The changing face of Asia cleantech

Miartech represents the next generation of China cleantech. Energy efficiency has become a key facet of government policy but reform hinges on information management: power grid operators need accurate and timely data on how much electricity is being used, when it is being used, and by whom. As a manufacturer of communication chipsets that enable automatic meter reading, Miartech is one of a clutch of firms looking to fill the gap.

Provincial authorities are rolling out smart grid initiatives so local power companies are obliged to buy these chipsets from manufacturers that meet specifications set down by the State Grid. This guarantees a certain level of demand while at the same time limiting the supplier base. Manufacturers must also provide systems support, creating an operational as well as a technological barrier to entry.

Intel Capital was suitably impressed to participate in Miartech's Series B round of funding in November, joining existing investors DFJ DragonFund and Draper Fisher Jurvetson.

This was not the venture capital player's intended approach when it first considered China's cleantech sector. As the VC arm of the world's leading semiconductor manufacturer, Intel Capital was initially drawn to silicon and from that to solar panels. Buying the same raw materials from the same suppliers, photovoltaic cells appeared to offer synergies. It was not to be.

"We found that the fabrication processes were so different from what we do on the chips side that there was not lot of cross-learning," says Richard Hsu, head of Intel Capital's China operations. "So we moved out of solar panels and focused more on computer-intensive solutions for cleantech. Miartech is our first investment in the smart meter market and we see a lot of opportunities in terms of software."

In this sense, the evolution in Intel Capital's strategy mirrors the changes taking place within cleantech itself. Driven in large part by government policy, the investment landscape in Asia has widened. While there is still a place for pure manufacturing models, investors must become more embedded in the supply chain to find value. At the same time, service and systems-oriented solutions, and the infrastructure required to provide them, are increasingly to the fore in markets ranging from electric vehicles to waste-water treatment to energy efficiency.

Change with the times

It is generally agreed that Asia, and China in particular, has the opportunity to lead the world in cleantech whereas in other technology segments it still trails. With more sector funds emerging and an increasing number of generalist funds chasing deals as well, venture capital firms have to define their role in the next chapter of Asia's cleantech story.

Chris Bongars, CEO and founder of regional greentech investment adviser SustainAsia, notes that the sector is unique in offering investment opportunities at either end of the spectrum. "At one end you have localized infrastructure or project finance type investments in clean energy such as mobility solutions," he tells AVCJ. "At the other end you have tech guys from Silicon Valley who target high growth companies that address the global demand and follow an export-oriented business model."

The differences between infrastructure and export plays amount to more than just the application of technology. While a typical IT-oriented investment is structured to grow rapidly on little additional capital once the technology has become established, infrastructure is a long-term commitment that requires ongoing support. In return, it offers stable cash flow but low double-digit returns - an unusual proposition for a standard venture capital firm.

Better Place, a company whose mission statement is to make electric vehicles affordable, is a case in point. Its network and services encompass not only the hardware and software used in the vehicles but also the battery switch stations and charging points that must be installed throughout a community if the system is to function. Better Place has raised around $750 million in funding globally, is operational in Israel and Denmark, and is now seeking capital to launch in Australia.

The company estimates that the electric vehicles business is worth $2 trillion worldwide once the full benefits of energy saving are taken into account. And there are plenty of government subsidies designed to ease market entry. However, Better Place exists in a gray area as far as investment is concerned - too much technology and too much risk for the generalist infrastructure fund and too much of a burden for the standard VC fund.

"There aren't a lot of GPs focused on this infrastructure-related area," says David Jones, executive director of Better Place Australia. "There is a lot of early stage VC for cleantech but not a lot of expansion or crossover capital."

Since they first entered the Asia cleantech space a decade or so ago, venture capital investors have followed a path much like that described by Intel Capital's Hsu. The goal has been to identify a technology that can be easily commoditized and manufacture products at the lowest possible cost.

Solar panels and then wind turbines emerged as the early sweet spots. In both areas, Chinese companies have gone from virtual anonymity to bossing the global market. Suntech Power, Trina Solar, JA Solar and Yingli Green Energy are routinely ranked among the top five photovoltaic cell manufacturers by capacity. Sinovel Wind Power and Xinjiang Goldwind Science & Technology are the second and fourth-largest wind turbine makers.

Each of these firms has received venture capital backing at some point in their development cycle, but the markets have subsequently floundered as supply outpaced demand. By bringing down the cost of technology, participants effectively removed the principal barrier to entry at the low end of the market.

"It is a fairly common investment theme in China: I have a bunch of money and I am going to build capacity faster than my competitors. If I can become the biggest player out there then I will be the survivor," adds Hsu. "That's fine but it's not an investment strategy we would sign up to."

The question is how far venture capitalists are prepared - or need - to stray out of their comfort zone.

