2022 preview: China sustainability

“Carbon neutrality” has emerged as a buzzword in China’s venture capital community. It stems from the government unveiling its “dual-carbon” goal last year, which involves reaching peak carbon consumption by 2030 and achieving carbon neutrality by 2060. The clock started in 2021, but the impact will be more obvious in the coming year.

Investors are readying themselves in different ways. Sequoia Capital China and CICC Capital have both launched their carbon neutrality funds with industry partners, while Lightspeed Capital China has gone as far as to rebrand itself – in Chinese only – as Lightspeed Photosynthesis, reflecting its new focus on green-tech.

Private equity and venture capital investment in cleantech (including electric vehicle manufacturers) is $5.4 billion year-to-date, while another $1.3 billion has gone into renewables, according to AVCJ Research. The overall total of $6.8 billion represents a record high, surpassing the previous two years combined.

Investors refer to the recent boom green-tech, rather than cleantech, to distinguish it from an earlier epiphany in 2000-2010. Last time around, renewable energy subsidies were in full force – at home and overseas – and capital went into solar panels and wind turbines. Today, subsidies are no longer required because technology-enabled progress has made solar cheaper than conventional energy.

In other words, investors regard green-tech as a promising commercialization and technology landing opportunity.

“Climate change is one of the two major challenges for the entire world,” says James Mi, founding partner of Lightspeed, adding that the other is inequality. “No single country can conquer it alone; it requires global cooperation. Everyone is looking for technological solutions and Chinese companies have a leading position in battery and solar technology.”

Nio Capital, a specialist investor in the space, claims that EVs will replace mobile phones as the epicenter of innovation and wealth creation for the next decade. Certainly, a lucrative ecosystem is developing around vehicle manufacturers and their component suppliers.

Rather than take a whole-supply-chain approach to EVs, investors are expected to identity attractive niches in upstream and downstream segments. Mingming Huang, founding partner of Future Capital, is an advocate of emerging opportunities in semiconductors, sensors, in-vehicle internet, and smart cabins.

However, most of the capital is targeting batteries. Even with cost reductions, batteries can represent 35-40% of the overall cost of an EV. Series A and B rounds for Svolt, a battery spinout from Great Wall Motor, account for one-third of all cleantech and renewables investment in 2021 to date. Investors are also looking at next-generation battery technology and new battery materials.

The battery opportunity stretches far beyond EVs, according to Kate Zhu, who leads Huaxing Growth Capital’s EV and autonomous driving value chain coverage. Energy storage devices, such as batteries, will become the basic unit of China’s future energy ecosystem.

“When clean energy replaces traditional fossil fuel energy, the entire energy system will be reshaped. Solar and wind power generation are affected by natural conditions – sunlight, wind strength – and are therefore inherently uncertain. But downstream application scenarios require stable power. Batteries will become a major link in making supply and demand match up,” she says.

Between 2030 and 2060, the renewables share of China’s primary energy consumption needs is expected to rise from 18.5% to 59%, with solar and wind combined going from 8% to 38%. This gives context to private equity investors endorsing not only storage as a key opportunity within clean energy, but also energy dispatch and management systems.

Li Zhang, a partner responsible for Cathay Capital’s smart energy strategy, adds hydrogen energy to his list of priorities, citing its applicability to commercial vehicles. “After refueling once, it can run 1,000 kilometers, which solves the problem of inter-city long-distance transportation,” she says.

Frankie Fang, a founding managing partner of local fund-of-funds manager Starquest Capital, echoes these sentiments. He is optimistic that a hydrogen battery company will emerge of similar size to Contemporary Amperex Technology (CATL), a Shenzhen-listed EV supplier that has seen its market capitalization grow more than sixfold to RMB1.58 trillion in the past 24 months.

Others, however, are adopting a wait-and-see approach. “We adopt so-called end-game thinking when considering this issue,” explains a cleantech-focused GP. “The state is pushing hard on hydrogen development, offering subsidies. But in the end, it must still compete with other energy solutions, and prove it can be sustainable without subsidies.”

Assessing opportunities based on their long-term commercial potential rather than near-term government support is likely to become an established trend, given the level of alignment between green-tech and policy. In this sense, there are similarities with hard-tech.

“This round of cleantech investment has two characteristics. First, it is consistent with the development of cutting-edge technology. Second, it pays more attention to companies that have their own R&D capabilities rather than ‘assembly and optimization’ businesses,” says Starquest’s Fang.

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• Topics
• Greater China
• Expansion
• Early-stage
• Cleantech
• China
• Starquest Capital
• Future Capital
• Nio Capital
• Lightspeed Venture Partners
• renewable energy
• green-tech