Thursday, 23 March 2017
Last updated 12 hours ago
Jan 21 2009 | 12:24pm ET
By David Kurzman -- Industry-wide consolidation is an obvious and predictable outcome for an industry that attracted billions of dollars of venture and private-equity capital, as the CleanTech industry has. The CleanTech sector will undergo multiple waves of consolidation, and the early implementers will not necessarily be the winners. While early adopters will tout their ability to presage this wave, in actuality, it matters little who is first to recognize the industry’s potential. If you doubt it, ask yourself who was first to develop the assembly-line approach to manufacturing? Henry Ford? In fact, many people beat him to it.
We believe there is something much more salient to CleanTech investors than being first: maintaining a deep understanding of how each sub-sector will develop. The prospect of consolidation has driven nearly every investment bank to develop a CleanTech practice. An understanding of the CleanTech sector’s development will allow investors to benefit from transformative inventions of today.
Unfortunately, we expect most early venture capitalists to be gravely disappointed by their CleanTech investments, due largely to their lack of understanding about the complexities of the industry and its sub-sectors. Too often we read that CleanTech is like the Biotech industry or the DotCom industry. We disagree.
CleanTech Is Neither Biotech, Nor DotCom, Nor…
Despite the widespread excitement about CleanTech investments, few really understand the issues and competitive forces involved. Despite the comparisons to Biotech, DotComs, and technology companies, CleanTech actually has the most in common with traditional industrial companies. In fact, most CleanTech companies operate at the edges of existing industrial sub-sectors. For instance, filtration and separation technologies are a $50 billion-dollar a year industry that includes pieces of existing water, air, non-aqueous fluids, medical, and advanced materials industries. Renewable power and batteries operate at the fringes of the distributed energy infrastructure. Biofuels encompass parts of the agricultural, transportation, and fossil fuel-delivery industries.
Similarities to Biotech, DotComs, and general tech companies quickly crumble once a basic understanding of CleanTech is absorbed. CleanTech involves fundamental science and engineering in a way that these other sectors often gloss over before diving deeply into the complexities of one or two areas of advanced science or software. In fact, if you mixed the capital required to develop a biotech drug or a large industrial manufacturing facility, the ingenuity and aptitude for new business models of a DotCommer, and the complexity of developing a new technology, you would only have something that resembled a Clean Technology industry.
CleanTech Consolidation Is Inevitable
Consolidation among CleanTech companies will come in fits and starts over the next decade largely because few CleanTech sub-sectors are at the same stage of development. The solar sub-sector, due its stage of development and to the sheer number of companies attempting to serve this industry, will be one of the first to consolidate, and we expect very, very few “pure plays” to survive long-term. Our pessimism about the survivability of most solar companies is neither due to any specific negativity we feel toward the group, nor is it a statement about the prospects of the industry. It is simply based upon the following logic:
1) The large tax (and modified-accelerated depreciation) incentives available to solar companies attracted an abnormally large number of entrepreneurs and companies to enter the sub-sector;
2) Most of these players would not have entered the industry if these incentives were not available;
3) These incentives are available equally to all competitors;
4) These incentives will create an accelerated pace of turnover and technological advancement.
Therefore: Most solar companies will either develop a technology or service that will become obsolete abnormally quickly due to the infusion of economic incentives, or the costs of providing incentives will become so burdensome to state and federal authorities that these inducements will be scaled back, and the more-costly technologies will become uncompetitive and therefore fail.
Near-Term Uncertainty For CleanTech
Investors are hoping that CleanTech stocks will “take off” on inauguration day and not look back. We are not so optimistic. There is simply too much uncertainty flowing through the markets.
Sure, the CleanTech industry is about to enter the bottom half of the 2nd inning, with the home team next to bat. The inauguration of Barack Obama holds a symbolic significance that Clean Technology’s time is close at hand. But the stock market is a voting machine that attempts to anticipate market changes. Investors have known for some time that Barack Obama was the incoming president, and that his policies will very likely reflect increased spending on our nation’s infrastructure. But until it becomes clear which infrastructures will benefit from increased spending and to what extent our nation will borrow from abroad, it is hard to know where to allocate investor capital.
The current market is reminiscent of the period just prior to the second invasion of Iraq in 2003. At that time, the U.S. was coming out of a bubble-induced deflation, interest rates were approaching all-time lows, and (since an invasion was all but a “fait accompli”) investors were looking for a way to play the “defense stocks”. It was clearer then, though, which companies would benefit from a war in the Middle East.
Now In 2009: deflation is much worse, interest rates have been cut essentially to zero (and that won’t be enough), consumer spending (representing 75% of our GDP) will be restrained by fear and unemployment, and the new theme is “CleanTech”, instead of defense. The uncertainty is pervasive to the system; it is not clear which companies will benefit from a war against unemployment that we created through Bubble Economics.
Deflation Drives Fierce Price Competition; Look For Unique Business Models
The problem with investors is that they’re just human. They overextend spending and credit for a time, followed by periods of under-spending and frozen lending markets. They drive the pendulum to swing too far both ways. This makes deflationary forces even more caustic as companies compete for what little consumer buying remains. The result will be fierce pricing pressure among CleanTech companies.
Business models that provide competitive pricing will survive the current deflationary environment. Some of the companies we include in the KCR© Strategic Portfolio have unique business models.
David Kurzman is Managing Partner of Kurzman CleanTech Research and Kurzman Capital. Prior to launching his consulting firm, he served as Managing Partner of Kurzman CleanTech, a five-year-old hedge fund investing in clean technology companies and led the CleanTech Research Group for Panel Intelligence, a primary research firm.