Pollution is a real problem in China. So it should come as no surprise that the 13th Five Year Plan includes drastic policy measures, calling for a reduction of emissions from coal burning industries, while showing support for wind, solar and bio power. And beyond policy making or economic restructuring, there is also a call for domestic entrepreneurs who can help develop innovative solutions to mitigate pollution in China's major cities and improve the livelihood for all.
Today, we sit down with Henry Yin, founder and CEO of Xiaosolar, which operates a solar sales, installation and financing business that has installed nearly 100 residential and commercial solar projects as of mid-2017. Prior, Henry was also a founding member of Light Chaser Animation and helped produce and market Little Door Gods, Light Chaser’s first animated film.
Henry first shares his journey from Harvard to McKinsey to Lightchaser, before conducting a deep dive on Xiaosolar and China's renewables sector, addressing key questions such as: what are the key macro factors driving China's renewables sector? What does the value chain look like, and how do the economics of solar power work? What does the consumer education process look like, and how may this differ residential vs. commercial? What are key success factors in this market? What is the role of consumer financing, and how can Xiaosolar differentiate against other players (traditional, large internet, specialized). Lastly, what are major differences between China vs. the US in this sector, and what is the role of cost in driving innovation?
Adam: Today we’re in Shanghai with my good friend Henry Yin, who is the founder and CEO of Xiaosolar. Xiaosolar currently operates a solar cell installation business in the area between Shanghai and Hangzhou, where it has installed a hundred residential and commercial solar projects as of mid 2017. Before that, he was a founding member of Light Chaser Animation, and helped produce and market the film “Little Door Gods”. So, Henry, thanks for joining us.
Henry: It’s great to be here, thanks for inviting me.
Adam: Let’s jump right in. Could you start by telling us a bit more about your personal journey. Why the move from McKinsey to computer animation to renewable energy?
Henry: I was at McKinsey for nearly two years and it was a very fulfilling learning experience. But in late 2012, you know, mobile internet was really picking up in China, and I was kind of itching to get into the game. At that time, I was fortunate to meet Gary Wang, the founder of Tudou.com. Tudou had just merged with Youku at the time, and Gary was thinking about starting his next venture. We hit it off immediately and he asked me to join his venture in computer animation. I considered it a great learning opportunity, a great time to get into startups. I thought I could learn a great deal from a master in the internet business.
So I joined, and it was great three years of constant learning and personal growth. It was a very fun industry to be in. The computer animation and movie business in China was seeing rapid growth, with more than 30-40 percent year on year growth between 2013 and 2016. During my three years at Light Chaser, we built the team from just a few co-founders and me to nearly 200 people. It was a tremendous experience.
Adam: Just to explore a bit more – Light Chaser is one of the first computer animation companies in China. How would you compare Light Chaser against Pixar?
Henry: Well, I think ultimately the two studios share similar goals. Both aim to produce top quality animation. Obviously Pixar is the industry standard, and I think Light Chaser is very much on track to becoming a great Chinese studio, expressing Chinese values and Chinese stories. Light Chaser has a lot of catching up to do, but I think it’s very well on its way to becoming a world class player.
China's Renewables Market
Adam: Very cool. Thanks for that, Henry. So now let’s move to the renewable and solar energy sector. Before getting to Xiaosolar, can you tell us more about some of the macro drivers in this market?
Henry: There are a couple of drivers for renewable energy in China. One is the terrible state of pollution here. Anyone who has been to a major Chinese city can see that. Even the government fully acknowledges the problem.
The second driver is the rapid decrease in solar panel cost and related costs. I was just looking at some numbers. In 2011, just 6 years ago, the cost of a solar panel was $1.3 USD per watt. That number is now around less than 40 cents. So it’s a 20 percent year on year decrease. And it’s likely to further decrease in that direction. It’s rapidly becoming very cheap to install solar power. Wind power is even cheaper, but the cost is decreasing at a slower speed. Renewables in general are becoming not only a clean way to generate energy but also increasingly a cost effective way. So I think we can expect solar to reach grid parity, which is the concept that solar energy will become cheaper than normal gas or coal power around 2020. Once we hit that, there’s no reason at all not to go solar, not to go renewables. Even if some countries pull out of the Paris Accord (e.g. the US), it’ll still make economic sense to go solar.
