china outbound investment strategies in the …...the report is prepared by azure international and...

China Outbound Investment Strategies in the Cleantech Sector – Nordic Opportunities

The report is prepared by Azure International and Cleantech Scandinavia and sponsored by Business Sweden, Innovation Norway, and Tekes, the Finnish Funding Agency for Technology.

Azure InternationalSuite H, 6 Floor, Office Tower, Oriental Kenzo48 DongzhimenWai StreetDongcheng District, Beijing100027, ChinaT +86 10 8447 7053F+86 10 8447 7058www.azure-international.com

Cleantech ScandinaviaMagle Stora Kyrkogata 7A223 50 Lund, SwedenT +46 73 940 2070www.cleantechscandinavia.com


cont

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Introduction .................................................................................................... 4

Why Nordic cleantech? .............................................................................. 4

Investments in Nordic Cleantech – International VCs are welcome ......... 5

Who are the companies? ........................................................................... 8

Nordics stand to benefit from China cleantech outbound investment... 10

China is focused on cleantech investing .................................................... 12

China outbound investment is growing, both for M&A and VC/PE ........ 15

Outbound M&A is growing ...................................................................... 15

VC outbound investing is poised to return ............................................... 16

Government reforms are further promoting outbound investment .......... 17

The geography of investing is shifting, which should help Nordics ......... 18

Chinese firms are shifting towards technology and markets ................... 18

Private companies are coming to the fore ...............................................20

China’s cleantech investing interests diversifying .................................... 21

Concluding remarks .....................................................................................22

References ......................................................................................................... 22

5Introduction

IntroductionThe economic growth in China and its market orientation has created a strong interest in Europe, and not the least in the Nordic countries. If a decade ago China was mostly seen as a main destination for outsourcing production, today the country has become a strong player in many industries and sectors abroad, making investments overseas. Having the financial muscles that low-running European economies lack, China creates, however, not only interest and curiosity, but also a certain measure of carefulness if not to say shyness, among European companies who have not previously done business in China.

Nordic countries are no exception here, and even though the past couple of years have seen an exponential growth in bilateral cooperation both on governmental and business levels, doing business in China has a flare of difficulty. The fact that few Nordics efforts in China so far had the time to grow into success cases supports the careful atmosphere.

This report aims to help understanding the current situation with outbound cleantech investments made by the Chinese actors and its strategic development. Understanding this strategy and the key factors that are influencing the possibilities and willingness to invest in foreign clean technologies will be valuable for individual companies that consider investment or M&A/exit option, as well as for the actors working with promoting inward investments in the Nordics.

We believe that Nordic companies and economies have great potential to benefit from the demand for clean technologies in China. But the developments are fast and one has to be a fast-mover to keep up with the pace, and to compete with other European regions that also put efforts in promoting themselves on the Chinese market.

The Nordic countries have intensified the cleantech cooperation with China in the past years. Several intergovernmental and trade promotion initiatives have been active in areas including cleantech. Most of these initiatives are nationally driven and governmentally funded, and among the notable are:

- in Sweden: The Swedish Trade and Investment Council - Business Sweden that has offices in 57 countries around the world, has a large representation in China with 5 offices, including one in Hong Kong, and China is one of the countries where the work is most active. Cleantech promotion in China is also supported on the government level, having in 2008 established a Swedish-Chinese Environmental Technology Cooperation that was later expanded to three biggest growing markets and now include India and Russia. CENTEC (Center for Environmental Technology) operates in the Swedish Embassy in Beijing and coordinates the bilateral efforts in cleantech.

- in Finland: Tekes, the Finnish Funding Agency for Technology and Innovation has a number of collaboration activities with the Chinese Ministry of Science and Technology. The areas include green nanotechnology, China-Finland ICT Alliance, cleantech and arctic affairs. The programs run nationally and on the regional level. Cleantech Finland, a public – private cleantech promotion organisation also considers China one of the main export markets for Finnish companies.

- in Norway, the Norwegian Energy and Environment Consortium (NEEC), an organisation for promoting Norwegian energy and environmental technologies in China, was established already in 2005 and is operated by Innovation Norway from the Royal Norwegian Embassy in Beijing. NEEC has a close relationship with Norwegian industry as it is built up as a membership network for enterprises.

6 Introduction

Why Nordic cleantech?

The five Nordic countries - Finland, Sweden, Denmark, Norway and Iceland – have a lot of common history and social legacy, even though the differences in languages, economic models, and even business culture are significant. Why do we then choose to speak about Nordic cleantech then, uniting these countries under a common brand? First of all, because the region is recognizable to the outside world, bringing along the Viking associations, and also because the cultural and business ties within the region make the separate countries, especially the four closer to the continent, a stronger economic actor than they would otherwise be.

As pointed out by the Nordic Innovation Centre, the five Nordic countries combined is the world’s tenth largest economy. So we think that it makes a lot of sense to use both the strong cultural brand (Norway, Sweden and Denmark occupy places 3 through 5 in The Economist Where-to-be-born ratings identifying countries with the best living standard and human development opportunities)1, and the actual economic power of the region when addressing larger foreign markets. The Nordics are almost equally high rated on the Ease of Doing Business, an index developed for the IFC and The World Bank that describes the regulatory environment for starting up a local business, where Denmark tops in place 5, followed by Norway in place 6; Finland in place 11, and Sweden and Iceland 13 and 14 respectively, among 185 world economies.2

Nordic countries are acknowledged as leaders within the international cleantech industry. There are several reasons for that, including the fact that many industrial actors have been early adopters and promoters of the cleantech business. Manufacturing companies such as Elkem, AlfaLaval, SKF, Grundfos, construction companies such as Skanska, YIT, NCC, energy companies Fortum, Statkraft, Vattenfall, geothermal and hydropower developers in Iceland, have all contributed to a more sustainable businesses and paved way to successful exports of clean technologies.

