Author Archives: Zhuo Zhang

State Grid divests assets with an eye to foreign growth

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In a notable move, the State Grid Energy Develop Corporation (SGEDC), a subsidiary of State Grid, has been 100% acquired by China Shenhua Group, China’s largest coal producer. Founded in April 2008, SGEDC owns eight peak and frequency regulation thermal power plants, consuming 20 million MT thermal coal per year. SGEDC achieved a net profit of RMB 78 million in 2011 and has an asset value estimated at 2.5% of the State Grid’s overall assets.

This looks to be a policy-driven acquisition as it brings State Grid more in line with the National Development and Reform Commission (NDRC)’s instructive policy of “plant and grid separation” and “separating the secondary business.” Meanwhile, Shenhua is looking to expand its power generation business, and the acquisition helps the company to better utilize its sufficient coal resources.

State Grid is going to receive over RMB 60 billion in cash from the deal, likely to be used to fuel investments in developing business in overseas markets. At this point, State Grid has completed foreign direct investments over $5 billion into grid facility operations, the establishment of foreign R&D labs, foreign company acquisitions, and some greenfield investments. State Grid’s president, Mr. Zhenya Liu, has noted that the corporation now has nine representative offices across Europe, North America, South America, and Africa. Importantly, the internal return rate of the State Grid’s oversea assets is three to five times higher than the return on its assets in China. Zhenya has also disclosed that by 2020 the overseas assets State Grid will own are targeted to be 10% of the corporation’s total assets.

As State Grid looks outside the borders of China, opportunities to partner with the SOE giant are certain to grow. Given the deep pockets they bring to the table, there is good reason to engage – but monitor, at a minimum.

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Wanxiang Finalizes A123 Systems Transaction. So Where to Now?

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China Wanxiang Group’s investment in financially troubled A123 Systems has moved quickly from a memorandum of understanding (client registration required) on August 8 to a definitive agreement, executed a week later. Wanxiang is certainly not a new name to those paying attention to the clean tech space. The company is actively expanding internationally, acquiring a $420 million minority stake in GreatPoint Energy, establishing a joint venture with Ener1 (client registration required) and partnering with, investing in, and forming a joint venture with Smith Electric Vehicle (client registration required).

In reality, lithium-ion batteries and the broader electric vehicle (EV) space are only a very tiny part of the group’s whole business. Wanxiang is China’s largest auto part supplier, serving almost all of the automotive original equipment manufacturers (OEMs) in China as well as leading international OEMs. It is famous for universal joints, bearing, drive axles, suspension struts, braking systems, rubber seals, and body panels, and is a bumper supplier for the likes of Audi. Being a highly influential group in Zhejiang province, the company has easy access to bank loans, making the $450 million total investment in A123 less painful for Wanxiang than it would be for many companies.

Chinese companies’ foreign merger & acquisition (M&A) activities are being driven by technology acquisition and/or foreign market penetration, and Wanxiang is no different. Chinese battery companies like ATL, China BAK, and CALB have much longer histories of lithium-ion battery R&D and a greater focus in this area than Wanxiang. As such, the fastest route for Wanxiang to catch up is to acquire technologies from foreign companies, which they will absorb to improve their own products then leverage existing sales channels already in place to distance themselves from would-be domestic competitors.

However, it is questionable whether the heavy investment can drive meaningful change in Wanxiang’s domestic business. Reviewing China’s EV landscape, only 8,368 full electric and hybrid electric vehicles were produced in 2011. Even though the Chinese government plans to put half a million EVs on the road by the end of 2015, only around 92,000 units can be produced in that year (see the report “Hype vs. Policy: The Chinese Market for Lithium Batteries” — client registration required). In addition, local product protection plays an important role in China’s EV market compared to traditional vehicles, adding greater complexity for companies in the EV value chain to supply to other provinces. Wanxiang is located in Hangzhou city, one of China’s six EV pilot cities, so a local market for Wanxiang exists. But it is only a portion of the already disappointing overall EV market in China. The $450 million investment is certainly a long-term bet if China’s EV market is the driving force.

