China road trip exposes list of uninvestable assets in the West
Global clean-tech dominance has not necessarily meant profits for Chinese firms
[LONDON] Venture capitalists (VCs) in clean tech are starting to say out loud what they have suspected for a while: China’s dominance has left key sectors in the West uninvestable.
A group of eight VCs from Western firms agreed to share with Bloomberg the details of a July road trip across China during which they visited factories, spoke with startup investors, and interviewed founders of companies.
They knew China had raced ahead in sectors such as batteries and “everything around energy”, but seeing how big the gap was firsthand left them wondering how European and North American competitors can even survive, says Talia Rafaeli, a former investment banker at both Goldman Sachs and Barclays who’s now a partner at Kompas VC.
“Everyone needs to take this kind of trip,” she said.
As financial professionals prepare to gather in New York for the city’s annual climate week, they will need to address the reality that China, the world’s largest source of carbon emissions, is now the strongest motor guiding the planet to a low-carbon future. While US President Donald Trump axes the green policies of his predecessor and Europe gets caught up in a regulatory stalemate, China is quietly making a number of transition sectors impenetrable to Western startups.
The VCs Bloomberg interviewed do not have mandates to invest in China directly. Instead, their goal is to avoid allocating funds to Western startups that cannot compete with Chinese peers. They plan to use climate week in New York to talk about little else.
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Planet A Ventures, a Berlin-based VC, has decided that investments in Western startups spanning battery manufacturing and recycling, electrolysers, solar and hardware for wind are no longer viable, said Nick de la Forge, general partner and co-founder of the firm. He said that before the trip, he’d suspected China was way ahead, but after going there, those sectors are now “strictly off the list”.
Yair Reem, a partner at Extantia Capital, said that the trip has already led his firm to halt investments in Western battery cell manufacturers. Instead, they will look for ways to collaborate with Chinese firms across supply chains. When it comes to battery manufacturing in the West, China’s dominance means it’s now “game over”, according to Reem.
Ashwin Shashindranath, a former Macquarie Group managing director who’s now a partner at Energy Impact Partners, says what he saw on the trip made it “very clear” that Western investors live “in a bubble” in their misconceptions about China.
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Al Gore, the chairman of Generation Investment Management and former US vice-president, said that China’s supremacy in the energy transition is now leading “many nations” to consider closer ties with the country. He describes America’s retreat from transition technologies as a “tragedy”.
China manufactures about 80 per cent of the world’s solar panels, supplies some 60 per cent of the planet’s wind turbines, 70 per cent of its EVs and 75 per cent of batteries, all at a lower financial cost than the West.
What’s more, China’s share of global clean energy patents stands at around 75 per cent, while the country dominates the supply chain for the critical minerals that underpin many green technologies.
And China’s notorious 996 model (work from 9 am to 9 pm, six days a week), though officially banned, still appears to shape labour market norms, according to the VCs Bloomberg spoke to.
Irena Spazzapan, a former Goldman Sachs commodities executive who now runs Systemiq Capital, said that China’s advances in renewables are all down to its ultimate goal of energy independence. The country “has prioritised energy security above all else”, she said.
For now, China remains the world’s largest consumer and producer of coal, and Western politicians have accused it of winning the clean-tech race at the cost of environmental and human rights protections.
Miranda Schreurs, chair of climate and environmental policy at the Bavarian School of Public Policy, says “there are certainly reasons to be concerned”. Yet the reality is that China is “jumping into the vacuum left by the United States with its rejection of climate science and international development assistance”.
Global clean-tech dominance has not necessarily meant profits for Chinese firms. Beijing has been phasing out subsidies such as the feed-in tariffs that had guaranteed high prices for renewable power. That’s as over-production has driven down prices to near break-even levels.
Spazzapan from Systemiq said that shareholder interests in China “have been largely disregarded, with chronic overcapacity and relentless price wars eroding company equity”.
It’s a system that favours “scale over profitability”, she said.
For companies and investors caught in the fray, it’s been “total misery”, said Dan Wang, research fellow at Stanford University’s Hoover History Lab and the author of Breakneck. China’s model relies on “a lot of state power, a lot of consumer power, but not very much financial investor benefit”, he said.
China’s willingness to let companies fail in droves creates “real social costs”, said Gernot Wagner, a climate economist at Columbia Business School. “But it works to create global champions that dominate the market.”
De la Forge at Planet A Ventures said seeing how far China takes corporate Darwinism was a “revelation”. Only “the strongest players survive”.
Meanwhile, the VCs were able to see up close how China is rapidly onshoring entire supply chains.
Gang Lin, the founder and chief executive of Marvel-Tech, a Shanghai-based developer of technology for zero-emissions power generation, said that he’s been able to find local suppliers at every turn, with many willing to adapt their own manufacturing processes to help.
The company, which has existed for roughly a decade, is developing a tri-fuel gas turbine capable of burning hydrogen, ammonia and natural gas.
Many of the companies the VCs visited are now looking to escape China’s price wars by ramping up exports.
GCL Perovskite, part of the GCL Group and with investors including Sequoia China and Temasek, makes next-generation solar modules. The company is working on being “globalised as soon as possible”, said chairman Fan Bin.
Another takeaway was how Chinese startups focus on incremental technological advances rather than on major disruptions to the status quo, according to the VCs.
Companies start with “the stuff that’s easier to market, to digest and to get to scale”, and then “do the crazy sh*t”, said Reem at Extantia. That’s “the opposite to what the West does”.
It’s a model the VCs say they saw repeated everywhere they went on a tour that also brought them to some of China’s biggest clean-tech firms.
That includes a stopover in Ningde to get a firsthand impression of operations at Contemporary Amperex Technology, the world’s largest manufacturer of lithium-ion batteries.
“We just saw the most automated, most advanced manufacturing line, and they had 12 of them in parallel, and many more around them,” said Jacob Bro, co-founder and partner at 2150. “And when you see that, you also just realise that catching up to that is futile: it’s not going to happen.”
Europe’s hopes of producing a world-leading battery giant sank with Northvolt, which has sought Chapter 11 bankruptcy protection in the US and also filed for bankruptcy in Sweden.
Today, Bro said: “If you want to build something like a Northvolt in Europe, you should invite these guys over and do it with them.” BLOOMBERG
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