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Clean-tech: let battle commence

The struggle for leadership in clean-energy technology pitches the ingenuity and know-how of Silicon Valley against the industrial might of China, writes Conal Walsh

CAN THE home of cheap gasoline, interstate highways and General Motors really do clean technology? While US stock exchanges prepare once again for a raft of initial public offerings (IPOs) from companies working in alternative fuels and energy conservation, some investors believe the smart money has already migrated to China.

The US is only a recent convert to climate-change action, but the government in Beijing has placed renewable energy at the heart of its industrial policy, with the aim of selling its expertise to the rest of the world. It's just another area in which the two powers look set to compete for dominance in the 21st century, potentially pitching the know-how and ingenuity of California's Silicon Valley against the industrial might of China's Pearl River Delta.

Ready for the fight

Some of California's finest declare that they are ready for the fight. "China and Europe are doing well, but we still own the fundamentals," says Robert Nelsen, head of start-up fund Arch Venture Partners. "The world has absolutely no hope of making any substantial impact on global warming without significant scientific innovations, almost all of which will come from the US."

Yet this view risks ignoring the billions of dollars of subsidies, protective tariffs, tax breaks and direct funding China has quietly used to leap-frog the competition in a number of renewable technologies.

Under its National Action Plan on climate change, China already derives almost 10% of its energy from renewable sources, and aims to raise that figure to 16% by 2020. China's solar-cell industry is the world's largest – hosting around 100 solar power companies, half of the world's total. The Three Gorges Dam is the largest hydropower project anywhere. The country's clean-coal technology is attracting foreign customers, while China is also overtaking the US as a market for wind turbines (PE 12/09 p7).

Much of the motivation behind all of this endeavour is domestic. Beset as China's cities are with industrial pollution, the country is expected to provide the majority of future market-led demand for greener energy as it searches for new ways to fuel its fast-growing economy.

Such is the pace of China's clean-tech revolution, indeed, that Steven Chu, the US energy secretary, warned Congress in October that the US risked "becoming dependent on foreign products". Remarking that the US' share of global solar-cell production had fallen from 40% to 7% in 15 years, and that China spends $9bn a month on clean energy, he said "the US has fallen behind".

US venture capitalists don't think the US will lose out to China. Despite limits on investment imposed by the recession and credit crunch in the past 18 months, California's venture capitalists expect a more active 2010 and are planning numerous clean-tech acquisitions or public offerings. A poll of venture capitalists in January identified the US as the place to start a clean-tech venture most profitably, with China a distant second.

In 2009, only one clean-tech company – A123 Systems, a lithium-ion battery maker – listed on a US stock exchange and just seven venture capitalist-backed clean-tech firms were bought by other companies. But this year, with economic downturn apparently coming to an end, the expectation is for a big improvement on those figures.

At least three clean-tech firms have already registered to go public in the US in 2010: Solyndra, maker of thin-film solar tubes, which has already raised $0.5bn of funding from venture capitalists and aims to raise $300m more through an IPO; Jinko, a solar firm based in China, but partly backed by US venture capital, which has scheduled a $100m float on the New York Stock Exchange; and Codexis, which is developing biofuel products in partnership with Shell, and which also aims to raise $100m.

Nor is this investment just a numbers game. US interest in clean-energy technology is undoubtedly on the rise, but US investment is targeting different areas of innovation to those favoured in China.

In contrast to state-supported efforts by the Chinese government to find alternative energy sources in wind and solar, the US' market-driven capitalists have shifted their favour towards energy conservation. With oil prices having eased since the highs of 2008, and faced with the likely adoption of nuclear power as the policy response to climate change, US investors have instead invested heavily in battery optimisation, energy-efficient building materials, makers of LED lighting, or software to track and manage energy used at home and in offices.

This difference of approach "demonstrates, to be very frank, the superiority of the American way", according to one US venture capitalist. More than 10 times as much private-sector funding goes to US clean-tech firms than to companies from China – and much of China's state sponsorship, he says, is "dumb money", wasted on unprofitable ventures, or creating market distortions.

Certainly, not all Chinese investment has been perfectly targeted. The economics of investments in Chinese wind and solar power, for example, are opaque, thanks to continued uncertainty relating to feed-in tariffs. Depending on the outcome of this issue, there may turn out to be serious overcapacity in China's wind-turbine and solar-panel industries. Government support for polysilicon manufacture, meanwhile, sent the price of the commodity into freefall last year, as Chinese suppliers ramped up production despite falling demand.

All of which drives some US venture capitalists to make bold claims about their companies' ability to compete. "At the moment, it's command economy versus market forces, and we're going to see which is best," says one. "Clean-tech really could become the place where ideological rivalries between China and the US get played out. But everyone here is very confident about that. We believe that this sector will deliver great long-term returns."

 

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