Cleantech -- China and the US Comparison, competition, cooperation

Cleantech-- China and the US Comparison, competition, cooperation December 10, 2010 Ken DeWoskin Erb Institute for Global Sustainable Enterprise

Agenda • China’s challenges • China launches the next five year plan • China Green growth overview • Some U.S.- China system features • Synergies– U.S. and China Deloitte 2

China seeks a leadership role in most Cleantech sectors Solar Thermal Hydro Power Wind Power PhotoVoltaics Clean Tech & RenewableEnergy Technology Segments Solid Biomass Efficient Mobility Bio Fuels Geo Thermal Waste Recycling Sustainable Materials Bio Gas Energy Efficiency CO2 Reduction Water Treatment Deloitte

China, India and the U.S. — green giants Sun radiation on the earth • China, U.S., and India together represent 42.6percent of the total power generated in the world (International Energy Agency 2009) • China — 3,279 TWh (16.6percent) • U.S. — 4,323 TWh (21.9percent) • India — 803 TWh (4.1percent) • The Indian and U.S. models are primarily reliant on private industry with incentivizing regulations • China is primarily reliant on a strong industrial policy and direct investment from central and local government sources • China and India have world-leading targets for renewable and to date have focused on wind power over solar • Both China and India have major PV module manufacturing capacity and export far more than they install domestically. Both markets are intensely competitive in manufacturing Source: Solar Millennium AG, Erlangen Very good Good Satisfactory Not satisfactory Annual Solar Energy Yield (KWh/KWp) Source: Mckinsey report quoted in Mint/MNES Deloitte 4

Market and policy imbalances and balance points are delicate and intertwined Steps Raise interest rates Not raise interest rates Risks Benefits Appreciate RMB Overslow growth Impede export growth Curtail asset bubbles Not Appreciate RMB Affordable housing Drive asset bubbles Continue stimulus Moderate inflation Discontinue stimulus Drive inflation Avoid trade strife Increase trade disputes Add property tax Support target growth Not add property tax Crash property markets Meet social obligations Encourage wage increase Foment social unrest Harmonious society Discourage wage increase Deloitte

China’s growth model has demanded large amounts of investment capital growing very quickly Bn RMB CAGR 40% 35% 30% 76% 25% 67% 20% 55% 15% 56% 52% 10% 48% 44% 41% 5% 36% 34% 37% FAI/GDP FAI CAGR Deloitte

Enter the era of “Inclusive Growth” This month China approved a new five-year blueprint for economic and social development, in which the ruling Communist Party of China promises to further improve people's livelihood and "vigorous yet steady" efforts. Princelings Xi Jinping Li Yuanchao Zheng Qingli Zhang Youxia Yang Yuanyuan Liu Yuan Wang Yi Deloitte

In various venues, a consistent public agenda has been promoted Stated Leadership PrioritiesLi Keqiang – Report to The Party School, Feb 2010 – China’s top 10 challenges Li is known to have advocated much more stringent property controls and more aggressive structural reform since early this year. • Moving to a more sustainable growth model • Boosting consumption to reduce dependence on exports and fixed asset investment • Shifting industry up the value-added chain • Reducing widening wealth disparities • Checking rampant environmental degradation • Reigning in corruption • Strengthening agriculture • Sustaining employment • Increasing energy efficiency • Coping with chronic water shortages Deloitte

How the planners plan to make the plan work To preserve the interests of the State while maintaining impressive growth rates at an increasingly large scale in an increasingly challenging environment • Grow demand for steel, energy, cement, and aluminum by mandating/funding low-income housing units, transport, and energy-efficient industrial upgrades • Diversify sources/types of commercial financing, via moderate liberalization of interest rates and liberalization of financial activities for non-bank investors • Project the Renminbi into a broader international role • Secure supply and price control of key commodities for the central government • Sustain a continuing net contribution of exports to national growth by reducing the value added in imports and raising China’s value-added portion of export products. • Diversify destination markets, particularly to Africa and the Mideast, where national strategic goals blend with markets that are comparatively easy to access • Stimulate domestic consumption via direct consumer subsidies, moderately accelerated wage growth, low prices, and logistic efficiencies Deloitte

