Dive In and Discover New Opportunities – With Necessary Preparation

Industry maturization has far-reaching consequences for China, “one of the hottest destinations for cleantech investments”

In 2010, the Chinese cleantech industry reached a record $54.4 billion, a 39% increase compared to 2009. The first panel in CEBEX Group’s 4th Annual Cleantech Investor Forum brought together cleantech industry leaders, investors and technology experts to share their thoughts on the cleantech landscape of 2011 and the years to come. Despite their diverse backgrounds, it became clear that each of these professionals cared about more than just the bottom line.

Marc Schueler, Managing Director of Venturing DSM China, expressed astonishment at “how fast this industry has developed, and how fast the country has developed.” Fellow panelist Jun Ying, Head of Research at China at Bloomberg New Energy Finance, echoed this sentiment: “China has already become one of the hottest destinations for cleantech investments.” However, China’s leaders are realizing that, if certain initiatives are not taken to preserve the environment, growth will not be sustainable.

Peter Corne, Managing Partner of Dorsey & Whitney LLP, agrees. “About five or six years ago, I began to start developing cleantech and clean energy projects as a lawyer,” said Corne. “The firm that I’m with… [has currently] got about 75 lawyers working on cleantech.” These lawyers view themselves as facilitators, working with others to make things happen in China. “It’s a fantastic opportunity for China right now with the policies,” Corne emphasized. However, with factors which are unique to China, including market risks, technology risks and regulatory risks, a potential investor needs to navigate carefully.

Daniel Zhu, currently a Venture Partner at Tsing Capital, explained that he was sent to China by his USA-based company 16 years ago, at a time when “environmentalism was not that big of a deal.” About five years ago, this changed. While previous ways of looking at business opportunities emphasized maximizing profits and minimizing costs, today’s business leaders are increasingly taking negatives on the environment into account.

On prompted to discuss the latest policies and how they are affecting investments, Corne explained that “it’s not just about renewables; it’s about technologies applied to other activities.” He listed wind as an example: offshore wind would provide tremendous opportunities in the areas of turbines, safety, and stabilization of related wind projects. Distributable energy, such as combined heat and power, along with other forms of small scale renewable energy, have the potential to be applied on a larger scale in rural areas of China—and recently, the government has incentivized these applications.

Agrees Zhu, “The whole China cleantech market is covered by the government.” As an example, the solar sector “is more driven by technology”; it is also oversupplied in terms of equipment and products, resulting in fierce competition among product producers. Through the development of breakthrough innovations, disruptive technologies regarding the cost per wire, the consumption of energy in production, and production efficiency have greatly impacted the market. As a result of these technologies, the entire solar industry will be restructured in two or three years. “Disruptive technology drives the market,” Zhu emphasized. Without the proper technology, projects can go very slowly.

However, finding good technology is not enough; a good business model is necessary for a company’s sustainability as well.

Ying encouraged investors to continue discovering more opportunities: “They [the government] are putting more money into emerging sectors.” If one puts in the research and analysis, new opportunities can be found in all sectors—even within the much-explored solar and wind markets. A potential investor should ask himself: “Who is going to be the emerging leading supplier?”

Schueler echoed this focus on discovering new opportunities, explaining, “We are seeing a maturization of the industry.” In the West, technology is perceived differently, and also defined differently. Traditionally, VCs in the States have come out of big universities, and they only invest in disruptive technologies. In contrast, many people in China understand that cutting edge technology is good to have: “Very often, people here in China were extremely daring and also extremely clever in combining good sustainable work in technology with a business model and adapting it to local circumstances”—and through doing that, becoming extremely successful. Investors should look at subsectors in which possibilities exist to drive the industries and make breakthroughs.

What is most important, according to Corne, is the extent to which you can “make the technology and the products associated with them economically feasible through scaling up.” Since China is a competitive place to do business, technology must be competitive on an economic level as well. Additionally, new technologies cannot simply be brought in from the West without changes; tailoring to Chinese conditions is critical. This should be done through a pilot project, as well as through R&D conducted in China. Government subsidies, some of which provide substantial support, can be a major source of funding: “there is help for the right sort of project in the right sort of category in the right sort of region.”

Zhu reminded the audience that China is a relationship driven country, and that the role of the government is important. He clarified: “when we say ‘the government supports the project,’ they are not always looking for something under the table.” Indeed, it can be politically correct to support the project: to upgrade an industry from high cost, high energy, and high pollution into clean, high tech, and environmentally friendly. “The government has every reason to support good environmental technology companies,” as well as startups. In China, in contrast with the States, “you need to find ways to leverage government support.” However, there is no specific measure of the level of financial involvement from the government that a company should follow; 50% is a rough outline.

From the audience, a question was raised about the issue of trust—namely, the general trust from the U.S. given to a Chinese company going IPO. Said Schueler, “It’s a bilateral thing that has to do with the maturization of the industry. It is very important, when investing in a different geography, to be aware of the differences.”