"Green Enterprise" Palo Alto Weekly - July 6, 2005

Can the free market really help solve the world's environmental problems? Some local entrepreneurs think so

by Jocelyn Dong

James Kao is rifling through a clear plastic bin behind the front counter of GreenCitizen, a new electronics-recycling center in Palo Alto.

"You know there are all these AOL CDs you want to get rid of," he said, fingering some of silver discs before tossing them back into a heap. "Twenty-five of them in a whole year -- they mail it to you!"

Lining the floor like prisoners facing a firing squad, each bin contains a separate brand and product: Samsung cell phones, Nokias, Apple iPods, HP printer cartridges. Victims of the rapidly revolving cycle of Silicon Valley consumerism, the once-coveted items found their way here after a quick and unceremonious fall from grace. Yesterday, they were the must-have products that lustful consumers daydreamed of owning; today, well, they're just trash.

"We try to separate it out, because ... we want to know how many Motorola cell phones and Nokia cell phones (there are)," said Kao, CEO of the Park Boulevard center.

A former high-tech executive, Kao is not just some nice guy trying to save local consumers from house clutter. He's an evangelist preaching the power of information to launch a whole new era of recycling.

Information? Recycling?

The industry may seem an unlikely field for innovation these days, with more than 5,300 recycling and reuse centers in the state already plying their nuts-and-bolts trades in bottles, glass, aluminum and scrap metal.

But given continuing environmental problems caused by trash worldwide, and government pressures on cities to reduce the waste stream to next to nothing, entrepreneurs are finding plenty of room -- and reason -- for finding new approaches to improve the field.

What's more, they're moving beyond the feel-good idealism that has traditionally fueled the industry. From electronic-waste recyclers to home-salvage businesses, local industry innovators are banking instead on free enterprise as the power tool for creating sustainable solutions to some of the world's more perplexing environmental challenges.

GreenCitizen, coincidentally located a stone's throw from Fry's Electronics, is the new kid on the block, holding its grand opening on Earth Day this year. The business's purpose: to serve as a one-stop drop-off center for used electronic gadgets, from MP3 players to computers.

Convenience is a key element in the GreenCitizen business model. The 5,000-square-foot center is open seven days a week to suit the schedules of customers, which include both individuals and businesses.

"We believe recycling cannot take off if it continues to be so inconvenient," Kao said.

The company must be doing something right. In the first two months, locals brought in more than 50,000 pounds of discarded goods, enough to fill the warehouse to overflowing. Forty-three percent of that tonnage was computer monitors.

But GreenCitizen is not intended to be just another tidy little ship in the sea of environmentalism. If it were, Kao wouldn't be a part of it.

Rather, the founder of a handful of high-tech start-ups wants to tackle the global electronic-waste problem, also known as e-waste. To his mind, the GreenCitizen center is just the starting point.

About three years ago, Kao watched a PBS special program on e-waste, which detailed the harm that discarded electronics are doing to the world, especially Third World countries. Toxic components such as lead, cadmium, and mercury end up seeping in groundwater or are burned, releasing fumes that lead to birth defects and damage to people's coronary, respiratory, nervous and skeletal systems.

Moreover, he learned, the volume of e-waste is huge -- and growing. There are more than 450 million units of obsolete electronics stockpiled in the United States. In five years, an estimated 3 billion units will be scrapped annually worldwide.

Kao put his mind to the issue, traveling to different countries to learn how they have approached the problem.

Out of that research, he realized four things. First, he would need to contract with reputable "de-manufacturers," the companies that take apart the electronics. The environmentally responsible ones break the device down fully into its components and manage the toxic parts, rather than retrieving only the valuable items and shipping the rest overseas or to the landfill.

Second, accountability has been missing from the e-waste recycling equation.

"The problem here is information. There's no accountability. There's no scorecard. It's like playing basketball but not knowing what the rules are. Everybody's busy doing something. Everybody's demanding everyone else to do something more. But there's no way to know who is doing what," Kao said.

Enter bar codes and databases. When a customer brings an old laptop into GreenCitizen, the device gets slapped with a bar code, which then is scanned every time the machine changes hands -- providing proof that it ultimately has been disposed of properly.