What keeps the planners awake at night? • Domestic risks such as inflation, asset bubbles, and mis-allocation of resources may be difficult to manage • External risks, such as trade disputes, WTO actions, currency wars, and other protectionist actions could take a toll • Additional stimulus will be used in 2010/11, making withdrawal of stimulus more difficult and return to market-reforms challenging • Large Chinese enterprises will gain strength domestically but remain challenged to create any footprint outside China • Enterprise control weaknesses, systemic corruption, and compromised reporting standards contribute to inefficiency, investor doubts, and market volatility • Worsening mal-distribution of wealth/resources • Demographic dividend is gone, and increasing dependency ratios with weak social infrastructure investment will strain household resources Deloitte

Following the money– looking at three sensitive contradictions The shift to domestic consumption– the actual measures of the FYP are very weak, with no proposed increase in distribution of national wealth to households. While subsidies currently drive about 25% or many major consumer purchases, they support products with lowest margins, and they have failed in the past (cellphones in 1998-99). Shift to household consumption will take longer and depend on demographics– dependency ratios and older work force with higher wages. The economy is continuing to privatize-- industries such as steel and mining are examples of a strong recentralization effort that lurks behind much of the FYP policy directions. The coal resources of Shanxi were dramatically returned to the control of large government enterprises like Poly Holdings, CITIC and Shenhua, after several years of privatization that created many wealthy families. The Central Government is putting massive resources into Going Green– The FYP envisions 5T RMB of investment in alternative energy, but a close read indicates that much of this is expected to be provided by private investors. The FYP actually will increase the use of fossil fuels, by re-powering the big SOEs in fossil fuels, restructuring energy pricing, and opening up huge reserves in Xinjiang and Inner Mongolia. Energy conservation is likely to be more important than renewables Deloitte

What does the 12th FYP say about Green Growth? Priority sectors– for technology, capacity and export development • Environmental preservation • New generation information technology • Biotechnology • High technology manufacturing • New energy • New materials • New energy vehicles • Sales of “new energy” automobiles to exceed 1 million by 2015 • New energy automotive will be among the most important sectors in the economy for the next ten years. China will be the world’s largest producer of new energy vehicles • Integrate BEV and hybrid electric vehicle technologies • China plans investment of more than 100 billion RMB over the next 10 years to support new-energy automobile production Deloitte

The plan continues the interventions post crisis . . . • “Green spending” is estimated to be US$221 billion, including renewables, low-carbon vehicles, high-speed rail, smart grid, efficiency improvements, water treatment (by HSBC). Much will be financed by local governments • Historically, big infrastructure spending by the State has created huge opportunities for entrepreneurs and MNCs (Internet backbone, ports, petrochemicals, power grid) • The State Council has just reiterated China’s interest in attracting foreign capital into areas with large investment and high technology needs 2009-10 Stimulus package has direct or indirect impact on many industries Construction Materials Consumer Business Steel Real Estate Power Grid Road & Infrastructure Equipment Manufacturing RMB 4 trillion Stimulus Package Logistics Power Generation Rail Airport Renewable Energy Agriculture Travel/ Tourism Deloitte 13

Non-public money is the pillar of Cleantech sectors Chinese Clean Tech Companies M&A (2006-Q1/2010) Chinese Clean Tech Companies IPO Capital Raised (2006-Q1/2010) Source: Cleantech Group, ChinaVenture In 2009, China/HK accounted for both the greatest value globally from clean tech IPOs (69percent), more than double the U.S. (26 percent) and 53 percent of deals too (17 of 32). 14 Deloitte

U.S.-China system features If we accept the premise that successful clean tech initiatives at national scale will require close partnership between governments and private sector, how do China and the U.S. compare? Government-business involvement deeply rooted in development model Ideological and structural commitment to free markets and regulator independence 2008/9 RMB 4 trillion ($589 billion )stimulus 2010/11 RMB 4 trillion ($589 billion) stimulus Direct grants in auto Direct grants in solar State Grid Corp SOE Power Corps Central power price management Non-regulatory controls Some stimulus funds Some DOE grants Supportive capital markets Supportive private investment Legislative delays in new regs Market-based power corps State-level price management Only regulatory controls Near and mid-term advantage implementing infrastructure ? Near and mid-term advantage developing core technologies Deloitte 15

