The export revolution will be air-conditioned.

Trade and job creation
Nov. 22 2010 6:56 AM

Coolerado

The export revolution will be air-conditioned.

Also in Slate: Martha C. White explores California's domination of  the international almond market, Boeing's push to  sell more aircraft overseas, how a small steel manufacturer  thrives on the world stage, how a small American software company can compete cheaply abroad, and how exports can  save the American economy.

Coolerado logo.

While the United States has the largest consumer economy in the world, manufacturers of renewable energy products and energy-efficient machines—industries that fall under the broad category of "cleantech"—face a frustrating paradox: The greatest potential demand for their products, be they wind turbines, solar panels, super high-efficiency appliances, or computer-aided ventilation systems, is beyond our shores. Cleantech companies represent one of America's brightest hopes in terms of export potential, but suppliers in this nascent market have a number of hurdles to overcome before realizing its potential.

There are a few reasons for the lack of domestic demand. Americans have historically enjoyed lower energy costs than much of the developed world. This means the premium commanded by most green machines is a greater deterrent here than in a country where gas costs the equivalent of $8 a gallon, since it takes longer for buyers to earn back the extra investment via lower fuel bills. The economic downturn has only heightened this disconnect by driving down the price of oil and other fuels. "In the United States, there's a massive amount of energy inefficiency," says Carter F. Bales, chairman and founding partner at private equity firm NewWorld Capital Group. "Energy's been viewed as low-cost, so efficiency hasn't developed as a market. Renewables can't compete against hydrocarbon-based energy without significant government assistance."

Unfortunately, government incentives for consumers or businesses to buy renewable-energy or energy-efficient goods are stingy compared with those in places like the European Union and Australia, and they tend to be doled out by a patchwork of federal, state, and local agencies. We also have a vocal (and well-funded) segment of the population that is openly skeptical that burning fossil fuels has an impact on the climate.

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Finally, China's trade policies lock foreign cleantech firms out of the world's largest potential market unless they're willing to partner with a Chinese manufacturer and produce their goods locally—a prospect that leaves companies uneasy in light of China's general disregard for intellectual property rights and dims the prospects for growing the numbers of American manufacturing jobs.

For young cleantech companies, both the opportunities and the challenges of a flat-world market are taken as givens. Founded in 2004, Denver-based Coolerado never had to adjust to the learning curve of rapidly accelerating globalization. Unlike older manufacturing companies, which built a customer base domestically before expanding overseas, right out of the gate, Coolerado had as much or more business come from foreign buyers as domestic ones. Co-founder and executive vice president Rick Gillan says Coolerado, which employs around 50 people, expects to do around $4 million in sales this year, about 60 percent of which comes from exports to 21 countries, including Saudi Arabia and Australia, its biggest markets.

Coolerado makes super-energy-efficient air conditioners. If you've never thought about how your home or office gets chilled during the dog days, it's a complicated process. Most conventional AC units rely on a refrigerant to cool incoming air and a system of fans and coils to get cool air into the room and hot air out. The scientific wizardry behind Coolerado's high-efficiency units, which consume around 90 percent less energy in dry climates and 50 percent less in moderately humid ones, starts with a different kind of cooling system known as an evaporation cooler or, less elegantly, a swamp cooler.

Swamp coolers use the evaporation of water to cool an interior. They're cheaper to install and operate, but the air they crank out is muggy as well as cool, making them less effective in humid areas and less desirable in places like offices, where high humidity could harm computers and other devices. Coolerado expanded on research conducted by a Ukrainian scientist that combined the low-tech properties of evaporative cooling with a more conventional coil-and-fan system to create a unique, indirect evaporative chiller. The device was included in Popular Science's "Best of What's New" green technology round-up last year, and Coolerado recently obtained funding from NewWorld Capital Group to expand its sales and production.

It's brilliant science; it's also expensive science. Coolerado units cost up to 25 percent more than top-of-the-line conventional air conditioners with comparable cooling power. In parts of Western Europe and Australia, incentives like feed-in tariffs and rebates have helped pave the way toward broader adoption of green energy sources and appliances. In the United States, efforts have been scattershot at best, not exactly a sustainable plan for sustainable goods. Plus, rebates and credits for energy-efficient appliances tend to revolve around the Energy Star designation, a joint venture between the Department of Energy and the Environmental Protection Agency. While Energy Star does classify air conditioners, Gillan says there's no category for Coolerado's hybrid model, which leaves them without that environmental equivalent of the Good Housekeeping Seal.