Another reason for a strong and knowledge-based cleantech sector is its connections to the research and education institutions and universities, to name a few Finnish VTT and Aalto University; Danish DTU; Swedish Chalmers, KTH, Lund and Uppsala Universities; and Norwegian NTNU. All these universities have education programs and research relevant for cleantech and educate many international postgraduates.

The cleantech scene in the Nordic countries largely consists of small and medium sized enterprises (SMEs) that commercialize innovations stemming from university research, industrial spinouts and inventions. These companies possess the knowledge and some of the most innovative technology, but often are not large enough to be fully able to internationalize. The size of companies and a relatively small local market only partly explain why. It is often difficult to raise enough capital from the Nordic financiers that will allow international expansion. In this regard a combination of a venture investment and technology transfer to China is a potentially successful model.

7Investments in Nordic Cleantech

Investments in Nordic Cleantech – International VCs are welcomeCleantech has become a distinct investment category for Nordic investors from about 2006 – 2007 and the sector has seen rapid development for four years until the economic crisis had its full effect on venture and private equity funds. The overall investment amounts grew up till year 2010 when the annual total reached over EUR 0,5 bln. This growth was to a large extent fuelled by the activity of private and corporate cleantech-focused Nordic VCs such as for example Volvo Technology Transfer, Sustainable Technologies Fund, Northzone, VNT Management as well as funds with governmental participation such as Sitra in Finland, Industrifonden in Sweden and Vaekstfonden in Denmark. Another contributing factor was large investments in Renewable Energy and Infrastructure companies such as e.g. a EUR 120 mln investment by Masdar Cleantech Fund in Finnish wind turbine manufacturer WinWind in 2008; and a EUR 115 mln investment by Siemens Windpower into Danish offshore installer A2SEA in 2010. Such large deals subsided in the following years, and in 2011 - 2012 the top deals fell within the range of EUR 10 – 25 mln.

INVESTMENTS IN NORDIC CLEANTECH 2007 - 2012

At the same time as some previously active funds divested, it has become increasingly difficult to raise new funds due to the recession in European finances. This combination led to an even sharper drop in private (VC and PE) investments in 2011 – 2012. This is, however, not necessarily a negative situation for foreign investors interested in the area. Such shortage of financing left a significant number of companies in search for, primarily, commercialisation and expansion capital creating a broad dealflow spectrum for a potential investor.

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187,3 371,9 460,6 505,7 187,1 202,1

Value of deals

Total number of deals

Source: Cleantech Scandinavia

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8 Investments in Nordic Cleantech

PRIVATE INVESTMENTS IN NORDIC CLEANTECH 2007 - 2012


Seen by the number of new VC funds closed in the last 12 month, the situation with domestic and European private investments in Nordic companeis is likely to improve. For Chinese VCs this is opening up for attractive co-investment opportunities together with local funds.

Another trend is that a large number of cleantech companies are coming into the VC-ready position in the next couple of years with the help of a well-developed system of governmental support and financing. Governmental agencies and funds all over Nordics have made en effort to match the receding private financing, increasing their share of the total financing from around 15% in 2008 – 2009 to 43% in 2012. The most active financiers in the cleantech field are innovation support agencies such as TEKES in Finland, Vinnova in Sweden, and Innovation Norway respectively; as well as energy authorities in Sweden and Denmark, and Enova in Norway whose target technologies lie within Energy Efficiency, Renewable Energy and Energy Storage.

The characteristic feature of the majority of government support recipients is that they are companies in early development stages. As the graph illustrates, the lion’s share of support is going to companies in seed stage. This type of support is often aimed at helping companies through the initial commercialization period, getting ready for a potential VC investment.

5262

8775

121

59

177,7

315,7

343,6

384,6

117,4 115,8

Total amounts, EUR, mln

Total Number of Deals

20122008 2009 2010 20112007

9Investments in Nordic Cleantech

DISTRIBUTION OF PUBLIC SUPPORT TO NORDIC CLEANTECH BY DEVELOPMENT STAGE, 2012


The investment opportunities in the Nordics lie not only in the early stage companies. The exit market has not been particularly active and private investors are looking for good opportunities. According to a study conducted in the fall of 2012, 19 out of 24 funds expect exiting some or all portfolio companies in a 3-year period, while at the same time stating in 77% of cases that their portfolio will need additional funding to reach a good exit point.3 This means there are opportunities in virtually all development stages.

The prevailing type of exit so far has been an industry sale, in the majority of cases an acquisition by a larger non-Nordic industrial company. For example, in 2011, 11 out of the 16 buyers were international industrials such as Fairchild Semiconductor, Ener1, DuPont, Saint-Gobain, Vestas, and Murata Manufacturing. Industrial companies from bigger foreign markets consider Nordic technology companies a valuable asset in expanding their cleantech expertise and profile.

The IPO market for cleantech companies is unlikely to develop in the nearest future, however, an acquisition by another VC fund, also most often foreign, may become an attractive option for Nordic VCs looking for exit options.

To sum up, the Chinese industrial and financial actors will find:

- a growing pipeline of early stage companies getting ready to international markets;

- broad dealflow for foreign VC investors in different development stages;

- dealflow for international expansion opportunities;

- acquisition opportunities for both industrial companies as well as financial actors as a means of exit for Nordic investors.

24

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10,6

49,9

19,4

6,3

Total amounts, EUR, mln

Total Number of Deals

Seed Commercialisation ExpansionR&D

10 Investments in Nordic Cleantech

Who are the companies?

The cleantech sector in the Nordic countries is diverse not only in the types and sizes of companies but also in a wide variety of technology areas. It is difficult to characterise such a mixed group of companies, but there are a few common traits shaped by the local business environment and industrial tradition.

