Cleantech-- China and the US Comparison, competition, cooperation

December 10, 2010Ken DeWoskinErb Institute for Global Sustainable Enterprise

Agenda

• China’s challenges

• China launches the next five year plan

• China Green growth overview

• Some U.S.- China system features

• Synergies– U.S. and China

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China seeks a leadership role in most Cleantech sectors

CO2 Reduction

Wind Power

Bio Gas

Photo Voltaics

Clean Tech & RenewableEnergy Technology Segments

Energy Efficiency

Waste Recycling Sustainable Materials

Solar Thermal Hydro Power

Efficient Mobility Solid Biomass

Bio Fuels Geo Thermal

Water Treatment

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• China, U.S., and India together represent 42.6percent of the total power generated in the world (International Energy Agency 2009)‒ China — 3,279 TWh (16.6percent) ‒ U.S. — 4,323 TWh (21.9percent)‒ India — 803 TWh (4.1percent)

• The Indian and U.S. models are primarily reliant on private industry with incentivizing regulations

• China is primarily reliant on a strong industrial policy and direct investment from central and local government sources

• China and India have world-leading targets for renewable and to date have focused on wind power over solar

• Both China and India have major PV module manufacturing capacity and export far more than they install domestically. Both markets are intensely competitive in manufacturing

China, India and the U.S. — green giants

Source: Solar Millennium AG, Erlangen

SatisfactoryGoodVery good Not satisfactory

Sun radiation on the earth

Source: Mckinsey report quoted in Mint/MNES

Annual Solar Energy Yield (KWh/KWp)

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Market and policy imbalances and balance points are delicate and intertwined

Steps

RisksBenefits

Raise interest ratesNot raise interest rates

Appreciate RMBNot Appreciate RMB

Add property taxNot add property tax

Curtail asset bubbles Overslow growthImpede export growth

Drive asset bubbles

Drive inflation

Increase trade disputes

Crash property markets

Foment social unrest

Moderate inflation

Meet social obligations

Support target growth

Harmonious society Encourage wage increaseDiscourage wage increase

Affordable housing

Avoid trade strife

Continue stimulusDiscontinue stimulus

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China’s growth model has demanded large amounts of investment capital growing very quickly

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

5000

10000

15000

20000

25000

30000

35000

40000

FAI GDP-FAI

37% 34% 36% 41%44%

48%52%

56%

55%

67%

76%

FAI/GDP

Bn RMB

5%

30%

20%

25%

15%

10%

CAGR

35%

40%

FAI CAGR

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Enter the era of “Inclusive Growth”

This month China approved a new five-year blueprint for economic and social development, in which the ruling Communist Party of China promises to further improve people's livelihood and "vigorous yet steady" efforts.

Princelings

Xi JinpingLi YuanchaoZheng QingliZhang YouxiaYang YuanyuanLiu YuanWang Yi

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In various venues, a consistent public agenda has been promoted

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1. Moving to a more sustainable growth model

2. Boosting consumption to reduce dependence on exports and fixed asset investment

3. Shifting industry up the value-added chain

4. Reducing widening wealth disparities

5. Checking rampant environmental degradation

6. Reigning in corruption

7. Strengthening agriculture

8. Sustaining employment

9. Increasing energy efficiency

10. Coping with chronic water shortages

Stated Leadership PrioritiesLi Keqiang – Report to The Party School, Feb 2010 – China’s top 10 challenges

Li is known to have advocated much more

stringent property controls and more

aggressive structural reform since early this

year.

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How the planners plan to make the plan work

• Grow demand for steel, energy, cement, and aluminum by mandating/funding low-income housing units, transport, and energy-efficient industrial upgrades • Diversify sources/types of commercial financing, via moderate liberalization of interest rates and liberalization of financial activities for non-bank investors• Project the Renminbi into a broader international role• Secure supply and price control of key commodities for the central government• Sustain a continuing net contribution of exports to national growth by reducing the value added in imports and raising China’s value-added portion of export products. • Diversify destination markets, particularly to Africa and the Mideast, where national strategic goals blend with markets that are comparatively easy to access• Stimulate domestic consumption via direct consumer subsidies, moderately accelerated wage growth, low prices, and logistic efficiencies

To preserve the interests of the State while maintaining impressive growth rates at an increasingly large scale in an increasingly challenging environment

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What keeps the planners awake at night?

