Feb 1, 2007: Tens of thousands of people have marched through Mexico City in a protest against the rising price of tortillas. The price of the flat corn bread, the main source of calories for many poor Mexicans, recently rose by over 400%… More from BBC here.

It seems that the ethanol boom in the US is starting to have an impact on food prices. Of course, a story like this is never that simple:

From the NY Times a week earlier: There is a continuing debate here about what caused the price of tortillas to shoot up so quickly. Some economists blame the increased demand for corn from ethanol plants in the United States, and it is true corn prices in the States last week reached their highest point in a decade, the United States Agriculture Department said. At the same time, the cost of white corn has risen about 13 percent here over the past year, Mexican government figures show.

But Mexican lawmakers and other officials have suggested that giant tortilla companies and corn flour distributors — among them Grupo Maseca S.A. and Maíz Industrializado S.A., often known as Minsa — have taken advantage of the situation, hoarding supplies to drive prices up even more.

President Bush’s 2008 budget, which was released earlier this week, proposes a record high amount of federal research and development (R&D) funding. But an increase in weapons-development funding is largely responsible for the record R&D spending: overall support for long-term research is down. And expenditures for energy-related R&D are less than the anticipated 2007 levels.

Technology Review: White House Budget to Cut Energy Research

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I am writing today from CERA Week in Houston, where “Old Energy” is definitely in the house. I am reminded that, despite the popular discussion about alternative energy —solar, wind, biofuels, hydro, etc— we shouldn’t forget that traditional fossil fuels are, by a very large margin, still top of the heap. The chart above paints a clear picture of today’s reality. I don’t know the exact definitions used by IEA here, but even “Combustible Renewables and Renewable Waste”, which sounds nice at 10% of the world energy mix, could actually represent a lot campfires and burning cow dung in rural Africa/China/India. Not exactly the technologically advanced renewables being venture funded these days. From a societal perspective, we have a long, long way to go. From a venture investment perspective, though, I think we can anticipate very large growth rates in these nascent industries.

Written by The Naib

It seems that the renewable energy news coming out of China just keeps on growing. In a bit of bad news it seems that even the Chinese are not immune to the global silicon shortage.

“Solar cell prices, which have increased by about US$0.30 per watt in the past two years, are expected to rise further, driving the cost of solar panels higher,” said Global Sources general manager of Content Development, Michael Kleist.

“With margins at about five percent for many manufacturers, the market is expected to continue to be challenging in the months ahead.”

From the 101-page Global Sources “China Sourcing Report”:

Surveyed solar panel manufacturers’ top concerns and primary challenges for the next 12 months:

• 56 percent cited higher raw material costs
• 20 percent said price competition
• 14 percent cited design copying/piracy
• 10 percent said power and labor shortages

“In order to increase profit margins, many manufacturers say they plan to increase capacity to gain economies of scale,” said Kleist. According to surveyed manufacturers:

• 22 percent plan to increase capacity by more than 50 percent
• 20 percent expect increases of 20 to 50 percent
• 50 percent plan increases of up to 20 percent
• 8 percent plan to maintain current capacity

“One bright spot for China’s exporters is the EU,” said Kleist. “Due to favorable legislation, which includes financial incentives encouraging the use of renewable energy, many manufacturers are targeting exports to this market.” Among surveyed manufacturers:

• 74 percent plan to focus on exporting to the EU
• 20 percent plan to target exports to the United States
• 6 percent plan to focus on the Mideast/Africa and Asia

Source: Sixty-Seven Percent Of China Solar Panel Manufacturers Plan To Raise Prices In 2007

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The last 2 years have witnessed a huge inflow of private equity into China… the subsequent run of networking events and fancy cocktail bar openings in Shanghai are reminisce of Silicon Valley in 1999, but with more neon and KTV.

Venture capital investments in companies headquartered in mainland China had a record-breaking year in 2006, with estimates of total investment reaching over $1.7 billion. Private equity also had a banner year after raising almost $16 billion for Chinese investments in 2005, compared to only $2.5 billion in 2004 (Journal of Private Equity).

In a 2006 interview, WI Harper Group Chairman, Peter Liu, characterized the situation, “More funding has brought more competition to the venture capital industry in China. Mainland-based domestic and foreign ventures firms raised US$4 billion in new funds (in 2005) due to their positive performance, setting a record for fundraising in China.” He went on to say, “Localization is one of the key success factors in China. Local teams always do better than foreigners and overseas Chinese. They have a better understanding of the culture, the demand, as well as the rules of the game.”