5 years ago cleantech was mostly associated with renewable energy and energy efficiency – these sectors attracted up to 80% of all funding received by Nordic cleantech companies – currently “green” thinking is entering all industry sectors and he dealflow gets more diversified by technology. The new companies are often more focused on specific challenges, not aiming at changing the entire industry but improving processes and material efficiencies. This lowers the barriers to market access and often implies lower capital intensity of the start-up. More companies are becoming suppliers to en already existing “cleantech” industry sector such as wind or solar power, or biomass heat and power generation.

Another characteristic of these companies is that they are getting less policy dependent. There were a lot of expectations related to subsidies, feed-in tariffs, emission trading systems and other policy measures in the beginning of the “cleantech era”, which often didn’t make a good ground for an investment decision-making process. Technologies independent from regulations are now more favored, as they have a chance for competing on international markets.

We consider these traits, together with a certain level of technology readiness and management capacity, a good basis for Nordic companies to start working with Chinese partners since the business models can often be limited to licensing the technology and not a heavy up-front capital investment.

Here are sector examples where Nordic countries have pioneering technologies that may provide a breeding ground for clean technology cooperation with China:

• Wind Energy: improvements in design of offshore and onshore towers and turbines, infrastructure and installation of wind power, software for prediction and management of wind parks.

OWEC Tower (NO), Seatower (NO), WindSim (NO), FORIDA Development (DK), ChapDrive (NO), Fiberline Components (DK), Liftra (DK), WinWind (FI), Mervento (FI), Windar Photonics (DK), Stalatube (FI), SG-Power (FI), WindVector (SE).

• Biomass-based heat and power generation: improvement of burners and equipment, innovative methods of raw material preparation and process monitoring.

Danish Dall Energy (DK), Dantherm Power (DK), Meva Innovation (SE), Cleanergy (SE), GasEk (FI), Mantex (SE), Acosense (SE).

• Energy storage and fuel cell technologies: energy storage for automotive and other applications.

European Batteries (FI), ReVolt Technologies (NO), Green Hydrogen (DK), IRD Fuel Cells (DK), Haldor Topsøe (DK), ReformTech (SE), Enfucell (FI).

• Solar power suppliers: development of components and new types of solar cells, efficiency improvements, applications for utilising solar energy in buildings.

NLAB Solar (SE), SolVoltaics (SE), Innogie (DK), Photosolar (DK), Parans Solar Lighting (SE), Savo-Solar (SE), Optistring Technology (SE).

• Industrial Energy Efficiency: changing existing industries into a more material and energy efficient businesses.

Numcore (FI), Pilum (SE), MagComp (SE), Opcon (SE), IPtronics (SE), Energreen (NO), SmartMotor (NO).

• Advanced materials: environmental friendly replacements for traditional materials or treatment methods

Kebony (NO), Abeo (DK), Deflamo (SE), I-Tech (SE), BT Wood (FI), Ocean Saver (NO), Aluwave (SE), Applied Nano Surfaces (SE).

11Benefit from China Cleantech Investment

Nordics stand to benefit from China cleantech outbound investmentChina and the Nordics: the two regions have dramatic differences in population, growth and development. What they have in common is a desire to develop clean energy technology and bring such technology to the global marketplace. Nordic countries stand to benefit from a number of trends in China cleantech outbound investment. Briefly, these trends are as follows:

•China is focused on clean energy, and promoting outbound investment in this area, as well as being the largest consumer and producer of renewable energy worldwide.

•China outbound M&A is growing, and diversifying toward new regions, including Nordic countries.

•China’s outbound focus is shifting toward technology, versus resource acquisition and diversification; this is especially clear in the rapidly maturing cleantech space.

•Small size deals and private deals are a major part of China M&A activity, even though big infrastructure and oil and gas deals—and deals driven by big state-owned enterprises (SOEs)—get more attention.

After China initiated the outbound investment strategy as a part of national policy in 2000, the country gradually picked up the pace of global investment, with an emphasis on a small number of markets (such as North America) and a narrow focus on resource acquisition, particularly in oil, gas, copper, iron and steel. With the most recent 12th Five-Year Plan, it is clear that this focus has shifted towards giving much more attention to technology at the national level. At the company level as well, Chinese corporate investors are looking to M&A and investment in more complex ways. New motives include gaining management talent, scientific knowhow, engineering experience, solid brands, and technology or market synergies. All of these are areas where Nordic countries have excelled.

12 China’s Focus on Cleantech Investing

China is focused on cleantech investingChina’s economic rise has been attended by enormous ecological consequences, but at the same time China’s government has successfully prioritized clean and renewable energy, in the process transforming the country into a cleantech industrial powerhouse. Renewable energy is a major element of the country’s energy strategy: hydro, wind, solar and biomass are all growing rapidly. Many of these areas also have strong counterparts in the Nordic countries. In particular, Nordic companies are known for high-technology in hydro planning, construction and operations, solar PV manufacturing, offshore wind engineering and development, and biomass supply chain.

China’s renewable energy is spurred by government targets, subsidies, low-cost loans from state-owned banks, and most particularly national industrial policies. The Chinese government regularly releases policies prioritizing investment in certain types of industries. The most important set of industries have been defined as Strategic Emerging Industries, SEIs, in China’s 12th Five-Year Plan. The majority of the SEIs have a clean energy component, including obviously new energy, energy savings and environmental protection, and new energy vehicles, but also to a lesser extent next generation IT (such as advanced meters), advanced materials and advanced manufacturing.

CHINA SEVEN STRATEGIC EMERGING INDUSTRIES

Source: Azure, NDRC 12th Five-Year Plan

Within these SEIs, the government has established remarkably specific goals for technology China should have mastered. Investment, international cooperation and acquisitions are all explicit methods for acquiring mastery in strategic fields, which is reflected in recent dealflow. For example, the Hanergy acquisition of Miasole (a U.S.-based thin-film developer) and the Wanxiang acquisition of A123 appear clearly aligned to acquire technologies in SEIs.

