Venture Capital's Clean Dreams for China

(page 3 of 3)

In order to make money, they must deploy the most efficient technology and management techniques to reduce costs. The difference between the fixed rate and the cost would be theirs to keep.

"It's like a janitor service. The client doesn't have to care what detergent I'm using or what kind of broom I'm using," he said. "It's a fixed rate. [Water treatment firms] can introduce anybody's technology, but the cornerstone is service."

Ye also believes that the next cluster of IPOs could come from energy efficiency companies. These energy service companies (ESCOs) profit by helping customers save energy. Typically, ESCOs don't charge customers anything for installing energy-saving equipment. Instead, they take a fixed amount - usually 50% - of a customer's energy savings.

Energy-saving will be big, Ye argues, because of the government's goal to reduce the country's energy intensity by 20% by 2020. Others tip clean-coal technology and wind power, citing policies targeting those sectors.

SHORT OF IDEAS
But government action is not the only foundation for cleantech success - gains from indigenous technology are important too. Most Chinese cleantech companies rate low on innovation, according to Holman of Lux Research. The solar companies, for example, tend to buy their technology either as turnkey systems from firms like Applied Materials in the US, or by forming joint ventures that base manufacturing operations in China while drawing technology from abroad.

No breakthrough technology from a Chinese company is on the horizon. What's more likely to happen, Holman says, is local companies will start to modify existing technologies to reap incremental gains. He cites Shenzhen Nanotech Port, which was one of the first to start manufacturing carbon nanotubes, a type of advanced material, on a mass scale. They worked from research by Chinese Academy of Science, which in turn built on advances made by Japanese labs.

"That's the type of pattern you'll also see in solar energy technology," he said. "In the next 10 to 20 years you'll start to see the more novel innovations."

China's innovation deficit is structural. In countries like the US, funding for basic research comes from the government. As the science gets closer to commercialization, it goes through research universities and eventually industry picks up the tab. But in China, most universities are still developing their research capacity, and government funding tends to go to the national Academies of Science.

This centralized model for funding research is inefficient and doesn't lend itself well to commercializing technologies.

Governments still play significant roles in cleantech funding globally. In 2006, a total of US$48 billion was spent on emerging cleantech research and development around the world, according to Lux Research. Half of that came from governments, while about 46% came from large corporations. The remainder, about US$2 billion, was bankrolled by VCs and private equity funds.

"In China, funding is biased more strongly towards government funding and significant investment from corporations. Relatively little is coming from venture capital," Holman said.

THE ROAD AHEAD
China's relentless growth is now giving way to a gentler "harmonious society" as Beijing accepts more must be done to prevent the country's environment from being consumed by its economic engine.

"The first 10 five-year plans were only concerned with the supply side. The government always wanted to produce more," said C.S. Kiang, dean of Peking University's environmental science college. "The 11th Five-Year Plan is the first time they said 'we need to improve energy efficiency and reduce pollution.' They are now talking about demand."

This is happening against a backdrop of rocketing oil prices and a growing consensus about climate change. If the right doses of capital and technical creativity can be added to government policy, could China eventually lead the world in the cleantech stakes?

Lightspeed's Chung answers with an emphatic yes.

"In China, [the environment] is a survival issue [and] the government has the ability to put their muscle behind it. It can say 'tomorrow all the coal-firing facilities in this province must adopt this technology - and they'll do it. Add all those things up, including the capital going in right now and the entrepreneurial interest that's been energized and you're going to get a lot of activity that will be amazing to see. China will become a cleantech powerhouse in the next 20 to 30 years."