Speaking at the AVCJ Asia Investment Forum in November, Richard Youngman, the Cleantech Group's managing director for Europe, the Middle East and Asia, was skeptical. A fan of Better Place's infrastructure approach in so far as it offers an innovative solution to an industry-wide problem, he questioned its suitability to Asia. The company's business model is disruptive - it is seeking to change the way an industry works - but not yet proven; investors could see huge returns, yet there is still an element of uncertainty.

"In Asia it seems to me that most people aren't looking for hugely disruptive technologies," Youngman says. "They are looking for things that work and want to get them to market, to revenue and profitability, and then to exit in a relatively short period."

Solar cell and wind turbine manufacturers have the strongest track record in this area. According to AVCJ Research, there were 25 venture capital-backed cleantech IPOs between 2003 and 2011, and the solar segment accounts for 20 of them. Although there were only three wind IPOs, Sinovel and Goldwind occupy the top two spots and generated over one third of the total capital raised. Needless to say, Greater China dominates, with 19 offerings from mainland-based issuers and four from Taiwan.

Trade and open market sales are distributed more evenly between China, Australia and India, but solar and wind still account for two-thirds of the transactions for which AVCJ has records.

Out with the old?

The concern is that venture capital firms will stick with what they know works and remain routed in export-oriented manufacturing. Youngman notes that the real danger is trying to copy from the IT world, where only certain principles readily transfer: rolling out the same solution in different places doesn't necessarily apply. "Asia will be significant in cleantech because the solutions will be specific," he says.

The VC practitioners who spoke to AVCJ believe they are on the right track simply because they are being more specific. Intel Capital's Hsu can point to Miartech, while Eric Wang, managing partner of Grand River Capital, cites the recent spate of investments in LEDs, batteries for electric vehicles and energy management systems - many of which were prompted by successful exits in these areas by US investors - as evidence of greater specialization.

"In solar there has been a movement away from panels to the systems level - for example, we have been looking at the inverter space," Wang says. "In batteries, people were talking about cell manufacturing but now they are going into materials and monitoring systems. In LEDs, people were looking at low-end packaging for batteries but now they are focusing more on high-end optical capabilities."

Pure infrastructure plays along the lines of Better Place don't appear to be so popular - the Chinese government has promised to provide much of the fixed assets - but batteries are seen as a way to leverage the rollout. A stable, high-energy density battery is difficult to produce but offers better gas mileage and therefore lower operating costs.

Backed by GSR Ventures, Oak Pacific Investment Partners and Foundation Asset Management, as well as a raft of government incentives, lithium-ion battery maker Boston-Power announced in October that it would relocate its operational headquarters to China. GSR and Grand River Capital are also investors in Aleees, a lithium-ion battery manufacturer that is working with Siemens and ZF Germany on electric public buses in Taiwan and has plans to reach into mainland China.

Although many of these investments purposely target market segments that place a premium on technological value-add and are therefore not immediately liable to attack from low-cost competitors, they still rely on mass production and global patents. It is unclear how venture capital firms will fare as cleantech moves deeper into services where the IT proficiency is one of a number of considerations.

The specialists

All venture capital professionals need to recognize a sustainable business model when they see one and identify management teams capable of executing strategies, but is there a point at which cleantech becomes so specialized that a generalist financial investor hits an intellectual ceiling?

Yes, says Bongars of SustainAsia. The development he envisages in energy efficiency, for example, is tailored solutions for certain industries with the providers having one foot firmly in the utilities space or the industry segment in question. "If you come from an IT background you don't necessarily understand the underlying tangible assets or infrastructures" Bongars explains. "In some specialist areas, we only talk to talk to existing asset owners because financial investors don't understand it. Then there are deals we would show to corporate VCs only."

A number of independent venture capital firms are already carving out niche markets. Earlier this year, Singapore-based Swiss-Asia Financial Services launched the China District Energy Fund, a EUR500 million ($637 million) infrastructure vehicle with the sole aim of investing in combined heat and power (CHP) plants. This area was singled out for its energy efficiency, good fit with government policy, ability to generate steady cash flow, and suitability for trade sale exits.

Those that follow suit will inevitably find themselves rubbing shoulders with strategic investors, either directly or through their VC units. As a result, target companies must weigh up the merits of financial and strategic investors and assess the impact on the pace of development, availability of fresh capital, level of control that must be ceded, and potential exit options.

In some cases, an emerging cleantech firm might be swallowed up by a corporate without the VC community hearing about it; in others a VC player might participate as a co-investor in order to share the risk. Either way, there is no ignoring the fact that strategic investors are likely to play an increasingly influential role as the sector becomes more specialized.

"What I am seeing is a hunger among companies in the West to be relevant here," the Cleantech Group's Youngman observed. "Three or four years ago, if I invited people in Western cleantech to come and see what is happening in Asia, a lot of GPs would have come. Instead I have with me a group made up of large corporates."

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• Topics
• Cleantech
• Venture
• Technology
• Early-stage
• Expansion
• Greater China
• Asia
• Cleantech
• Venture
• Growth capital
• Intel Capital
• Grand River Capital
• SustainAsia
• Draper Fisher Jurvetson
• TMT
• energy