For Eco-Entrepreneurs in China, No Simple Way to Grow a Business
Hydrogen Power for Fleet Vehicles Has Tough Road to Market

By Edward Cody
Washington Post Foreign Service
Thursday, December 28, 2006

SHANGHAI -- Except for its paint job, green to symbolize environmental friendliness, the bus looked ordinary enough as it bumped along a suburban Shanghai street late one recent morning. But it was strangely quiet. Only a distant hum accompanied the rattles and passengers' conversations.

The hum came from a hydrogen fuel cell providing clean, renewable energy to the demonstration vehicle, manufactured by Shen-Li High Tech Co. Ltd., a private Shanghai company that set out to make its fortune from hydrogen power for buses, taxis and generators in the giant Chinese market.

Shen-Li, launched here by a Clemson University-trained engineer, Hu Liqing, found encouragement in a campaign by the Chinese Communist Party to promote bold departures such as hydrogen power.

Party leaders have decided that the Chinese people, steeped in tradition and educated to obey party directives, must learn to initiate and innovate, because the future of the Chinese economy depends on it.

Most of China's current economic boom has come from young men and women working for low wages in factories that use technology and product designs from abroad. As the economy matures, China's government has warned, it must rely increasingly on new technology invented by the Chinese themselves, who are being urged to turn assembly plants into laboratories blooming with a hundred flowers of new ideas.

"We must speed up the construction of an innovative nation," the Communist Party's Central Committee declared after a Dec. 5-7 meeting.

But the experiences of Shen-Li and other companies with ambitions to market hydrogen power suggest that China's one-party system and pervasive controls hamper innovation in many fields, from arts to sciences. In a nation where the party retains a monopoly on power -- economic and otherwise -- bursting from the official mold with a new idea and bringing it to market is never easy.

Although the need for pollution-free vehicles and renewable energy is clear in China's increasingly choked cities, the future of hydrogen power has remained in the grasp of a powerful officialdom that decides on budget allocations. The government's senior levels repeatedly have endorsed alternative forms of energy but have yet to take decisive steps toward getting hydrogen-powered vehicles onto the streets.

The Shanghai municipal government and party apparatus, proud of a can-do attitude that helped make their city China's most prosperous, promised big-time investment in a hydrogen-powered bus and taxi fleet. But the local leadership went down in a corruption scandal in September, raising doubts about their plans.

"In China, it all depends on the government," said Mao Zongqiang, one of the country's leading experts on hydrogen and other alternative fuels at Tsinghua University's Nuclear and New Energy Institute.

Hu Liqing, 43, made hydrogen power his mission years ago, even before the Communist Party struck up its innovation theme. After postdoctoral studies at Clemson and two years working in Vancouver, B.C., he returned and founded Shen-Li in 1998 with the idea of attacking the pollution in his native China and making money as well.

"We are trying to do something good for human beings," he said in an interview at his factory in Shanghai's suburban Longyang Industrial Garden. "Even in Canada, we are losing paradise. Of course, Chinese people face an even more serious situation, and so that's why I came back and tried to get people to focus on the future."

Hydrogen cell power is under development at major automobile companies around the world. Shen-Li has put together its version by drawing on foreign parts and know-how and its own research. It hopes to make its mark by finding a way to economically mass-produce the propulsion systems.

The beauty of hydrogen power, Hu said, is that a simple chemical reaction in the fuel cell combines hydrogen and oxygen to make water, producing electric current to power a vehicle, with water the only emission. Moreover, he noted, there are potentially boundless supplies of hydrogen and oxygen, unlike petroleum.

The problem is that producing, storing and distributing the hydrogen costs money and requires an infrastructure of filling stations that does not exist, he acknowledged. In addition, the price of manufacturing a hydrogen-powered vehicle exceeds that of producing a traditional gasoline-powered one.

Until recently, that problem looked like it was on the way to being addressed. The activist Communist Party secretary for Shanghai, Chen Liangyu, and the Shanghai mayor, Han Zhen, visited Shen-Li in July and told Hu they were serious about his technology.