Joyce Ferris, founder and managing partner at private equity firm Blue Hill Partners, says the United States could stimulate demand at home by implementing tougher energy-efficiency requirements for federal buildings and higher-education facilities, two enormous potential markets for companies like Coolerado. "We see a huge opportunity in the next five to 10 years," she says. "The bottom line about efficiency is it just fundamentally makes sense."

The price of Coolerado's units have also hampered its expansion into emerging markets, especially since the company requires cash upfront before shipping an order. "We've made some exceptions and have gotten burned on that," Gillan says. Coolerado sells directly to individual customers via the Web and through distributors, which means orders can be large. Company execs are looking into the Export-Import Bank's credit insurance program to guarantee a big prospective piece of business with a Nigerian customer. The prospect of not getting paid is always a risk for small exporters. "The way to mitigate that is through the Ex-Im bank," Gillan says.

While most of the components for the company's AC units are built in the United States, some elements, such as a high-pressure fan that's shipped from Germany, are sourced abroad. Faced with high-production costs that limit its ability to expand in emerging markets, Gillan says the company has explored the possibility of building units overseas to cater to lower-income emerging markets.

In 2008, Coolerado partnered with an Indian manufacturing firm that claimed it could bring down costs enough to win business from local commercial clients while retaining Coolerado's quality standards. While the arrangement remains in place, Gillan says the original promise of identical quality at cut-rate prices remains unfulfilled. "They haven't done as much as we would have liked them to do, but we have to drive the price down," he says. The partner is selling units "to a limited degree," Gillan says. Coolerado gets a cut of each unit sold and continually monitors its partner's performance. The off-shoring trade-off—cheaper goods versus the prospect of poor quality or production delays—is something many domestic manufacturers have had to figure out as globalization expands.

Coolerado also faces the difficulty of breaking into the Chinese market. Gillan is at once blasé and cynical about the threat of Chinese patent pilfering, saying, "It's going to happen with China one way or the other. Better to find the right partner and somewhat control it." Coolerado hasn't had a chance to test how well this "if you can't beat 'em, join 'em" approach will work; a deal with a Chinese factory that expressed interest in building and submitting prototypes back in 2005 fell through after Coolerado's would-be partner never shipped any models to them.

China is a vexing problem for the entire cleantech sector. The nation is shaping up to be a huge producer as well as a huge consumer of renewable and energy-efficient products, thanks to zealous government intervention in and subsidization of the market, actions that some experts say violate trade regulations. China officially rolled back local content requirements on wind turbines last year, but they did so only after their own producers had become dominant. American manufacturing groups charge that China's way of selecting U.S. renewable-energy companies with which to partner skews in favor of those willing to do most of the production in China. Such actions are perceived by many in the West as heavy-handed, and that was the case even before China's recent halt of rare-earth mineral exports threatened to slow production of everything from smartphones to wind turbines. (China, for its part, denied any kind of deliberate stoppage of rare earth exports; trade economists don't buy it, since the freeze was preceded by a dustup over maritime borders between China and Japan.)

While some of these rare earth materials have made their way back into circulation both here and in the European Union, the sudden cutoff of supply has led some lawmakers to consider measures like loan guarantees to support American mining and production of these minerals. It would be a huge investment, but some think it's necessary. If China maintains its tight grip on rare earth elements, and the United States or other countries don't step in to fill that vacuum, cleantech manufacturers could be forced to move production to China to access the materials, an unappealing prospect for Western manufacturers and bad news for American factory workers.

To grow their exports, companies like Coolerado are going to need U.S. legislators to craft environmental policies and pursue a trade agenda that helps them sell more products at home as well as abroad. "The government has to understand we're in competition for renewable jobs, and we have to do everything we can," says William E. "Wilber" James, managing general partner of RockPort Capital Partners, a venture capital firm with a green focus. "Our entrepreneurs are the best in the world. We need to make sure they get every advantage in the world."

Video: The Export Revolution

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Martha C. White is a freelance writer in New York.

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