BLOOMBERG With assistance from Winnie Zhu and David Stringer "China Road Trip Exposes List of Uninvestable Assets in the West"
Venture capitalists from Western firms have visited China and seen firsthand the country's dominance in clean tech sectors such as batteries and energy.
The VCs say China's advances have made it difficult for Western startups to compete, and some have decided to halt investments in certain sectors or look for ways to collaborate with Chinese firms.
China's dominance in clean tech is attributed to its prioritization of energy security, willingness to let companies fail, and ability to rapidly onshore entire supply chains, making it challenging for Western companies to catch up.
Venture capitalists in clean tech are starting to say out loud what they’ve 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 like 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 Group Inc. and Barclays Plc 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’ll 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 don’t have mandates to invest in China directly. Instead, their goal is to avoid allocating funds to Western startups that can’t compete with Chinese peers. They plan to use climate week in New York to talk about little else.
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, says Nick de la Forge, general partner and co-founder of the firm. He says 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, says the trip has already led his firm to halt investments in Western battery cell manufacturers. Instead, they’ll 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.
Al Gore, the chairman of Generation Investment Management and former US vice president, says 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% of the world’s solar panels, supplies some 60% of the planet’s wind turbines, 70% of its EVs and 75% 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%, while the country dominates the supply chain for the critical minerals that underpin many green technologies.
Irena Spazzapan, a former Goldman Sachs commodities executive who now runs Systemiq Capital, says China’s advances in renewables are all down to its ultimate goal of energy independence. The country “has prioritized energy security above all else,” she says.
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 hasn’t 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 says shareholder interests in China “have been largely disregarded, with chronic overcapacity and relentless price wars eroding company equity.”
It’s a system that favors “scale over profitability,” she says.
For companies and investors caught in the fray, it’s been “total misery,” says 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 says.
China’s willingness to let companies fail in droves creates “real social costs,” says 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 says 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 Ltd., a Shanghai-based developer of technology for zero-emissions power generation, says 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 “globalized as soon as possible,” says 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,” says 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 companies, including electric vehicle giant BYD Co., as well as some of its newest, including solid-state battery maker Shenzhen Inx Technology Co. Ltd.
They also stopped in Ningde to get a firsthand impression of operations at Contemporary Amperex Technology Co., 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,” says Jacob Bro, co-founder and partner at 2150. “And when you see that, you also just realize 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 AB, which has sought Chapter 11 bankruptcy protection in the US and also filed for bankruptcy in Sweden.
Today, says Bro, “if you want to build something like a Northvolt in Europe, you should invite these guys over and do it with them.”
The Turning Point:
