[The Vector] Innovation, Growth and Competitiveness: China and the U.S. (continued from earlier post)

What’s worse, the U.S. has traditionally attracted the bulk of private venture capital. Now, these capital flows are making their way towards Asia, as Asia’s great public investment and focus gives more confidence to private capital. Deutsche Bank says “generous and well-targeted [clean energy] incentives” in China and Japan will create a low-risk environment for investors and stimulate high levels of private investment in clean energy. These nations rely on a “comprehensive and integrated government plan, supported by strong incentives.”

In fact, it was reported by Reuters that Deutsche Bank is spurning the U.S. for green energy investment financing. “You just throw your hands up and say…we’re going to take our money elsewhere,” says Kevin Parker, global head of Deutsche Asset Management Division, which oversees $700 billion in funds, of which about $7 billion is devoted to climate change products. Amid U.S. political uncertainty, Parker said Deutsche Bank will focus green investment dollars in China and western Europe, where it sees positive government environments. “They’re asleep at the wheel on climate change, asleep at the wheel on job growth, asleep at the wheel on this industrial revolution that is taking plan in the energy industry, “ said Parker in reference to leadership in Washington. He said the on-again, off-again tax incentives for renewables contributes to the poor outlook for investment in the U.S. (“Deutsche Bank Spurns U.S. for Investment”, by Richard Cowan. Reuters. August 11, 2010.)

Funding is already falling, as shown in the “Rising Tigers” report. The North American share of venture capital funding fell from 72 percent in 2008 to 62 percent in 2009, a four-year low for the region, with North American clean tech startups raising $3.5 billion in VC funding that year, down 42 percent from 2008. It was Chinese firms that dominated initial public offerings (IPOs) in clean tech sectors with 17 Chinese companies securing $3.4 billion, or 72 percent of global IPO proceeds in 2009.

The “Rising Tigers” report (link to the full report here) states that between 2000 and 2008, the United States attracted $52 billion in private capital for renewable energy technologies, while China attracted $41 billion. China surpassed the U.S. for the first time in 2008.

On October 19^th of this year, the U.S. announced they will pursue an investigation into China’s clean energy industry under Section 301 of the Trade Act of 1974. This Act empowers the U.S. president to take measures against unfair or discriminatory trade practices by other countries. Some believe this action was taken because of the Chinese postponement on exchange rate policy, or even as a November election salvo. At its base is the issue of China overtaking the U.S. in the green industry.

China already surpassed Japan this year as the world’s number 2 economy. China’s GDP in Q2 of 2010 was $1.337 trillion while Japan’s was $1.288 trillion. It came out of a light recession last year, and its economy is 90 times bigger than 1978, says Bloomberg (“China Tops Japan and World’s number 2 Economy” Aug 16, 2010). Four of the top 10 companies of the world by market capitalization are from China (PetroChina Co, Industrial & Commercial Bank of China, China Mobile Ltd. and China Construction BankCorp). And they surge forth in renewable energy.

China has a long-term and clear energy policy. The policy includes feed-in tariffs, support for companies and utilities, low-interest financing, increase in infrastructure, and a focus that has allowed them to come out of nowhere to be a leader today in this industry. China went from producing 2.89 million KW from wind power in 2006 to 25.58 million KW in 2009, and it produces more than 40 percent of the world’s solar cells. It has just begun construction on the world’s largest offshore wind farm, and dominates the world in hydropower as well as solar water heaters. U.S. leaders would do well to focus on implementing a long-term national plan, creating incentives for businesses and consumers, overcoming obstacles and have some guts and foresight, before it is too late. Leasers must realize that each action can domino to future positive results and each day of inaction sets us back even further.

It has been pointed out that by attacking China with the unfair trade practices (is it misplaced or proper? Is it sour grapes?) may further hurt U.S. companies. For instance, General Electric exported 340,000 KW of wind power capacity to China in 2009. There are in fact challenges for U.S. companies to enter Chinese markets and obstacles for Chinese companies to enter U.S. markets. China has recovered from the economic crisis well before the rest of the world and is showing impressive growth each quarter. The country has moved from 3^rd to 2^nd biggest world economy, overtaking Japan, and this is thanks in part to green energy.

By 2012, China, Japan, and South Korea plan to produce 1.6 million hybrid gas-electric or electric vehicles annually while North America is projected to produce a paltry 267,000. Japan has unveiled a plan to boost domestic solar power capacity by a factor of 20 by 2020. The three nations also plans to generate at least 20 percent of their electricity from renewable sources by 2020. These objectives are backed up by targeted R&D investments, technology-specific deployment incentives, and government procurement programs. China is rapidly deploying wind and solar power, supported by guaranteed preferential tariff prices and, in many cases, low interest financing. Why is the U.S. not doing the same or better within its own borders?

The “Rising Tiger” report says large government investments in China, Japan and South Korea are significant because, in contrast to many other industries, there are large barriers to the widespread commercialization of clean energy technologies. We know these barriers include:

high capital costs
business uncertainty and risk;
a lack of enabling infrastructure (e.g. transmission lines and storage for solar and wind);
historically low levels of publicly funded R&D;
low levels of privately-funded R&D due to intellectual property concerns and perceived risks;
and issues of competition with entrenched and cheaper fossil fuels.

Public sector investments in new technologies have traditionally played a pivotal role. As an example, price and performance improvements in wind turbines occurred in Denmark, where the government guaranteed its market for wind energy in the 1980s and 1990s, and offered both targeted deployment incentives and supportive industrial R&D programs. Today, Denmark’s Vestas remains the world’s top wind turbine manufacturer by capacity and tiny Denmark is in the top 10 countries of the world with installed wind capacity (REN21 2010). Denmark enacted feed-in tariff policies as early as 1993 and by 2008, 29% of its electricity was generated from renewables.

It is not too late for the U.S. to take action, says the “Rising Tigers” report. But at some point, the Asian first-mover advantage (along with established European powers such as Denmark and Germany), and continuing aggressive measures in the clean energy sector, will entrench the leaders in the industry so that it will be far more difficult to overcome or contend with the competition.

There is no question that the U.S. has some obstacles, not the least, political. Each state and municipality has its own rules, regulations, budgets, and issues, and there is not the kind of coordination or cooperating mindset needed to attain results. Two expensive wars have put a burden on the coffers. Even more important, there is not a mindset in partisan Congress, where legislation and policy set the stage, to work for the national good and long-term goals. Each politician seems to chip away at whatever makes their own constituency happy in order to get votes and stay in office. Instead of a macro, long-sighted view of what is needed, there seems to be more micro, short-term, “my neighborhood vote” politics and planning, which undercuts long-term goals.

(Continued from earlier post)

It must be acknowledged that another obstacle may be a mindset and will of everyday people. Citizens have to make their desires known, but they have to understand the issues and get educated, not just listen to sound-bites from those in opposition to renewable energy. There are myths to overcome, such as those the late Hermann Scheer often spoke about, and these myths can be overcome. As Jeff Immelt, CEO of GE said recently at a talk at the University of South Carolina, it seems that if there is a stronger groundswell from people (voters) about what we need, that could perhaps not only influence those in office but could help support businesses. Businesses need the support of government policies and certainty. It is all a vicious circle, and the U.S. seems to be in a death-spiral at the moment. Will the U.S. compete, play catch-up and take its place in this new industry?