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American Corporate Investors, With Help from U.S. Treasury, Poised to Profit From 'Green' Light-Bulb Production in China

As the Obama administration gets set to enforce a controversial federal law phasing out old-fashioned incandescent light bulbs next year, two large U.S. firms have positioned themselves to profit handsomely from the production of more environmentally friendly lighting -- in China.

One reason for those profitable prospects is a financial commitment from the U.S. Treasury to a project that is being administered by the United Nations to ensure that China's fast-growing lighting industry is a bigger and bigger success.

The investment banking giant Goldman Sachs and the networking behemoth Cisco (through a venture capital fund it jointly owns) are significant investors in China's largest domestic lighting manufacturer, NVC Lighting Holding Co. Ltd., a company that was originally established in 1998 and is now registered in the Cayman Islands.

Additional investors include several funds controlled by China's state-owned CITIC, the Chinese International Trust and Investment Corp., and a number of individual Chinese investors (including a member of a local Chinese Municipal People's Congress), who have also registered corporations offshore.

NVC went public with a share offering in May 2010 on Hong Kong's stock exchange. The shares were not offered in the U.S. except through qualified institutional buyers, according to NVC's stock prospectus.

Click here to view the prospectus. 

Both Goldman Sachs, through its Asian subsidiary, and Cisco, through its investment vehicle, SAIF, or SB Asia Investment Fund, are represented on the NVC board.

SAIF began buying into NVC in 2006, for $22 million, and Goldman joined in during 2008, with $35 million. At the time of the share offering, SAIF was named as NVC's biggest single shareholder, with about 36 percent of the company. Goldman Sachs' initial share was about 11 percent, dropping to 9.39 percent, according to the Hong Kong stock prospectus. Goldman Sachs also served as a lead underwriter on the stock offering.

The investments by SAIF and Goldman in China's foremost commercial lighting company were thus extremely timely -- especially because China's lighting industry is currently getting a technical and marketing boost through a multimillion-dollar program to ensure that China succeeds in making more of the "green" light bulbs that Americans and other Western consumers will be required by law to use.

The project is being financed through a vehicle known as the Global Environmental Facility (GEF), which invests in projects that produce "significant" global environmental benefits. The U.S. Treasury is a major funder for the GEF, and in this case the environmental benefit is reducing China's carbon dioxide emissions from its electrical lighting sector -- the same rationale used for the incandescent light bulb ban in the U.S.

The funds are administered in China by the United Nations Development Program (UNDP), the U.N.'s flagship anti-poverty agency, in cooperation with China's communist government, to improve the technical and marketing capabilities in the lighting market, and to raise the quality and standards of its products -- which also will help to further consolidate the position of China as one of the major powerhouses of the global lighting industry.

Noting that China has become "a key production base for energy-saving lighting products in the world," NVC declares its own objective is to become a "leading global participant in the lighting products industry," and says in its stock prospectus that "overseas markets will become an increasingly important source of our growth in the future."

Overseas sales were 20 percent of its revenues last year; its goal for the "near future" is 50 percent, with North America and Europe as leading commercial targets.

The firm also expects China's share of the global lighting market to grow to 21 percent of a $39 billion industry over the next three years, vs. 15.4 percent of a $28.5 billion industry in 2007.

One factor in that growth will be the $84 million GEF project, which goes by the ungainly acronym of PILESLAMP (Phasing-out Incandescent Lamps & Energy Saving Lamps Promotion).

Click here to view the PILESLAMP Project document. 

The original partners in PILESLAMP included the Chinese subsidiaries of two well-known international firms, Panasonic and Philips, according to the GEF. They have been joined by 16 other firms (one of them, Zhejiang Yankon Lighting, is also affiliated with Philips), including NVC.

PILESLAMP's main goal is not economic, but environmental: to keep as many as 4.4 million metric tons of carbon dioxide out of the atmosphere as a result of helping to improve industrial and lighting efficiency in the world's most populous nation.