Third, the recycling business is not phenomenally profitable, despite the wealth of mom-and-pop recycling centers set up to accept specific goods. The components alone don't produce that much revenue, especially when one accounts for labor and overhead costs. To succeed, Kao would have to add features to boost his product's "brand."

"It's sort of like selling Nike shoes. If you're just selling it for the cost, you wouldn't be buying Nike shoes for $200," Kao quipped.

So he decided to market the recycling information itself to the manufacturers of the items he collected -- Nokia, Dell, HP, and others. If they knew how many of their products have been properly destroyed, they could bring that information to governments or even consumers to demonstrate their "green halo," as Kao called it. Hopefully, manufacturers would be willing to reimburse GreenCitizen for its services, since setting up their own collection and de-manufacturer plant could get expensive.

Another possible ways to make money, according to Kao: asking local businesses to sponsor GreenCitizen. The recycling center would offer customers store coupons whenever they drop off used goods -- and the businesses would get added environmental clout.

Next week, GreenCitizen is launching another revenue generator, a pick-up service for companies.

It may seem a touch ironic that Kao's putting his faith in free enterprise. Environmentalists, after all, blame the free market for toxic e-waste, which they say has allowed companies in rich countries to take advantage of cheap labor -- and lax environmental regulations -- in poor countries.

But Kao sees it as the best model.

"I had the feeling that it's not going to work if it's just the stick approach," he said, referring to the European practice of exacting payment from manufacturers for all of their items that are discarded. "You really have to have the carrot and the stick. The reason why the U.S. economy is working so well is you create a good framework for everyone to participate. And that's what we're going -- we're providing a framework that allows volunteer participation."

Whether he's got a winning formula has yet to be seen. The recycling world is full of spectacular failures as well as successes. Every year, scores of bright-eyed hopefuls enter the $4 billion-a-year field in California, planning to make a buck off of other people's trash.

" The world of recycling has always been full of entrepreneurs," said Mark Murray, executive director of Californians Against Waste, an environmental nonprofit in Sacramento.

People look at government-contracted recyclers who are charging good money to haul away garbage and think, "I can do that for less," he said.

But what they don't realize is it costs money to manage waste, said Murray. They only see the potential profit, since the materials essentially cost nothing.

"This has happened a lot in the world of tires," he said. "People believe, 'Once I have enough of this stuff, someone must want it.'"

In the 1980s and 1990s, entrepreneurs believed that tires would be "the next big thing," having value as a petroleum fuel source, he said. "We had literally dozens of enterprises spring up in the Central Valley."

Giant piles of tires quickly grew, but lacking a market for them, the businesses quickly ran into the red. Some stockpiles even caught on fire, creating toxic infernos -- the antithesis of an environmentally sound company. Some business owners abandoned their caches, leaving the government to step in and deal with the mess.

"People get in over their head, and there are disasters," Murray said.

State and local government have also played an influential role in encouraging recycling recently.

This January, SB 20 went into effect, a law that provides financial incentives to recyclers. Whenever consumers buy computer monitors and other video devices, they pay an advanced recycling fee of $6-10 per unit. That money is turned over to the state, which reimburses recyclers 48 cents per pound for those dismantling the products.

Laws have also created standards that force people to recycle. In Palo Alto, under the construction and demolition-debris diversion ordinance, 90 percent of a building project's inert solids, such as asphalt, concrete and rock, must be diverted from the landfill. Half of the remaining debris must also be kept from the dump.

It is the latter trend that has helped Paul Gardner's business, Whole House Building Supply and Salvage in East Palo Alto, to grow and flourish. If Kao's is the start-up with an as-yet-unwritten future, Gardner's is a tried-and-true enterprise cut of similar cloth. Both men aim to tackle the environmental problem comprehensively -- albeit in different ways -- rather than chipping away at one part of the situation while ignoring the rest.

Whole House is a patchwork of home de-construction services. It offers house demolition sales, during which architects, contractors, interior designers and others come to a home to buy its parts -- even the shingles off of the roof.

A few weeks ago, the company sold 18,000 bricks off of a Hamilton Avenue house in Palo Alto. One of the three buyers was fixing up a home just down the street.

It also runs a retail warehouse on Pulgas Avenue, which stretches across its property in a kind of shantytown of wood frames and corrugated plastic roofing. Inside each structure are hundreds of household items salvaged from demolitions -- toilets, working refrigerators, French windows, Douglas fir two-by-fours and more.

