China: A clean-tech gold rush? Valley sees big market

ZHANGJIAGANG – Sam Huang has found a new land of opportunity for Silicon Valley – in the shadow of a giant smoke stack in the Yangtze River Delta.

Dressed in a black designer suit, with a Treo attached to his ear, the executive with San Jose-based Echelon, whose smart-building technology is usually associated with gleaming high-rises, paid a recent visit to a new client: China’s third-largest steel mill. The plant is trying to go green by using Echelon’s products to reduce the energy consumed to forge steel and iron to feed China’s around-the-clock construction craze.

Less energy used means fewer tons of coal burned to produce electricity. At the Jiangsu Shagang Group, a vast complex located 100 miles west of Shanghai, that saving could be as much as 65,000 tons a year. It is a tiny step for cleaner technology – and clean air – in a nation that is building coal-fired power plants at an assembly-line speed of one a week.

Silicon Valley companies, which first looked to China to manufacture PCs and iPods, now see potential profit in its environmental meltdown.

They see opportunities to sell a vast range of clean-tech products and services. Those include water filtration systems; green building technologies that reduce energy use; processes to convert waste into biofuels; better wind turbines; solar power technology; “smart” street lights; and even software for energy companies to help manage operations more efficiently.

“Every market is big in China,” Huang said.

`Next 24 months’: Clean tech expects flood of funding

Gary Rieschel, a veteran valley venture capitalist who relocated to Shanghai, sees a “tidal swell” of interest in the China energy and clean-tech market from abroad. “The wave will occur some time in the next 24 months,” he predicted. “Silicon Valley has a huge play here.”

Already, venture capitalists are increasing their clean-tech bets in China, from $7 million in 2004 to $222 million last year, according to VentureOne and Ernst & Young. In that same period, venture funding for clean-tech deals in the United States soared from $522 million to $884 million.

Chinese government officials and environmentalists say the only hope to head off environmental catastrophe is through the kind of technology Silicon Valley offers. China’s air, water and land are so polluted that environmental hazards kill hundreds of thousands of its people each year. And China’s pollution problems are spilling over onto other countries. Dirty air traced back to China can be found in California’s skies, and could become a major source of pollution.

Cleaning up China’s environment “will require good technological assistance and sheer political commitment,” said Hal Harvey, environment program director at the William and Flora Hewlett Foundation in Menlo Park, which funds projects in China.

Doing business in China is never easy for foreign companies, and executives who move into this growing sector face the same challenges others have run into, including corruption, intellectual property theft and a wall of distrust erected by Chinese industry leaders.

But the opportunities in China are too great to ignore, particularly for risk-taking valley entrepreneurs and investors who relish change-the-world business plans.

Some initiatives are driven by personal reasons. Peggy Liu, a former Silicon Valley Internet executive now living in Shanghai, grew tired of watching her two young boys breathe “black air.”

So Liu, whose home is outfitted with four air filters, created an international network linking academics, government officials, entrepreneurs and investors on both sides of the Pacific to find practical – and profitable – solutions to China’s environmental woes.

“It’s the do-good, save-the-world, on-the-edge, it’s-OK-nobody-has-figured-it-out-before mentality,” said Liu, who in 1996 co-founded an early e-commerce Web site. “I was one of those people.”

In early April, she organized a conference on energy for U.S. investors in Shanghai that attracted high-level Chinese government officials and members of the Bush administration (www.mitenergyinchina.org). She then founded the Joint U.S.-China Cooperation on Clean Energy, a network of government officials, investors, industries and researchers to promote innovation in areas such as energy-efficient buildings, transportation systems, non-food biofuels and “clean” coal technology.

High-priced tech: `We may not be able to afford it’

“It’s not just the technology that comes out of Stanford University,” said Liu, chief operating officer of Mustang Ventures, a $40 million fund focused on investing in start-ups in China. “There is a whole industry of things that will appear, a whole slew of service-based companies.”

But for any venture to succeed in China’s new and often ruthless market economy, it must produce clear economic benefits, and those can be hard to achieve.

“On the one hand, we want the best technology,” Lai Ming, general director of science and technology with the Ministry of Construction, said in his office in one of Beijing’s boxy, Soviet-era buildings. “On the other hand, we may not be able to afford it. The Silicon Valley guys may not be able to lower the price.”

Selling to this once-closed society requires a very different business model.

“You must find some old China hands, people who understand the government,” advised Xiong Sihao, a vice minister who oversees network coordination and information security. “You just can’t come here and say, `I have the greatest technology.’ Who cares?”

Plenty of patience must be built into any China business plan, said Andrew Hu, who has headed up China operations for Oracle, and is now president of China operations for San Jose’s Wyse Technologies. Wyse makes “thin client” devices, desktop monitors that resemble a personal computer but operate on a network and provide significant energy savings.

Wyse, which had trouble getting traction in China, now has a more receptive audience because of the new focus on saving energy. A Wyse device uses about 10 watts per hour, vs. 300 watts for a regular desktop.

“The pollution is killing the environment,” Hu said. “The government is trying to do everything to make even the slightest improvements.”

While companies trying to crack the clean-tech market in China face many challenges, some can take advantage of its authoritarian government structure.

“You can do things on a scale in China that you can’t in the United States,” said Charles Freeman, managing director of the China Alliance, an association of law firms. “And the government can demand things on fiat: If you’ve got a better catalytic converter, the government will actually mandate it.”

But there are downsides, added Freeman, who served as the United States’ chief China trade negotiator from 2002 to 2005. “Your intellectual property will be pirated. It’s not a matter of if, it’s a matter of when. The key is to be constantly innovating.”

Intematix, a maker of materials for next-generation street lights that are energy-efficient, longer-lasting and non-fluorescent, counters the piracy threat by manufacturing its products in Fremont, then selling them in China.

“Everyone tries to copy,” said Chief Executive Peter Larsson. But he added that China is changing and that copycats are increasingly concerned about getting sued.

Cautious optimism: China remains focused on economic growth

Whether China can sustain economic growth while improving its environment remains to be seen. Likewise, Silicon Valley’s ability to succeed as a clean-tech partner in China is far from guaranteed.

“All this hype, all these people running around – it reminds me of the bubble,” said Shanghai-based venture capitalist Andy Tang, managing director of Draper Fisher Jurvetson’s Dragon Fund in China.

Still, Tang said he is “cautiously optimistic” about the new business environment in China, particularly for companies with clean-tech pitches. Many of the start-ups he has investigated actually have made money.

Rob McCormack, co-founder of Mustang Ventures and husband of Peggy Liu, isn’t optimistic that the government has the will to strike a balance between economic growth and environmental protection.

“I go to cities of 400,000, 500,000 and they are just disgusting,” he said. “China doesn’t care about pollution. They are still going for growth, because growth is stability.”

But his wife looks at the country’s exploding economy and draws an opposite conclusion.

Driving through Shanghai’s Pudong district, a forest of skyscrapers that 15 years ago was farmland, she pointed to yet another nearly completed high-rise. “This building didn’t exist a few months go.” She sees the same get-it-done drive in the government’s campaign to save the environment.

“I think the government is absolutely serious about what they call green GDP,” Liu said.