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• Domestic risks such as inflation, asset bubbles, and mis-allocation of resources may be difficult to manage

• External risks, such as trade disputes, WTO actions, currency wars, and other protectionist actions could take a toll

• Additional stimulus will be used in 2010/11, making withdrawal of stimulus more difficult and return to market-reforms challenging

• Large Chinese enterprises will gain strength domestically but remain challenged to create any footprint outside China

• Enterprise control weaknesses, systemic corruption, and compromised reporting standards contribute to inefficiency, investor doubts, and market volatility

•Worsening mal-distribution of wealth/resources

•Demographic dividend is gone, and increasing dependency ratios with weak social infrastructure investment will strain household resources

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Following the money– looking at three sensitive contradictions

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1. The shift to domestic consumption– the actual measures of the FYP are very weak, with no proposed increase in distribution of national wealth to households. While subsidies currently drive about 25% or many major consumer purchases, they support products with lowest margins, and they have failed in the past (cellphones in 1998-99). Shift to household consumption will take longer and depend on demographics– dependency ratios and older work force with higher wages.

2. The economy is continuing to privatize-- industries such as steel and mining are examples of a strong recentralization effort that lurks behind much of the FYP policy directions. The coal resources of Shanxi were dramatically returned to the control of large government enterprises like Poly Holdings, CITIC and Shenhua, after several years of privatization that created many wealthy families.

3. The Central Government is putting massive resources into Going Green– The FYP envisions 5T RMB of investment in alternative energy, but a close read indicates that much of this is expected to be provided by private investors. The FYP actually will increase the use of fossil fuels, by re-powering the big SOEs in fossil fuels, restructuring energy pricing, and opening up huge reserves in Xinjiang and Inner Mongolia. Energy conservation is likely to be more important than renewables

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What does the 12th FYP say about Green Growth?

Sales of “new energy” automobiles to exceed 1 million by 2015 New energy automotive will be among the most important

sectors in the economy for the next ten years. China will be the world’s largest producer of new energy vehicles

Integrate BEV and hybrid electric vehicle technologies China plans investment of more than 100 billion RMB over the

next 10 years to support new-energy automobile production

• Environmental preservation

• New generation information technology

• Biotechnology

• High technology manufacturing

• New energy

• New materials

• New energy vehicles

Priority sectors– for technology, capacity and export development

• “Green spending” is estimated to be US$221 billion, including renewables, low-carbon vehicles, high-speed rail, smart grid, efficiency improvements, water treatment (by HSBC). Much will be financed by local governments

• Historically, big infrastructure spending by the State has created huge opportunities for entrepreneurs and MNCs (Internet backbone, ports, petrochemicals, power grid)

• The State Council has just reiterated China’s interest in attracting foreign capital into areas with large investment and high technology needs

The plan continues the interventions post crisis . . .

2009-10 Stimulus package has direct or indirect impact on many industries

RMB 4 trillion Stimulus Package

Airport

Road & Infrastructure

Rail

Real Estate

Power Grid

Power Generation

Construction Materials

Logistics

Agriculture

Travel/ Tourism

Consumer Business

Equipment Manufacturing

Steel

Renewable Energy

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Non-public money is the pillar of Cleantech sectors

2006 2007 2008 2009 Q1'10 -

1,000 2,000 3,000 4,000 5,000 6,000

051015202530

1,280 951

3,501

5,332

131

129

27 25

5

Deal Value (US$M) Deal Number

Chinese Clean Tech Companies M&A (2006-Q1/2010)

Chinese Clean Tech Companies IPO Capital Raised (2006-Q1/2010)

In 2009, China/HK accounted for both the greatest value globally from clean tech IPOs (69percent), more than double the U.S. (26 percent) and 53 percent of deals too (17 of 32).

2006 2007 2008 2009 Q1'10 -

500

1,000

1,500

2,000

581(9)

1,659(11)

344 (6) 338 (7)

244(1)

37 (1) 927(6)

Overseas IPO (US$M) Domestic IPO (US$M)

Source: Cleantech Group, ChinaVenture

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If we accept the premise that successful clean tech initiatives at national scale will require close partnership between governments and private sector, how do China and the U.S. compare?

