CLEAN TECH: SPECIAL REPORT
Backed by Beijing, deep-pocketed, globe-trotting Chinese venture capitalists are buying up U.S. companies to power China’s emerging clean-tech revolution—and getting very rich in the process. How American technology is scaling up on the other side of the pacific.
One of Sonny Wu’s favorite restaurants in the city where he lives is a venerable wood-paneled haunt in central Hong Kong where the waiters wear black bow ties and the menu melds comfort food from the East and West. On a recent Sunday evening, dressed in jeans, an untucked red-and-white checked shirt, and a gold Patek Philippe watch, Wu, a 47-year-old venture capitalist, is attacking dinner in much the same way he attacks whole industries these days: He sits quietly in a corner, snaps up a range of options, and gorges himself.
As he demolishes a platter of barbecued chicken wings and washes it down with hot tea, Wu explains why he’s racing to corner two sectors he believes are primed for explosive growth: LED lights and electric cars. In March, Wu scored his biggest win yet. He beat out such suitors as KKR (KKR) and Bain & Co. for a $3.3 billion purchase of 80% of Philips’ (PHG) Lumileds unit, one of the world’s leading LED-light makers. Now he’s preparing to move the California-based arm of the Dutch multinational to China, where he is building factories to scale up the business.
A similar strategy led him in 2011 to buy control of Boston Power, a Massachusetts battery maker that boasted advanced technology but couldn’t commercialize it. He moved the company to China, and then, in 2014, he bought a stake in a little-known Chinese electric-car maker, Xindayang, which today is cranking out bulbous, brightly colored electric cars with Boston Power batteries under the hood. The company has sold about 32,000 electric cars this year—each for about $10,000.
Xindayang’s growth trajectory, Wu claims, puts it on track to soon sell many more cars than Tesla Motors (TSLA), the California-based maker of luxury electric vehicles that, along with its CEO, Elon Musk, is a global sensation. “Elon Musk is sexy, but Elon Musk is not changing the world,” Wu declares, his fingers glistening with barbecue sauce. “Let’s be frank. The guy who’s making the $100,000 car is not changing the world. The guy who is making the $10,000 electric vehicle is changing the world.”
He pauses, then grins. “You cannot have caviar every day. You have to eat chicken wings.”
Wu—part Chinese, part North American, all audacity—is the model of a new breed of global high-tech financier. He grew up in China and Canada, dropped out of graduate school at the University of California at Berkeley, and speaks unaccented Mandarin, Cantonese, and English. He has luxury homes and offices in Beijing, Hong Kong, and Silicon Valley, and he acts like a local on both sides of the Pacific—a body of water he treats essentially as a puddle, hopping across and back, first-class, more than a dozen times in a typical year. A chauffeur in Beijing ferries him around in a Porsche Cayenne, the desk manager of Shanghai’s five-star Jing An Shangri-La Hotel knows him by name, and Wall Street’s biggest banks now recognize him as a serious player.
The brash investor is quickly amassing an empire that, bankrolled in part by his friends in the Chinese government and among China’s billionaire set, is snarfing up technology companies from across the U.S. and around the world. His strategy is simple, unsentimental, and a sign of the times: Buy Western companies that have good technologies but poor domestic growth prospects and bring them to China, where Wu and his contacts serve up the money and the market to help the firms grow very big, very fast.
China, the world’s biggest polluter, is racing to clean itself up. The skies above its cities have become so poisonously smoggy that what started as a public-health danger has become, for China’s ruling regime, a political threat. That’s why Beijing is cracking down on pollution. The country’s leaders are mandating improved efficiency for coal-fired power plants, rolling out fat incentives for renewable energy and electric cars, and advising government-affiliated banks to help finance this power shift. At the same time, the country sees clean-energy technologies as a huge new market. Just as China cornered the manufacture of T‑shirts and televisions a generation ago, so it is moving to dominate the production of electric cars and solar panels in the near future.
In the U.S., China’s clean-energy push elicits both praise and terror. Environmentalists laud it, arguing that only if China, the world’s biggest greenhouse-gas emitter, goes green will the world have any chance of solving climate change. Nationalists decry it, fearing that China is snagging American clean-energy technologies that could, in the fullness of time, look like lost crown jewels. As for the Silicon Valley entrepreneurs developing these technologies, they’re simply seeking capital to fund their ventures—and finding that increasingly it comes from China.