Quick Facts:

In October 2010, China’s State Council issued the Decision to Accelerate the Development of Strategic Emerging Industries. It called for the establishment of VC funds to support SEI development.4

In 2012, the central government set up a RMB 7.5 billion (US$ 1.17 billion) fund for Strategic Emerging Industries.5

Next Genera*on IT

Energy Saving & Environmental

Protec*on New Materials New Energy Advanced

Manufacturing New Energy Vehicles Bio-‐technology

13China’s Focus on Cleantech Investing

The Chinese government aims for SEI’s to growth from 4% of GDP in 2010, to 8% by 2015 and 15% by 2020.6

According to the estimates by Zhou Zixue, economic analyst at the Ministry of Industry and Information Technology, MIIT, strategic emerging industries will be worth RMB 4.3 trillion by 2015 and RMB 11.4 trillion by 2020.7

Companies falling under the strategic emerging industries scope receive special treatment with regard to grants, loans, land deals and taxes. Both national and provincial governments have SEI support systems in place. For example, the Guangdong provincial government will provide US$ 300 million in support per year through loan subsidies and awards.8

China’s support for outbound foreign investment is highly selective. Policy changes related to outbound investment are, in general, not designed to liberalize the market. Instead, they are designed to expand markets for Chinese companies and acquire technology and knowhow for important industries. Industries falling outside the government’s defined scope may struggle to attract investment.

Market openness is also a concern. Although senior Chinese policy-makers have said that foreign companies would be able to participate on equal terms in Strategic Emerging Industries, domestic companies are often given preference.9

Venture capital is a major means of developing China’s Strategic Emerging Industries. In 2012, the National Development and Reform Commission noted that 41 venture capital funds dedicated to SEIs were set up in 2011, with government financing of RMB 70 billion, including 24 funds set up under individual provincial governments.10 Subsequently, at the end of 2012, the NDRC announced that there were over 102 funds with a total of RMB 29 billion in private capital, of which 24 were devoted to energy and the environment with RMB 7 billion in funding.11

It’s important to understand that these government-sponsored VC firms are quite different from the typical Western VC firm. For example, no public list of the 102 VC firms mentioned above is available, partly because many VC firms avoid publicity, relying primarily on government relationships and instructions to create dealflow. Fund structure is also unique: the government’s guidance is that central government funding must not surpass 20%, regional government matching funding must not be below that of the central government funding amount, and private funding must be over 60%, with total capital contributed at least RMB 250 million per fund.12 In practice, central and regional governments contribute roughly 20% and private investors the remainder.13 Private VC firms have also been appointed to manage the funds, such as the case with Qiming managing one of the four SEI funds established for Beijing. The funds will likely pursue mainly domestic investments, but foreign investments using U.S. dollar funds, especially to acquire and localize technology, are certainly possible.

What to Expect:

•Foreign technology firms falling under the Strategic Emerging Industry scope will be M&A and investment targets in 2013.

•More specifically, foreign technology firms with superior technology to China’s domestic current domestic offerings will be prime investment targets. Expect opportunities for hydro, solar, biomass, smart grid, energy efficiency and new materials.

14 China Outbound Investment

China outbound investment is growing, both for M&A and VC/PE China’s outbound M&A activity reached a record high in 2012 as Chinese enterprises continued to seek deals abroad, especially in the energy and resources sectors. While the trends of growing private investment and a focus on oil and gas remained, 2012 saw a shift in the countries targeted for M&A. As yet there has been little activity between China and the Nordics on cleantech specifically. However, China outbound investing is expanding from just a few target countries to include a wider set of regions, including Scandinavia. Given the new focus on cleantech outbound investment at the national policy level in China, this bodes well for opportunities in this area.

Outbound M&A is growing

Although the go-abroad policy was officially launched in 2000, significant outbound investment did not begin until the mid-2000s when rapidly increasing demand for raw materials impelled China to develop resources abroad. Chinese investors have continued to take advantage of weak global economic conditions to secure long term access to resources like oil, gas, iron ore and coal.

From 2008-2012, Outbound M&A grew at an average CAGR of 58%. State-owned enterprises (SOEs) provided a majority of the investment, accounting for 83% of deal value, while private firms accounted for a majority of the deals, 73% of total deal volume. SOEs have consistently participated in larger deals than private firms, but both saw their average deal size grow significantly in 2012. The average deal size for SOEs increased by 54% from 2011 to 2012, and the average deal size for private firms tripled to nearly US$ 178 million per deal.14 (A higher average deal size can reflect a few large deals.)

CHINA OUTBOUND M&A 2008-2012

Source: PWC, Azure

Quick Facts:

•In 2012, total China outbound deal value reached US$ 65.2 billion, up 54% from 2011.15

•China accounted for 7% of cross border M&A activity in 2012.

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15China Outbound Investment

•China was the largest investor in developing economies in 2010 and 2011, with total outbound foreign direct investment amounting to US$ 60 billion annually. It is projected to reach US$ 150 billion by 2015.16

•In 2010, China’s Vice-Minister of Commerce Yi Xiaozhun predicted that outbound foreign direct investment would surpass inbound foreign direct investment by 2015.17

•In July 2012, Chinese regulators increased the monetary value of some approval thresholds tenfold—meaning national-level approval is no longer needed for resource deals under US$ 300 million or other deals less than US$ 100 million.18

VC outbound investing is poised to return

2012 was a slow year in terms of fundraising and investment in China. Domestic investment dropped from 362 deals worth US$ 6.2 billion in 2011 to 202 deals worth US$ 3.7 billion in 2012. Fundraising also fell well short of 2011’s historic highs, the total value of new USD-denominated funds fell 36% from 2011 to 2012.

Market inhibitors in 2012 may become market drivers in 2013. A number of disappointing IPOs in early 2012 forced many VC-supported firms to enter a holding pattern. In 2012, there were 98 IPO exits compared to 171 in 2011.19 IPO activity should increase in 2013, bolstered by recent upswings in global stock exchanges and built up backlog. In addition, overcapacity in global solar, wind and LED industries has also created a buyer’s market for firms looking to acquire resources and next generation technologies. Chinese venture capital and private equity firms will look to find deals in depressed asset classes.