U.S.-China system features

Government-business involvement deeply rooted in development model

2008/9 RMB 4 trillion ($589 billion )stimulus2010/11 RMB 4 trillion ($589 billion) stimulusDirect grants in autoDirect grants in solarState Grid CorpSOE Power CorpsCentral power price managementNon-regulatory controls

Some stimulus fundsSome DOE grantsSupportive capital marketsSupportive private investmentLegislative delays in new regsMarket-based power corpsState-level price managementOnly regulatory controls

Near and mid-term advantage implementing infrastructure

Near and mid-term advantage developing core technologies?

Ideological and structural commitment to free markets and regulator independence

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Comparing China and the U.S., the different models of development, different stages of development, and different resource situations drive differing strategic goals and focuses

U.S.-China system features-- different calculus

• Build infrastructure to mitigate future import/security risks– Crude oil and food grains

• Maintain competitive environment for export economy and domestic growth

• Reduce environmental impact• Incentivize manufacturing capacity for

export value• Indigenize technology to reduce

technology costs to manufacturers

• Seed marketplace to diversify commercial energy options

• Reduce dependence on foreign oil and high risk domestic production

• Reduce environmental impact• Incentivize technology development

for export value• Incentivize manufacturing capacity for

export value• Finance global green growth

commercial operators through PE/VC channels

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There is a consensus around fast growth sectors– but we should reexamine frequently

1. Financial services

2. Healthcare and health sciences

3. Agriculture and food

4. Cleantech (renewables and high tech)

5. Education

6. Entertainment and media

7. Mobile IT

8. Energy conservation

9. Fossil fuels and traditional power

10.Manufacturing

Consensus PossibleAverageBetter than average

Worse than average

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Outbound investment remains dominated by energy and materials

OUTBOUND INVESTMENTS FROM CHINA AND HONGKONG

TWELVE MONTHS THROUGH SEPTEMBER 2010

Totals reported Macro Categories percent totals value totals percent/totals value totals

Consumer Products 1% 346.47 1% 346.47

Consumer Staples 5% 2595.218 8% 2595.218

Energy and Power 27% 13384.541 42% 13384.541

Financials 38% 18971.591 excluded excluded

Healthcare 1% 377.875 1% 377.875

High Technology 1% 446.703 1% 446.703

Industrials 11% 5372.376 17% 5372.376

Materials 16% 7912.434 25% 7912.434

Media and Entertainment 1% 390 1% 390

Real Estate 0% 204.392 1% 204.392

Retail 0% 6.974 0% 6.974

Telecommunications 1% 492.818 2% 492.818

ALL MACRO CATEGORIES 100% 50501.392 100% 31529.801

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• Clean tech now is the most popular VC/PE investment category in China, and the investments continue to increase

• 29 companies received VC/PE investment with total disclosed value of US$784M in 2009

• In Q1 2010, 11 companies have received VC/PE investment with total disclosed value of US$72M. Largest deal in 2009 was one of the largest automobile company, developer of EVs — US$426 million from a domestic PE firm. US$230 million high profile investment in BYD

• The leading deals in 2010 thus far have involved: a developer of LED lighting —US $22 million; and a developer of advanced batteries for large-scale energy storage — US$22 million

U.S. China

Supplier of capital Supplier of energy

Supplier of technology Supplier of environmental products & natural resources (rare earths and special metals)

Leading global producer of innovative clean tech products

Market for U.S. clean tech technology products

2006

/Q1

2006

/Q2

2006

/Q3

2006

/Q4

2007

/Q1

2007

/Q2

2007

/Q3

2007

/Q4

2008

/Q1

2008

/Q2

2008

/Q3

2008

/Q4

2009

/Q1

2009

/Q2

2009

/Q3

2009

/Q4

2010

/Q1

0

100

200

300

400

500

600

0

2

4

6

8

10

12

14

16

VC/PE Investment in China Clean Tech (2006/Q1-2010/Q1)

Disclosed Deal Value (US$ M) Number of Deals

Synergies — U.S. and China enterprises

Source: Cleantech Group

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Synergies — U.S. and China cooperation