The notion of such global environmental benefits is fundamental to the mission of the GEF, and it has spent upward of $9 billion on such themes since its inception in 1991, while encouraging other investors, governments and agencies to spend an additional $42 billion. The U.S. contributed $1.68 billion to the GEF during that period.

This year, the U.S. has contributed $90 million to the GEF, and has pledged to hand over $575 million during the 2011-2014 period.

Many of the GEF's projects involve the conservation and extension of natural habitats and biologically important preserves, and, according to a U.S. official, its programs overall "protect the U.S. environment from ocean pollution, chemical pollution, climate change, destruction of biodiversity and other threats that are increasingly created beyond our borders."

"Program results show that our investments in the GEF directly catalyze action and investments by other countries to reduce their pollution and to curb the damage that they inflict on our shared spaces, such as the atmosphere and the oceans," the official said. "These programs help transform the behavior of other countries in ways that support our national interests and insulate us from real and growing threats."

But in PILESLAMP, the chief means of reaching that environmental goal is to accelerate the technological and commercial development of the Chinese lighting industry, raising the quality of products and their international standardization while improving the industry's marketing and sales capability.

The lighting project builds on a previous, $26 million GEF/UNDP pilot project, known as the China Green Lights project, which extended from 2001 to 2005, and had more or less the same aims: upgrade Chinese lighting products, increase consumer awareness of more efficient lighting, and establish a "vibrant, self-sustaining market in efficient lighting products and services," according to a project website.

That project was apparently a roaring success. Its sponsors claim that it saves 15.78 billion kilowatt hours of energy, worth about $986 million to consumers, and, using whatever calculating methods are available for such things, kept 6.8 million tons of carbon out of the atmosphere.

It also gave the Chinese lighting industry an initial big jolt: according to the GEF website, there was a 46 percent increase in China's output of high-efficiency lighting products -- and a 40 percent increase in exports -- between 2002-2003 alone.

Whether that early project's success also helped to spark SAIF's investment in China's lighting flagship is not known. Questions about the company and its relationship to the project, sent by Fox News to NVC and to Andrew Yan, the SAIF managing partner who also sits on NVC's board, were not acknowledged.

When Fox News requested to speak to Goldman Sachs executives involved with NVC, the reply was that they were "not available." Questions submitted by email were not answered.

The success of that Green Lights effort, however, did lead onward to PILESLAMP. The new efficiency project was in the planning stage in 2008, and started implementation in 2009. It is slated to end in 2012 -- months after the U.S. incandescent lighting ban kicks in.

Those banned U.S. light bulbs, of course, are imports. GE closed its last incandescent light bulb factory in the U.S. in September 2010 -- and moved production to China.

PILESLAMP's planners also hope to get rid of China's own inefficient incandescent lighting -- by 2022, according to a PILESLAMP project document.

The GEF itself is an international financing mechanism with 182 member governments, including the U.S., and a variety of international partners. It is, among other things, the financial mechanism for the United Nations Framework Convention on Climate Exchange (UNFCCC), the U.N. mechanism for dealing with CO2 emissions and "climate change."

In the case of the China lighting project, UNDP, its "implementing partner" -- the one responsible for carrying out and monitoring work on the ground -- in turn works with China's powerful National Development and Reform Commission (NDRC), which is led by Zhang Ping, a top-ranking member of the Chinese Communist Party's Central Committee.

The NDRC's mission, according to its website, is the most important strategic central organ for steering the overall Chinese economy "to push forward strategic economic restructuring" and "to organize the formulation of key strategies, plans and policies in addressing climate change."

In the case of China's lighting industry, the GEF's actual cash outlay is minimal seed money: $14 million. The government is kicking in $27 million and various private manufacturers, who also could be expected to benefit from the scheme, were supposed to commit the rest, in cash and kind.

But the small expenditures are intended to have sweeping effects. The GEF project's aims include further consolidation of China's still fragmented lighting market, increasing the quality of Chinese energy-saving lighting products, improving domestic marketing and sales, and adding even further to investment in the energy-efficient lighting industry through promotional advice and encouragement to investors.

