China’s tech landscape is far more dynamic and, for investors, is yielding significant opportunities. In recent decades, China has moved mountains when it comes to innovation, creating an unparalleled technology ecosystem fuelled by burgeoning competition, homegrown talent, and committed capital.
Tracking China’s Rise as an Innovator
About five years ago, trends that emerged in China began to shape the global tech landscape, a phenomenon dubbed “reverse innovation.” Silicon Valley companies have increasingly come to regard China as the laboratory for future innovation. Notable examples include Google’s establishment of an artificial intelligence (AI) lab in Beijing, as well as an alliance between Google and Tencent focused on cloud services.
This has seen rapid growth in the market capitalisation of Alibaba, Baidu, and Tencent, even outpacing their U.S. equivalents Amazon, Google, and Facebook. Alibaba came to market in 2014 and also saw significant leap in its share price. An investor in China tech enjoyed twin benefits — the growth of existing publicly listed platforms, and the opportunities arising from new listings, the number of which appears set to accelerate.
In 2013, China’s contribution to the global creation of unicorns (private companies valued above $1 billion) was negligible, while the United States accounted for a 75% share. In 2017, China created one-third of the new unicorns globally, and 7 of the top 10 in terms of market capitalisation.Of the world’s six largest private tech companies valued at more than $30 billion, four are from China: Ant Financial, Didi-Chuxing, Toutiao, and Meituan (Uber and AirBnB are the other two).1
The Key Drivers of China’s Tech Surge
China and the United States have three elements in common: enormous pools of talent, deep and large reservoirs of capital, and continental-size markets that permit massive scale. However, there are elements unique to China that have spurred the adoption, breadth, and profitability of these businesses.
The secret to China’s technology surge lies in three interlinked factors: (1) the legacy of traditional infrastructure and the consequent opportunities to “leapfrog,” (2) the innovation within business models that created solutions tailored for China’s realities, and (3) the speed and intensity of user adoption that has driven enormous growth and capital to fund this transformation.
1. Legacy of Traditional Infrastructure
Offline retail space in the United States is plentiful — about 50 square feet per person. In China, that number is less than one square foot per person. It should come as no surprise, therefore, that e-commerce penetration in China is in the high teens, about twice that of the United States.2 What’s more, about 40% of incremental growth in retail sales is happening online, pointing to a likely doubling of e-commerce penetration in coming years.
Meanwhile, the average number of credit cards owned in the United States is about 2.5 cards per capita and 4.0 per household,3 about 10 times the number in China. Thanks to the widespread availability of mobile payments, Chinese users now pay with cash less than one-third of the time4 and one-sixth of urban residents no longer consider it necessary to carry a wallet.5
China’s per capita information technology spending is about one-eleventh of the United States,6 but with the country’s median age approaching 40 years, China is on a rapid drive to embrace automation and productivity tools. Enter cloud computing, which is being embraced by small and medium enterprises (SMEs) on a mass scale, leapfrogging the era of client-server hardware and ERP platforms.
2. Innovation within Business Models
In parallel, China’s technology companies have developed unique business models. The silos of e-commerce, social networks, and search seen in the Western world apply only partially in China.
Alibaba is the world’s largest e-commerce platform — its gross market value (GMV) of U.S.$768 billion in the year ended March 2018 dwarfs Amazon’s global GMV by a factor of more than 2.5x.7 But Alibaba is also the world’s third largest advertising platform, after Google and Facebook.
Elsewhere, Tencent may be the largest gaming company in the world, while also boasting over a billion monthly active users on its social networking platforms, but its business goes well beyond this. The company’s WeChat platform pioneered the concept of the “super-app,” a veritable operating system for daily life in China, facilitating entertainment, communication, e-commerce, travel, and lifestyle services all at once.
Meituan, China’s largest food delivery platform, is also its largest domestic hotel booking service by volume.
China’s online video businesses bring together both ad-supported (as with YouTube) and subscription services (as with Netflix) under one roof. Facebook may have struggled with video, but in China, Douyin — a short video platform introduced by ByteDance (also known for its Toutiao news app) — rose to 500 million monthly active users (MAUs) in just two years. ByteDance, a business founded in 2012 with no backing from China’s technology behemoths, now owns 10% of all mobile app time in China.8
And Pinduoduo, a “social commerce” platform founded in 2015, recently listed at a value north of U.S.$20 billion, having grabbed over 300 million active shoppers in under three years.
3. Speed and Intensity of User Adoption
China’s nearly 800 million-strong Internet user base is unique in the speed with which it adopts new modes of living, communication, and entertainment. Alibaba’s Alipay mobile payment platform counts over 500 million users, but 300 million users also use it for wealth management, 400 million for insurance, 100 million for financing, and 260 million for credit profiling!9
In e-commerce, consumers in most countries show a propensity for buying electronics and books online. Broaden the categories, and Chinese users stand out. For example, 85% of Chinese users are willing to buy beauty products online, versus just 50% of users in the United States. For household items, the Chinese propensity to buy online is 84%, versus 36% in the U.S.10
There are other differences too. On average, the Chinese spend 160 minutes a day watching linear television (including multi-tasking), well below the U.S. average of 240 minutes.11 Each year, per-capita cinema visits in China are well under 1.0x,12 less than one-third of the U.S. average. It is no surprise that unique opportunities in entertainment have emerged online in China, and its technology businesses have been quick to respond.
An Evolution that Comes with Challenges
What’s next? China’s innovation and creativity will continue to evolve, as will its ambition. Frontier technologies around AI, autonomous driving, drones, and associated areas (such as facial recognition at scale) are the new ground zero. In 2016, China accounted for only 12% of global funding in AI startups.13 In 2017, it leapt to a 48% share, well ahead of the United States’ share of 38%.
This also brings new challenges. For example, China lags in semiconductor knowhow, in some cases by a factor of 6x-10x.14 China needs to build and retain its AI talent; studies indicate that the country has, at best, half the number of AI experts versus the United States.14 Geopolitical concerns may limit technology transfers between these twin hubs of global technology.
This makes for an interesting future, but from the base that China has already reached, we view the road ahead with optimism.
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Our equity and fixed-income investments, who spend considerable time in these markets, share their insights on where they believe the greatest opportunities lie. Our Innovation Index also demonstrates emerging markets may lead the next wave of technological breakthroughs.
- ^Media reports and valuations of last reported funding rounds
- ^National Bureau of Statistics for China, and eMarketer for U.S., 2017 data
- ^Statista Data, 2016
- ^People’s Bank of China
- ^Source: Study by RDCY (Chongyang Institute for Financial Studies, Renmin University of China)
- ^EITO, Statista 2016
- ^Media quotes and public disclosures
- ^QuestMobile, June 2018
- ^Disclosures by Ant Financial and Alibaba in July 2017
- ^A November 2014 study by the management consulting firm A.T. Kearney on the propensity to buy online: “Connected Consumers Are Not Created Equal: A Global Perspective”
- ^Bernstein Research, January 2017
- ^IECONOMICS, for 2016
- ^CB Insights, 1Q 2018 update
- ^“Deciphering China’s AI Dream,” by Jeffrey Ding, University of Oxford, March 2018