Stephan Dolezalek, a managing director at California’s VantagePoint Capital Partners and a veteran Silicon Valley clean-energy investor, sees in the trend the reality that China—its government and its investors—are hungrier to scale up clean energy than the U.S. is. “We’re stuck with a perfectly okay system. We’re stuck with incumbents trying to protect their stakes. We’re actually aggressive in trying to stop it from taking hold in the U.S.,” says Dolezalek, who in 2012 helped sell Silicon Valley solar-panel maker MiaSolé, a firm VantagePoint had invested in but couldn’t commercialize, to Hanergy, a Chinese hydropower conglomerate. Against this backdrop, the Chinese are responding sensibly, Dolezalek says. “They’re saying, ‘Great. We’ll just do it.’ ”
Middlemen like Wu are springing up to grease this transpacific money flow. Equally at home in Shanghai and San Francisco, these investors are arbitraging the gap between America’s clean-energy know-how and China’s clean-energy need. Their center of operations typically is Beijing, where they have friends in high places. But it would be wrong to see them merely as arms of the Chinese state. Like opportunistic investors everywhere, they raise money wherever they can get it. Much of their capital comes from Europe, Japan, and the U.S.
Their game shows little sign of slowing. The Shanghai stock market, which was cratering the week I dined with Wu in China, has since been rebounding. The U.S. presidential race is likely to whip up American anti-China rhetoric—elections typically do—but the politicking won’t change the financial reasons beckoning U.S. entrepreneurs to China. And whatever the outcome of a round of global climate-change negotiations in Paris that was underway as this article went to press, China and the U.S. will need each other to follow through on promises they’ve made to curb the amount of carbon dioxide they cough out.
Building a Foundation
Chinese money has been trickling into Silicon Valley for years. But lately the flow, particularly into clean-energy technologies, has opened up. An ecosystem of Chinese-funded high-tech incubators is sprouting in the Valley. Bankrolled by a mix of Chinese individuals, corporations, and municipal and provincial governments, they’re giving U.S. companies space to grow—and a clear path to do it in the biggest clean-energy market on the planet.
One of Silicon Valley’s first Chinese-funded incubators, called InnoSpring, opened in 2012 in a stucco-and-glass office park in Santa Clara, Calif., across a highway from Levi’s Stadium, home of the San Francisco 49ers. InnoSpring’s funders include Wanxiang Group, a Chinese auto-parts giant that in recent years has bought such U.S companies as Fisker, an electric-car maker, and A123, a battery developer.
InnoSpring’s pitch to U.S. companies is clear. “We are here because we can take them to China if they want to go,” says Wanfeng Liu, InnoSpring’s Shanghai-based president, on one of his recent visits to Santa Clara.
Some 20 Chinese-funded technology incubators dot Silicon Valley today. Most were opened in the past three years, estimates Ping Wu, who helped conceive of InnoSpring as well as one of its newer rivals, called SVC Angel. (The “SV” stands for Silicon Valley, and the “C” stands for China.)
SVC is essentially a loose club of Chinese investors pouring money into Silicon Valley, and it has what amount to two brand-new clubhouses. There’s an incubator for entrepreneurs, housed in a Santa Clara office. In typical Silicon Valley fashion, the blacktop looks like a joint BMW and Mercedes new-car lot, and the office is crammed full of communal tables where young people on whimsically colored chairs hunch over laptops.
Then there’s the group’s more sober base for investors, about 25 miles northwest of Santa Clara, in Belmont, Calif. It’s in a building overlooking San Francisco Bay that once was the first headquarters of Oracle (ORCL), the software giant. The space is a collection of glass-walled offices, each with a sign identifying the company using it. “All these are Chinese funds,” says a proud Don Ye, an early investor in SVC Angel, whose second-floor corner office has by far the facility’s best waterfront view.
Living in a Middle Zone
If there’s an elder statesman of Chinese clean-energy venture-capital investing, Ye, the 51-year-old founding partner of the Beijing firm Tsing Capital, is it. His first fund, which he struggled to raise in 2002, when he was just 38, had $13 million. The fund he closed in 2012 had $282 million. His investors have included some of the biggest names in global finance: multinationals such as BP, BASF, ABB, and Mitsui; development institutions such as the World Bank’s International Finance Corp.; European pension and sovereign-wealth funds; and family offices, including that of Eric Xu, co-founder of Chinese web-search engine Baidu (BIDU). In his Beijing office, in a room with a massive tea set where Ye receives visitors, a credenza holds photos of Ye with an array of luminaries, including Al Gore.