It also sells items on the Internet, through sites like eBay.

And the company bids on de-construction jobs, in which they take apart a home, accounting for every plank of lumber and every fixture. Only things like stucco, sheetrock and insulation aren't salvaged.

Gardner estimates the company handles a couple hundred homes a year at least, including work for such Silicon Valley luminaries as Sun Microsystems' Scott McNealy.

Operations manager Manase Vaiomounga said that hiring Whole House to take apart a home makes financial and environmental sense to customers.

Through the sale and deconstruction, about 80 percent of the home's materials can be reused or recycled.

Not only that, but Whole House works with a local nonprofit, East Palo Alto Council of Tenants. Homeowners essentially donate their household components to EPACT and receive a tax write-off. Whole House then contracts with EPACT to sell the parts.

So although a home-deconstruction job may cost the customer $20,000, the owner receives a $33,000 tax break, Vaiomounga said.

Whole House also benefits the community, he pointed out. The company employs 35 workers and offers antique and high-quality fixtures for a significant discount.

"A lot of people in this area can't afford to go to Home Depot," Vaiomounga said. By shopping at Whole House, "they can have the taste of living fancy from us."

Most recently, Gardner has added another service to his line-up: custom-made products. Noticing that some of the shorter pieces of lumber didn't sell well, he hired two woodworkers to make them into what he calls "value-added" products.

Now, along with the old doors and pipes, a new arch trellis stands in the warehouse yard, along with sturdy planter boxes, butcher block boards, plant stands and more.

Gardner, a 50-year-old activist in the peace and environmental movements, didn't exactly set out to create a flourishing business. He just hated waste.

The construction worker began in 1991 with a newsletter that listed used building materials that local contractors told him about. The subscription list grew to 400 people. He used to hand out the newsletters in the parking lot of Home Depot, he said.

Then in 1995, he decided to host a demolition sale, in which he tried to sell off as much as he could of the house before it was bulldozed. It turned out to be a success.

Like a kid in a candy shop, Gardener thought to himself, "'Wow, there's serious potential here.'

"Before I was thinking of it as an avocation, a hobby. I didn't know if it was possible to have a whole line of business in it, but after that sale, I said, 'There's something to it.'"

But the sales led to other problems; namely, there would be items left over, and Gardner couldn't stand seeing it go to waste. So he asked family and friends to keep the stuff.

It all worked fine until they finally revolted.

"'Paul, you've gotta get your crap out of my backyard. I'm tired of storing it,'" he recalled them saying. So in 1998, the warehouse came in to being.

"I'm the last stop before the landfill," he said.

In 2002, Gardner added the de-construction services. And now, the custom made wood products.

If Gardner believes in free enterprise, it's not because he shuns nonprofits. In fact, he first tried to run the operation as a nonprofit, in conjunction with EPACT. Despite hiring experienced fund raisers, however -- including one woman worked with the Ford Foundation -- Gardner said the charitable money for reuse and recycling never materialized.

"We couldn't raise a dime," he said. "So now I'm a believer that the way to go is, you gotta start super small and add as you can. We have a hybrid situation here; you have the motivation of the for-profit and the benefits of the nonprofit."

The Bay Area housing market has made conditions perfect for his business, Gardner acknowledged. Homeowners, whether through the privilege of wealth or for reasons of seismic safety, are tearing down their homes in droves. Because of the good climate, much of the building materials are in excellent condition.

Asked whether he could foresee replicating his business, Gardner said he could -- in five to 10 years. Maybe in a place like San Jose, he said, or Santa Cruz.

In that way, Gardner and Kao are very much alike. Kao can envision GreenCitizen centers popping up throughout the Bay Area, focused on serving the local market. He even wonders aloud about the possibility of creating a demonstration de-manufacturing facility -- which would be a model of environmental responsibility -- that could then be exported to Third World countries.

Whether through years of research and development or through sheer intuition, trial and error, both entrepreneurs seem to be finding new ways of making the do-good work of recycling pay off. Call it free enterprise with a conscience.

Both also appear confident that, like wheels gathering momentum, there will be many more ways for them to tackle the problem of waste while turning a profit.

"We go deeper into the solution as we go," Kao said.

Senior Staff Writer Jocelyn Dong can be reached at jdong@paweekly.com.