Acquiring reputable foreign technology can also be used to alleviate the “made in China” stigma in developed economy markets. In other interviews with China’s large lithium-ion battery companies, most have indicated they are actively looking for sales opportunities in foreign EV markets, but they lack sales channels. It is challenging for major foreign EV OEMs to accept Chinese-made batteries from the more established, reputable battery suppliers, let alone for a company like Wanxiang that lacks a battery pedigree. This applies to the vehicle market in general, where Chinese automakers are viewed today with the same skepticism met by Japanese automakers during the middle of the last century, and more lately by Korean OEMs. Enter A123, not only with advanced technologies, but very strong customer networks with high-profile EV OEMs around the world ranging from upstarts like Fisker to established high-end brands such as BMW. Wanxiang hopes to increase access to the international EV market through A123′s already existing international customers. However, given A123′s trials and tribulations, which include product recalls and inconsistent customer acquisition, Wanxiang should know that there is some work to do before its foreign EV market penetration can ride on A123′s coattails.

The real medium-term nugget in the deal for Wanxiang may lie in grid storage, which has big market potential in China, and is substantially controlled by only two companies: State Grid and China Southern Grid. State Grid has opened a large grid-storage demonstration project in 2011 (Zhangbei), and Wanxiang is one of the four bid winners, along with CALB, BYD, and ATL. According to interviews with many executives in State Grid, big project winners must have good technology and close relationships with the grid giant, with the latter being much more important than technology. Wanxiang indeed has a very close relationship with State Grid. While it is unlikely that State Grid will open a new large grid storage project within two years, subsequent growth looks assured as renewable energy proliferates. China has installed 17.6 GW in wind turbines during 2011, representing over 20% of China’s power generation installations for the year. However, in our discussions with China’s National Development and Reform Commission (NDRC), only 80% of the wind energy can be utilized until grid storage is deployed. For Wanxiang, it is hard for outsiders to judge if the company will really digest A123′s technology and transfer it into its products, but because of the good relationship between Wanxiang and State Grid, Wanxiang’s acquisition of a controlling share of A123 gives State Grid a strong reason to ramp up battery procurement from Wanxiang.

Winners and losers in China’s domestic lithium-ion battery landscape may well be defined by which can pick up quality assets to shore up their technology and market needs. As we recently predicted:

“As technology developers around the globe struggle to stay afloat, even with quality technology, Chinese companies will be on the lookout for opportunities. In the near term, the foreign opportunity will be technologically focused, and Chinese companies will be looking for technology licensing or joint venture opportunities with large foreign companies, as well as M&A opportunities among startups and small to medium enterprises in foreign countries. Venture capital (VC)-backed Li-ion battery startups will be needing exits, some at pennies to the dollar, making VC-backed startups with advanced technology especially hot targets for Chinese big Li-ion battery companies as they inorganically grow their capability.”

Competitors in the space both in China and around the globe better be ready, as we’ve only just begun the global roll-up, and Chinese entities will not be spectating.

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Two UHV Transmission Projects in Western China Drive Increased Opportunity for Wind Power

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Construction began last month on two ultra-high voltage power transmission (UHVT) lines that will transfer 750 kV ultra high voltage DC current generated by thermal plants and renewable energy fields in Xinjiang province. The two lines will have a total transmission capacity of 10 GW, and will link central China with the eastern part of China: One from Hami to Zhengzhou in Henan province, and the other from Xinjiang province’s main grid to the main grid in South Western China.

The distribution of power resources is very unbalanced in China. For example, western provinces such as Xinjiang own rich thermal coal and renewable resources. But their power consumption is low compared with eastern provinces, such as Jiangsu and Shanghai, where demand far outstrips generation capacity. Under these circumstances, efficient power transmission is critical.

The Hami-Zhengzhou line with an electricity transmission capacity of 8 GW is slated for completion by the end of 2014, and will link the provinces of Xinjiang, Gansu, Ningxia, Shaanxi, Shanxi and Henan. The entire line is 2,210 kilometers with a planned investment of RMB 23.39 billion. The Xinjiang-Northwestern China line is planned to be finished in 2013, and will become one of the backbones of the main grid in Northwestern China. The planned investment of this line is around 9.56 billion RMB.

The construction of these UHVT lines indicates the start of China’s “Electricity transmission from Western to Eastern program.” Together they will be able to transfer 165 TWh electricity per year. The government believes that building thermal plants and generating electricity locally is more economically efficient and a better long-term solution when compared to the cost of transporting thermal coal to Eastern China. Also, importantly, such lines can only help to relieve air pollution in Eastern China.

Estimates project that indirect investments pulled by the two UHVT lines will reach RMB 300 billion, help employ 60,000 and increase Xinjiang’s GDP by 1.5%. Further, completion of the UHVT lines will generate greater demand on wind power and solar power, while easing the ability of renewable power-generating companies to sell power to the grid. It is expected that more tenders will be conducted for wind power projects in Xinjiang and other areas in Western China in upcoming years. Growing wind power capacity in Western China will benefit leading wind contractors in the area, such as Gold Wind and Sinovel, and fuel growth for suppliers who target them.

