Category Archives: China Innovation

The Path to Performance-Driven Profits in China’s Construction Materials Market

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China’s construction industry has represented a cornerstone of the country’s economic growth in recent years. While such growth cannot go on in perpetuity, new drivers, regulations, and constraints are emerging to create a very different opportunity, where materials developers can and must play a critical role. Front and center in that are the building thermal envelope materials pivotal in addressing the high heating and cooling component of China’s vast and growing building inventory. China’s demand for building thermal envelope materials from 2012-2015 will be 5,570 million m2, but there is structure to this at the provincial level.

To identify the promising provincial market, the overall market size, energy demand on heating and cooling caused by weather, electricity price, and the energy saving target can be used to determine the highest potential markets and for the highest performing materials. The Premium quadrant indicates the provinces with the strongest need for high-quality building thermal envelope solutions, because of the harsh local weather and high electricity price. There are four provinces in this category, including Heilongjiang, Jilin, Liaoning, and Xinjiang. For these provinces, improvements in the thermal envelope solutions’ insulating performance can make a huge economic difference. Technology providers with high-quality building thermal envelope solutions can realize a shorter payback period in these provinces than in other locations, considering China’s price-sensitive construction market. In addition to these four markets, there are two markets that clients should pay attention to – Shandong and Hebei – with considerable market size and lying just outside the Premium quadrant. Both of these provinces also are promising based on their large market size and on their strong demand on high-quality building thermal envelope solutions.

Provided appropriate local relationships are established in the locations with greatest need, payback period analysis indicates that developers of phase-change materials, vacuum insulation panels, and low-emissivity (low-e) insulating glass are set to parlay these and similar provinces’ predicaments into growth, while aerogel and electrochromic glass developers will be left wanting.

Source: Lux Research report “Go North: The Path to Performance-Driven Profits in China’s Construction Materials Market (client registration required).”

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Chinese Player Pilots a New Process for Ceramic Metal Composite Production

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Recently, the world’s largest apparatus for combustion synthesis under high gravity successfully passed its pilot production in the Dalian Huayuankou Economy Development Zone. The high-gravity device and process technology was jointly developed by Technical Institute of Physics and Chemistry (TIPC), Chinese Academy of Sciences (CAS) and Dalian Hunton Industries. Hunton Industries will use this high-gravity device to produce ceramic metal composites, reducing energy consumption in comparison to the conventional powder metallurgy process. Ceramic metal composites can be used to synthesize gradient tungsten carbides with a diameter of 200 mm and a thickness of 10 mm, which is a key material to produce mine drilling tools and wear-resistant work pieces.

This project was sponsored by the national “863″ program and an international collaboration program, namely “International Thermonuclear Experimental Reactor“. The performance of the high-gravity device claims to be close to commercialization standards, although TIPC will continue to assist Hunton to improve the manufacturing stability and product quality. Hunton plans to produce oversized cermet for a domestic thermonuclear fusion reactor test early next year.

As a medium-size company, Hunton’s successful participation in the national “863″ project with a CAS institute exemplifies the increasing role that Chinese private small and medium enterprises (SMEs) are playing in the Chinese R&D landscape and the world-leading materials innovation that can result. Clients that are seeking technology partnerships in China should not only look at large companies, as the most innovative technology may come from SMEs, as well.

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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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RFID chip suppliers have a ready-made growth opportunity in China

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Given that China owns the largest number of kilometers of toll express ways in the world, the commercial opportunities that arise from increasing traffic system intelligence are also correspondingly large. Case in point is the proliferation of electronic toll collection (ETC), well established in developed countries but only now going through rapid growth in China. According to recent data released by the Department of Transportation in Zhejiang province, the number of ETC users has increased dramatically to reach over 137,000 in 2012. The province has installed 339 ETC lanes in 164 expressway toll collection stations, with a coverage rate of over 52%. The average number of the times ETC enabled vehicles pass the toll gates exceeds 48,000 a day.

As China moves away from a labor-driven economy to technology-enabled growth, increasing the deployment of intelligent systems for the betterment of the population is a key focus. Toll collection is a major problem, with manual toll collection significantly slowing down the traffic, a problem that will only proliferate as the number of cars in China continues to grow. Given this, ETC systems are strongly promoted by the Ministry of Transport as a smart traffic system that increases the efficiency of toll collection. In some cities, the government subsidizes 50% of the cost of the ETC tags for new users when they purchase ETC tags. In many cities, vehicle owners that pay via ETC systems can also get a 3% discount on the toll fees.

An ETC system normally consists of a RFID tag which contains the vehicle identification information. In 2011, it was estimated that over 1.88 million ETC tags were shipped in China, mainly to the aftermarket, at an average selling price of RMB 350 per unit. On this basis, the Chinese ETC tag market exceeded $100 million in 2011. Considering the large-vehicle installed base in China, now in excess of 100 million civilian vehicles in 2011 and the low ETC installation rate at present, the Chinese ETC tag market is expected to grow rapidly in the next few years. Opportunities to supply high-quality RFID chips to major Chinese ETC tag manufacturers such as Genvict represent a quick path to a strongly growing market for suppliers with an appropriate cost position.

