

4. Business opportunities for foreign companies
4.1. Market segmentation
4.2. Business opportunities in selected water service sectors
4.2.1. Water treatment
4.2.2. Water supply and distribution
4.2.3. Maintenance and repair
4.2.4. Disposal of sewage sludge
4.2.5. Seawater desalination
4.2.6. Consulting services
4.3. Participation opportunities in selected public projects
4.3.1. Nanshui-Beidao (South-North water rerouting project)
4.3.2. Protection of important river, lake and water reservoir areas
4.3.3. Water saving and water management projects
4.3.4. Ecological sewage water and sanitary projects
4.4. Summary

5. Risk management for foreign investors
5.1. Risk identification and assessment
5.2. Risks checking and analysis
5.2.1. Water price development
5.2.2. “Take or pay” versus “fixed return”
5.2.3. Government’s breach of faith
5.2.4. Competitive bidding procedure
5.2.5. Loan term limitations
5.2.6. Land use rights
5.3. Recommendations for potential risk treatment
5.3.1. Estimate the competitive situation
5.3.2. Aim for mutual benefits
5.3.3. Pick winnable battles
5.3.4. Build up a polychronic planning system
5.3.5. Secure information flow
5.3.6. Attain strategic advantages
5.3.7. Marshal adequate resources
5.3.8. Lean winning ways
5.4. Summary

6. Conclusion



Table of Figures

Figure 1: Business segments of the Chinese water market

Figure 2: The PESTLE Model

Figure 3: The administration of China’s water management

Figure 4: Vertical and Horizontal structure of the Ministry of Water Resources

Figure 5: Development of China’s GDP from 1995 to 2005

Figure 6: China’s Regional Disparities

Figure 7: Laws and Regulations in the Chinese Water Market

Figure 8: Contamination of important rivers

Figure 9: Water resources availability per capita

Figure 10: The determination of National Advantage

Figure 11: PSP Models for foreign investors

Figure 12: Company profiles of main competitors in the Chinese water market

Figure 13: China’s Water Demand

Figure 14: Interrelation between the service sector and the goods sector

Figure 15: Market segmentation and attractiveness

Figure 16: Provincial projects for water supply and sewage treatment

Figure 17: China’s Water Prices

Figure 18: Planned seawater desalination plants

Figure 19: Investments in the Nanshui-Beidao project

Figure 20: Treatment quotas for important rivers, lakes and water reservoirs

Figure 21: Perceived risks in the Chinese water market

Figure 22: Strategic jigsaw for risk treatment

Abstract (English)

Since the beginning of the “Open-Door-Policy”, China has scored remarkable achievements. Its GDP has grown from 150 billion to 1.65 trillion USD and its per capita GDP from 190 to more than 1,200 USD. However, the resources that such growth demands have raised concerns about the long-term sustainability and hidden costs of the growth. Many of these concerns are associ- ated with the state of Chinas water resources. As demand for water has increased, so too have problems with water shortages, pollution, falling groundwater tables and flood/drought damages. To tackle these challenges the Chinese government increasingly encourages foreign companies to engage in the Chinese water market.

Market research studies claim that this market holds promising business opportunities for both domestic and foreign companies. This thesis questions this observation from a foreign investor’s perspective. It shows that the Chinese water market indeed holds business opportunities, but that these opportunities are mainly tied to certain sectors and regions. A questionnaire carried out between foreign managers showed that these opportunities go together with high market entry barriers and high market risks. Therefore, this thesis pays special attention to potential risk treatment measures which take the position of foreign companies and the special characteristics of the Chinese water market into account.

The paper contains six chapters. After an analysis of the business environment of the Chinese water service market, the thesis describes business opportunities for foreign companies. After- wards potential risks for foreign investors are discussed and measures for a strategic risk treat- ment introduced.

Keywords: water market, water supply, water treatment, PSP projects, risk management, PESTLE analysis, Diamond of Nations

Words: 20,485

Abstract (Chinese)

illustration not visible in this excerpt

1. Introduction

China has undergone a remarkable transformation process and rapid economic development since the beginning of the ‘Open Door Policy’ introduced by DENG XIAOPING. There is no doubt that its dynamic development has had positive impacts on environmental conditions, such as a higher efficiency in the use of natural resources or technology improvements for water treatment. Nevertheless, concerns remain about the hidden costs of the growth. As demand for water has increased, so too have problems relating to water shortages, pollution, falling groundwater ta- bles, and flood/drought damages. A recent study conducted by the World Bank suggests that the overall cost of water scarcity accounts for 147 billion Yuan annually, or about one percent of the Chinese GDP (WORLD BANK, 2007, p. xvi). However, the Chinese government certainly under- stands that action is needed and increasingly pushes the topic of an environmentally sustainable development2.

