I've been most recently reading When China Rules the World. A fascinating treatise on what happens to the world economy when, over the coming decades, China's economy becomes paramount in the world economic system. China and cleantech is something I've been thinking about and investigating for some time now.
Timely then to see the report from New Energy Finance (note: opens pdf) that in Q1, China was the biggest recipient of clean energy project finance, nearly double that of the amount invested in clean energy project finance in the U.S., nearly two-thirds again more than that invested in Europe.
I think it's safe to say that China will be a major driver of clean energy and water technology adoption over the coming decades. Not only because their economy is growing so quickly. Not only because China has only 1/5th the water per capital, as well as much less domestic energy supply and arable land, than the U.S., thus necessitating wiser use of natural resources earlier in their economic development cycle. But also because now they've visibly committed themselves to becoming leaders in the sector and, as one regional GP told me today, "they don't want to lose face by not meeting that target."
So China will be a major mover in cleantech markets. But what does that mean?
I believe that the developments will impact cleantech investors in three phases:
1. The rapid-growth market phase
At first, the major impact on the cleantech economy will be China as outsourced manufacturer, and China as fast-adopter market. We are already seeing this happening. With such strong economic growth comes strong resource needs, and many cleantech startups I speak with are already in discussions in China about potential early rollouts of technology. Using local distribution or other types of partners, they are looking to build early projects and find early customers there.
This requires establishing such local partnerships, however, as it's a lot easier said than done to sell cleantech goods and services into this market. So I know many entrepreneurs and investors who are racking up lots of frequent flier miles getting back and forth. And spending a lot of time establishing strong partnerships there as a stepping stone to actual sales.
Furthermore, as cleantech hardware markets shift toward a fabless model using contract manufacturers for their device businesses, China will naturally increasingly become the actual manufacturer of cleantech hardware systems and components, just like has happened in the IT and telecom industries.
2. The homegrown innovation phase
China is awash in liquidity. There is a lot of external capital chasing the opportunities presented by the market, but there is a lot of internal capital as well, looking for good domestic investment opportunities in China. Plus, there is the national commitment to establish more homegrown technology leadership in this sector.
In the next few years we will see the emergence of more homegrown Chinese clean technology startups that are developing proprietary IP. It is already beginning in sectors (such as large-scale wind turbines) where the technology is readily adaptable from technology developed elsewhere. But with a steady source of strong technical expertise and domestic markets available, Chinese cleantech entrepreneurs will increasingly be among those developing first-to-commercialize solutions across a number of cleantech sectors and subsectors.
For cleantech investors, finding out how to access these entrepreneurs, and develop winning deals from such relationships, is the still-unanswered question.
3. The China-sets-the-standards phase
As the Chinese market becomes the most important global market, and especially as homegrown producers become more independent producers of technology themselves, China will hold increasing sway over the development of entire industries like smart grid communications, smart buildings, distributed generation power management, M2M communications, and other subsectors of cleantech where standards-setting will be important.
In smart buildings, languages like Bacnet are important standards that have been brought to market by European and U.S. technology developers to date. But in the future, what the Chinese market settles on a standard will often be what the world settles on.
And thus China will shift from being an attractive market for western cleantech entrepreneurs to think about servicing, to a critical must-address market that will be addressed by both domestic and foreign innovators alike.
All of the above will happen a lot more rapidly than many might expect.