CHINA VC FUNDRAISING BY QUARTER, 2010-2012

Source: Zero2IP, Azure

Quick Facts:

•In 2012, China domestic VC investment was US$ 3.7 billion with 202 deals. In contrast, U.S. VC raised US$ 29.7 billion in 3363 deals.20

•Chinese venture capital firms backed 28 U.S. companies in 2011, nearly double the two previous years.21

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Although IPOs have been the historic means of VC exit, M&A will be an important focus in 2013. Foreign cleantech firms with innovative technology and strong potential in the Chinese market will be attractive targets. As exits pick up via new IPOs and M&A activity during the first half of 2013, the fundraising environment should also improve. China’s cleantech VCs will then be able to resume their long-term investment strategies.

Government reforms are further promoting outbound investment

Government support and the global economic environment are encouraging outbound investment. Since 2010, the Chinese government has now officially prioritized outbound investment over inbound direct investment.22 A number of recent changes to outbound investment regulations have expedited the outbound investment approval process while opening up investment to high net wealth individuals. This will enable private investors-the fastest growing outbound investor class-to pursue more deals abroad with less government oversight.

APPROVAL THRESHOLDS FOR OUTBOUND INVESTMENT

Source: Azure, China Briefing

Private companies are subject to tight approval scrutiny, but the government is introducing new regulations to speed up the process. Companies looking to make large outbound investments will have to deal with three government authorities: The Development and Reform Commission (DRC), the Ministry of Commerce (MOFCOM) and the State Administration of Foreign Exchange (SAFE). In July 2012, Chinese regulators increased the monetary value of some approval thresholds tenfold, simplifying the approval process for private investors making small to medium size investments in approved industries.23

China’s state-owned enterprises (SOEs) will continue to play an important role in growing cleantech abroad. Backed by China’s sovereign wealth funds, like China Investment Corporation and Safe Capital, several SOE in the electric power industry have made significant acquisitions. These SOEs own stakes—often indirectly—in several of China’s top wind, solar and energy storage firms. It’s a natural way to establish sales pipelines abroad.

Development and Reform Commission

• Less than $ 100 million in non-‐resource investment subject to approval at provincial level

• Less than $ 300 million resource related investment subject to approval at provincial level

Ministry of Commerce

• Investments between $ 10-‐100 million subject to approval at the provincial level

• Over $ 100 million subject to approval at naDonal level

State AdministraDon of Foreign Exchange

• Less than $ 10 million outbound investment subject to approval at provincial level

• Over $ 10 million requires naDonal approval


What to Expect:

•Regulatory changes will accelerate private outbound investment.

•Large SOE’s, like Three Gorges and State Grid, will continue to pursue acquisitions that indirectly create sales pipelines for wind and solar companies.

•Foreign firms in the Strategic Emerging Industries will be China’s primary M&A and investment targets

The geography of investing is shifting, which should help Nordics

Even as recently as five years ago, China foreign outbound investment was essentially limited to North America, Asia and one or two deals elsewhere, typically in the developing world. The focus at that time was also clearly on resource acquisition. Given China’s need to diversify foreign exchange holdings and the need for major SOEs to diversify their businesses globally, it is unlikely that big-dollar dealflow will taper off. Instead, what has already happened is that deals are diversifying, particularly in terms of geography.

China’s diversification has led several notable China outbound deals with Nordic flavor. In the resource and cleantech area, in 2011 the China National Blue Star Group acquired Norwegian Elkem, a specialty materials company, which holds solar-grade silicon production among its main product lines. 24 In 2010, China’s Geely Automotive purchased struggling Swedish automotive brand Volvo from Ford. 25 And in 2008 China Oilfield Services limited purchased its Norwegian peer Awilco. 26 These three deals indicate the range of deal types that will remain common: technology and manufacturing (Elkem), brands (Volvo), and services (Awilco).

Chinese firms are shifting towards technology and markets

Chinese cleantech companies looking to boost margins are actively pursuing a policy of vertical integration, expanding into both upstream and downstream segments of the value chain. This expansion is not only motivated by profit margins but also the fact that high labor inflation is eroding Chinese companies’ major competitive advantage: low cost manufacturing.

PROFIT MARGIN VALUE CHAIN CURVE FOR CHINA LOW COST MANUFACTURERS

Source: Azure International


Quick Facts:

•Wage inflation in China has exceeded 10% for the last three years.

•In the last two years, Chinese PV manufacturers Canadian Solar, GCL-Poly Energy and Trina Solar moved into project development.

China imported approximately 45% of polysilicon used for PV manufacturing in 2011,27 but China is expected to become a polysilicon exporter by 2015.

Although many Chinese cleantech firms have established good reputations regarding their technology, they need to improve their sales and service capabilities. With regard to project development, in many fields experience is limited to large domestic projects developed by SOEs. To succeed in foreign markets, renewable firms, particularly solar firms, need to learn how to function in a fragmented market that places more emphasis on quality of service. In addition, Chinese firms are still heavily reliant on imported materials and foreign technology licenses. Foreign direct investment can address these issues, enabling Chinese firms to reduce production costs while increasing economies of scale.

Downstream investments and acquisitions will focus on new sales channels and service networks. Established cleantech manufacturers will require a stronger on the ground presence in foreign markets to provide proper distribution and after sale services. In developed markets this can be pursued through acquisitions of local companies with strong sales support networks and brand recognition. In developing markets, Chinese firms will look to establish manufacturing and build new brands. Upstream acquisitions will focus on technology and manufacturing advances.

What to expect:

•Chinese manufacturers with strong brands and technology will establish manufacturing in developing markets.