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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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Though Progressing Unevenly, China’s Smart Cities Offer a $153 Billion Opportunity

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While China’s build‐out of “smart cities” is significantly smaller than the hype might suggest, it still represents a $153 billion opportunity across 54 projects, mostly in the southern and eastern provinces. This week’s graphic appeared in a report published in March by Lux Research’s China Innovation Intelligence Service. It illustrates analysis revealing that over half – 31 – of China’s smart city projects are slated to unfold in cities that in 2010 yielded a minimum GDP of USD 100 billion (Tier A) and USD 60 billion (Tier B).

In terms of the speed at which these projects are unfolding, 15 are already under construction. Another 21 were announced with details such as investment amount, smart city applications involved, project deadline, and even participating suppliers. Fifteen additional smart city projects rated an official announcement, but few details to date. Finally, three Tier C cities – minimum 2010 GDP of USD 15 billion – have expressed an intention to launch projects, but haven’t formally announced them yet.

As the graphic shows, all of the 15 smart city projects under construction are either in Tier A or B cities. Not surprising, since these cities have more developed economies with greater resources. But they also have more urgent needs than lower tier cities. For example, top Tier cities, such as Beijing, Shanghai, Shenzhen and Guangzhou, were the earliest to open to foreign companies, and had to meet demands for advanced municipal infrastructure before other cities did. This experience with infrastructure construction benefits these Tier A and B cities when additional deployment is needed.

In addition, Tier A and B cities were more ambitious in their municipal development planning than cities in the bottom two Tiers. They had to be since almost all were economically strategic for China or their respective provinces.

China’s largest cities – Beijing, Shanghai, Tianjin and Chongqing – are managed directly by central government. Guangzhou and Nanjing are the capital cities of Guangdong (No. 1 province by GDP) and Jiangsu (No. 3 province by GDP). Lastly, Wuxi is in the top Tiers due to its appointment by Prime Minister Wen Jiabao as the center of “Sensing China,” the national initiative to build out embedded sensor and actuator technologies for applications in everything from containers to pacemakers.

Source: Lux Research report “Intelligent Navigation of China’s Smart Cities.”

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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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Convergence of Marine Biotechnology and Traditional Chinese Medicine an Untapped Corporate Opportunity

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A significant portion of traditional Chinese medicine (TCM) utilizes marine biology resources. The category, described in classic TCM anthologies like “Shan Hai Jing,” “Shen Nong Ben Cao,” and “Ben Cao Gang Mu Shi Yi” have been practiced for almost 2,000 years. However, modern technologies that identify, isolate, and exploit the active gradient from the marine plants and animals have remained scarce. Dating back to 1997, the Chinese government has recognized that outdated methodologies are unable to fully realize the potential of medical resources from TCM, and it has strengthened research funding and investment since that time. By 2010, the added industry output of the marine biopharmaceutical industry was CNY 9.5 billion ($1.48 billion), with an expected annual growth rate set at about 30% in the 12th Five-Year Plan period.

Not surprisingly, innovation capacity for marine-derived TCM is geographically concentrated - with Shanghai, Qingdao, Xiamen, and Guangzhou representing the four major regions for innovation. Currently, there are more than 10 Chinese institutes specializing in marine biopharmaceuticals. Among the more pioneering research institutions are Ocean University of China, the First Institute of Oceanography, SOA, the Institute of Oceanology, and the Chinese Academy of Sciences. Nevertheless, a few bottlenecks remain in China’s development of marine biopharmaceuticals.

The first and foremost bottleneck is technology. China’s marine biopharmaceutical industry relies on its general biopharmaceutical industry to exploit marine resources and produce medicines. Yet, general biopharmaceutical technology development lags in China, limiting growth in the marine biopharmaceutical sector. Given that the size of the sector is not large enough to attract private investors, most of the R&D funding has come from government plans, which need to increase before ensuring the set growth rate of 30% in the next few years.

Also, the development of the industry requires strong partnerships across the value chain, but basic research, product development, animal testing, and clinical trials lack the collective critical mass of corporate, governmental, investment, and academic stakeholders to drive and accelerate development. Although there is preliminary evidence of such partnerships, for example, China’s recently founded alliance on marine biotechnology innovation, more consortia and partnerships (client registration required) are expected to emerge to ensure the growth of the industry. Clients interested in the marine biopharmaceutical industry have an opportunity to stake an early position with the aforementioned leading research institutes and find technology partners in the four innovation bases mentioned. We’ll be seeking out briefings with the leading academics and technology developers to better define this path in the coming weeks and months.

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The Lux Top 10

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During the fourth quarter of 2011, Lux Research analysts profiled 262 companies across 12 different emerging technology domains in the fourth quarter of 2011.Here are the 10 they thought were the most compelling. Some, such as Proterro, stand out for their disruptive potential. Others, such as Diamon-Fusion, made the grade with well-executed business strategies. The competition for a Top 10 spot will only get hotter as we expand our portfolio of coverage domains to include Energy Electronics and a broadened green buildings portfolio.