The political countermeasures from the Chinese government include management model re- forms, Private-Sector-Participation projects (PSP) and the support of new technology develop- ment and application. According to the 11th Five-Year-Plan, more than 140 billion Euros will be spent on environmental projects and campaigns to increase the awareness of the population for environmental issues before 2010. Both domestic and international enterprises can profit from this trend. Despite of market barriers3 the overall market size and future market potential provide positive arguments for a participation of foreign investors. This particularly holds true for Ger- man enterprises that are among the global players in this field. With their advanced technology and management know-how they can not only profit from the Chinese water market, but can also play an important role in facilitating harmonious development in Chinese society.

The overall goal of this study is to draw a realistic picture of the business opportunities for Ger- man enterprises. Due to the vast size of the Chinese water service market and its extensive dis- parities, most research studies have a rather narrow approach and focus on subsets or certain regions of the market (e.g. LEE, 2006; FANG 2004; XU, 2006). A research study about the overall market opportunities and risks including strategic measures for foreign investors is still missing. This thesis aims to bridge this gap. Its content is based on in depth literature research, interviews with political decision-makers and company representatives, an evaluation of questionnaires among foreign managers as well as experiences of the author while working and studying in China.

This thesis is presented in six chapters:

First, chapter one gives a general introduction into the Chinese water market and the challenges the Chinese government and private investors face. It states the study’s hypotheses and presents the organization of the paper.

Chapter two aims to give a broad overview of studies which have already been carried out about PSP-models in the public water sector. It focuses on cooperation models between private entities and the government and presents economic modelling approaches to estimate the window of opportunity for private investors.

Chapter three analyzes the water market first from a macro perspective and then goes to a micro analysis focusing on the competitive situation for foreign companies. This chapter illustrates the rapid change of the market conditions and gives an idea how these changes effect the success of a company. Furthermore it introduces the institutions of the Chinese water market and the direct and indirect effects of their actions on participating companies.

Chapter four focuses on business opportunities for foreign companies. The attractiveness of selected water service industry segments is evaluated based on a multiple market segmentation model. In addition, opportunities arising from public projects are discussed.

Chapter five evaluates the risks associated with foreign investments in the Chinese water service market and aims to develop a strategic risk measures to help foreign investors to select appropri- ate controls and counter measures. The risk management strategy is based on a questionnaire capturing first hand insights from international managers who are currently active in the Chinese water service market.

Finally, chapter six summarises the main findings of the study and provides a brief outlook at the further development of the Chinese water market from a foreign investor’s perspective.

2. Literature review

The “Trade Policy Review” of the WORLD TRADE ORGANIZATION (WTO) provides a general overview of the factor conditions and reform challenges of the Chinese water sector. China faces falling ground water tables, geographically unevenly distributed water resources, a largely out- dated water supply system and a worsening water contamination (WTO, 2006). The social and environmental effects of these consequences are widely discussed in research literature. Most of these studies concentrate either on specific regions (e.g. WORLD BANK, 2005; DOMAGALSKI AND OTHERS, 2001) or on particular sectors (e.g. CAI AND OTHERS, 2001). Simultaneously the agricul- tural, private and industrial demand for water increases. This leads to a distressing imbalance between supply and demand. Recently SHALIZI (SHALIZI, 2006) and VARIS (VARIS AND VAKKILAINEN, 2005) paid special attention to this ambivalent development.

The Chinese authorities have undertaken a wide range of programs to cope with these challenges. The status of implementing these programs is summarized in the Ministry of Water Resources (MWR) “ Water Resources Report ” (MWR, 2005). In addition the World Bank prepared a strategy document (WORLD BANK, 2007b) which outlines comprehensively the key actions necessary for the future. However, neither of these documents provides a quantitative assessment of how much of the different problems can be resolved by the different actions. Nevertheless, they provide an excellent collection of actions to be implemented.

