Part of the value SVB brings to its clients is access to experts, potential partners, customers and investors, increasing its clients’ probability of long-term success. On April 8-9, 2010, SVB hosted its first Cleantech Leadership Summit ¬“Crossing the Cleantech Divide” ¬ at Stanford University, hosting more than 100 cleantech insiders. The Summit was designed to bring together a select group of leaders from the venture capital, entrepreneurial, public policy, energy, academic and NGO communities with the goal of focusing attention, insight, and energy on the question of how best to promote the development of high-growth, innovative technology companies in the energy generation, energy storage and energy efficiency sectors, over the course of the coming decade.
The program featured conversations with successful cleantech entrepreneurs, customers, and energy industry executives, and facilitated small group break-out sessions in which participants interacted directly with each other to explore and develop new ideas. One of the resulting conversations is captured here:
Much has been made of the potential role of emerging cleantech markets in driving the economic recovery and renewing U.S. leadership in technology innovation. The mobilization and retraining of displaced workers for jobs in the new “green collar” workforce was a primary motivation behind federal stimulus funding for energy efficiency, renewable energy and smart grid. Yet, among cleantech venture capitalists and entrepreneurs in Silicon Valley, there is a decided ambivalence about the role of the sector in creating national competitive advantage. Indeed, the very notion of national competitiveness can take on divergent overtones in a world where capital from all over the world, flowing through investors in Silicon Valley, supports companies based around the world, with networks of manufacturing, supply chain, and markets located wherever economic logic may dictate. As one VC in our discussion put it, “Global markets are great if you’re an entrepreneur or investor, but I have to put on my nationalistic hat” for discussions about competitiveness. In short, capitalism and economic nationalism make strange bedfellows in today’s globally interconnected economy.
While there is no consensus about the nature of the “problem”, there is broad agreement that the U.S. has not done as good a job as other parts of the world in creating the most favorable conditions for the emergence of cleantech as a growth industry. It is the intersection and interplay of markets, workforce, and supportive public policy that fosters the virtuous circle within which new industries emerge and gain traction. Instead, the U.S. story in cleantech to date has largely been one of harvesting the legacy of our historic strengths in innovation infrastructure. These include:
* Great research universities that have for decades generated new ideas and trained the world’s best scientists and engineers (but are now suffering shortfalls in research funding, dwindling pools of domestic talent, and a reduced ability to attract the best foreign students and retain them here after graduation);
* Government policy that largely stays out of the way, when it comes to regulating prices, wages, and the flexibility of business formation and closure (but may do less than other nations to “pick winners” and support emerging industries and technologies);
* A well-organized and funded ecosystem of private investment capital that is able to nurture innovation outside the walls of large, entrenched corporations and government labs (but requires vibrant capital markets to provide the “exits” that reward innovators and investors); and
* A business culture that supports risk-taking and entrepreneurship.
It is the continued health and well-being of the ecosystem of the innovation economy as a whole that will likely determine long-term economic competitiveness for the U.S, rather than efforts to stimulate specific cleantech markets or technologies.
Clearly, state and federal policy can have significant impacts in the short-run, by stimulating markets for clean energy products through subsidies, mandates, and procurement programs. For example, one participant noted, there is a very high correlation between those states that have adopted Renewable Portfolio Standards (RPS) and the location of clean energy companies and the jobs they create. It is likely that a national RPS (as proposed in pending Congressional legislation) or some form of carbon pricing would have a similar effect at the federal level, driving the development of new industries and companies to meet clean energy demand.
And, of course, government can also help level the playing field by eliminating legacy subsidies for old, dirty energy sources, where they still exist.
However, we must distinguish between the short-term value of stimulative policy in creating markets and the long-run location of manufacturing, as an engine of job creation. As one participant noted, no matter what we do with policy, sometime in the current century, China will overtake the U.S. as a market for everything. So long as U.S. companies position themselves well to serve the Chinese consumer, U.S. workers and investors should stand to profit.
Moreover, while some cleantech businesses will follow policy and locate initial production in countries that have strong domestic markets, the long-term logic as these industries mature will be to site manufacturing wherever it is cheapest and best to do so. Of course, siting decisions are complex and reflect, not only labor cost, but differences in available workforce and productivity, transportation cost and distance to markets, business environment, and the whole range of government regulations (labor and environmental law, taxation, currency regulation, etc.). It is unlikely that even the most supportive public policy can overcome structural cost differences between nations over the long-term – witness the sustained German investment in a Feed-in Tariff for solar, which led to the creation of tens of thousands of jobs in Solar Saxony, but is now undergoing a serious re-assessment as German solar companies migrate production to lower cost facilities (and closer to high growth markets) in Southeast Asia.
Manufacturing can be important, not only as a source of employment, but also as a training ground for technology expertise, generating new intellectual property and providing the knowledge base for future innovation. After all, Silicon Valley became the hub of “fables” semi-conductor design because it was once the hub of actual chip production. With today’s semi-conductor industry almost entirely based overseas, the Valley’s skilled workforce is aging, and the next generation of chip designers will likely learn their trade elsewhere. The same thing could happen over a generation, if cleantech manufacturing is allowed to drift overseas.
Every industry clamors for subsidy in tough economic times, but the case for supporting growth sectors is stronger than for those that are declining as a share of the economy. To achieve sustainable competitive advantage, government must provide the right signals and flexibility to support the movement of capital and labor from “sunset” to “sunrise” industries.
In contrast to other developed economies, the U.S. does not have an industrial policy, per se, though support for clean energy appears high today by even recent historical standards. As an example, the bailout of the auto industry is causing Detroit to focus money and attention on greater fuel efficiency and the development of plug-in hybrid and all-electric vehicle technology. This represents in part a government bet on one particular branch of the technology tree – electricity, as opposed to say, alternative liquid fuels, to meet our future transportation needs. Whether this bet works out well will depends on technology and market factors beyond government’s control.
There is no single guidepost to balancing the competing policy objectives in cleantech – policy makers must look holistically, not just at jobs and competitiveness in isolation, but at the full range of geopolitical, environmental, and economic issues involved in the transformation of the energy economy.
Getting the Fundamentals Right
In the long-run, what will matter to U.S. competitiveness is a re-investment in the basic infrastructure of innovation (what NY Times columnist Thomas Friedman calls “nation building at home”). A fixation with the location of manufacturing (and whose congressional district gets which stimulus award) will be less relevant to future competitiveness than successful policy intervention in areas such as education and worker training, immigration reform, and even financial market regulation, all of which are not currently working well to encourage continued U.S. leadership in innovation.
Some big picture historical questions emerged in the course of our discussion. Does the U.S. face an inevitable “end of empire” moment, such as that experienced by the European powers at the end of the 19th Century? Or, to borrow a page from the Innovator’s Dilemma paradigm, are the emerging economies “disruptive” start-ups that have a natural advantage over incumbent economic powers in innovation? What is the long-term role of the U.S. in the world economy – an importer, an exporter, a generator of IP?
The answers to these questions will be left to future historians to judge, but clearly much is at stake.