Adam: To round out our understanding, can you walk us through the value chain, the different stages in this industry. For example, from sourcing and manufacturing of solar panels to deployment and any other key stages or activities that are required.
Henry: The first stage is the sourcing of silicon, because that’s the material with which solar panels are manufactured. There are multiple stages and I won’t go into specifics, but the next stage is the production of solar cells and combining them into what we call the solar modules. Each little blue piece that you see on a solar panel is a solar cell, and the combination of those generally into 60 cells or 72 cells in one panel is considered a module.
But actually Xiaosolar does none of that. We focus on deployment. We are the people who go out and find either customers or places where we can put the solar panel. So we’ll help with installation and increasingly with financing. I’ll make a comparison to the real estate industry – the solar panel manufacturers are like those who produce the cement for houses. Xiaosolar is more like a real estate developer. We go find the land, we go find the investors who want to set up panels, and then we help set up the panels.
What's the Value Exchange?
Adam: Ok, got it. Help walk us through the value exchange between different parties in this ecosystem. So you have the supply side of these panels, you have deployment (including yourself), and you have the end users (the buyers). In particular, how do you go about convincing the buyers to come onboard?
Henry: That’s a question about our core business value. Our business value is based on using solar to generate a steady long-term recurring cash flow for the customer via the production of electricity. The customer pays an upfront cost for the panels, but then every year the panels produce electricity. The customer’s income comes in three parts: one is the savings that they achieve from solar electricity. They consume the electricity themselves, and they save on grid electricity. Second, they can sell surplus electricity back to the grid. Number three is on top of all that. For every kilowatt-hour they generate, they get a subsidy from the government. That’s a bonus on top of the previous two revenue streams. The return varies for different areas in China, but with those three levers combined, consumers can recoup the upfront cost in about 5 years.
So you end up having a pretty good rate of return which is 20+ percentage points over a long period of time. In the countryside around Shanghai and Zhejiang, the returns are little lower, but generally you still get returns of around 10-15 percent on your investment. That’s the basis for which we do everything. It’s this investment return on a solar based system.
Adam: You mentioned favorable government policy. Is it a blanket policy across China or does it vary by region?
Henry: Right now there’s a blanket subsidy of 0.42 RMB per kilowatt-hour generated across China. On top of that, each provincial government will have their own incentives. Sometimes municipals or county governments will have their own incentives as well. But that’s all on top of the central government’s incentives.
Adam: Got it. So how does that play into your expansion strategy. Why the focus on Shanghai and Hangzhou?
Henry: We are actually mainly in the countryside between Shanghai and Hangzhou because that’s where the houses are. Chinese people, the middle class especially, live in high rise apartments, and those are not very conducive to installing solar. So we work mostly with rural farming communities to help those residences get solar power. It’s been quite successful thus far. Our revenues have grown around 40 percent month on month since the beginning of this year. We expect to expand to around 5 counties by the end of this year, with annual revenue to be at least 10 million RMB.
Key Success Factors and The Importance of Consumer Financing
Adam: That sounds very promising. So tell us more about your key success factors. Your revenues are increasing, but I imagine it’s difficult (and costly) to educate your end consumers, you’ll probably need a very big or at least a very strong sales force. in the US, SolarCity, which is a similar comparable model, is experimenting with a one-stop shop. These allow the end user to learn about renewables, buy some panels and eventually even buy their own Tesla electric car – not sure how this is working out for them, but perhaps the marketing synergies could reduce quite a bit of overhead cost. And I know that’s just one example, but I’d like to hear your view on buyer education and other success factors.