Now Ye is raising a fifth fund, for which he’s targeting $350 million. The money is chasing fixes for China’s monumental environmental ills, and Ye and his partners plan to invest much of it in Western tech companies, particularly those from the U.S. that they hope to scale up in China. “China’s environment now has cancer,” Ye says. “But China has lots of cash.”
The venture business has been good to Ye. As he decried China’s polluted air and rivers, he was sitting under a gorgeous blue sky, sipping tea by the backyard pool of his vacation home in Woodside, Calif. The house has a clear view of San Francisco Bay, solar panels on the roof, and a Mercedes SUV that retails for $90,000 sitting in the garage alongside a Chevy Volt. Strung between trees in the backyard were multicolored flags, each with a different sutra, or aphorism in Buddhism, the religion that Ye took up a few years ago. Ye has a Buddhist master from Tibet as a personal teacher, and one morning as he and I speak by the pool, the guru sits at the kitchen table, quietly eating breakfast. Earlier in the year Ye had hosted a July Fourth fireworks-watching party; he plans to make it an annual tradition.
“China’s environment now has cancer,”says one Chinese venture capitalist. “But China has lots of cash.”
Ye always seems to be in a middle zone between China and the U.S. “Hello?” he says by the pool at one point, answering one of the two mobile phones sitting on a table beside his tea cup. “I mean, Wei?” he adds, proffering the traditional Mandarin phone greeting once he realizes the caller is Chinese. The call is about a Silicon Valley investment of Ye’s that’s proving difficult: Atieva, a company racing to develop a luxury electric car.
Atieva was founded in 2007 by Bernard Tse, an engineer who the year before had left Tesla, where he was a vice president and board member. From the start the company was focused on China, where government has rolled out generous subsidies for electric cars. In 2009, Tsing Capital invested $8 million in Atieva. The startup later raised additional money—with help from Tsing—including a $200 million round that closed in 2014, with virtually all the money coming from China. The biggest chunk, $100 million, came from Beijing Automotive Industry Holding Co., or BAIC, a state-owned company that’s one of China’s largest automakers.
Electric-car designer Henrik Fisker introduced a new model in November 2014. Fisher Automotive was bought in bankruptcy in early 2014 by China’s Wanxiang Group.Photograph By Frederic J. Brown — AFP via Getty Images
Ye invited me to visit Atieva to meet Tse, the CEO. But when I got to the company’s headquarters, a squat building in an industrial section of Palo Alto, Tse didn’t want to talk. A potential explanation for his reticence emerged a few days later. Atieva’s board met, and a session scheduled to take two hours lasted many more because of friction about the company’s direction, reported Ye. Atieva and several of its investors regard themselves as competing against one another to get an electric car onto the road. They are, Ye says, “all in the same pot.”
A couple of weeks later, I headed to China. In Beijing, I went with Ye to BAIC’s headquarters, a building designed by a German architect that’s clad in metal and looks like a ship, with halls as long and shiny as bowling lanes. Sitting alone in an office, I could hear people approaching, because their rubber-soled shoes padding against the floor made an ever louder “swish, swish.”
The BAIC investment in Atieva envisions a joint venture in which BAIC will open a factory in China to build Atieva cars. BAIC already makes its own electric vehicles; it sold 5,510 of them in 2014, a tiny fraction of its total sales of 2.4 million passenger vehicles. But BAIC has plans to boost electric-vehicle production. Part of its strategy is to build an Atieva car that’s faster, lighter, more luxurious, and able to go farther on a charge. The goal, I was told, is for Atieva’s car to compete against Tesla’s Model S.
Scaling Up at China Speed
China represents the commercialization strategy for another of Ye’s Silicon Valley clean-energy investments: Sunpreme, which developed, in Sunnyvale, Calif., an innovative way to make efficient solar cells. Ashok Sinha, Sunpreme’s CEO, founded the company in 2007 after a career that included two decades at Bell Laboratories and several years at Applied Materials (AMAT), a prominent Silicon Valley maker of equipment for the computer-chip industry.
Sinha had spent significant time in China, which was fast becoming the center of the global solar industry. He knew he wanted to locate his factory there. In November 2009, at a dinner for several of its portfolio companies that Tsing held on Lamma Island—part of the Hong Kong archipelago—an attendee from Jiaxing, a city about 90 minutes west of Shanghai that was embarking on an aggressive program to install solar panels on rooftops and streetlights, suggested that Sinha put his factory there.
