Until October 2008, many in Japan who observed the convulsions in the U.S. economy were taking comfort that this was a limited U.S. problem, unrelated to Japan – until Toyota and other major Japanese companies began to publish reports of their own plummeting profits. Then, High Alert!

This short article focuses on a largely unnoticed area where Japan and the U.S. can productively collaborate in an increasingly important sector – clean tech/energy efficiency and conservation. Here Japan has a demonstrated international competitive advantage and also an opportunity to stimulate industrial growth and create sustainable, new jobs in both countries, which can help to turn the tide. Our focus is Japan's Innovation Genome – the thousands of small and medium enterprises, which have excellent green technologies and know-how, but until today have hesitated to enter the U.S. market, preferring instead the more familiar terrain of Southeast Asia. Is there a politically astute, "win/win" strategy for this sector, which will enable it to participate in the massive opportunities now available under the recently enacted American Recovery and Reinvestment Act (ARRA) of 2009, and many state initiatives?

The Opportunity in a Nutshell

ARRA is the first of three pieces of federal legislation, the other two parts being a comprehensive energy bill and special legislation relating to climate change. (At present it is unclear whether these will be integrated as one law or split into two pieces of legislation.) At this point several general observations can be made, which are strategically relevant: 1. The Obama Administration is linking energy, especially green energy, to national economic policy in one, overarching system, which recognizes the arrival of a New Global Energy Economy. 2. The creation of sustainable jobs is a top priority. 3. The Obama Strategy embodies the core idea that vigorous government action is critical, but government action alone will not extract the nation from its present economic crisis. The only way out is to mobilize the imagination and talents of the private sector in a "creative partnership" with government. 4. For the first time in many years, federal and state green initiatives are strongly aligned and synergistic.

Although support in ARRA of $787 billion (6 percent of GDP) still falls short of the $1.4 trillion forecast by economists* to ensure full employment, it is still a massive sum, which includes $286 billion in tax relief and $501 billion in subsidies, and other incentives. Within this framework support for energy efficiency is significant – directly, $20 billion in tax incentives under ARRA, including a 30 percent tax credit – and indirectly, through grants, preferential loans, and other financial benefits. The targets are "strategic sectors," which will serve as engines of economic growth: advanced batteries, the Smart Grid, new materials, electric vehicles, green buildings, and all forms of renewable energy. The Department of Energy's Office of Energy Efficiency and Renewable Energy will receive $ 16.8 billion, which it will distribute under a formula by block grants and other means to the states, and through them to local communities, companies, and householders. Please see: http://www1.eere.energy.gov/informationcenter/

California will be a major recipient of these funds, which will be distributed by the California Energy Commission, the Public Utilities Commission, and the Air Resources Board, directly and through public-private partnerships, guided by California's Long Term Energy Efficiency Strategic Plan.

In addition to the recent federal benefits, the states already have in place numerous special tax incentives, grants, green banking loans, green bond initiatives, and procurement programs to encourage energy efficiency and conservation. Behind these programs is the recognition that energy efficiency measures afford the most direct ways of reducing the carbon footprint, which means that energy efficiency will play an important role in the cap and trade systems, likely be implemented by 2011–2012. Finally, the strong federal and state support for energy efficiency and conservation is sending a signal to the venture capital and private equity markets that this is a favored sector for capital appreciation and investment.

A Strategic Roadmap

There are three significant practical challenges facing small and medium Japanese companies (and the Japanese government which is supporting them) in participating in these programs:

  • Information risk: Small and medium Japanese companies are at a disadvantage in terms of market intelligence, legal knowledge, and political access. The risks of bad decisions are great without an effective means to identify, assess, and vet people and opportunities.
  • Timing: ARRA is being rapidly implemented and key constituencies and stakeholders are already in active negotiations with the Department of Energy and other supervisory federal agencies.
  • Costs: The costs of gathering reliable intelligence and taking decisive action are prohibitive for small and medium sized Japanese companies, when acting alone.

 The clear path of action is effective collaboration, as explained below.