Henry: You bring up the point of market education. I think in the US a lot of consumers purchase solar because they are environmentalists. But in China, a large majority of our customers are still buying solar because of a good rate of return. Now I don’t think that’s necessarily a bad thing, and I don’t think it’s something that we can solve anyway. For us, the key success factor for our current business model is, as you’ve mentioned, a good ground team of sales people. Tactics may include be door-to-door, leveraging personal relationships, or explaining to entire communities the benefits of going solar.
And you know, on top of that, we provide a very attractive financing model. Currently we provide that in partnership with the local banks, but in the future, we will raise our own funding to provide this type of loan. Basically, it’s a zero-down 10-year loan in which the customer pays nothing upfront, and then every month they pay monthly interest back to the bank. However, the interest payment will be less than the energy cost savings or gains that they receive every month. So net net, they are not paying out anything. For the first 10 years they might not make much, but between years 10 and 25, all the cash flow will be positive. It’s a no brainer for the consumer, and that’s how we’ve managed to expand so fast.
Adam: Sounds good. And how is your consumer financing service delivered? I mean, is it via a website, an app, or is there some sort of offline approach that allows consumers to sign up at the point of sale?
Henry: For now it’s very much a paper-based process in which a customer still has to go to the bank, signs some documents, and then get the loan. So we are trying to revolutionize that part, make it more accessible for customers and easier to execute for our salesman or future local partners. That’s definitely part of our product strategy. Also we are going to try to expand the regional coverage of the loan to the whole of Zhejiang province and eventually all of China.
Adam: I realize that you’re still working on this now, but given your current view, how would this financing service differentiate from what larger players such as Alibaba, Tencent, Omniprime, etc. offer?
Henry: We are a bridge between solar and financing. Right now, we are essentially Xiaosolar 1.0, where we are pretty much a solar company with a limited financing product. Our next step is to beef up that financing product but at the same time remain a solar expert at our core.
So, now comparing us to these other forms of online loans, we are very different because our loan’s term is always 10 years, or at least 8 years or above. Only with that would our consumers have the life-time zero-cash option going forward. And only with that would consumers be willing to purchase the solar system. That’s our key differentiator against regular online financing/loan agencies.
Another differentiator is that we are clear solar specialists. A 10-12 percent loan isn’t even that sexy these days. We will be able to generate income from solar sales and related product sales. For example, once we establish relationship with these customers through these loans, we could then sell them solar batteries and down the road perhaps even electric cars. We could get into the monitoring of their houses, a smart home concept. There are numerous back-end ways by which we can monetize the customer relationship.
Adam: Very interesting. Yet to build this up you’ll still require capital. How will you access that?
Henry: That’s a big part of the fundraising that I’m trying to do in upcoming weeks. So this product will be seeded primarily by debt finance and not equity finance. We won’t try to get equity financing and give a 12 percent return on that. A big chunk of the equity financing will go through to providing the capital for raising the debt. That’s the same logic that Mosaic, our comparable company in the US applied when they raised $220 million last year. It’s to provide the capital to raise more debts or bonds.
Another route we could take is to work with banks and ultimately, not provide the financing ourselves, but to connect the banks that we work with to solar residences, to our customers who want to go solar, and provide the bridge. We become the middleman in that scenario, and it’s a lighter form of providing the financing. So whether we go the asset-heavier route or the asset-light route, we won’t use our equity financing to directly provide the loans.
Adam: Ok. For that asset-light approach when you’re partnering with the banks, do you still intend to make money of that debt. I mean a few bps here or there on revenue share, or are you okay just leveraging them as a partner and then hoping that upsells your other products?
Henry: I think as the middle man, we will take a cut of the proceeds, whether as a form of interest rate or a form of a fee. But again our focus right now is the growth, and as you say, we can have a lot more backend opportunities if we manage to hit a large number of customers.
Adam: Ok, got it. And Henry, moving beyond the consumer financing piece, what about other elements of your expansion strategy? You’re currently between Shanghai and Hangzhou, but are you moving to other areas? You’ve also mentioned that you are primarily residential, so is commercial also an opportunity for you guys in the future?