What happened next, Sinha recalls, was textbook China. Negotiations with Jiaxing officials began almost immediately. “In March we had the deal. In May we had the opening ceremony. And by the end of Christmas, we had product coming out,” he says. “This speed is unheard-of. It would not have happened anywhere else in the world.”
Jiaxing and the surrounding province of Zhejiang gave Sunpreme incentives that Sinha values at about $5 million. On a recent Saturday morning—Saturdays are workdays at Sunpreme’s China factory—the scene on the processing floor looks like a cross between Willy Wonka’s chocolate factory and Dr. No’s underground lair. A solar-cell production line is largely a series of furnaces, each baking various coatings onto a piece of silicon that improve its ability to turn sunlight into electricity. At Sunpreme, workers dressed head to toe in white jumpsuits scurry around in a carefully orchestrated ballet, ferrying racks of silicon slices from one machine to another. The chemistry of the coatings that Sunpreme adds to the silicon slices, and the precise way it applies those coatings, are the company’s secret sauce.
Sinha, the CEO, has spent the past few months flying around the world in search of some $250 million to balloon Sunpreme’s production capacity by a factor of about 25 over the next two years. Sunpreme, he says, is in advanced talks with multiple parties, including one of the world’s largest solar players: Sun Edison (SUNE), based in California, whose stock has taken a recent drubbing. Officials in New Mexico and Virginia also have met with Sunpreme to try to woo the company’s new factory, Sinha said.
But though each of those states has discussed with Sunpreme a grant of more than $10 million, their incentives pale against the deal being dangled by Suzhou, a Chinese city not far from Jiaxing that has built considerable solar-manufacturing infrastructure. Suzhou officials have lined up millions in Chinese bank loans for Sunpreme with an interest rate of 4%, a fraction of what Sunpreme would have to pay in the U.S. “That,” Sinha says, “is good money.”
Taking On Tesla
If Don Ye is the diplomatic ambassador for China’s clean-energy venture capital community, then GSR’s Wu is its grand strategist. Wu, who holds stock worth hundreds of millions of dollars, likes expensive French wine, fast German cars, and big global deals. “The future of clean-tech manufacturing is in China,” he says confidently. “The U.S. can try to block it; it doesn’t matter. It’s all about competitive advantage.”
Born in 1968, Wu grew up in China. In 1981, soon after Deng Xiaoping, then the Chinese leader, normalized relations with the West, Wu’s parents, both teachers, moved with their 13-year-old son to Vancouver. Wu went to college in Canada—his passport is still Canadian—and he enrolled in a Ph.D. program in physics at Berkeley. He dropped out when he concluded that, as he puts it, “I wouldn’t have a chance of winning a Nobel Prize.”
Soon after he took a job at Nortel, the Canadian telecommunications and semiconductor giant. He returned to China for Nortel, then later left the company to launch a startup. In 2004 he started GSR. It stands for Golden Sand River, one of three waterways that originate in China’s Yunnan province and wend their way into neighboring countries. Only the GSR returns to China. The metaphor fit Wu’s investment thesis.
GSR’s first fund, closed in 2005, totaled $75 million. A decade later GSR’s war chest is about $2 billion, and the firm recently announced its intent to raise as much as $5 billion. Wu’s non-Chinese investors have included the World Bank and Holland’s AlpInvest Partners. GSR’s office occupies much of the 56th floor of the China World Trade Center Tower III, an 81-story skyscraper that is now Beijing’s tallest building.
When it enters into a deal, GSR does more than invest its own money. It taps its contacts in government in China and at other investment entities to pile on their money too. A case in point is GSR’s bid to dominate electric cars.
A tentpole of that strategy is Boston Power, founded in Massachusetts in 2005 by a former battery-industry consultant seeking to make high-efficiency lithium-ion batteries for notebook computers. The company soon was squeezed, says Richard Chamberlain, Boston Power’s longtime chief technology officer. Battery prices were declining, “and we had no manufacturing scale.”
In 2011, Boston Power took two big steps. It shifted strategy to target its batteries toward vehicles instead of computers, because “we saw big government subsidies” rolling out in China for electric cars, Chamberlain says. And as part of that shift, it accepted an investment from GSR. The move sparked concern in the U.S. that China was snapping up a valuable American technology. Wu rejects that worry. “We saved the company from bankruptcy,” he says.