•In developed markets, technology acquisition and distribution capabilities will be favored over manufacturing capacity.

Private companies are coming to the fore

Private firms are driving outbound investment growth. Private firms set new records in terms of absolute deal value and percent of overall investment in 2012.28 Private investment growth continues to gain on state-owned enterprise investment with private M&A deals accounting 39% of deal value in 2012 compared to 22% of deal value in 2011.29

Although private firms are subject to more rigorous approval processes, they have several advantages over SOEs in the global M&A market. Private firms are less bureaucratic and are more motivated by commercial interests. Many private Chinese firms have foreign stock market listings, giving them better access to offshore capital markets and more transparency.30 Private firms are also more willing to partner with major international players on cross border deals. Working with local firms reduces the possibility of objection from foreign governments, brings in local knowhow and significantly reduces technical and legal risks.


NUMBER OF CHINESE M&A DEALS BY SIZE OF DEAL IN U.S. DOLLARS, 2002-2011

Source: Dealogic, Yue Chen 2012

Another encouraging sign is the size of deals. Although the average deal size by year for outbound investments ranged widely between a low of US$ 21 million in 2003 and a high of US$ 489 million in 2009, the largest number of deals from 2002-2011 fell into the range of US$ 1-10 million.31 According to a recent Deloitte survey, of 69 M&A practitioners surveyed, 78% expect average outbound M&A deal size to be less than US$ 300 million.32 Scandinavia boasts a large number of smaller firms with technology and engineering expertise, but small companies have limited ability to enter the China market on their own. The fact that Chinese firms are looking to snap up, or just invest in, small companies bodes well for future Scandinavia dealflow.

China’s cleantech investing interests diversifying

Looking purely at the venture capital segment of China’s investment sector, it is clear that the focus on new technology is rapidly diversifying to new sectors of cleantech. Early on, just a few sectors attracted interest in terms of funds invested, particularly waste and water treatment and solar. Solar investments led the industry several years ago but are now largely ignored, reflecting overcapacity in PV manufacturing and silicon supply, among other factors. (Large Chinese power groups have continued to invest abroad in solar, however.) Through analyzing China’s top five cleantech VCs investment trends over time, one can see a clear trend towards diversification and new sectors.33 In particular, LEDs and new materials are capturing significantly more attention in recent years.

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PREFERRED CLEANTECH VC SEGMENTS BY YEAR, FOR TOP FIVE CHINA CLEANTECH VC FIRMS

Source: Azure International and company information

In looking at the number of investments by industry segment per year, definite trends emerge. 2008 is by far the most diverse year, mostly reflecting that Tsing Capital was beginning to invest from its CEF III Fund. From 2008 to 2010, battery and energy storage technology became very popular but it enthusiasm quickly faded, mirroring the rise and fall of interest in electric vehicles in the global market—a trend that might now reverse. Finally, the most dominant trend featured in this figure is the growing optimism in the LED industry from 2010 to 2012. Despite production overcapacity in 2012, venture capitalists in China are still bullish about the long term prospects of the LED lighting industry. Innovative LED lighting producers are receiving significant government support as the nation tries to develop its own core IP.

Chinese venture capital firms typically invest in foreign technologies that have a strong cost reduction or sales potential in the Chinese market. These investments also reflect deficiencies in domestic technology: Chinese VC firms invest abroad when domestic technology is limited or uncompetitive. In recent years, we see increased investment in new material and battery and energy storage segments. This trend should pick up as slower than expected growth in global electric vehicle and energy storage markets leaves many early stage companies stranded, allowing Chinese firms to acquire superior foreign technologies at bargain prices.

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2003 2004 2006 2007 2008 2009 2010 2011 2012

Others

Wind

Waste/Water Treatment

Sustainable Transportation

Sustainable Agriculture

Solar

Other Generation

New Materials

LED

Grid

Energy Efficiency

Cleaner Coal

Battery/ES

21Concluding remarks

Concluding remarksChina outbound investment has reached an exciting new phase, as a result of a growing domestic clean energy industry and a new central government push towards strategic industrial acquisitions. In several important areas of clean energy, China has already established itself as a leader in a field with shrinking margins due to commodity oversupply. As a result of this force, leading clean energy companies, as well as government agencies, are looking to both consolidate the industry while expanding into high technology. These trends have important implications for companies doing business in developed world regions with both high technology industries and highly-developed service and management sectors. The Nordic countries, with their highly professional research and development centers and long-standing commitment to sustainable development, continue to lead in many fields of cleantech where China would like to expand. China-Nordic dealflow is still small, but seems poised to grow, especially as private deals and small deals become more common. Now is the time for Nordic companies to begin to explore strategic options and new markets, as well as new partners for joint development.

22 References

References1 Economist Intelligence Unit, November 2012. http://www.economist.com/news/21566430-where-

be-born-2013-lottery-life

2 Doing Business, The World Bank Group, 2012. http://www.doingbusiness.org/rankings

3 Venture Capital Activity in the Nordic Cleantech Sector: Funds, Portfolios and Success Stories. Cleantech Scandinavia Report, November 2012.

4 Gilbert B. Kaplan, “China Announces $1.5 Trillion Development Plan for Seven Strategic Emerging Industries,” martindale.com, Jan. 11, 2011.

5 Lan Lan, “Nation seeks strategic industries’ development,” China Daily, July 24, 2012.

6 “China to Spur Strategic Emerging Industries,” China Daily, www.chinadaily.com, July 24, 2013.

7 Xiaolei Gu, “China Releases Blueprint to Promote Seven Emerging Industries,” China Briefing, June 1, 2012.

8 Gilbert B. Kaplan, “China Announces $1.5 Trillion Development Plan for Seven Strategic Emerging Industries,” martindale.com, Jan. 11, 2011.

9 “China’s Strategic Emerging Industries: Policy, Implementation, Challenges, & Recommendations,” U.S. China Business Council, March 2013.

