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Cross the Rubicon

Helping Your Company Sell Into, Raise Capital From, and Find Partners in Emerging Economies

Cross the Rubicon - Helping Your Company Sell Into, Raise Capital From, and Find Partners in Emerging Economies

America’s Choice: Protectionism or Competition?

Over at today’s Asia Times, my column on how China’s embrace of CleanTech sets a challenge to American policy. Should the United States pursue protectionism or competition? The answer could well shed light on more than just America’s ability to compete in this area, but the country’s more general policy malaise in the face of modern globalization.  More here.

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Raising Capital & Finding Partners in China

China has long been an investor in America, as everyone who points towards the country’s significant holdings of US Treasuries, is eager to make clear.  China’s investment in Treasuries is, however, something of a necessity given the country’s currency exchange mechanism and the role of Treasuries as a fiat currency in their own right.  The much bigger opportunity is for American companies to raise capital in China for projects that will be rolled out in the United States.  To see America become an even more important destination for outbound investment from Chinese companies (whether SOEs or privately owned) would send a clear message to both Beijing and Washington DC about globalization by further connecting our two economies.

            During our meetings last week, we had the opportunity to see what it means to raise capital in China from at least two of the absolute best venture capital funds operating in the CleanTech space within China, Chyrsalix and Tsing Capital.  CleanTech in China is such a pressing priority because the country’s energy demands cannot be met through conventional means without further damaging the environment (if, in point of fact, it would even be possible to meet China’s voracious energy demands through conventional sources of power).  Consequently, China has aligned its national strategies and local implementation around the concerted desire to become the world’s easiest place to scale up new CleanTech operations.  Capital is more plentiful, deal flow much stronger, regulatory barriers much lower, and incentives to get to scale much greater in China than anywhere else in the world.  As China’s CleanTech market inches towards what I suspect is a global critical mass where the country becomes the unquestioned leader in this realm, several entrepreneurs on our trip pointed out that China will also become more interested in CleanTech investments outside its borders.

Other companies, eager to find new sources of capital, may have to actually come to China in order to raise funds.  In other words, while some Chinese capital may be willing to be put to work outside their borders, for today, most is going to want a degree of oversight only possible if the investment takes place in China.  This forces the question of how to manage the risks of taking your business to China, in particular in a field where proprietary technology is at play.  The solutions we heard about last week were very innovative and ranged from what pharma is doing as they export drug discovery to lower cost Chinese contract R&D companies (compartmentalize one part of the drug molecule to one contractor, another to a second one, etc., etc., then bring the research together state-side), to the insight one venture fund partner offered last week that successful capital raises in China will require you to “become a Chinese company.”

What did he mean by that?  As he put it, the best way to protect your investment when you come to China is to become as thoroughly intertwined with the local culture, government and research institutions as is possible.  To him, this meant finding the right Chinese advisers and getting them either on the board or otherwise invested in seeing your technology be protected and further invested in; the right funders and partners who have the right relationship with the best pinch points in the Chinese government.  This is admittedly an uncomfortable piece of advice because at some level it acknowledges the calculus in China is you leverage relationships where laws, regulations and enforcement remain ambiguous means of protecting your business.  However, as American companies seek out new capital partners in China, they have little choice but to embrace the tangible and intangible challenges of becoming Chinese.

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Take Your Technology to Africa

This week has been jam-packed with a truly wonderful set of CleanTech meetings coordinated by the Trade Development Alliance of Greater Seattle.  Composed of an interesting group of angel investors, trade specialists and entrepreneurs, our group has had a first-rate exposure to what is happening in China for the CleanTech market. Over the next several posts, I will try to draw out some of the top-level insights that struck me about what we saw and heard.

Earlier this week, we had a good meeting with Prudent Energy, manufacturers of VRB (Vanadium Redox Batteries).  Originally technology developed in Vancouver, the company’s IP was sold to a Chinese business where it has taken on new life, due in no small part to China’s voracious appetite for new technologies that will allow it to create, store and disperse energy.  The technology itself is quite interesting (the electrolyte offers almost unlimited charge and discharge capabilities, can sit idle for long periods without energy loss, but is not particularly energy dense, meaning it requires larger and larger spaces for increased storage capacity).  But, what I found even more interesting was some of the applications Prudent had been able to find; specifically, their installations in Nigeria with Safaricom and in Kenya with Winafrique.

The problem Prudent solved in both Nigeria and Kenya was one that does not face developed nations:  how to get power to telecom towers in remote parts of the country.  In Africa, where mobile phone adoption has grown exponentially over the last decade, getting power to these telecom stations has become a critical infrastructure engineering challenge.  The solution Prudent offers is simple and elegant in its own right; what is equally laudatory is finding this application in the first place.  I found myself wondering how comfortable Western businesses are finding these sort of opportunities in undeveloped economies like those in central and western Africa?