One can find ample literature about the effects of these business reforms on business opportuni- ties for foreign investors. International political organizations and governments have carried out studies to promote foreign participation in the Chinese water market. The U.S. Department of Commerce, for example, describes the Chinese water market reforms as “a great chance for U.S.-American companies” (USDC, 2005, p. vii) and introduces attractive market segments for international investors. The German Office for Foreign Trade followed a similar approach in 2006. Their study examines the scope and quality of Chinas political reforms and highlights im- portant areas of demand (BFAI, 2006).

Even though, both studies give a proficient and enfolding overview of the business opportunities, they lack on a comprehensive evaluation of market risks. These risks have been subject to other studies. LI, for example, argues that in certain segments of the Chinese water market legal risks would certainly outweigh the business opportunities (Li, 2004, p. 241). However, strategic measures how to tackle these risks are not mentioned in detail by any of the mentioned studies. Therefore, this thesis aims to extend the prior described research papers with an analysis of po- tential risks for foreign investors and an evaluation of strategic measures for a market oriented risk management.

3. Business environment of the Chinese water service market

The Chinese water market underwent a rapid change in its relatively recent history. In the first years after the introduction of the "Open-Door-Policy" by DENG XIAOPING in 1978/79 the construction capital of Chinese water works was largely funded by foreign governments and international finan- cial institutions like the World Bank and Asia Development Bank. In exchange for these loans the waterworks usually had to purchase equipment from selected foreign companies through interna- tional bidding procedures (LI, 2004, p. 241). Since then much has changed. In 2002 the Chinese gov- ernment has opened up the entire municipal service sector to both domestic and international enter- prises. In recent years the number of PSP-deals signed exceeds the total of any other country (ICF, 2006, 1).

Chapter three analyses this dynamic development and describes the competitive environment foreign investors face. After a definition of the researched market, a PESTLE analysis is carried out to illustrate the overall dynamic market development. In addition, chapter three analyses the institutions affecting this business environment with a ‘Porter’s Diamond Model’ framework.

3.1. Market definition

The dynamic horizontal and vertical growth of the Chinese water market creates new market opportunities but increases market risks at the same time (SHALIZI, 2006, p. 12 ff.). A clear market definition is the first step one must take in order to seize these opportunities and to prevent pitfalls. In order to get a clearer picture of attractive participation fields in the Chinese water market, the study focuses on specific business fields. For this study political and business decision-makers were interviewed to identify the business fields that are of main interest for foreign investors. Based on these interviews the Chinese water market can be divided in seven service markets and four goods markets (see Figure 1).

Figure 1: Business segments of the Chinese water market

illustration not visible in this excerpt

4 Within these business fields, the service sector seems to hold the highest potential for foreign investors. 10 of 12 interviewed experts believe the medium-term and long-term potential for for- eign companies in the goods market to be only limited, while many expect a further growth in the demand for high quality and reliable services. This study follows the anticipation of these experts and focuses on the service sector, in particular on the markets: water supply, maintenance and repair, water treatment, disposal of sewage sludge, seawater desalination, water saving projects as well as consulting services.

3.2. Dynamic development of the Chinese water service market

Private investors have been present in China’s water sector since the late 1990s. However, in 2002 when the Chinese government opened up the municipal service sector investments really took off and have developed positively over the last years (ICF, 2006, p. 1). Experts estimate that the water supply and sewage treatment businesses will form a combined market of RMB 10 bil- lion by the year 2010 (LI, 2004, p. 243). This impressive development calls for a market analysis which doesn’t only describe the current picture of the Chinese water market but pays attention to the trends and developments at the very same time. Therefore, this study first carries out a PES- TLE analysis examining the political-, economical, social, technological, legal and environ- mental developments (see Figure 2).

Figure 2: The PESTLE Model

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3.2.1. Political Development

Political development has an important impact upon the regulations of businesses and the spend- ing power of customers and other business (WANG, 2006, 2 ff.). The Chinese water market is still under tight government control. Even after the opening of the entire municipal service sector (2002), the national, regional and local governments still decide about investment possibilities and try to keep a close eye on the business operations. Foreign managers in the Chinese water market are usually in constant contact with local and national government agencies (SHALIZI, 2003, 17 ff.). Therefore, an understanding of the political system and its reforms is essential for a successful investment.

