If We're Not Careful...

China's going to eat our lunch in cleantech.

This was the overwhelming feeling I was left mulling over during my return flight from China last week. I had a great trip, visiting Beijing, Tianjin, Suzhou, and Shanghai over five days as I looked at some new investment opportunities. It was a lot of fun – and I was really impressed by the alignment of government policy and startup-driven innovation that have China poised to lead the world in a number of important cleantech markets.

At this point a Friedman-esque rant on US ineptitude comes naturally – but in this blog post I will instead focus on what China is doing really well right now:

Investment in infrastructure. Many of the big cleantech markets of the future – smart grid, vehicle electrification, distributed renewable generation – require big-time infrastructure investment, and the pace of investment in China right now is astounding. Whether it’s the “mag-lev” train to Pudong airport, the state-of-the-art regional technology centers, the Olympic Stadiums (Bird’s Nest, Water Cube), or just simply the hundreds of cranes and bulldozers you see during the course of a morning commute, the government’s capacity to invest in critical infrastructure is mind-boggling.  In a world where the developed western world is debt-laden, this is a major advantage, and China’s government has proven its ability to swiftly make bold investment decisions.

Government’s strategic focus and resolve. China is determined to become the world’s leader in energy and clean technology. And unlike a western democracy, when China President Hu Jintao makes up his mind, action follows quickly. I was struck by examples of this routinely on my trip, but 2 examples really hit home for me:

• Vehicle electrification. China has announced its 20-city electric bus program, whereby 20 leading cities will have 1,000 EV buses on the road by 2012.  It turns out this is a very shrewd initiative. The key to the EV market is gaining real-world experience – ie miles logged – with vehicles on the road. Buses average 16 hrs/day and maybe 100 miles/day, versus 20-40 miles/day for a car – and with a bus it is easy to collect the actual drive-cycle data from a single owner/transit authority. Therefore, going “buses first” makes a lot of sense. And it’s not like the China bus market is small: by 2012, buses sold in China could exceed 200-300 MWH of aggregate battery capacity, which is roughly the equivalent of the aggregate battery capacity of Toyota Priuses sold in the US in 2009.
• Carbon trading. Though cap-and-trade legislation passed the US House of Representatives in June 2009, and the Obama administration supports the initiative, just this week the US Senate gave up climate legislation in favor of a narrower energy bill. Meanwhile, China moved swiftly into action following the talks at Copenhagen, and on Friday morning I read the announcement of China's rollout of a cap-and-trade system. What is amazing is that China took this step even though, as a developing country, China will not be subject to the same stringent carbon emissions caps as developed countries, even if/when an agreement is finally reached at a successor event to the failed Copenhagen summit last December. China’s utilities and heavy industry will be poised to succeed in what will inevitably become a carbon-constrained world in the future.

Culture of entrepreneurship. I had expected to find a layer of bureacracy and red tape in the way of entrepreneurs in China, whereby startups wait for earmarks and other subsidies to determine a market's winners and losers. I found just the opposite. I found myself feeling very comfortable in meetings with Chinese entrepreneurs and industry executives, as the ways in which they communicated (even if at times in Mandarin!) were very familiar to me. People were direct and transparent, and there was an informality that any entrepreneur in the US would instantly recognize as an important part of successful startup culture. One of my mentors in the venture business once told me, "I can't list out all the necessary and sufficient attributes of a great entrepreneurs, but I know it when I see it." I agree that great entrepreneurs share a certain je ne sais quoi - and I saw more of it in China this week than in any of my trips to Japan or Western Europe.

All in all, it was a fun week in China and I was deeply impressed by the pace and breadth ofinnovation. There is no doubt that the US remains in a class by itself in terms of fundamental research and "ideation", but the winners in cleantech will ultimately be those that ride aggressively down the experience curve and deliver the best value over the long-term. The experience curve in cleantech is influenced by government policy in ways to which US entrepreneurs are not accustomed, and this is where China is determined to lead.