Venture Capital's Clean Dreams for China

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The Japanese manufacturing giant Sharp, for instance, is the world's largest manufacturer of PV modules, according to research firm Clean Edge. The size of these companies means the proportion of their business exposed to solar energy is relatively small.

However, a number of global factors, including the rising price of oil, has driven demand for renewable energy - which includes solar - stocks.

"There's a desire for people to play the solar trend, but there [were] limited opportunities to do so in the public markets," said Michael Holman of Lux Research, which follows the cleantech industry. "That's what's driving up a lot of these valuations."

UNFAMILIAR TERRAIN
Cleantech is alluring, but it's not easy for VCs to get into it in China. While many of them have a thorough grounding in computer science and engineering, they are less surefooted when it comes to navigating cleantech's intellectual terrain.

"Cleantech is very different from IT. In IT you do a lot of meetings and it's related to software bits and bytes," said Andrew Chung, a senior associate at Lightspeed Venture Partners, a Silicon Valley firm. "But with cleantech, you're dealing with material science, you're dealing with physics, optics, fluid dynamics, synthetic biology - a totally different set of sciences."

According to Chung, who says he has reviewed more than 400 cleantech companies in the past 18 months, many VCs in China are hunting for later-stage deals in companies with simple business models that depend on execution more than technology. Many Chinese firms are far from the cutting-edge of clean technologies; instead they operate copycat business models, deploying technology that's widely in use but promising better and cheaper execution.

"In China you accept the fact that the technology will be relatively commoditized, but [VCs] need to look for guys and teams who have a solid model and can execute the heck out of it."

There is also the greed factor. Both public investors and VCs alike are prone to plumping for the next big thing in order to make a quick and lucrative exit.

This kind of bandwagon-hopping is one reason why some believe the Chinese solar stock prices are unsustainable.

END OF AN ERA
While PV makers can control their labor and assembly costs in China, their demand for polysilicon is driving the price of the raw material up. The Chinese firms' sole advantage - their cost - is therefore being threatened.

"For the guys in the middle, the Suntechs of the world, all the margin will be squeezed out," Lightspeed's Chung said.

Indeed, at the time of writing, prices of these stocks were tumbling because of investor suspicion that LDK misstated its polysilicon inventory. The firm has denied the allegations so far.

The next wave of Chinese cleantech companies will have to abandon the PV industry's cheap exports model if they are to find growth. A number of factors must coalesce for this to happen, notably policy and enforcement.

For one thing, Beijing has to make it worthwhile for cleantech companies to target China as a market instead of relying on policy pushes in Japan, the US and Europe.

While the central government has signaled its support for clean energy by creating a renewable energy law and mandating, under the 11th Five-Year Plan, that 15% of China's energy to come from renewable sources by 2020, industry participants say these broad policies have not translated into action.

"[The Renewable Energy Law] is too general. It's hard to follow," said Jerry Li, head Cleantech Network's China subsidiary. "You see sentences in regulations and laws, but there are no practical procedures to follow."

If structures are put in place that enable cleantech firms to break free of the factory-based manufacturing model, they could start to act as aggregators, packaging different technologies in order to offer installation, monitoring and consulting services to clients.

Tsing Capital's Ye is a believer in the next-gen services model for Chinese cleantech. In the water treatment business, he says, firms are usually locked to a fixed tariff.