10 “Special Funds for Strategic Emerging Industries Set Up in 24 Provinces and Municipalities,” China Scope Financial, www.chinascopefinancial.com, Apr. 13, 2012.

11 “China’s Policies and Actions for Addressing Climate Change (2012),” China.org, china.org.cn, Nov. 22, 2012.

12 “《国家发展改革委财政部关于实施新兴产业创投计划、开展产业技术研究与开发资金参股设立

创业投资基金试点工作的通知》,” National Development and Reform Commission, www.sdpc.gov.cn, 2009.

13 “为新兴产业送来政策春风 [For emerging industries a new policy wind],” Caijing, finance.china.com.cn, Feb. 26, 2013.

14 David Brown and Jeremy Ngai, “PwC M&A 2012 Review and 2013 Outlook,” PwC, www.pwc.com, Jan. 1, 2013.


16 Ibid.

17 Hanemann Thilo and Daniel H. Rosen, “China invests in Europe: Patterns, Impacts and Policy Implications,” Rhodium Group, www. Rhgroup.net, June 2012.

18 Chet Scheltema, Frank Yang and David Chan, “Chinese Outbound Foreign Direct Investment Faces Rigorous Scrutiny,” China Briefing, www.china-briefing.com, Dec. 31, 2012.


20 “China Venture Capital Investment Continues Decline in Fourth Quarter,” Dow Jones Venturesource, www.venturesource.com, Feb. 24, 2013

21 Ibid

23References

22 Li Zhenyu, “Breaking down China’s overseas investment,” china.org, www.china.org.cn, Dec. 11, 2012.

23 Chet Scheltema, Frank Yang and David Chan, “Chinese Outbound Foreign Direct Investment Faces Rigorous Scrutiny,” China Briefing, www.china-briefing.com, Dec. 31, 2013.

24 “2011年上市公司十大海外并购 [Top 10 Outbound M&A deals], Tengxun Finance, Dec. 30, 2011.

25 “吉利与福特在瑞典正式签署收购沃尔沃的协议 [Geely and Ford signed the official contract for Volvo’s sale in Sweden],” Xinhuanet, Mar. 28, 2010.

26 “中海油服195亿吞挪威同业 [China Oilfield Services Ltd swallow its Norwegian peer for RMB 19.5 billion],” July 8, 2008.

27 Arnulf Jager-Waldau, “Research, Solar Cell Production and Market Implementation of Photovoltaics,” Europa PV Status Report 2012, Sept. 2012.

28 Cai Xiao, “China’s M&A deals tipped to rebound in 2013,” China Daily, Jan. 31, 2013.


30 “China Outbound Investment Will Impact on the Australian Regulatory Landscape,” King, Wood & Mallesons, www.mallesons.com, April 2010.

31 Yue Chen et al., “China Going Global – A Boomerang Strategy,” PowerPoint presentation, Columbia University, May 8, 2012.

32 Du Juan, “Outbound M&A activity on the rise, survey says,” China Daily, Jan. 18, 2013.

33 The five cleantech VCs surveyed here are Tsing Capital, Qiming Venture Partners, GSR Ventures, IDG Capital Partners Northern Light Venture Capital.

Sponsors of this reportThe report is prepared by Azure International and Cleantech Scandinavia and sponsored by Business Sweden, Innovation Norway, and Tekes, the Finnish Funding Agency for Technology.

We give local ideas global opportunities

Innovation Norway

Innovation Norway is the Norwegian Government's mostimportant tool for fostering innovation and businessdevelopment in Norway and abroad. We supportcompanies in identifying their value-added potential and todevelop their competitive advantage through innovation.Our organisation gives Norwegian enterprises access to abroad business support system as well as financial means.Innovation Norway provides competence and advice in allstages of a company’s development, and we organiseseveral promotional and network activities annuallyworldwide. Innovation Norway also has a dedicateddepartment giving advice to foreign companies wishing toinvest in Norway.

Innovation Norway is a publicly owned entity withownership divided between the Ministry of Trade andIndustry and the provincial authorities in Norway. Thismeans that we have a mandate to support Norwegianbusiness both at home and abroad, helping them from theinitial stages until commercialisation and

internationalisation. Our vision is to "give local ideas globalopportunities". Staying true to that vision, we have 20offices at different locations in Norway and 38 offices ininternational markets. Innovation Norway is the Norwegiangovernment's official trade representative abroad,constituting the commercial section of Norwegianembassies and consulates general.

Energy & Environment

The energy and environment sector in Norway consists ofmore than 2,200 companies with 45,000 employees and acombined turnover of NOK 170 billion. With the exceptionof hydroelectric power, this is an immature growth industrythat requires a high degree of innovation andinternationalisation. Energy and Environment is one ofInnovation Norway’s seven prioritised sectors. As part ofthis work, we are focusing on several subsectors, such aswind and ocean energy, water treatment, green ICT, solarenergy and energy efficiency etc.

Innovation Norway. Akersgata 13, P.O.Box 448 Sentrum, NO-0104 Oslo, Norway We give local ideas global opportunities

We give local ideas global opportunities

Norway has more than 100 years of experience fromharnessing the energy generated by our many riversand water falls. In fact, almost 40 % of Europe’s hydroreserves are located in Norway. This makes Norwayan important partner in international hydro powerprojects. Experience from the offshore oil & gasindustry in the North Sea has led to several innovativesolutions that are now applied in related sectors.Thus, Norwegian companies are playing a central partin the development of offshore wind in Europe –delivering both offshore technology and projectmanagement expertise.

Innovation Norway in China

As the commercial section of the Norwegian embassyin Beijing and the Consulate General in Shanghai, weplay an important role as door-opener for Norwegiancompanies in China. Our knowledge of local marketsand stakeholders makes us a valuable partner forNorwegian companies in their internationalisationprocess. In addition to organising seminars andworkshops, we also coordinate Norwegianparticipation at important events, such as exhibitionsand conferences.

