Venture investment in China's cleantech industry promising but challenges remain - industry insiders

By Jing Yang

Beijing. December 4. INTERFAX-CHINA - Despite the optimism expressed by venture investors in China's cleantech industry at a forum held in Beijing yesterday, investors maintain that various challenges still need to be resolved if further large-scale development of the industry is to go ahead.

Cleantech involves services and products that apply technologies ranging from alternative forms of energy generation, such as wind, solar power and biofuel, to smart materials and water treatment, with the ultimate aim of improving efficiency and productivity while limiting ecological harm.

Cleantech is ranked the third largest recipient category for venture capital investment in China at present, led only by information technology and communications, according to a report compiled by Cleantech Network LLC, an organization comprised of industrial investors, entrepreneurs, service providers and policy makers.

The cleantech industry in China will see robust growth in the future for two key reason, according to Christoph Loeslein, CEO of the energy and environment division of London Asia Capital, a UK-based but Asia-focused investment company.

Loeslein said that government-set targets to improve energy efficiency and reduce carbon emissions will lead to potentially huge domestic demand, while Chinese companies can also become major cleantech exporters, especially in global markets with high demand like wind power, as their technologies mature.

However, China is significantly lacking investment in basic research and development, which will bottleneck the industry's further development, Loeslein said.

This view was echoed by Gary Rieschel, managing director of Shanghai-based Qiming Venture Partners, who said that the creation of a sound intellectual property protection system is essential for bringing in more foreign alternative energy and water treatment technologies, as well as encouraging greater local innovations.

Riesechel said however that planting the seeds of innovation is a gradual process, and that it took the United States 15 to 20 years to achieve similar goals. "We need to make the urgency of innovation heard, but we also need to be patient," Rieschel said.

At the same time, the Chinese government is very conservative when it comes to foreign investment, by only allowing foreign partners to hold minority stakes in most joint ventures, and disallowing individual companies from deciding their own sharing holding structures, Rieschel said.

The rapid development of renewable energy seen in some European countries, such as wind and solar power in Germany, has been coupled with long-term and stable incentive systems created and maintained by national governments, London Asia Capital's Loeslein said. More work is still needed to put such systems in place in China, Loeslein said, adding that with the resulting guaranteed profit margins, foreign investors would be more interested in putting money into China's cleantech industry.

China's lack of water resources will likely delay the development of some projects in the domestic cleantech industry that require large amounts of water, such as hydropower and clean coal, Frederick Long from Olympus Capital said.

The importance of such resource scarcity was highlighted by the fact that both the Cleantech Network report and industry insiders agreed that water treatment and energy efficiency projects have the greatest potential to become the leading investment category for cleantech in China.

Total cleantech venture investment in China will reach approximately $600 million in 2007, and is expected to surpass $700 million in 2008. Venture investment in water-related cleantech could reach $100 million in the Chinese market next year, while energy-related venture capital is likely to climb to $500 million, according to the Cleantech Network report.

China aims to cut energy consumption per unit of GDP by 20 percent by 2010, or 4 percent annually, as well as emissions by 10 percent for the targeted period. The country reduced its energy consumption per unit of GDP by just 1.23 percent last year, only one-third of its original target.

However, Qiming Capital's Riesechel believes that it will matter little whether or not China hits such targets, as investment will continue to flow into China's cleantech industry as long as such targets are in place.