U.S.-China system features-- different calculus Comparing China and the U.S., the different models of development, different stages of development, and different resource situations drive differing strategic goals and focuses • Build infrastructure to mitigate future import/security risks • Crude oil and food grains • Maintain competitive environment for export economy and domestic growth • Reduce environmental impact • Incentivize manufacturing capacity for export value • Indigenize technology to reduce technology costs to manufacturers • Seed marketplace to diversify commercial energy options • Reduce dependence on foreign oil and high risk domestic production • Reduce environmental impact • Incentivize technology development for export value • Incentivize manufacturing capacity for export value • Finance global green growth commercial operators through PE/VC channels Deloitte 16

There is a consensus around fast growth sectors– but we should reexamine frequently Better than average Worse than average Consensus Possible Average Financial services Healthcare and health sciences Agriculture and food Cleantech (renewables and high tech) Education Entertainment and media Mobile IT Energy conservation Fossil fuels and traditional power Manufacturing Deloitte

Outbound investment remains dominated by energy and materials Deloitte

Synergies — U.S. and China enterprises • Clean tech now is the most popular VC/PE investment category in China, and the investments continue to increase • 29 companies received VC/PE investment with total disclosed value of US$784M in 2009 • In Q1 2010, 11 companies have received VC/PE investment with total disclosed value of US$72M. Largest deal in 2009 was one of the largest automobile company, developer of EVs — US$426 million from a domestic PE firm. US$230 million high profile investment in BYD • The leading deals in 2010 thus far have involved:a developer of LED lighting —US $22 million; and a developer of advanced batteries for large-scale energy storage — US$22 million Source: Cleantech Group 19 Deloitte

Synergies — U.S. and China cooperation Major U.S. Corporate Activity in Chinese Cleantech Innovation 2010 — some examples 20 Deloitte

Synergies — U.S. and China benchmark cases Technology flows are indirectly documented in a number of high and low profile investments, strategic alliances, and government policy decisions • World’s largest solar farm, to be completed in 2019 • 2,000 MW PV Solar Farm, will power 3 million homes • Underscores attraction of Cadmium Tellerium thin film technology over domestic crystalline PV • Estimated cost: US$5-6 billion A solar JV with Chinese government in Ordos, Inner Mongolia • World’s largest solar research facility & lab • Xi’an city government will reimburse the company for a quarter of the lab complex’s operating costs for five years • Thin film manufacturing line, a complete crystalline silicon pilot process, facilities for R&D, engineering, demo, testing and training • Cost: US$250+ million A solar technology center In Xi’an, Shaanxi Province • The 10th Five‐Year Plan (2000-2005) began the Chinese government's interest the development of EVs — allocated RMB 880 million (US$131 million) for EV Projects • 11th Five- Year Plan (2006-2010) allocated RMB 1B (US$147M) • In June 2010, the central government picked 15 automakers & JVs for fuel-efficiency subsidies of RMB 3,000 (US$441) per vehicle Government subsidies to JV automakers Deloitte 21

Synergies — U.S. and China Distribution of Clean Tech Investment in China 2006-2010 Q1  Energy generation and transportation are still the key investment beneficiaries, while energy efficiency and energy storage, are important emerging sectors increasingly gaining investors’ attention. Deloitte 22

Looking ahead — Five key takeaways • China has been able to mobilize substantial amounts of capital and has pressed the indigenous innovation campaign for many years • Still, the pressing need to address environmental remediation and energy security assures an important role for foreign investment and foreign technology for years to come • China derives benefits from its well-established government-business alignment but also runs the risks of resource misallocation that is common to economies with strong industrial policies • The renewable energy build-out in the U.S. is likely to have a larger role for decentralized power generation, net metering, and structured feed-in tariffs; China to have a larger role for centralized, commercial scale generation facilities • Substantial synergies exist between the U.S. as a technology and finance leader and China as a manufacturing and construction powerhouse. The two systems working harmoniously will play a dominant role in the greening of the globe Deloitte 21 23

Cleantech -- China and the US Comparison, competition, cooperation