Over the past 50 years, China has constructed a vast and complex bureaucracy to manage its wa- ter resources (Figure 3). Vertical and horizontal boundaries between institutions on all levels create a complicated framework which is difficult for outsiders to grasp. It is important to recog- nize that, until recently, water saving has not been a major concern to Chinese policymakers. Instead, the Chinese water management system was designed to prevent floods and to divert and exploit water resources for agricultural and industrial development. China’s accomplishment of this task is largely why the nation faces water-shortage problems today (LOHMAR AND OTHERS, 2003, p. 5).

Figure 3: The administration of China’s water management

illustration not visible in this excerpt

The key institutions in this framework are the Ministry of Water Resources (MWR), the Ministry of Construction (MoC) and the State Environmental Planning Administration (SEPA).

The Ministry of Water Resources (MWR) sets political goals and oversees the water protec- tion, water management and water allocation. It approves dam projects, water reservoirs and hydroelectric power stations. Furthermore, the MWR operates “Water Resources Commissions for Certain Rivers” and regional bureaus on provincial-, county-, and township level (LOHMAR AND OTHERS, 2003, p. 6 f.).

The Ministry of Construction (MoC) is responsible for the construction and maintenance of infrastructure for the water supply and treatment sector. It operates bureaus on provincial- and township level. The MoC is represented in all of China’s registered cities but not on all country levels. To increase the efficiency of the system The MWR and MoC representations were merged to Water Bureaus in some provinces and municipalities (LOHMAR AND OTHERS, 2003, p. 6 f.).

The State Environmental Protection Administration (SEPA) examines industrial projects in water supply and treatment. Additionally the SEPA oversees the industrial waste water. However, due to limitations in human resources and funds the SEPA can only oversee a small share of the industrial waste water (LOHMAR AND OTHERS, 2003, p. 6 f.). Furthermore, it often struggles with local governments who are trying to protect their local industries. Therefore, the SEPA estab- lishes more and more provincial institutions outside of the reach of the provincial governments.

However, outside of this basic framework, many sub national water management institutions influence water policy. Provincial-, prefecture-, county-, and township governments all have Water Resources Bureaus (WRBs) linked vertically to the MWR in Beijing (Figure 4). Formally, the sub national offices are charged with implementing the rules and policies advanced by the national authorities. In reality, however, the heads of local WRBs are appointed by, and report to, leaders of their own jurisdictions (such as provincial governors or county magistrates) (LOHMAR AND OTHERS, 2003, p. 7).

Figure 4: Vertical and Horizontal structure of the Ministry of Water Resources

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These horizontal ties frequently dominate the vertical ones. As a consequence, WRBs also create and execute water policy and regulations based on the needs of their own jurisdiction. This causes a considerable degree of heterogeneity in water policies across regions. Most county of- fices have established water resource stations in each township, which in turn interact with local villages. Traditionally, in most villages, the village leader, or a water officer on the village com- mittee, takes charge of the village’s water management system and assesses water fees (BFAI, 2006, p. 17 f.).

The reform of the political institutions in the Chinese water market still has a long way to go. China still misses an all embracing and nationwide policy. Business representatives stated that the success of a project very much depends on the ‘good will’ of political institutions and on the ability of the company to communicate with these institutions. However, one must also recog- nize that China showed impressive improvements in recent years. The interviewed managers expressed their hope that the reforms will continue to lead to a more equal treatment of domestic and foreign companies and to a more uniformed application of unified standards.

3.2.2. Economic development

The political development has a vast impact upon the economical development. The father of China’s political development, DENG XIAOPING, said in 1985 that “[China’s reform] is a great experiment that is not described in books.” Ironically, it is this ‘great experiment’ that provides the basis for this thesis. DENG’S “Open-Door-Policy” can be seen as the key to China’s rapid economic development in recent years. Over the last decades, China - which had been suffering from heavy poverty, severe production inefficiencies, and almost a standstill in economic development for over a generation prior to the reform - has become the fourth largest economy in the world. While developing nations typically experience periods of boom and bust, China has enjoyed a steady growth-rate above 9% since the 1980s.5

Figure 5: Development of China’s GDP from 1995 to 2005

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Source: China Statistical Yearbook, several issues.

