The rapid economic transition of China from an undeveloped nation to a country which now derives 50% of its GDP from industrial production created a series of negative side effects that has sown the seeds for China’s next wave of its economic journey; cleantech. In recent years it has been acting with vigor to create a sustainable economy and is now not only the world’s largest cleantech manufacturing hub, but its cleantech innovation capacity is rising rapidly. (See: The rise of home-grown cleantech innovation in China, by Cleantech Group analyst Stephen Marcus.)
So why is China a cleantech leader?
1. Government’s strategic focus and resolve. The Chinese government is determined to become the world’s leader in clean technology. And unlike a western democracy, when China’s central leaders make up their minds, action follows quickly. The Chinese government has set renewable energy targets of 20 GW of new solar and 150 GW of wind by 2020. Its policies state that non-fossil fuel sources of energy should account for 30% of the overall power supply by 2020. This would be a major shift given that 80% of China’s current supply comes from coal. This transformation represents a huge market opportunity.
2. China is the world’s largest cleantech investor. China pledged $200.8 billion for green initiatives in its stimulus bill in 2009, 79 percent more than the $112.2 billion allocated to the sector in the U.S.
3. Cleantech is not an option; it’s a necessity! The country’s enormity and economic growth rates make sustainable development a necessity. With hyper annual growth at around 5%-9% annually and 18 million people moving to urban areas every year, China needs as much cleantech as possible, as soon as possible and as cost effectively as possible. The country fully understands that their energy demands and pollution levels are unsustainable – sixteen of the world’s most polluted cities are in China. China’s policy has changed – it’s no longer growth at any cost; it now has to be green GDP.
4. The financial landscape for Chinese cleantech innovation goes beyond state funding. There is a huge influx of new venture capital and private equity funds that are focused on Chinese cleantech. Additionally, limited partners around the globe are planning on increasing their exposure to China. 38% of European LPs plan to have more than a tenth of their PE exposure in the Asia-Pacific region in the next two years; 41% of North American LPs and 87% of Asia-Pacific LPs aim to have a similarly high proportion. Newly announced China-focused funds include China International Capital Corp (CICC), Infinity Group, Olympus Capital, Origo Partners, Redwood Capital and Tano Capital.
5. Cleantech IPOs in China are strengthening whilst the rest of the world is flailing. In 2009, for the first time, China/Hong Kong accounted for the largest share of money raised from cleantech IPOs (69%), well ahead of the U.S. (26%). It also accounted for the majority of cleantech IPOs by deal number. In 2009 China accounted for 17 (53%) of the 32 cleantech IPOs that were tracked globally.
6. China is attracting top tier corporations that see the commercial opportunities in cleantech. Corporations such as American Superconductor, Duke Energy, Applied Materials, Verdant Power, GE, IBM, Daimler, Intel, and Boeing have all set up strategic partnerships in China in 2010. Increasingly these partnerships are based around developing technology, not just outsourcing manufacturing.
7. Transitioning from ‘Made in China’ to ‘Created in China’. China is emerging as a source of cleantech innovation and valuable IP, the implications of which the rest of the world should not underestimate. Home grown cleantech innovation in China extends way beyond what most people realize, and the universities, research labs and start-ups are developing great cleantech ideas. There are currently over 1,600 government supported incubators and science parks in China and it already ranks fourth in the world in terms of cleantech patents across a variety of clean technologies.
8. The Winds blows strongly in China. The Global Wind Energy Council (GWEC) has reported that China “doubled its entire installed capacity each year since 2005.” Last year, they became the largest wind market in the world, passing the U.S. and Europe. “The Chinese government is essentially using the state banks and state power companies to support and foster a turbine industry,” according to Jefferies Bank analyst Michael McNamara.
9. Chinese prices. Energy is commodity meaning that the market will end up in the hands of the lowest cost producer. This is where China is king. It is estimated that business costs in China are about three times less, when compared to the rest of the world, meaning that any comparative investment numbers actually understate the value of the capital being deployed in China. An exemplar case is Broad Air Conditioning – a provider of air conditioning units powered by clean energy sources – which was founded in 1988 with a $3,000 investment and now employs over 2,000 people and had over $450 million in revenue in 2007.
10. The government is focusing on both commercialization of technology and on cleantech R&D. The Ministry of Finance has decentralized the R&D process by using policies such as preferential tax treatments, favorable financing policies, government procurement policies and the implementation of technology standards to encourage R&D institutions to partner more with the private sector. The Ministry of Education also provides universities with incentives to turn their research into commercially viable products. As a result, the industry share of R&D spending in China has dramatically increased from less than 30% in 1996 to approximately 60% in 2003. Today this number is expected to be even higher. China’s 11th 5 year plan (2006-2010) was clearly focused on conserving energy and natural resources, sound environmental practices and R&D. The next 5 year plan is expected to be even more cleantech and R&D focused.
Conclusion
The pitting of U.S. vs. China in cleantech will no doubt continue for many years to come. And whilst the political will and investment numbers in China are putting the rest of the world to shame, one must be careful not to over inflate where China’s cleantech sector is today, nor underestimate where it is heading in the coming years.
The West is still king when it comes to cleantech innovation and expanding new industries. China’s immediate need to create a sustainable economy means that China will need to collaborate with companies and investors from other countries, creating huge market opportunities for foreign stakeholders across all asset classes. “Already, 86% of cleantech joint ventures with a Chinese company, involve a foreign partner, and I would expect to see more cross-border cleantech investments involving Chinese cleantech firms in the future,” according to Cleantech Group research analyst, Stephen Marcus.
Article by Shawn Lesser, appearing courtesy Cleantech Group.
Shawn Lesser is the president and founder of Atlanta-based Sustainable World Capital, which is focused on fund-raising for private equity cleantech/sustainable funds, as well as private cleantech companies and M&A. He is also a founder of the GCCA Global Cleantech Cluster Association
