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The latest cleantech VC: China

Will the Chinese government make a good cleantech VC? The government recently announced a plan to invest directly or through venture capital funds into startups that are developing technologies including clean power and green cars.

The Ministry of Finance posted a policy statement last Friday outlining its criteria for pumping up emerging technology development in the country. The criteria spell out what types of startups will qualify (founded no more than five years ago, for example) and what kind of venture capital funds might attract government participating (each equity fund must have a minimum of 2.5 billion yuan, or $391 million).  The government said, in general, it wants to contribute no more than 20 percent of a fund, and it doesn’t want to stay in a fund for more than 10 years.

China’s VC and startup ecosystem, and its government support of it, isn’t something new. But the new policy statement highlights once again China’s ambition to become a technology powerhouse. It also underscores the concerns raised by many U.S. officials and venture capitalists, including Energy Secretary Steve Chu, that China is on an earnest march to take over from the U.S. as a leader in science and technology innovations.

China is already the biggest solar panel producing country in the world, and the government has announced plans to help finance gigawatts of solar farms in the country. It also appears to be a promising market for energy storage and electric cars, though those technologies have yet to make an impact there.

The Chinese government’s support for cleantech echoes the views of some private investors, including those outside of China. Hudson Clean Energy Partners announced in July it was raising a fund in China, though it hasn’t said how much. China-based Green Capital Group launched a cleantech fund of 5 billion yuan back in 2009.

Should governments act as VCs?

The Chinese government’s plan to play the VC role comes at a time when the U.S. government is facing strong criticism for its support of startup cleantech companies. The energy department offered solar panel maker Solyndra a $535 million loan to build a factory in 2009, and the company, which used up most of that money, filed for bankruptcy last week.

The Fremont, Calif., company said it couldn’t compete when manufacturers, particularly those from China, were able to raise a lot more money to expand manufacturing and lower the prices of their solar panels much faster. The company restructured its debt with the government once earlier this year, and apparently was seeking to do so again. But the DOE said no just a day before Solyndra announced it was going out of business.

Investing in startups will always be a risky proposition; Solyndra raised more than $1 billion from private investors, which will not see the big payday. But the federal loan, which was part of a larger effort to create jobs and promote a variety of cleantech research, manufacturing and installations, has raised questions about the government’s role in science and technology development.

The result of our public opinion poll (GigaOM Pro, subscription required) about Solyndra showed that people have conflicted feelings about where and how the government should spend the money to promote cleantech innovations. Many both criticize the DOE for putting up the money while pointing out that China has been doing the same for its domestic manufacturers and at a greater scale.

Some critics say government shouldn’t help companies build factories or solar farms but instead focus on early-stage or basic scientific research. But the government can still be seen as favoring one technology over another by putting money into research projects. Besides, the DOE has offered loans and loan guarantees to projects using a wide range of technologies, in addition to funding clean research and development through a separate program called SunShot.

While the American public and policy makers debate the extent of the government’s involvement in supporting cleantech, China will roll ahead with its own plans. Those plans don’t guarantee that China will successful (corruption and inefficiency are two big problems), but they will still likely provide a nice boost for its startups.

Images courtesy of Suntech Power, BYD

4 Responses to “The latest cleantech VC: China”

  1. Even before we ask if governments should act as VCs, we should ask if governments should continue to distort the playing field against renewable energy by subsidizing the oil industry with $80 billion per year in tax breaks (for example). This change would create a new landscape where we’d have a better understanding of how much support renewable energy technologies need.
    Regarding NorskeDiv’s comment on environmental laws, I believe we need to legislate to protect all US industries facing unfair competition due to weaker environmental rules abroad — after China and others, more countries will show up with weak regulations. And the answer is *not* to transfer environmental rule-making from the Federal level to the state level — that’s only a trick to get states to compete against each other and weaken their laws in a race to the bottom. States should be allowed to augment Federal regulations in some areas. For instance, many states require some percentage of local content for PV equipment they buy or pay incentives on.

    • Well, there you go. While we criticize other countries for their unabashed reliance on fossil fuels and creation of environmental problems, we are not above doing the same. The phrase “protect all U.S. industries” is loaded, though. The government has tried to do that by offering financial support for different segments of the renewable industry because the industry couldn’t lined up the big loans that Chinese companies were able to secure. That was an attempt at leveling the playing field, and obviously it’s easier said than done. You can tax imports, but if American manufacturers can’t line up money to build factories, where will American-made equipment come from?

  2. NorskeDiv

    How do you compete when a Chinese solar panel manufacturer simply pays some “contractor” to dump the hydrogen flouride in the nearest river where a western manufacturer must sink 30-40% of their costs into treating that waste?

    Green energy startups, especially solar panel makers, are a dead end for the United States unless we slap tariffs on foreign goods based upon the environmental impact of the manufacture of them. Either that, or the Chinese people get sick and tired of being poisoned by the billionaires of their country who are becoming filthy rich by breaking every single Chinese environmental regulation. Given the structure of Chinese government and media, the latter is impossible, so the former remains the only option.

    • I think the Chinese (central) government is trying to fix environmental problems. But it will take a while. It’s a big country with many regional and local governments that have their own interest to protect. The U.S. went through its own environmental nightmares with polluted water and air, etc, and that led to tougher/new laws such as the Clean Air Act. This is not to say that it’s ok for China to move at a glacial pace, but I don’t believe the status quo will last forever as you suggested.