An important mile-stone on China’s remarkable development was its WTO-entry in 2001. The pace of the economic development has increased substantially in the first years after the WTO entry and is far from an end. The World Bank estimates that China’s GDP will be larger than the US-American GDP in 2020 (ASIAN ECONOMIC NEWS, 2005)6. This economic development is not lost on multinational corporations. For companies all over the world, the nation is increasingly seen as a critical component in their global strategy. The “Middle Kingdom” became to one of the most important destinations for foreign direct investments. In 2006 foreign enterprises invested more than 63 billion USD in China (CHINA STATISTICAL YEARBOOK, 2007). That is an increase of 5 % to the previous year. With cumulative investments of 9.6 billion USD (2006) Germany is China’s most important European investor. However, still 80-90 % of the foreign direct investments are directed to the coastal areas of the country7 where only 9 % of the total population live.

Figure 6: China’s Regional Disparities

illustration not visible in this excerpt

Source: JAN HUTTERER, 2006: “Marketing in China, Chancen und Risken am Beispiel deutscher KMU”

This concentration of foreign investments results in great regional disparities. The urban centers of the coastal areas have a relatively high per capita income which promises good business opportunities for foreign investors. Outside these regions China’s transformation is less dynamic but still sweeping. However, many parts of western and central China are still characterized by a low purchasing power and underdeveloped business environments (DEUTSCHE BANK RESEARCH, 2004, p. 4). The Chinese government undertakes great efforts to tackle this problem. Hence, the reduction of regional disparities is one of the five harmonization incentives of the 11th Five- Year-Plan.

One can conclude that China’s dynamic economic has positive effects on China’s water market. The growing industry and rising per capita income lead to an increase in the demand for water supply and treatment solutions. This creates business opportunities for foreign investors. However, past experience shows that China is not a “must-win-market” and that many other factors than the economic development also have to be taken in consideration when evaluating business opportunities.

3.2.3. Social development

The German philosopher and economist KARL MARX argued that social development would trig- ger economic development and vice versa (see MARX, 1859). While many others of MARX’ theo- ries can be and are subject to very controversial discussions, history seems to support this spe- cific idea and reveals a direct relationship between economic development and social conditions. Nevertheless social issues and a social responsibility of companies have been considered as a luxury for a long time. However, many companies awoke to it only after being surprised by pub- lic responses to issues they had not previously thought were part of their business responsibilities (PORTER, KRAMER, 2006, p. 1). Cases like Agua del Tunari in Cochabamba (2001)8 or Maynilad Water in Manila (1997)9 have shown that social issues can have a big affect on business opera- tions in the water market.

Although water scarcity in northern China has been building up for decades, it has only recently begun to affect the livelihoods of people. Protests against water contamination and scarcity be- come more and more frequent and media reports sharpen the public awareness for China’s water problems (BFAI, 2006, 21). In response, the Chinese government has begun to address these problems at all levels, from the national level down to the village and farm levels. However, given the scale and social impact of these problems, solutions are often difficult to implement and sustainable progress is difficult to achieve (LOHMAR AND OTHERS 2003, P. 4).

One example for a direct effect of social needs on politics is the retained price policy of the Chinese governments. Raising water prices would have adverse effects on farmers’ already low incomes and would dilute the competitive advantages of China’s manufacturing industry. This could create social instability and directly counter important policy goals. Still, some analysts argue that the Chinese customer’s perception of higher water prices changes in favour of investors (e.g. BLUME, YAMAMOTO, 2002, p. 92). However, it is unlikely that the Chinese water prices will increase to the world’s average in the near future.

The Chinese water pricing system mostly uses regional market segmentation models to define maximum price levels. This system works well in case of regional disparities. However, the Chi- nese market is not only affected by regional disparities but also by high income disparities within regions. In 2005 the Gini coefficient (a widely accepted measure of inequality in which zero ex- presses complete equality while one represents complete inequality) exceeded 0.4, which is the international benchmark for alarm (PEOPLE’S DAILY, 2005). Since water has to be affordable for both low and high income people, regional pricing models have to be aligned to the groups with the lowest income. This leads to inefficient pricing structures leaving only a small profit margin for investors. Policies such as increasing block prices, which charge marginal costs for marginal water use while allowing people a minimal level of use at a minimal charge, are rare (LOHMAR AND OTHERS, 2003, p. 3).

3.2.4. Technological development

The British philosopher KARL POPPER argues that economic, social and technological develop- ments are highly correlated (POPPER, 1992). His arguments are supported by a vast array of eco- nomic studies that show that technological progress improves with positive economic develop- ment. Market research studies show that China is in need of more sophisticated technological solutions to cope with the increasing water demand. The Chinese government aims for a more consistent technological development and innovation to tackle this challenge (ZHU RONGJI, et al. GTZ, 2000, p. 7). To strengthen China’s research and development it follows three basic princi- ples: promotion of domestic research and development, support of international cooperation pro- jects and attraction of foreign technology.