The city government had put up about $200 million for hydrogen cell research and development, some of which kept Shen-Li and its 150 employees going. Shanghai officials announced a plan to put 1,000 hydrogen-powered vehicles on the streets here by 2010 and 10,000 by 2015. After that, mass production would be on the horizon, they suggested, and Shanghai would be at the forefront of the world's search for affordable, environment-friendly transportation.

Under the plan, the state-owned Shanghai Automotive Industry Corp. would produce a good share of the cars, and a company in nearby Suzhou would produce the buses. Some officials suggested General Motors Corp. would get a part of the deal as well. But that would still leave a lot of business for Shen-Li.

"In Shanghai, I am very lucky," he said then. "The politicians want to make an investment in the future."

But party secretary Chen was implicated in a pension fund scandal and removed from power three months later. Shanghai officials and business leaders waited for Chen's replacement, wondering whether he would be as enthusiastic about hydrogen-powered vehicles.

Eminent Chinese scientists with connections to the government then warned Beijing that hydrogen fuel-cell technology may not be advanced enough to warrant large-scale investment. As a result, official enthusiasm cooled.

Lower-level Shanghai officials say they remain interested, but in the meantime they've shrunk their ambitions. A new plan recently announced called for only 100 environmentally friendly vehicles of all kinds on the streets by 2008, 1,000 by approximately 2012 and the capability to mass-produce them -- but no commitment to do so -- by 2015. No money has been allocated.

"It's not a very good sign for us," said Shi Tao, who manages administration and outside relations at Shen-Li. "We are a little frustrated."

A subsidiary of Fosun Pharmaceutical Corp., meanwhile, purchased a 36 percent share of Shen-Li late last summer. Since then, Shi said, the company has focused on electricity generators, which offer hope for more immediate sales in China and abroad. Private venture capital for an iffy project like hydrogen vehicles is hard to come by in China, he explained.

From the headquarters of his Fuyuan Century Fuel Cell Power Co. Ltd. in suburban Beijing, Zhong Jialun has watched the ups and downs of hydrogen power plans in China with a practiced eye. Zhong, 63, has seen many things come and go in his time, and now he has put his money on hydrogen power.

"I've always been an optimistic guy," he said. "Everybody says China is the world's factory. But it's just a factory. We haven't mastered the key technologies. But we aren't going to allow things to stay that way. I agree with the government. We must have our own innovative technology. We can't just sell cheap labor."

Born into a prominent family of Red Army officers, Zhong commanded a submarine in the early days of the Chinese navy. During the Cultural Revolution of 1966 to 1976, he said, he ran into trouble with the authorities by pointing out that the upheavals of the times were a poor mix with the exacting standards of submarine technology. He was sentenced to death. His sentence was reduced to life in prison, then to 25 years. He served five years until the military brought an end to the Cultural Revolution.

After prison, Zhong found his way into business, following the advice of China's leader of the time, Deng Xiaoping. He went into metals, then restaurants and clothing. Another death sentence, for alleged corruption, was repealed. By the end of the 1980s, he was in the innovation business.

At Fuyuan Century Fuel Cell, he hired a research staff to find a way to make membranes, which are the key and most expensive element in hydrogen fuel cells. The U.S. company DuPont dominates the market for these components.

A Canadian-based Chinese scientist joined the team in 1999 and, in 2000, the company succeeded in making its own membrane, Zhong said, using a manufacturing process that is different from DuPont's. "The next step was to turn it into a product we could sell, to make money," he added.

The Beijing city government's plans for the 2008 Summer Olympics seemed to offer promise. Municipal authorities acquired three hydrogen-powered demonstration buses, assigning them to run a 12-mile route from the Summer Palace to the Wudaokou university district. Eager to show environmental credentials, it also has encouraged the building of two hydrogen filling stations, one of which produces its own hydrogen.

But the buses were bought from DaimlerChrysler. Zhong and his 60 workers have yet to get the orders they need to move their technology into production. While the government reevaluates, officials said, there are no plans for large-scale fuel-cell production in the capital.

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