China has historically been a tough market to crack for foreign companies. Most U.S. Internet firms, for instance, who once dreamed of tapping the massive opportunity there have either offloaded their operations to Chinese companies or, as in the case of Google, pulled out entirely in the face of censorship and cyber attacks. Cleantech companies, too, face a number of hurdles, and for players now eying opportunities in China what will it take to ensure brighter fortunes?
Sizing Up the Opportunity
Firms working on technology for electric vehicles, charging infrastructure, the smart grid and other green segments will find some attention-grabbing figures in China, which faces a skyrocketing electricity demand and aims to dominate global exports of equipment for energy generation:
- With about 35 cars per 1,000 people in China’s 1.3 billion-person population, roughly 80 percent of car sales in the country are currently are made to first-time buyers. This potentially lowers the barrier to adoption of alternative vehicles.
- Nearly half of the more than five million charge point installations anticipated worldwide by 2015 will happen in China, according to Pike Research.
- The government-owned State Grid Corp. plans to invest $586 million in a smart grid buildout over the next five years.
- Government spending in China for smart grid-related technologies was set to reach $7.3 billion this year, according to ZPryme Research & Consulting.
- China is projected to invest $208 billion in renewable energy over the next decade, compared to forecasts of $36 billion for the U.S. in that time period, according to the International Energy Agency.
- Sixty nine percent of the total cleantech IPOs last year came from China.
- China became the world’s largest maker of wind turbines last year. It is also the largest solar panel manufacturer.
Statistics like these have drawn the interest of companies ranging fromo electric motorcycle startup Mission Motors, battery maker EnerDel (a subsidiary of Ener1) and smart grid heavyweights General Electric and Cisco to Atieva, a tight-lipped developer of battery pack management systems. And there are plenty of others hoping to break into the Chinese market.
Meet the Players
Highlighting its interest in the country, IBM recently moved its Energy & Utilities VP of Sales, Brad Gammons, from Texas to Beijing, and last year the company told us it expects to generate a minimum of $400 million in smart grid revenues in China over the next four years.
Ener1 CEO Charles Gassenheimer, meanwhile, told us in an April 2010 interview that with a little luck, Ener1 will have one of the world’s largest revenue streams associated with lithium-ion batteries and electric vehicles in the coming years, with China representing “one of the more important end markets for electric cars” and a “huge potential consumer market.” (Check out the video interview here — Gassenheimer starts talking about China as the key to driving down battery costs around 13:50).
On the investor side of the equation, respondents in a Reuters poll of 41 U.S. venture capital investors earlier this year ranked China as the second-best market for cleantech over the next five years, just behind the U.S. According to Maurice Gunderson, a senior partner at CMEA Capital, an influx of government funding for cleantech in China represents, “an opportunity, a threat and a wake-up call” for the industry.
Of course, the street can run both ways, with a growing number of China-based companies, such as battery maker and electric vehicle developer BYD and solar firms like JinkoSolar, seeking business in the U.S market. When it comes to U.S. startups looking abroad, however, Melissa Guzy, VantagePoint Venture Partners’ Managing Director and Group Leader for Emerging Markets-Asia, said in a phone interview from Beijing that something has shifted. “For so long, so many people thought not a lot about going to China,” she explains. These days she says a growing number of greentech developers in the U.S. have been realizing that, “if there’s one country that’s commercializing these technologies, it’s China.”
Guzy’s top recommendation for young greentech ventures hoping to break into the Chinese market is deceptively simple: “Don’t come here and think you’re going to do it by yourself.” The Chinese government requires that its wind power projects have at least 70 percent made-in-China components, and similar pushes are expected to help domestic companies get a piece of the smart grid pie.
So who do you need to know to start doing green business in China, and how do you make those connections?
Start With Your Existing Network
Many large U.S. venture capital firms have operations in China or affiliate relationships with Chinese firms. Guzy, who describes herself as having “one foot in both worlds,” recommends startups work with investors to find Chinese partners and set up local teams. “Start with an existing relationship,” she says, and interview multiple people and companies to find the right fit.
Examples of partnerships that have recently taken shape or are now in the works between U.S. greentech startups and China-based companies include:
- Atieva and Lishen Battery Power. Atieva’s investors include Beijing’s China Environment Fund III and Venrock Associates.
- Coda Automotive and Lishen Battery Power. Coda’s backers include Former Treasury Secretary Henry Paulson, investment bank Piper Jaffray, President Clinton’s Chief of Staff Thomas McLarty and Farallon Capital Management founder Thomas Steyer.
- ECOtality and Shenzhen Goch Investment.
- EnerDel and the electric vehicle division of Wanxiang, one of the largest auto parts suppliers in China.
- Mission Motors, whose backers include Finney Capital and Infield Capital, and motorcycle maker Zongshen Power Machinery.
Arm Yourself With a Broad Advisor Lineup
Some best practices apply across the spectrum of technology providers seeking a piece of the Chinese market. As Bill Bishop noted in a recent GigaOM Pro piece, “For anyone serious about expanding into China, the highest priority is to line up advisors who have experience there, from venture investors to lawyers to accountants to, in some instances, market-entry firms. It’s critical to understand the competitive, regulatory, and legal topography of any given industry and sector.”
Bishop also cautions that in many cases, companies need to apply with Chinese government agencies for protection of intellectual property and patents prior to launching discussions with potential partners.
Get to Know the Gatekeepers
At a high level, Guzy said the road to business in China for U.S. greentech firms will run through three main gates, all connected by the central government: research institutions, companies and local governments, especially those in Wuxi, Tianjin and Shanghai (see map below).
For any projects or ventures related to electricity, said Guzy, companies will also need to broker a relationship with the government-owned State Grid Corp. For automotive ventures, Ford Motor’s Director of Sustainable Business Strategies John Viera pointed to the university system, and specifically Tsinghua University in Beijing, as key entry points for U.S. companies. “They’re used to help the government understand what can and can’t be done,” he said. (Tsinghua houses the China Automotive Energy Research Center, founded last year with funding from General Motors and Shanghai Automotive Industry Corporation, or SAIC).
Focus on Commercialization
Gaining a toehold in the Chinese market also requires startups to employ a different mindset than in the U.S., said Guzy. In the U.S., many companies “focus on wowing people with the latest tech.” Whiz-bang demonstrations of next-generation technology may help to woo partners, buyers or investors en route to eventual commercialization in the States, but Guzy said successful greentech startups in the Chinese market will focus more immediately on the question of, “How do I commercialize today?”
For the energy storage market, Peter Wagner, a venture capitalist with Accel Partners, and Dan Squiller, CEO of battery startup PowerGenix, noted in interviews last year two routes for startups to commercialize products with relative speed and low capital requirements: Sell peripherals to the emerging market, or sell energy storage tech to existing markets, such as electronics, power tools and lawn equipment. (See: “How to Break Into The Energy Storage Market.”)
Guzy said she sees micro electric vehicles, short-haul electric delivery trucks, LED lighting and utility storage as some of the most interesting opportunities in China’s greentech market at this point. But she noted that the country offers a particularly valuable opportunity for startups working on utility storage. “China always starts with a demo project,” often including a mix of large and small ventures, and a young company selected to participate in one of these projects can gain critical access to the power grid that might not be available to them in the U.S. The result, said Guzy, is an “environment where startups can test their tech earlier.” For U.S. greentech startups, it will be important to evaluate this environment with eyes wide open — and armed with strong allies.