Sponsorship of research institutes: One example for the sponsorship of research institutes is the China Institute of Water Resources and Hydropower Research (IWHR). Its major programs are funded by the Ministry of Water Resources, the Ministry of Science and Technology, as well as the National Natural Science Foundation of China. The IWHR signed international coopera- tions with prominent overseas research institutes and has developed technologies for turbines, construction materials for dams, water saving technologies and other technical improvements. In addition to this, the institute is engaged in the design of hydro projects, supervision of safety monitoring and safety identification as well as technical consulting service at home and abroad (.

Support of foreign cooperation projects: The Chinese government seeks partnerships with other governments in the field of environmental technology. These ties are particularly strong between the Chinese and German government10. For example, in accordance with the “Sustain- able water concept and application for the Olympic Games 2008” the German and Chinese min- istries of research and development (BMBF and MoST) jointly encourage several research pro- jects: efficient rain water management systems, the implementation of water saving high tech- nology, the use of grey water for buildings in the Olympic village as well as water treatment and -recycling (BFAI, 2006, p. 48). For example, the Hamburg University of Technology, the Tsinghua University Shanghai and the Beijing Drainage Group work jointly on a sustainable sewage water recycling concept including the Olympic lake11.

Attraction of foreign technology: The Chinese government supports the production and im- plementation of water saving technologies and facilities. Foreign projects which are considered as “encouraged” according to the “Catalogue of Guidance of Foreign Investment Industries” (January 1, 2005) are subject to special subsidies like tax rebates or customs clearances. Encour- aged are projects in the following fields: water protection, equipment of facilities for the desali- nation of sea water, water saving technologies for industrial facilities and households, pipe con- structions for the public water supply and disposal and technologies for environmental protection and the resource savings.

One can conclude that the development of technology is a key element for improving water use efficiency and water quality. In many fields China still depends on the supply of foreign technologies. The main question: How long will this still hold true? China’s research and development begins to catch up with western countries and more and more Chinese companies move up the value chain. China undoubtfully still has a long way to go but based on technological improvements the competitiveness of Chinese companies increases each day.

3.2.5. Legal development

The previously prior described changes have created a challenge for the Chinese authorities to develop a robust regulatory regime. However, the development of an effective “rule of law sys- tem” is a difficult and lengthy path. According to a survey12 78 % of all questioned German small and middle sized companies supported the statement that China’s regulations are not im- plemented properly and legal rights are difficult to enforce (SCHWÄRMER, NANDANI, 2002, p. 6). While acknowledging great improvements in recent years, the report criticises a lack of clarity of the regulations. Particularly in the case of the Chinese water market the regulations regarding PSP-models are very complex. They have been influenced by national, regional and local deci- sion-makers fighting for different needs and interests (see Chapter 3.2.1).

Figure 7: Laws and Regulations in the Chinese Water Market

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Over the years, the conflicting interests of these decision-makers have lead to an extensive and voluminous regulatory framework (Figure 7). In the following the most important laws and national standards are introduced.

The “ Law for the prevention and control of water pollution ” came into effect in 200013. It contains quality standards for water supply (GB5749-1985), two norms for contaminated waste water and a water sewage standard for industrial waste water (GB8978-1996)14. The law also contains measures for monitoring, administration and prevention. Pricing mechanisms for sewage water treated in sewage treatment plants are specified (BFAI, 2006, p. 18 f.).

The “ Water Law ” was promulgated in 1988 and amended in 200215. It concerns site develop- ment and the use of surface- and groundwater. It measures are supplemented by the execution norms of the Chinese State Council (CSC) and provincial operation guidelines. In 2002 the legis- lative introduced the “polluter-pays-principle”, which is regarded as a milestone in the Chinese water management law. This means that in theory a company with exhaustive cultivation of wa- ter resources, causing for example erosions, can be held liable for compensation. However, in reality this principle is only rarely applied. If held liable, the compensation payments are gener- ally rather low (BFAI, 2006, p. 19).

The “ Clean Production Law ” draws up a framework for a sustainable economic development16. However, due to a lack of monitoring and implementation instruments, this law is often referred to as a “tiger without teeth” (e.g. BFAI, 2006, 20). The postulated recycling measures are merely stated on paper and are seldom actually carried out (BFAI, 2006, p. 20).