1. Diamon-Fusion International – Positive – Advanced Materials

With its transparent silicone film used to coat silica-based substrates, Diamon-Fusion is one of the few startups in the protective coatings space with a strong track record in both technology and business execution.

2. Proterro – Wait-and-see – Bio-based Materials and Components

Proterro is commercializing a strain of photosynthetic organism that produces sugars at levels ten times more productive than sugarcane and in a configuration that could deliver the holy grail of “five cent” sugars (i.e. five cents per pound). But it will need funding and downstream partners to scale its potentially breakthrough technology beyond a lab prototype.

3. Topell Energy – Positive – Alternative Fuels

Working with German utility RWE, Topell Energy scaled its first commercial torrefaction facility in 2011 to convert wood waste into bio-coal pellets. Topell is a leader in the torrefaction space and is positioned to capitalize on healthy incentives in the EU for coal/bio-coal co-firing.

4. Spirae: Wait-and-see – Smart Grid

With the growing grid penetration of renewable energy sources and the inherent difficulty in managing their fluctuating inputs, Spirae could be in a prime position to support utility infrastructure with its comprehensive control and management system – if it can prove its concept on a large scale and secure long-term utility contracts.

5. eIQ Energy – Positive – Solar Systems

One of the few DC/DC optimizer companies staying with stand-alone hardware, eiQ partners with engineering, procurement, and construction companies that can realize its technology’s value in the strong commercial market segment.

6. Pervasive Displays – Wait-and-see – Printed Electronics

Using a technology honed for the One Laptop Per Child Program, Pervasive Displays produces low-power electrophoretic display modules that target application developers for warehouse signage and electronic shelf labels. While Pervasive has power advantages from its control functions, it will need to drive its costs down to compete with more established competitors and access a broader market.

7. Kurion – Positive – Water

A high-risk but high-profit U.S. nuclear contamination control company that rapidly scaled to clean up the Japanese Fukushima radioactive cooling water problem. The work generated massive windfall profits when no one else on the planet was prepared to deal with the problem.

8. Hycrete – Wait-and-see – Green Buildings

Hycrete’s water barrier technology improves the durability of concrete infrastructure at prices significantly cheaper than the incumbent membrane-based approach. But it will need to establish partnerships with well-known infrastructure or chemical companies in order to gain market access in the conservative infrastructure segment.

 

9. Citic Guoan MGL – Wait-and-see – China Innovation, Electric Vehicles

In the sea of Chinese lithium-ion battery developers, state-owned MGL stands out for its traction in China’s electric and hybrid-electric bus market. Its strong government relationships could provide ready channels to market for would-be foreign technology partners. But competition with other domestic firms such as China Aviation Lithium Battery Corporation (CALB) will be fierce.

10. Ablynx – Wait-and-see – Formulation and Delivery

Ablynx engineers its “nanobodies” – therapeutic proteins derived from antibodies in camel blood – to specifically deliver small molecule drugs to a target site. Despite stiff competition in the saturated antibody field and a multitude of emerging targeting strategies (such as DNA aptamers), Ablynx has snagged more than its share of heavyweight partners (Boehringer Ingelheim, Merck Serono, Norvartis, Pfizer), and is generating tens of millions in revenue to assist in its own healthy development pipeline.

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China National Biotechnology Group targeting a $2 billion IPO in Hong Kong

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News of a potential listing of China National Biotechnology Group (CNBG) spread like wildfire early this month, fueled largely by its targeted opening valuation of $2 billion which, if successful, would represent the biggest IPO thus far by a Chinese medical company.

A subsidiary of state-owned China National Pharmaceutical Group (aka Sinopharm Group), the corporation plans to list on the Hong Kong Exchange (HKEx) during the first half of 2012. Its public launch follows in the footsteps of Sinopharm Holdings, another unit of the Group that had secured 8.7 billion HKD ($1.3 billion) for its IPO in September 2009. Given Sinopharm’s successful IPO and its subsequent thriving stock values, CNBG’s higher offering is less surprising.

CNBG is the country’s largest biotechnology company for vaccines and blood products and the world’s fourth largest vaccine manufacturer. Its sales revenue reached close to 4.2 billion RMB in 2009, returning 1.1 billion RMB in profits for the year. Additionally, it recently announced its leading role in an 863 project focused on developing key technologies and products related to vaccines. The project involves eight other organizations, and received a total state grant of 150 million RMB.

Viewed from from the technical, political, or social prospective, CNBG’s IPO target looks promising despite slight tumbles in the Hang Seng Index since April this year. While its decision to list on HKEx is natural given Sinopharm’s success, it may also indicate a strategy to grow in foreign markets. Compared to other capital-raising centers in mainland China – particularly Shanghai and Shenzhen – HKEx will allow CNBG to link with a bigger international audience while maintaining its roots with Chinese investors. Both Sinopharma Holdings and CNBG will look to grow through mergers and acquisitions, as well as through organic mechanisms. Considering their strong positioning, clients can examine possible cooperation means with the Group through joint ventures, direct investments, or strategic partnerships.

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