GSR has put some $50 million of its own capital into Boston Power. Investors GSR helped bring in, including prominent firms from the U.S. and Europe as well as private and government-affiliated parties from China, have since added over $300 million. In addition, GSR helped arrange a package of subsidies for the battery company to defray the cost of building a commercial-scale factory in Liyang, a city west of Shanghai. Among those subsidies: The local government agreed to build the factory and gave the company several years to pay the cost back. By mid-2013, the facility was up and running.
Then, in 2014, GSR invested in Xindayang, the Chinese EV maker. GSR has put about $15 million of its own money into the company so far. Xindayang began in 2001 as a manufacturer of motors and controllers for electric bikes and scooters. In 2012, wanting higher margins, Xindayang started cranking out inexpensive electric cars. The new vehicle was hatched with the help of designers in Italy. But its curvy lines couldn’t hide the limitations of its battery, a Chinese model that could power the car only about 75 miles on a charge.
Boston Power now sells most of its batteries to Xindayang, which markets its cars under a joint venture with Zhejiang Geely Holding Group Co., the Chinese automotive giant that also owns Volvo. The Boston Power battery boosts the car’s range to about 110 miles on a charge. That’s not just more convenient for a driver. Crucially, it means the car qualifies for the highest level of consumer subsidies under a new round of electric-car incentives China recently rolled out. That car retails for about $23,400, but the subsidies slash the price a consumer pays to about $9,300. Xindayang is aiming to sell 300,000 vehicles by 2020, says Shu Bin Zhang, a Xindayang manager who shows me around the factory one afternoon. Says Wu: “Whatever the number is, it’s going to be more than Tesla.”
The car itself is no Tesla. It’s advertised as going from zero to 30 miles per hour in seven seconds. When I take it for a spin on the lot surrounding Xindayang’s factory in Shandong province and floor it, I clock it at 10 seconds, and that acceleration produces a harsh rattle in the car’s rear end. Still, Zhang notes, “most people can afford it.”
Largely on the back of Xindayang sales, Boston Power, still a small player in the battery industry, is struggling to expand production. Its factory in Liyang, says Chamberlain, is producing at much less than its capacity. “Some things aren’t working as well as they should be,” he says.
But GSR is barreling ahead. It’s talking to government officials in Tianjin, an industrial city southeast of Beijing, hoping for an incentive package that would lure Boston Power’s next plant there.
All of which means Boston Power’s future is firmly in China, the biggest auto market in the world. Chamberlain, whose Boston roots are audible every time he opens his mouth, says it’s hard to imagine his company growing nearly as fast back home: “It would be very hard in the U.S.”
Forming a Master Plan
Wu’s grandest move yet was his come-from-behind buyout of Philips’ Lumileds lighting unit in spring 2015. If any observers doubted before that deal that Wu is for real—and plenty of players did, including Philips and its chief investment banker in the transaction, Morgan Stanley (MS)—they don’t doubt him anymore.
Wu’s team beat out the likes of KKR and Bain essentially because it wagered it could wring more profit from Lumileds’ technology—a bet based on a calculation that it could tap its extensive China contacts to ramp up Lumileds’ production hard and fast. Wu’s team assembled a slate of investors, most of them from China, who collectively put up about $1.3 billion in equity. It also got the Bank of China to fork over some $1.9 billion in debt—at 3% interest, well below market rates.
Now, finalizing the deal depends on approval by the Committee on Foreign Investment in the U.S., known as CFIUS, a federal entity that can block U.S. asset sales to foreigners if CFIUS concludes those sales would jeopardize national security. Wu is working a Washington strategy to win CFIUS approval. Meanwhile, he’s already begun building the first of what he expects will be several Lumileds factories in China.
Like a chess master watching his strategy unfold, the venture capitalist can see his global plan coming together perfectly. “Every element for LED lighting is under our control. Every element for electric cars and electric batteries is under our control,” Wu tells me triumphantly one afternoon.
He is sitting in Shanghai, sipping a cool drink by a corner window in the executive club on the 55th floor of the Jing An Shangri-La Hotel. Then he pauses. “Maybe I’m too arrogant. Maybe I’m too ambitious,” he volunteers, though it seems more out of politeness than because he really has doubts. China’s sky is notorious for darkening quickly. On this day, however, the view of the country that calls itself the Middle Kingdom is pretty clear. As Wu gazes out the club’s floor-to-ceiling windows, he can see, in many directions, for many miles.
A version of this article appears in the December 15, 2015 issue of Fortune.