Additionally, the Chinese water sector is subject to a number of national standards and princi- ples for the supply of drinking water, the quality of surface water, as well as thresholds for cer- tain industries and sewage water treatment plants. Some of them are national and binding stan- dards which have to be followed, such as the standard for surface water (GB3838-2002) or for ground water (GB/T14848-1993) or the standard for water quality of irrigation for agricultural fields (GB5084-1992). Based on these general parameters, regional governments pass more defi- nite parameters reflecting local requirements for water quality and -management (BFAI, 2006, p. 20 f.).

However, the implementation of these regulations remains to be a problem. As discussed in chapter 3.2.1 the horizontal and vertical boundaries between institutions reduce the effective implementation of legal measures. Furthermore, past experience show that provincial and local governments tend to focus more on economic development. An enforcement of regulations that are contradicting this goal is difficult.


2 Environmental protection, especially water protection, has been a main focus of the 11th Five-Year-Plan (FYP).

3 The World Trade Organization (WTO) states that the most severe marker barriers are legal uncertainties and political risks (WTO, 2006).

4 According to the classification of the United Nations Organisation (UNO) this category actually belongs to the secondary sector. However, interviews with managers showed that most companies actually see themselves in the service sector. Integrated service solutions make up for a large part of the customer perceived value.

5 Some independent estimates are lower. For the 1980s -1990s, the World Bank reduces the PRC government rate by 1.2 %, while the Organization for Economic Cooperation and Development (OECD) cuts 3.8 points. Even after such adjustments are made, China’s economic growth remains impressive.

6 MCKINSEY estimate China to surpass the USA in the year 2040 (MCKINSEY, 2004, p.3).

7 They especially take place in three regions: 1) Shanghai and surrounding area, 2) the industrial north-east of the country, 3) the pearl-river-delta (Deutsche Bank Research, 2004, p. 4).

8 In 1998 the World Bank granted a loan of 25 million USD for the investments of water treatment plants in Cochabamba / Bolivia. One of the main conditions was to transfer all costs to the customers and to align the wa- ter prices with those of the USA. The US-American company Agua del Tunari, a daughter company of Bechtel, won the bid. Shortly after the start of the operations the water prices increased by more than 35 %. The upcoming pressure of customers forced the company to withdraw from their investment (BECHTEL, 2005).

9 When Maynilad Water, a joint project of Suez with Manilian stakeholders, entered Manila in 1997 it promised lower water fees and an expansion of the infrastructure. Only a year into the contract, Maynilad asked for the first rate increase with only minor improvements in the infrastructure and even a reduction in water quality. In the end, due to social and political pressure Maynilad cancelled the contract and decided to exit Manilas water market (LLORITO AND OTHERS, 2003).

10 The first “German-Chinese Environmental Conference” was held in December 2000.

11 The project also includes the largest Membrane-Bio-Reactor-System (MBR) worldwide. It separates biomass from germs (BFAI, 2006, 48).

12 The survey was carried out in 2002 by Haarmann Hemmelrath Management Consultants among 600 German small and medium sized enterprises which are currently active in the Chinese market.

13 Link for e-copy of the law:, last visited on October 2, 2007.

14 The level of water contamination, before and after the sewage treatment, is indicated by the water quality classes ranging from I to III.

15 Link for e-copy of the law:, last visited on October 2, 2007.

16 Link for e- copy of the law:, last visited on October 2, 2007.

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China’s Water Service Market
Opportunities and Pitfalls for German Companies
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Die Arbeit untersucht die Chancen und Risiken eines Engagements ausländischer Unternehmen in dem chinesischen Wassermarkt. Hierfür bedient sich die Arbeit folgenden Instrumenten: eine PESTLE-Analyse über die Marktentwicklung, eine Porters Diamond-Anlyse über die Wettbewerbsbedingungen, ein mehrdimensionale Marktsegmentierung zur Marktstrukturierung, qualitative und quantitative Variablen zur Bestimmung von attraktiven Marktsegmenten und Risikomanagement Strategien basierend auf den Theorien von Sun Zi und Mark Dorfman.
China’s, Water, Service, Market
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Jan Hutterer (Author), 2007, China’s Water Service Market, Munich, GRIN Verlag,


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