How we as businesses engage in the sort of early-stage missionary activity like that which opened Prudent to opportunities in Africa remains something every management team should be considering.  How can your company free up the time to let someone in your organization wander?  Who is willing to do this sort of tip-of-the-spear work?  Many businesses in the west are extremely efficient – something that Chinese business cannot say – but in their pursuit of efficiency they have lost touch with their more entrepreneurial roots.  A successful future for your business means finding a way to get re-acquainted with the spirit of wandering and exploration that likely helped found your company.  Looking at Prudent Energy, a formerly Canadian company that is now based in China, I see much of this willingness to wander and explore, something that holds a critical lesson for American business as well.

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Too Much, Yet Not Enough

Analysts of China’s macro-economy can be pretty easily split into two camps:  the optimists (bulls) versus the pessimists (bears).  Optimists point towards China’s impressive record since the country opened to outside investment and essentially suggest that any short-term instability in the Chinese economy is to be expected and should not be understood as paving the way for societal collapse, political revolution, and the nationalization of economic actors.  Pessimists point towards what they see as massive overinvestment in infrastructure and the beneficiaries of Beijing’s much-lauded Five Year Plans as signs that the country has wildly misallocated capital and that ultimately, this will catch up with the country in ways that are likely to lead to political instability.  I’m more of a middle-of-the-road analyst who thinks that you can be a long-term bull but short-term bear on China.

 

Cumulatively, the conversation can be very frustrating:  for every sector-specific specialist who points to over-building in the portion of China’s economy he or she has studied, is a sector-agnostic generalist who acknowledges these problems do exist, but points towards China’s 1.3 billion potential consumers and the huge untapped market in China they represent as signs that the country can ultimately absorb almost any inefficiency.  If the reasoning of the latter reminds you of the mindset of certain housing bulls from not too long ago in America’s own economy, good, it should.  China is different in many ways, but it is still an economy built by and run through human hands (if not more so than in Western economies).

 

The country’s top-down Five-Year Plans identify what Being calls its strategic emerging industries (SEIs).  The fifth SEI in the most recent Five-Year Plan is what Beijing identifies as its “New Energy Industry.”  As part of the plan, Beijing aims to “Construct industrial bases for new-generation nuclear power equipment, large wind power generating sets and parts, new assemblies of efficient solar power generation and heat utilization, biomass energy conversion and utilization technologies, and intelligent power grid equipment, and implement exemplary large-scale application projects of marine wind power, solar power, and biomass energy.”

 

One of the sectors where this dynamic of over-capacity and over-investment is most at work is clean-tech.  In a nutshell, China’s investments in this sector are too much, yet not enough.  While attempting (and achieving) its goal of being the world’s leader in clean-tech, the short-term reality is that the country has both over-invested in pursuit of this goal while also coming up so short that current environmental problems hold the potential to unseat the government’s tight control over the civilian population.  If you think this is a misrepresentation of how bad the problem is, take a look at some video shot this week in Beijing (actually, don’t, because in the 24 hours since Jim posted this the Chinese government caught it and took it down; rather, the picture from Jim’s Atlantic magazine blog will convey the seriousness of the situation).  Keep in mind, as Jim Fallows puts it, that this is not the sort of smog you might encounter on a misty Pacific Northwestern morning.  No, this is the sort of micro-particulate pollution that is deadly.

Here’s the conundrum that captures so much of the over-arching disagreement between China bulls and bears:  the country desperately needs clean-tech, but in its pursuit of clean-tech answers it has badly misallocated capital, over-invested in many (if not most sectors) and made these choices perhaps too late and without the invisible hand of the market to act as a guide to the government’s own approach to solving the problem.  Regardless of these concerns, in the short term, many clean-tech entrepreneurs have rushed to China.  Capital is cheaper for them there, easier to raise, and resources are aligned in such a way that they can get pilot plants to scale much faster than anywhere else in the world (the United States included).

 

For 2012, most analysts believe China will go to extraordinary lengths not to rock the boat.  The country’s leaders will do whatever they need to in order to ensure the planned fall 2012 transition of power for the Party Congress and General Secretary take place according to plan.  Underneath their pursuit of stability, look for cracks to begin showing in clean-tech sectors where technology is more science than engineering, and where other cheaper avenues exist (i.e. expect China to continue to evolve its traditional clean coal and nuclear power plants at increasingly higher speeds than it does its wind or solar plants, even though the latter are SEIs).  Once 2012 is over, I would anticipate other clean-tech sectors (batteries, electric automobiles) to begin to reel as Beijing goes about stabilizing its shaky economy by allocating as many resources as it can to healthcare spending and incentives to encourage the Chinese consumer to spend money.  As Beijing pulls away government incentives, a lot of good technology and key research is going to come on the market cheaply.  Smart money is going to sit on the sidelines during 2012 and look for some great bargains in the clean-tech sector in 2013.

 

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