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Foreign and domestic VC distribute deals differently across China

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Graphic of the WeekVenture capital investments in China have come roaring back from the economic crisis, reaching $5.4 billion in 2010, a 79% increase over 2009. Yet according to a recent Lux Research report, domestic and foreign investors take very different approaches to the market.

For example, where foreign investors zero in on break-out technological innovations, domestic investors also factor in a start-up’s market channels and financials. In addition, local VCs like to invest early, and represent 80% of Series A deals signed in China. Foreign VCs have backed less than half that number.

Domestic and foreign VCs also diverge on the technologies they back. Foreign investors, for example, have driven significant activity in LEDs, medical equipment, solar, and pharmaceutical industries. In contrast, local firms dominate investment in materials technologies, be they advanced materials platforms or green building construction materials.

Finally, as this week’s graphic illustrates, foreign and domestic VCs vary widely on where in China they invest. Four out of China’s thirty-one regions have attracted 56% of the country’s overall VC activity – Beijing, Shanghai, Jiangsu, and Guangdong. Not surprisingly, foreign VCs tend to favor opportunities located in locations familiar to them, such as Beijing and Shanghai. In either city, the number of foreign- and domestic-backed deals is proportionate.

But tallying deals tells only half the story. Measure the total amount invested, and foreign VCs have out-invested their domestic counterparts by two-to-one in both Beijing and Shanghai. In contrast, domestic VC investments dominate by a five-to-one ratio in the highly active provinces of Jiangsu and Guangdong – both hotbeds of renewable energy and electric vehicle activity to name only two. In these areas, and indeed across the rest of the country, domestic VC firms are seeing more opportunity and acting accordingly.

Source: Lux Research report “Investing in Indigenous Innovation: China’s Emerging Technology VC Landscape.”

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China’s EV market struggles for lack of traction amid technical challenges and parochialism

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The fanfare surrounding the “Ten Cities and Thousand Buses” program in China has certainly captured attention across the EV ecosystem. In total, 25 cities have announced demonstration plans of hundreds and, in some cases, thousands of renewable energy buses. Far fewer of these buses, however, are deployed and rolling on China’s streets today. Across our recent coverage, examples of shortcomings have emerged: 50 electric buses used during the Beijing Olympic Games have already stopped operation; 17 of 20 hybrid buses in Tianjin have broken down during the demonstration period; and in Linyi, a city in Shandong Province, the number of demonstration buses has dropped from 100 to 30. The major obstacles preventing public transportation companies from adopting new energy buses include high costs, frequent malfunctions, and battery performance degradation.

The reality of the “Five Electric Cars Pilot Cities” program is falling short of expectations, as well. In Changchun, no electric car has sold during the past year, after only five the year before. Shenzhen, with the highest motivation to pave the way for the electric vehicle industry, has seen only two charging stations deployed, compared with the city’s targeted number of 250 by the year 2012. Furthermore, BYD, the local heavyweight, has only sold 400 F3DM PHEVs and less than 100 E6 EVs. In Hangzhou and Shanghai, there are only 25 and 10 registered electric vehicles, respectively, and only two of them are owned by individuals in Shanghai. Even though some of the cities have electric vehicle sales, most of the cars have been bought by the employees of automakers and electricity power corporations. Chinese governments have subsidized only 100 million RMB to the five cities, compared to an anticipated total subsidy of five billion RMB.

Apart from the most common explanations for the inactive EV market, which include high cost, infrastructure concerns and quality problems, local product protection is another barrier to the EV market in China. For electric buses, almost all of the cities procure locally-produced brands. For electric cars, even though there are many Chinese automakers claiming their EVs are ready to be sold, there are only five types of cars available in the current market. With key subsidies and support for the electric vehicle industry coming from local governments in tandem with central governments, the lack of local champion manufacturers has major implications. Provincial governments are reluctant to subsidize EVs produced elsewhere that are being sold in their own provinces. For example, Changchun is one of the most traditional automotive industry provinces in China, with the likes of FAW Group within its borders. The government’s promotion of electric cars is very weak there, likely because FAW Group still has yet to produce electric vehicles.

It remains to be seen if the slow adoption of electric vehicles will cool China’s electric vehicle industry down. The most recent guidance on the 12th Five-Year Plan cuts EV production in 2015 from 500,000 to 250,000 units. But rational behavior in capacity expansion for emerging technology is often the exception and not the rule. Clients should watch the signals from China’s consumers and governments.

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