|
 Email This Post
|
 Print This Post
|
By Joe Drury
Apr. 9 – China’s explosive 9.5 percent annual growth since the market reforms of 1978 has transformed the society by squeezing an entire industrial revolution into one tumultuous generation. It has also brutalized China’s environment and placed enormous strain on its natural resources, necessitating the development of cleaner alternative energies to offset the costs of China’s dramatic rise.
The swing from agricultural to industrial society has thrown China into the midst of the largest and fastest human migration in history. Opportunities in bustling cities seem much more promising than in the impoverished countryside.
According to a 2009 McKinsey & Co. study, 350 million people will move from the countryside into cities by 2025, filling 200 hundred cities with teeming populations exceeding one million.
But in addition to the environmental degradation resulting from this urbanization along with economic growth– over two-thirds of China’s rivers and lakes are now too polluted even for industrial use – the country faces a dual problem of energy self-sufficiency and cost-containment.
Energy demand rose 5 percent per year since the market reforms, a rate that has rapidly increased following the shift to energy-dependant heavy industry manufacturing in 2001
To meet this growing demand, China increased oil imports by 5 percent in 2009, along with huge swells in imported coal and natural gas. Imported crude oil represented 52 percent of China’s overall consumption in the same period of time.
The problem will only get worse. A January 2010 China Daily article predicts that 65 percent of all oil consumed by China will be imported by 2020, greatly reducing the country’s energy security.
China’s voracious energy demand consequently exposes domestic markets to inflating commodity prices that threaten the profits of commercial enterprise, not to mention increase the cost of living.
“For a typical company with a profitability of 10 percent, the impact of a 3.5 percent annual increase in the price of resource-dependent input could effectively eliminate all profits within a decade,” warned Nicholas Parker, Executive Chairman of Cleantech Group, in an opening speech at a 2009 Clean Tech Forum in Delhi.
The dawning clean technology industry handily solves these pressing threats while also developing an internationally competitive industry. China’s shift to clean tech has been natural, as its success stems from what made it the low-cost manufacturing center of the world: large and sustained public investments combined with low production costs and low-cost labor.
This strong platform of investment explains why clean technology is overcoming the barriers of high capital cost and economic risk that historically prevented clean technology from reaching parity with conventional technologies.
“The Chinese government is very progressive and pragmatic,” said Michel Brekelmans Director at L.E.K. Consulting at a 2010 Cleantech Investor Panel hosted by China Entrepreneurs in Shanghai. “There is a clear recognition of the problem and they know something has to be done.”
Investment climate
China aims to spend 34 percent of its US$586 billion stimulus package on clean technology projects, in addition to the $100 billion already directed to projects for cleaner rail and grid systems. Over the next 20 years, the Chinese government will channel direct investments totaling over $440 billion into the clean market.
“China is practically throwing money at the sector,” said Peter Fung, executive director at Coolpoint Energy Ltd in a Jan. 2010 interview with Reuters. “I won’t [be] surprised if it eventually becomes the biggest clean tech producer.”
Private investment is also flooding into the market. From 2000-2008 the United States—the previous world leader in clean tech private investment—attracted US$52 billion, whereas China only claimed US$41 billion.
But China’s investment shot to US$34.6 billion in 2009, leaping past U.S. investment of US$18.6 billion to rank China as the leading destination for private clean tech investment in the world.
The growth reflects the success of the government’s often-complex program aimed to foster a domestic clean tech market and manufacturing base. A 2009 survey of China clean tech by the China Greentech Initiative identified 19 central government entities with duties related to clean tech and at least 18 national programs relevant to the sector.
Planning at the national level is guided by the 11th Five-Year Plan (2006-2010), which placed an unprecedented emphasis on sustainable development by setting ambitious targets to reduce energy intensity per unit of GDP 20 percent by 2010.
Under this plan is a network of laws, incentives, and industrial promotion policies that attach the more nebulous national plans to paper through concrete policy. Examples of laws include the Renewable Energy Law of 2005, which required many power grid operators to purchase resources from renewable energy producers.
Other incentives include tax benefits pertaining to China’s corporate income tax, including up to three-years tax exemption or 50 percent reduction in CIT if the revenue is derived from certain clean tech projects. Promotional policies include the Green Credit policy, which requires commercial banks to incorporate environmental protection criteria into lending decisions.
These favorable policies attracted US$331 million venture capital investments in 2009, roughly equal to 2008 due to the economic recession at a time when other clean tech VC investment fell around the world.
Market outlook
In terms of VC investment in 2009, China’s eight largest clean tech sectors included energy efficiency, energy storage, water and wastewater management, agriculture, recycling and waste, materials, transportation, and energy generation. From these, the wind and solar photovoltaic markets are particularly strong and already the largest in the world, dominated by domestic giants like Suntech Power Holdings and Goldwind Science and Technology.
As these markets become more developed, foreign investors are wise to focus on filling innovation gaps by developing the efficiency of existing energy technologies or providing energy management like energy auditing and advisory services or monitoring and control systems.
According to André Loesekrug-Pietri, Managing Partner of private equity firm CEL Partners, “Metering is a huge opportunity. It’s good to know that you have to reduce energy output, but you need to be able to measure say how much a steel mill or a house is producing” in order to gauge how much energy is being reduced.
Growing urbanization and construction needs offer an excellent opportunity to utilize green building materials, services, and solutions. A 2009 survey of China clean tech by the China Greentech Initiative estimates that “certified ‘green’ floor space constitutes less than 1 percent of new built environmen.t”
This deficit exists despite the government’s goal for building efficiency to constitute 40 percent of China’s total energy efficiency improvements by 2010.
For all the opportunities in China’s clean tech sector, there are also many obstacles for foreign companies. The sheer number of government agencies, preferential laws and regulations suffers from lack of transparency and consistency, not to mention sheer legal complexity.
“Paying penalties is cheaper than complying with the law in many areas,” said Zhou Weidong, the China director at the Business for Social Responsibility in a 2009 BusinessWeek interview.
Government policies also favor domestic suppliers against foreign rivals. In return for access to the Chinese market, laws require foreign companies to share their technology with local enterprises. A weak legal framework for intellectual property rights and contract enforcement can give these foreign companies reason to worry.
Finally, companies involved with developed clean tech sectors not covered under China’s incentive umbrella may find domestic competition more intense. “It’s easy to invest in areas that are encouraged by the government,” said Loesekrug-Pietri. “Investment in other places like turbines is difficult, because there is a lot of local competition.”