It also seems to me that having so many fewer truly local firms in the fray helps them maintain their edge. It strengthens their competitive advantages in terms of deal flow, government relations, due diligence and portfolio monitoring. And, there’s just so many foreigners in the market now. I know this commentary seems kind of funny coming from the one white guy over there working for a local firm, but it’s an intersting dynamic you don’t find in the Silicon Valley.

While there are many aspects to the competitive landscape, for this post, I’ve zeroed in on three axes:

1. Stage
2. Local vs Foreign
3. Geography

Let’s start with the first two. To keep track of the goings on, I’ve created a 3X2 matrix. Obviously, this is not all inclusive but starts to give a picture of what’s going on. Actually, I welcome all input on developing this further, so please comment. The big takeaway is that the 2 bottom corners are pretty crowded. That is, there are a lot of foreign firms that are looking early stage VC and late stage buy outs. To generalize, there seems to be less attention paid to mid-stage growth equity.

The third axis which I find important is geography. Like the US, the distribution of VC investments is fairly concentrated around a handful of innovation clusters. The large majority of early stage venture capital investments have been made in three major metropolitan areas in China: Beijing, Shanghai and Shenzhen. Not surprisingly, most of the foreign-based PE or VC firms also tend to focus their China operation in these three areas.

Venture Capital Invested, 2006 (Zero2IPO)

However, unlike the US, China has 1 billion more people outside those regions that are kicking and scratching their way into a modern 21st century. With as many as 200 hundred cities with over 1 million people (the US has 7) and very fragmented markets, local governments and entrepreneurs are building their own technology and innovation clusters. It’s my belief that the greatest untold story in China today is the technology and business model innovation that is happening in China’s secondary cities.

Having said that, science and engineering innovation as a whole in China is still far behind the US. In a large majority of the cases, once you sort through all the business plan hype, the opportunity is really about tech transfer and market access. The interesting part will come when the markets begin to consolidate and companies can more easily reach national markets. This will be driven by transportation and communication sector investments. It’s already starting to happen, which leads more to PE thinking than VC.

For this reason and others, the geographic distribution of private equity investment has been more diversified, although many of the successful deals in the secondary regions were invested by domestic investors, since foreign investors find it difficult to confront the challenges at the local level (despite all the right conections in Beijing).

All in all, China’s private equity activity is poised to maintain its trajectory in the year of the pig, but I think we will see higher deal prices as a result of the competition. In response, both foreign and local firms will hone in more on their proprietary deal flow in order to carve out niches for themselves.

The current cover story on Forbes exposes the underbelly of wall street and the penny stock trends accompanying the cleantech boom:

KissyKat And The Magic Diesel
Daniel Fisher
When the cry goes up, “Renewable Energy!” an army of penny-stock operators swings into action.

I was thinking about paddling out in the morning, then I saw this:

Shark Alert: Recent sightings have been reported at Waddell Creek, Ocean Beach, Cowells in Santa Cruz, Pescadero State Beach in San Mateo County, and Manresa State Beach. Be cautious when participating in water activities in these areas. If you would like to document other shark sightings and encounters, please visit the Shark Research Committee website.

Source: Surfline | Fort Point

I might still paddle out…

[Update Sun evening: I went for a bike ride instead...]

technorati tags:surf, sharks

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Accoridng to the Global Wind Energy Council (GWEC):

China is set to become the world’s largest producer of wind power by 2020, when it could draw 150 million kilowatts (kw) from the gusts along its enormous coasts and vast deserts and plains, generating 10 percent or more of its needs. Currently, the country ranks seventh in the world for wind power production, leaping 30 percent on an annual average, since 2000 (350,000 kw) to 1.26 million kw in 2005.

And in 2007, says one analyst, the country’s wind power capacity is set to rise by 65 percent. All in all, China boasts a total capacity of 3.2 billion kw, of which one billion kw can be developed, according to the GWEC report. But coming anywhere near that capacity–and attracting more crucial foreign investment–will require reforms of the country’s wind pricing mechanism.

One major impetus for developing wind (see the strong foreign interest and the… more…

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China plans on spending $103 million (800 million yuan) on turning a
dump into a major wind farm. The plant, in an exposed landfill area
near the East China Sea, will be built by the Shanghai Environment
Group and Shanghai Huadian Electric Power Development Co. Ltd. The 15
1.5MW turbines should be enough to power 100,000 homes, and will offset
the use of over 12,000 tons of coal. “By 2010 the total wind power will
be around 300 MW, two percent of the city’s total installed power
capacity,” said Li Xin, an official with the Shanghai Development and
Reform Commission.

China had 62 wind farms in operation with an energy capacity of
1,266 MW at the end of 2005. The government has set a target of 5,000
MW for 2010 and 30,000 MW for 2020, by which time wind power will
account for three percent of the country’s total power needs.

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