{"id":660498,"date":"2013-05-28T08:00:17","date_gmt":"2013-05-28T12:00:17","guid":{"rendered":"http:\/\/gigaom.com\/?p=648988"},"modified":"2013-05-28T08:00:17","modified_gmt":"2013-05-28T12:00:17","slug":"5-lessons-learned-from-bringing-cleantech-to-china","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/660498","title":{"rendered":"5 lessons learned from bringing cleantech to China"},"content":{"rendered":"

One morning it dawned on me that of the nine energy companies in our Venrock portfolio<\/a>, a third are focused on China \u2013 yet none of them planned it upfront. I figured it would be good to understand how other cleantech start-ups have approached the middle kingdom, so I enlisted MIT MBA student (and fluent Mandarin speaker) George Miller to interview a representative sample and collect best practices.<\/p>\n

George spoke confidentially with 15 venture-backed cleantech start-ups that have set up Chinese operations. Every interviewee was either a C-level executive or VP of business\/corporate development; the majority were CEOs. Nine of the 15 interviewees entered China primarily to sell into the domestic market, while the balance aimed to export from Chinese manufacturing facilities. The average company is 11 years old and entered China five years ago.<\/p>\n

\"cleantech<\/a><\/p>\n

Most of our research findings are confidential to Venrock and the companies interviewed, but some high-level conclusions deserve a broader airing.<\/p>\n

China strategies have been mostly improvised.<\/b> At all of the companies we spoke with, China is a big, board-level deal, ranking somewhere between \u201can important growth market\u201d and \u201cour sole focus.\u201d Yet only four firms had a specific China plan at the formation stage, and three initially didn\u2019t plan to enter China at all.<\/p>\n

\"Cleantech<\/a><\/p>\n

Nearly all companies partner. <\/b>The most common engagement model we found was a joint venture (JV) with a Chinese enterprise, represented by eight of the 15 interviewees. Six have set up distribution agreements but not full-blown JVs. Only one has gone it alone in China, with a standalone, wholly foreign-owned entity that manufactures and sells directly.<\/p>\n

\"china_3\"<\/a><\/p>\n

IP is the big challenge.<\/b> When we asked about key challenges experienced in China, intellectual property (IP) protection topped the list. This is no surprise \u2013 tales of IP leakage in the country are legion, with cleantech\u2019s most glaring example being the outright theft of American Superconductor\u2019s wind turbine software<\/a>.<\/p>\n

General transparency in business dealings came second, and a cluster of people-related challenges followed. In contrast, interviewees didn\u2019t find market access difficult: We heard that with strong government support and large pools of capital, the risk appetite for capital-intensive projects is greater than in most developing countries.<\/p>\n

\"china_4\"<\/a><\/p>\n

JVs are the solution.<\/b> Conventional wisdom says to protect IP by building moats \u2013 like splitting manufacturing steps across sites so no one person knows them all, or supplying a key \u201cblack box\u201d component from outside China. Our interviewees employ these moat-building tactics, but they think bridge-building works best: The technique rated most effective was forming a joint venture with a large Chinese partner, incentivizing that partner with outsized ownership, and relying on its self-interest to defend the IP. Notably, every interviewee with a JV ranked this tactic the highest.<\/p>\n

\"china_5\"<\/a><\/p>\n

JVs address secondary problems, too.<\/b> When we delved into interviewees\u2019 secondary challenges about transparency and people, it turned out that a strong JV partner was effective in resolving them as well. The stories we heard addressed\u2026<\/p>\n

…conflicts of interest: \u201cWe had no idea that the largest shareholders in [a potential distributor] are also in the seats of power at [the end customer]. Only once you reach the goal line do they open the kimono.\u201d<\/i><\/p>\n

\u2026internal corruption: \u201cOne of the executives we hired was marking up purchase orders and taking kickbacks. He didn\u2019t have a bad heart, and that practice is common in China \u2013 so instead of \u2018firing\u2019 him, we \u2018retired\u2019 him.\u201d<\/i><\/p>\n

\u2026training: \u201cBecause our technology is so unique, we didn\u2019t have trouble attracting and retaining talent. The challenge was educating them on exactly what we do.\u201d<\/i><\/p>\n

\u2026workforce management: \u201cIt\u2019s not just the government that\u2019s socialist; it\u2019s also the labor force. Financial incentives don\u2019t work well. We used vacation time as a key motivator.\u201d<\/i><\/p>\n

It\u2019s self-evident that these challenges can be mitigated by a strong in-country partner that knows the value chain and manages lots of people.<\/p>\n

. . . . .<\/p>\n

Chinese joint ventures are no walk in the park. The average JV in our sample was three and a half years old, had taken longer to get going than expected, and was considered too early to call as a success or failure. Interviewees complained about long government approval processes and culture clashes along the way, and we didn\u2019t hear any silver-bullet tactics for doing it right: The best practices were all things you\u2019d expect, including intensive background checks of partner executives, JV agreements that maintain \u201cface\u201d for both start-up and partner (usually relying on profit-sharing), and experienced domestic legal representation. And clearly, you\u2019ve got to be obsessive about picking a trustworthy partner \u2013 American Superconductor\u2019s widely-publicized IP dispute is, in fact, with its former JV partner Sinovel.<\/p>\n

Despite all those caveats, I drew a clear conclusion from this work. Most cleantech innovation is happening in the U.S., but most adoption will be in growth economies building new infrastructure \u2013 with China at the top of the list. Chinese incumbents like Wanxiang<\/a>, Shenhua<\/a>, and ENN<\/a> are scouring the west for technologies to pick up. In this environment, a cleantech start-up can either play defense at the barrel of a financial gun (see A123 Systems<\/a>), or play offense, entering China on its own terms and timeline. If you\u2019re going to do the latter, be prepared to partner up.<\/p>\n

Matthew Nordan (<\/em>@matthewnordan<\/span><\/em><\/a>) is an energy VC investor at\u00a0<\/em>Venrock<\/span><\/em><\/a>,\u00a0one of the oldest and best-performing VC firms. Earlier, he co-founded and led the energy tech analyst firm\u00a0<\/em>Lux Research<\/span><\/em><\/a>\u00a0and forecasted technology futures at\u00a0<\/em>Forrester<\/span><\/em><\/a>. There\u2019s more where this came from at\u00a0<\/em>mnordan.com<\/span><\/em><\/a>.<\/em><\/p>\n

George Miller is an MBA student focused on energy entrepreneurship at\u00a0MIT Sloan, where he directed the\u00a0<\/i>MIT Clean Energy Prize<\/i><\/a>. Fluent in Mandarin, George has consulted to nuclear energy companies entering China with\u00a0<\/i>Dynabond Powertech<\/i><\/a>\u00a0and\u00a0supported\u00a0the president of the\u00a0<\/i>Kauffman Foundation<\/i><\/a>\u00a0in fostering global entrepreneurship. He can be reached at <\/i>georgemiller@me.com<\/i><\/a>.<\/i><\/p>\n

\"\"<\/p>\n

<\/a><\/p>\n

Related research and analysis from GigaOM Pro:<\/strong>
Subscriber content. Sign up for a free trial<\/a>.<\/p>\n