In a large and complex market such as China, visibilitycan be a challenge for small and medium sizedcompanies. To mitigate this challenge, InnovationNorway has established the Norwegian Energy &Environment Consortium (www.neec.no). NEEC is anetwork of companies that facilitates informationsharing. In addition, the consortium also works onprojects in a coordinated manner, delivering completeand turn-key solutions. As China is looking to investin more sustainable solutions, we believe thatNorway can be an important partner.

For more information visitwww.innovasjonnorge.nowww.neec.no

Pioneering green Technologies from swedenSweden holds a leading position within en-ergy and environmental technology as well as implementation of these technologies into the society. Year after year, Sweden ranks in the top on innovation indices. At Business Sweden we see a number of clusters as well as individual enterprises with interesting business potential in the following categories/areas: Bioenergy, Biofuels for transportation, Solar power, Wind power, Green buildings, Heating & cooling, Waste & recycling, Water & waste-water and Sustainable transportation.

Anyone wishing to tackle environmental challenges or develop technology for this can learn a lot in Sweden. Some examples on how to do this is to set up a local center of excellence, to acquire know-how and to build relations with leading clusters, R&D institutions, industries and municipalities.

Business Sweden is the official investment promotion agency for Sweden. We make it easier for foreign companies to invest in research and development in Sweden by identi fying and drawing attention to the cluster of industries, companies, compe-tences and ideas in the Swedish market.

We work with different forms of invest-ments: from new establishments, mergers and acquisitions to partnerships, R&D collaborations and knowledge transfer.

Business Sweden was one of the first investment promotion agencies to open offices in China. We are now operating in Greater China from offices in Beijing, Shanghai, Guangdong, Hong Kong and Taipei with dedicated investment promotion personnel in the Energy & Environmental Technology field in Shanghai and Taipei.

Some exampleS of intereSting SwediSh technologieS

BuSineSS Sweden in Shanghai Bin Li, Senior Investment Promotion Officer T +86 21 6218 9955 [email protected] www.business-sweden.se

BuSineSS Sweden in taipei Rita Huang, Senior Project Manager T +88 62 2757 6573 [email protected] www.business-sweden.se

Large-scale, floating platforms for wind and wave power www.hexicon.eu

One of the world’s leading energy solution providers based on Stirling technology www.cleanergy.com

Photo: Mattias Samuelsson/imagebank.sweden.se

Innovate in Finland

Tekes promotes a broad-based view on innovation: as well as it funds technological breakthroughs, Tekes emphasizes the significance of service-related solutions, design, business and social innovations.

Tekes is the most important publicly funded expert organization for financing research, development and innovation in Finland. The annual budget of Tekes is about 550 million euros. It employs approximately 400 people, working in the headquarters in Finland and in seven offices abroad. Tekes has important international networks in Europe and Russia, as well as in China, India and the United States.

Find more about Tekes online www.tekes.fi

Growth and Competence from Renewables and Fresh Green Solutions

Tekes Groove programme is bringing together companies and technologies to find new innovations and connections towards greener solutions during 2010-2014, with a total volume of 95 million euros, about half of it contributed by Tekes. The goal is to create new paths for global operations and new possibilities for integrating novel technologies and services into the renewable energy markets. The programme enhances international business opportunities for small and medium-sized enterprises working with renewable energy by funding, improving their competitiveness and developing networks with financiers. Groove programme also offers coaching services with experienced mentors specialized in Asian, African and South-American markets.

Since 2010 about 75 projects have been funded, 32 of them already finished. The focus of the projects has been Wind, Solar and Wave energy related, but also few Bioenergy, Smart Grid and Energy Efficiency projects. International collaboration focus areas have been Brazil and China as well as Africa, Germany and India.

2013 Groove programme in collaboration with Jiangsu Province are arranging a Joint Call focused on Cleantech extensively.

Tekes in China

Tekes has created an extensive collaboration network with China’s leading innovation regions. It promotes science and technology cooperation between Chinese and Finnish universities, research institutes, companies and officials in the greater Beijing area, Shanghai and Yantze delta, the Pearl river delta and recently in the Jiangsu province.

Innovative R&D companies and searcher groups find Tekes the gateway to China.

The focus areas of R&D collaboration are:

Environmental and energy technologies Information and telecommunication technologies Biotechnology and healthcare systems Production and materials technologies, including nanotechnology

Small and medium-sized enterprises can improve their competitiveness towards larger international markets. For example Tekes can fund research on feasible Chinese clients and markets, improve international business models and strategy, map partnerships and networks, and develop service and product concepts to the new markets.

By 2009, Tekes has been funding over 60 China oriented projects with a funding share of about 30 million euros.

Tekes offices are operating in Shanghai and Beijing.

Beijing

Tekes- Finnish Funding Agency for Technology and Innovation

Embassy of Finland Kerry Center, South Tower, Level 14 1 Guanghua Road, Chaoyang District

Beijing 100020, P.R. China Telefax +86 10 8529 8654

Shanghai

Tekes- Finnish Funding Agency for Technology and Innovation

Consulate General of Finland Finland-China Innovation Center

Rm 402, Bldg 2, 690 BiBo Rd, Zhangjiang Hi-Tech Park, 201203 Shanghai, P.R. China

Fax +86 21 6104 1432

30 Notes

The report is prepared by Azure International and Cleantech Scandinavia and sponsored by Business Sweden, Innovation Norway, and Tekes, the Finnish Funding Agency for Technology.

Azure InternationalSuite H, 6 Floor, Office Tower, Oriental Kenzo48 DongzhimenWai StreetDongcheng District, Beijing100027, ChinaT +86 10 8447 7053F+86 10 8447 7058www.azure-international.com

Cleantech ScandinaviaMagle Stora Kyrkogata 7A223 50 Lund, SwedenT +46 73 940 2070www.cleantechscandinavia.com

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