Ross professor sees new dynamics in clean technology development and financing, including 'co-opetition' between the U.S. and China.
ANN ARBOR, Mich.—A fragile economic recovery and the failure of a cap-and-trade bill in Congress would seem to create a haze over the future of the clean technology industry, but Ross professor Peter Adriaens sees some clear patterns emerging.
The most prominent trend is a cooperation/competition dynamic between the United States and China. The regulatory business environment and the economies in both countries favor clean technology innovation in the U.S., while China has the economies of scale for deployment. This creates a situation where manufacturing innovations and new markets that result from scaling deliver new products that can be re-imported. General Electric refers to this as reverse innovation. While most of the headlines focus on trade disputes between the U.S. and China, Adriaens says he finds this evolving trend more relevant.
Adriaens defines clean technology as a process or business model that targets better use of natural resources, accelerates efficiency, or reduces emissions, such as a zero-emissions car.
"The U.S. is never going to be the kind of economy with top-down mandates to deploy this much wind energy by a certain year, this much solar, and this many electric vehicles," says Adriaens, professor of entrepreneurship and strategy. "We are, by and large, a bottom-up, market-driven economy. China has five-year plans. Their government has decided they're going to fund infrastructure and deploy these technologies."
That's why Adriaens says he sees "co-opetition" between the two countries.
"The U.S. develops and validates with pilots, but the big deployment where you can learn about the inefficiencies and find economies of scale takes place in China," he says. "I know it frustrates some people here in the U.S., but from the entrepreneur's perspective, it's very positive because we can move around as markets and opportunities warrant. We are the early-stage investors and China is, to a large extent, the deployer."
But China isn't standing still. It wants to compete in the innovation space, but that transition will take time, Adriaens says.
"They want to take our place as the innovation economy but they don't have the expertise yet," he says. "You can't just decide you're going to innovate. Here, we accept the fact that you learn by being willing to fail. We're very tolerant of that because it's necessary, but China isn't there yet. In the meantime, they're going to put the infrastructure in place to enable more home-grown innovation, such as technology parks, aggressive intellectual property policies, and government-backed venture capital."
Strategic Shift
Sources that are funding innovation and the specific kinds of companies receiving those funds are other changes afoot in the clean technology arena. Until about two years ago, venture capital and private equity firms were the big clean technology investors. But as liquidity dried up and home-run exits were few and far between, these players backed off in a big way. Taking their place are corporations willing to invest in these new ventures.
The good news for them, Adriaens says, is they're able to do so relatively cheaply, since many of the deals were considered undervalued or distressed assets. And the nature of the investments and acquisitions changed. With no cap-and-trade legislation expected soon in the U.S., big infrastructure deals for solar and wind energy have given way to more software, IT, and energy management system deals.
Those still allow a good exit, and they make sense whether there is cap-and-trade or not, Adriaens says.
"What happened is this kind of investment went from being a fringe activity to being a strategic activity for corporate VC or direct investment," he says. "Of course, the big challenge with any and all of these clean tech deals is to figure out the right business model so you can get returns for your investors."
Who's Plugged In?
Electric vehicles, especially the Chevrolet Volt and Nissan Leaf, are generating plenty of buzz. But it will take a while for them to catch on, especially as alternatives like turbo-charged, direct-injection engines remain more affordable.
Adriaens notes that hybrid vehicles have been available for about 10 or 12 years and still only represent about two percent of the U.S. market. The plug-in or electric vehicle slice of that will be a fraction of that for some time, he says.
A drill down into the likely buyers of plug-in, electric vehicles shows why. The Volt and Leaf are targeted at people who drive about 40 miles a day or less. But Adriaens says it's not necessarily about the 40 miles; it's how you drive it. A driver who does mostly city driving — dropping the kids off at school, going grocery shopping — uses much less of the battery than someone who does a highway commute to work.
"The around-town driver needs a battery that's only half the size of the $10,000 to $15,000 battery," he says. "And those who only drive around town have peer- to-peer models emerging for them. So suddenly the 40 miles per day segment is going to be smaller in reality."
Biofuel Firms Diversify
One alternative fuel idea that's been building is using the lipids, or fat, produced by algae as fuel. Algae have been engineered to increase lipid production and they are relatively easy to grow. Extracting those fats into usable fuel is the tricky part. The question Adriaens and other researchers had was how these firms justified their infrastructure costs, especially since the price of oil was relatively low until recently. That has muted demand for alternative fuels.
But then researchers noticed that some firms changed their names, dropping the word "biofuel." It turns out these companies are now focusing on other, non-fuel uses for the fat produced by algae. It can be found in plastics, cosmetics, dietary supplements, and fertilizer.
"All of these markets are less price-sensitive," he says. "We were wondering how these firms got the money out that they put in by just offering a fuel product. They've figured out that biofuel alone won't work in the U.S."
—Terry Kosdrosky