The rationale is that what's good for China's lighting industry is for the planet. "With China as the primary manufacturer of lighting equipment globally, enhanced (energy-saving lighting) manufacturing capacity and lower production of (incandescent lights) in China will provide environmental benefits globally, PILESLAMP project documents declare.

In other words, even though China lighting market was worth $33.7 billion in 2008, and growing at more than 8 percent per year, according to one industry analysis, and with nearly half of that total production ($16.2 billion) being exports, the logic is that China still needs help -- including financial assistance -- from outside to maintain a powerful and growing industrial advantage in an area where it is steadily pulling ahead.

Moreover, China's energy-saving lighting is already heavily subsidized for consumers, according to PILESLAMP documents -- and for exporters, who get a subsidy for sending energy-saving lighting to consumers elsewhere. In the case of domestic subsidies, the document says they can have "only local effect."

(To the uninitiated, China's overall industrial advantage might already seem overpowering enough. Last month alone, the country ran a $31.5 billion trade surplus, a 41 percent increase over the previous month. For the first half of 2011, the U.S. ran a $133 billion merchandise trade deficit with China.)

Part of the reason for PILESLAMP, according to GEF project documents, is that China's huge, internal market is still too huge, too highly fragmented and too dependent on old-fashioned incandescent bulbs -- and that the world's most populous authoritarian government ostensibly can't do enough about it fast enough without help.

The GEF program therefore intends to accelerate China's lighting industry development by several years, by promoting energy saving products in "rural areas and small cities," where Chinese manufacturers of efficient lighting "do not have experience in establishing marketing channels," and also in medium and larger cities. PILESLAMP includes "workshops for supermarket sales personnel" in such areas to "improve consumers' awareness."

And it also includes conversion of lighting manufacturers to making new lighting products, cleaning up industrial pollutants, and helping to shape policies to increase the energy-saving market share in lighting, as well as monitor the results.

Beyond that, it appears that Chinese authorities see lighting modernization as a key area of national strategy. Indeed, on background, a GEF official told Fox News that the Chinese government "wants to move faster than developed countries (in energy-efficient lighting products).They're very competitive on this front. They are in a hurry."

GEF's relatively small contribution is more important than it sounds. It is "catalytic" in the phrase of a GEF official who discussed the project on background with Fox News, in encouraging other investors and the Chinese government itself to take part in the program.

Much of the money, according to GEF documents, is going for such bland activities as "development of financial and fiscal policies, and policies on creating market mechanisms to support (energy-saving lighting) promotion" and thereby increase their market share. Or on "in-depth analysis of the Chinese lighting market, understanding the most relevant for Chinese trends, and then preparing draft policies for consideration for implementation by the Government of China."

In its latest project update, however, PILESLAMP also reports that it is helping two Chinese manufacturers specifically transition from incandescent to energy-saving lighting manufacture, and is about to begin helping three more. 

Meantime, the project reports, "The Chinese Government is supporting a number other companies through this transitional phase. PILESLAMP is documenting the technical and business steps in the transition process and using this material to train other producers to increase the likelihood of successful transition to the production of quality, efficient alternatives." 

It is also helping to define standards for further improvements in lighting efficiency, and helping deliver more sophisticated lighting to some of China's rural poor.

In much the same sense, NVC acknowledges that an invisible part of Western corporate investment in the company consists of important strategic advice from its SAIF and Goldman investors.

As the firm says in its stock prospectus, "we have benefited from significant support from SAIF and GS (Goldman Sachs) ... in refining our corporate governance structure and developing our growth strategy."

So far, NVC's growth strategy seems to be going very well. In March, the company announced that its revenues were up more than 50 percent over the previous year, to nearly a half-billion dollars. Profits were up more than 455 percent.

In a press release, the company touted its continued international expansion and said its rapid growth was attributable to a global economic rebound, NVC's increased promotion of energy-saving lamp products and "the energy-saving and emission reduction policy of China."

George Russell is executive editor of Fox News and can be found on Twitter @GeorgeRussell