Plotting the future of China cleantech

The sector is unique in offering investment opportunities at either end of the spectrum. A venture capital or private equity practitioner could do anything from project finance-style mobility solutions for particular localities to setting up a wind turbine production line and label it cleantech.

But in one area there is general agreement. The first wave of China cleantech came by virtue of low-cost labor; the next wave must come by other means.

There are two reasons for this - policy and economics. On the policy side, China's 12th Five-Year Plan, covering 2011-2015, is the most aggressively green planning document the country has ever produced. It includes commitments to reduce carbon and energy intensity, protect forests, minimize industrial pollution and promote industrial efficiency, curb motor vehicle emissions and encourage recycling.

The environmental agenda is also closely aligned with wider technological goals. The government has identified pillar industries such as new energy, environmental protection, biotechnology, advanced machinery, IT, new materials and new energy cars. Taking these industries contribution to GDP from 5% to 15% by 2020 will make the country cleaner but also make it more technically adept and value-oriented.

It is clear that Beijing will offer incentives to cleantech solutions that prioritize brain over production line brawn.

As for economics, a host of renewable energy specialists delivered strong returns for the VC backers in the past decade. Suntech Power and Yingli Green Energy among the photovoltaic cell manufacturers and Goldwind and Sinovel among the wind turbine makers have established themselves as global powers by taking established technologies and driving down the output costs.

Although some VC investors say they continue to eke out value by pursuing ever more sophisticated niches, the model can't necessarily be applied to the next wave of technology change.

The principal issue is labor cost. Wages are escalating in China, faster than companies can climb the value production value chain. A solar panel manufacturer with 10,000 employees that is called upon to raise salaries by $1,000 per head every year stands to see a $10 million addition to its bottom line. In these circumstances, long-standing competitive advantages soon begin to ease.

Elsewhere, venture capitalists say salaries are already less of a concern. Properly functioning LED and lithium ion battery facilities - two areas that have become immensely popular with investors in the last couple of years - are far less labor intensive. The reality is that China is on course to emulate Japan: fully automated production lines staffed by one person per shift whose principal task is watching a screen.

Rapid changes in technology require swift responses. Buoyed by policy momentum and capital, the wheel is turning - cleantech remains one of relatively few industries in which China has genuine hopes of becoming a value-added leader.

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• Topics
• Cleantech
• Greater China
• China
• Cleantech
• Venture