Cleantech Joint Venture with Chinese Companies

China and HK 14 percent

U.S. 58 percent

Foreign (non-U.S.) 28 percent

Corporation Description

A power tech company Partnered with a China wind group to design and jointly develop multi-megawatt wind turbines for onshore and offshore markets (May 2010)

World’s largest aircraft manufacturer

Signed collaboration agreement with two Chinese state-owned enterprises to develop a Jatropha-based biofuel with the aim of powering China’s first biofuel flight later this year (May 2010)

A global infrastructure, finance, and media company

Opened smart grid demonstration center in Yangzhou aimed at Chinese utilities; demonstrates grid infrastructure and control and home energy applications (April 2010)

An IT giant Announced plans to invest $40M in creating its Energy & Utilities Solution Lab in Beijing to develop technologies for China’s smart grid market. Expects $ 400M in revenue over the next few years (March 2010)

The venture arm of a chip giant

Announced a partnership with a China sovereign wealth fund, China’s sovereign wealth fund, to invest in technology innovation globally, including clean tech (February 2010)

Major U.S. Corporate Activity in Chinese Cleantech Innovation 2010 — some examples

Series1

-10% 0% 10% 20% 30% 40% 50% 60%

U.S. LPs' Planned Changes to PE China In-vestment Strategy over the Next 2 Years

Decrease or stop investing Expand investment Begin investing

Respondents

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Technology flows are indirectly documented in a number of high and low profile investments, strategic alliances, and government policy decisions

Synergies — U.S. and China benchmark cases

A solar JV with Chinese government in Ordos, Inner Mongolia

A solar technology centerIn Xi’an, Shaanxi Province

Government subsidies to JV automakers

• World’s largest solar farm, to be completed in 2019• 2,000 MW PV Solar Farm, will power 3 million homes • Underscores attraction of Cadmium Tellerium thin film technology over

domestic crystalline PV• Estimated cost: US$5-6 billion

• World’s largest solar research facility & lab• Xi’an city government will reimburse the company for a quarter of the

lab complex’s operating costs for five years• Thin film manufacturing line, a complete crystalline silicon pilot

process, facilities for R&D, engineering, demo, testing and training• Cost: US$250+ million

• The 10th Five‐Year Plan (2000-2005) began the Chinese government's interest the development of EVs — allocated RMB 880 million (US$131 million) for EV Projects

• 11th Five- Year Plan (2006-2010) allocated RMB 1B (US$147M)• In June 2010, the central government picked 15 automakers & JVs

for fuel-efficiency subsidies of RMB 3,000 (US$441) per vehicle

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Agriculture

Air & EnvironmentEnergy Efficiency

Energy Generation

Energy Infrastructure

Energy Storage

Manufacturing/Industrial

MaterialsRecycling & Waste

Transportation

Water & Wastewater

By Disclosed Value (U.S.$ M)

Distribution of Clean Tech Investment in China 2006-2010 Q1

Synergies — U.S. and China

Agriculture

Air & Environment

Energy Efficiency

Energy Generation

Energy Infrastructure

Energy Storage

Manufacturing/Indus-trial

MaterialsRecycling & Waste

TransportationWater & Wastewater

By Number of Deals

Energy generation and transportation are still the key investment beneficiaries, while energy efficiency and energy storage, are important emerging sectors increasingly gaining investors’ attention.

0

10

20

30

40

Most Popular Clean Tech In-vestment Sectors*

*Nu

mb

er

of

De

als

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• China has been able to mobilize substantial amounts of capital and has pressed the indigenous innovation campaign for many years

• Still, the pressing need to address environmental remediation and energy security assures an important role for foreign investment and foreign technology for years to come

• China derives benefits from its well-established government-business alignment but also runs the risks of resource misallocation that is common to economies with strong industrial policies

• The renewable energy build-out in the U.S. is likely to have a larger role for decentralized power generation, net metering, and structured feed-in tariffs; China to have a larger role for centralized, commercial scale generation facilities

• Substantial synergies exist between the U.S. as a technology and finance leader and China as a manufacturing and construction powerhouse. The two systems working harmoniously will play a dominant role in the greening of the globe

Looking ahead — Five key takeaways

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