Henry: We’ve done a couple of commercial projects, and if they come along the way we will take those projects. But commercial solar is more relationship driven, or ‘guanxi’ driven. Because you have these humongous rooftops, then tens of solar companies will bid for these rooftop products. Their offerings are all the same so who do the building owners pick? The ones they know and like. So it’s a very different landscape that we don’t have particularly strong differentiator in.
Adam: Right. And now looking beyond the local environments let’s also touch on global companies. For example, Solar City is particularly prominent. How do you think Chinese companies compare against American counterparts? What are the certain things we need to think about when it comes to the divergence between these opportunities in the market?
Henry: A very similar business model in the US is a company called Mosaic, and it’s been expanding very rapidly. I think last year it raised $220 million in order to facilitate their solar loan product offering. Our proposed business model is very similar to theirs. They currently cover all 50 states of the US, and their main product is the solar loan offering. They work with local solar companies to provide these loan products to consumers, and they have a very rigorous risk management process. I think that’s their core competitiveness. Through their risk management process, both on the product side and on the customer risk profile side, they can lower the cost of their financing to an extent that traditional banks or even solar leasing companies cannot. They’ve become a major competitor to Solar City.
Now to China. There are actually plenty of single-house homes here. You just won’t know it, because most people that we meet and interact with live in the city. In China there are actually 0.5 billion people still in the countryside, and an estimated number of 55 million individual houses. If we just install a fifth of these houses, we come up with 1.6 trillion RMB in terms of market size. So it’s a very significant market.
In the US however, companies sell generally towards middle class families, while in China we typically sell to lower income families. The pitch has to be different. Middle class families in the US want to save on their electricity, on their power bill. Whereas in China, it’s more about ok I have this empty roof anyway, I might not use that much power, but even if I didn’t, I could sell my extra electricity back to the grid and make some cash. These are two slightly different mindsets, and the selling process is therefore different. But I think the core value proposition is still the same. To be able to use this underlying solar asset, manage risks properly, but also democratize the loan financing product cross regions makes for a very attractive business.
US vs. China
Adam: One more point about US business models that may or may not work here. So going back to Solar City, they’ve launched a new solar tile product. What’s your view on that, and will you bring that to China?
Henry: Well, we actually offer something similar for our clients. First of all, I think, it’s a very respectable product, and it’s something I’d like on my own roof. However, the costs so far just seem so high and out of reach, especially for our local customer base.
Now, we also have something similar in concept. We already have that as one of our product offerings in rural China. We run into lots of customers with the traditional clay tiles, so these are roofs that are leaking, that are crumbling. When we talk to the customers they are like, hey sure, install the solar panels, but can you replace my roof too? So what we do is use this new material, a low cost Chinese material, and we basically incorporate it into the whole pricing of the entire solar package. The proposal becomes, well okay, if you install the solar panel, you get a new roof, pretty much for free. This serves the same purpose as Elon Musk’s solar roof, but at a much lower cost, and I think it’s much more realistic for our potential customers.
Adam: Right. And on a flip side, do you think what you’ve just mentioned can actually take off in the US?
Henry: Maybe. I think there are similar concepts in the US, but I think US families sometimes care more about aesthetics. Production costs are very different between China and the US, so if we migrate the model to the US it might not be as profitable.
Adam: One last question for you, given your time spent in China, given the perspective of your schooling in the US, can you think of any examples of Chinese innovations or business models in the renewables area that you think might be relevant for the Western world to consider?
Henry: The US is definitely a leader when it comes to the renewables business. If there’s one thing that perhaps the US renewables industry could learn from China, it’s cost. Because in China, the electricity prices are so low, we are forced to innovate on cost. For example, the roof product I was telling you about, we don’t think so much on the aesthetic side. Rater we think more about how we could provide more value to our customers, and more returns eventually, financial returns. There’s a reason why Chinese companies are producing really low cost but standard quality solar panels. We are producing over 70 percent of the world’s supply. It’s this cost innovation part that I think American renewable companies could consider.
Adam: Thanks Henry, good luck with the fundraise and we’ll catch you again on a future episode.