  • Collaborative Intelligence & Innovation Networks (CBIN/COINS): The most immediate and least costly way for small and medium companies in Japan to develop effective peripheral vision is as follows: 1. Join existing CBIN/COINS, such as the Open Source Consortium on Energy Storage, Materials Science and the Smart Grid, which includes twenty-five utilities, universities, research centers, and individual inventors and entrepreneurs. Please see: http://www.energyvoyager.com/html.php/1/88/; http://www.energyvoyager.com/html.php/47, and 2. Expand the membership and services of existing Japanese online communities relating to energy efficiency and conservation. One example is the 6,000 member Eco-Net organized by Funai Sogo Kenkyujo, one of Japan’s leading marketing and consulting companies; another example is Green Innovation Connect, a new CBIN/COIN recently launched by JETRO and Nikkei America.
  • Strategic Sectors: The focus of these CBIN/COINS should be on the "Strategic Sectors" targeted under ARRA and other new laws to be enacted in 2009-2010. As noted, these are: housing (green buildings), transportation (electric vehicles), power (including the utility industry) and all forms of energy storage, and financial services, especially green banking.
  • Strategic Alliances: International strategic alliances, an area where to date most small and medium Japanese companies have little or no experience, represent the most effective means to spread risks, reduce costs, and gain leverage by using the human, financial and other resources of U.S. and Japanese companies in the U.S. market. Although these collaborative relationships can take a variety of forms, to succeed in every case the core strategy should be designed to reinforce the Obama philosophy of economic stimulus and green job creation.
  • Alliances with large Japanese companies that are already established in the U.S. market. Example 1: $ 18 billion has been appropriated under ARRA and a recent California green bond issue for the construction of a high speed, energy efficient train from Anaheim, California to Las Vegas, Nevada. Although small and medium Japanese companies will encounter difficulty in participating directly, their chances will be significantly augmented by joining forces and enhancing the presentations of large Japanese manufacturers which will participate in bidding for these huge contracts. Example 2: Japanese trading companies are among the few remaining entities that are cash rich and actively scouting for green opportunities in the U.S. By allying with these companies, small Japanese companies can gain access to capital and other resources of the large trading companies. A specific illustration of a product already tested in Japan and ready for introduction in the U.S. that might benefit from such collaboration is the lighting material developed by an Osaka-based company, which can be arrayed on tall buildings to provide a durable, long lasting, energy efficient way to illuminate building signs at night. Example 3: JETRO has a strong interest in supporting alliances of small Japanese companies in the U.S., and for this purpose has established a network of incubators in major centers of green innovation in the U.S. These incubators represent one potentially effective channel for establishing a presence in the U.S. Example 4: A variation on the above themes would be a cluster of Japanese companies, which combine or share technology, common facilities, and financing, which then form alliances with U.S. companies.
  • Alliances with U.S. operating companies and financial institutions: It would be politically wise for Japanese companies to establish their operations in the U.S. as separate alliance companies, including U.S. entrepreneurial companies and green venture financial groups. These companies can begin as marketing and sales outlets, but can rapidly morph into true manufacturing bases, research and development centers, supported by cross-licensing strategies.
  • Collaborative Innovation: Collaborative Innovation, a new and exciting specialty, holds the most promise in the near future for a true "win/win" for Japan and the U.S. By contributing to scientific and technological breakthroughs at the nerve plexus of the strategic sectors noted above, collaborative innovation will trigger further advances, raise productivity, and stimulate economic recovery and sustainable job creation in both countries. In these collaborative ventures, an important legal innovation will be "mega-patents," whereby the Japanese and U.S. (and perhaps other national) participants agree to pool their best ideas and inventions, creating one or several powerful patents enforceable against third parties, while allocating the benefits and risks of these mega-patent portfolios by contract.

Long Beach/Los Angeles Joint Green Economic Development Authority – The Model Implemented

Ports have long been the center of commercial and economic development. The Port of Long Beach, California, and its associated port of Los Angeles, are ideally positioned to become a strategic driver of economic growth in the region, based on clusters of green companies, universities and community colleges, drawing upon the technical requirements of the Ports. Here is a hypothetical case on how all the components noted above can be organized- most likely created by special legislation – in a new Long Beach/Los Angeles Joint Green Economic Development Authority:

  • A nucleus of green companies from the U.S., Japan, and other countries, representing all the strategic technologies and sectors identified in ARRA would become charter members of Green Innovation Connect or an expanded version, designed as a Collaborative Business Intelligence & Innovation Network.
  • Some of these companies would establish operations through the available incubator at California State University, Long Beach.
  • Participants would collaborate as part of the COIN in building a showcase "Zero Emission Facility," perhaps on the university campus, deploying some of the advanced technologies, which have already been used in Japan at the Hokkaido EXPO. Faculty and students in engineering and related disciplines would be actively involved in designing the prototype facility.
  • Venture capital firms, green banks, and other financial institutions interested in renewable energy, energy efficiency, and the Smart Grid would be actively engaged to participate in building the financial base of the Green Innovation Zone.
  • The Long Beach/Los Angeles Joint Green Economic Development Authority, a newly constituted entity, would seek funding under ARRA and through the issue of special California green bonds and related financial measures, to prepare and implement a Comprehensive Green Economic Development Plan. The Plan would include support for research, the creation new green jobs, education and skills training, and special incentives for both domestic and foreign companies to establish and build businesses in the Zone. The Joint Green Economic Development Authority would appear a strong candidate for California’s new ARRA funding programs.
  • The Long Beach/ Los Angeles Joint Green Economic Development Authority can become a model, which can be rapidly implemented in other parts of the country.

These are a few preliminary ideas of the Strategic Roadmap. One thing is certain: This Great Recession, like other grim periods before it, will end, and when it does, the advantage will lie with those who today have the vision to act imaginatively and proactively. Now is the time for Japan’s small and medium enterprises, with support from the Japanese government and through alliances with reliable U.S. companies, state governments and local communities, to establish themselves as active participants in President Obama’s Green New Deal.

* These and other quoted figures in this article are undergoing continuing review and frequent revision.

© Julian Gresser & Manatt, Phelps & Phillips LLP, All rights reserved, March 2009. Julian Gresser (jgresser@manatt.com) is Of Counsel to the international law firm of Manatt, Phelps & Phillips, where he is a member of the firm’s Global Climate Change and Asia Practices. Mr. Gresser is also Founder and Co-Chairman of the Clean Tech/Green Energy Council within the Association of Strategic Alliance Professionals (www.strategic-alliances.org). Manatt is taking the lead in working with various groups to develop and implement the Long Beach/Los Angeles Joint Green Economic Development Authority Initiative. Mr. Gresser expresses his appreciation to his colleagues, who have contributed to this article: Chako Ando, a business consultant, Craig Moyer, the Head of the Global Climate Change Practice at Manatt, Phelps & Phillips LLP, and William F. Lyte, President of Technoplex.

The above opinion piece is from an independent writer and is not connected with Greentech Media News. The views expressed here are those of the author and are not endorsed by Greentech Media.