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China: navigating the push towards technology leadership

China: navigating the push towards technology leadership

05-10-2021 | 投資觀點
After more than three decades of accelerated catchup with more advanced economies, China is now engaged in a race for global technology leadership. Having turned into ‘the world’s factory’, China now aspires to become the planet’s innovation barycenter too.
  • Jie Lu
    Jie
    Lu
    Head of Investments China
  • Yann Morell Y Alcover
    Yann
    Morell Y Alcover
    Investment Writer

Speed read

  • China is engaged in a race for global technology leadership
  • The country has already secured a leading position in many areas
  • We identify three major investment themes

Research and development (R&D) statistics illustrate this ambition. Supported by higher economic growth, China is actually expected to take global R&D leadership this year, and outspend the US for the very first time.1 China now leads the pack in many areas, such as artificial intelligence (AI), 5G telecommunication networks, ultra-high voltage electricity networks or high-speed rail.

While China’s technology push is hardly news, rising tensions with the West, in particular with the US, have put it under the spotlight

While China’s technology push is hardly news, rising tensions with the West, in particular with the US, have put it under the spotlight. Over the past few years, Chinese officials have increased their emphasis on the need to become less dependent on foreign technology. Some have even theorized a so-called ‘technology decoupling’, advocating self-sufficiency in a number of critical industries.

However, one key consideration to bear in mind is that China’s technology push amid rising tensions with the US does not necessarily herald a full economic decoupling, nor an era of deglobalization, as some have argued.2 For now, US restrictions on exports to China issued in 2020 remain essentially focused on a few select technologies, where non-US alternatives are difficult to find.

Meanwhile, China's main policy goal remains to improve the country’s manufacturing capability to produce higher value-added goods and services, and keep the economic growth engine roaring. Policy makers acknowledge that this will be impossible without importing advanced technologies from the US, Europe, Japan, or South Korea.

Figure 1: MIC 2025’s ten strategic industries

Source: China State Council, MERICS, Robeco, September 2021.
China’s technology ambitions were formally articulated in 2015 with the ‘Made in China 2025’ (MIC 2025) initiative, a ten-year comprehensive blueprint aiming to modernize further the country’s industrial base. MIC 2025 identifies ten strategic sectors, including aerospace equipment, medical devices, or high-tech ships, in which China intends to excel and secure a leading position.

Focus on a few selected technologies

Even under the MIC 2025 umbrella, the designated ten core industries are clearly not all being pursued with the same intensity. In recent years, China has been prioritizing efforts in a small number of emerging technologies, including AI, semiconductors, robotics, and new energy vehicles (NEVs), 3 with colossal efforts being deployed from a human and a financial perspective.

Figure 2: Top 20 countries in AI paper output 1997-2017

Source: China Institute for Science and Technology Policy, July 2018, “China AI Development Report 2018”, Tsinghua University.

AI, for instance, is perhaps the area in which China has achieved the most spectacular results and secured a clear leading position at global level.4 The Chinese AI-related ecosystem benefits from various supporting factors, including the country’s gigantic market size which provided a unique opportunity to assemble large datasets, and a long-standing friendly policy environment.

AI is perhaps the area in which China has achieved the most spectacular results and secured a clear leading position at global level

China seems therefore poised to become a leader in AI-empowered businesses, like speech and image recognition applications. At global level, the main AI services providers remain large US technology giants, but Chinese firms are catching up fast. China already employs the world’s largest cohort, by far, of AI professionals, with over 12,000 AI jobs in 2019, versus roughly 7,500 for the US.5

Another area where strong progress has been made NEVs. China has the world’s largest fleet of NEVs in circulation, far ahead of Europe and the US, as well as the world’s largest battery-charging network. And although the country’s NEV car registrations were overtaken by European ones last year, it remains one of the most dynamic markets, largely dominated by local manufacturers.

Figure 3: Market share of top five battery makers

Source: SNE Research, March 2021.
China has also managed to secure a leading position in various areas of the NEV supply chain. This is especially the case for electric battery production, where the largest Chinese manufacturers have emerged as global leaders along with their South Korean and Japanese competitors. Altogether, China accounts for over 70% of global battery cell production capacity. 6

Three investment themes

China’s technology push is offering opportunities in many industries, but finding these is not always straightforward. Not all initiatives have lived up to expectations, so far, and political will does not warrant success. Yet that does not mean opportunities in areas where results have been mixed are entirely absent, nor that policy success will necessarily lead to attractive returns for investors.

From this perspective, we have identified three major investment themes worth considering: the relentless rise of NEVs, the advent of ‘industry 4.0’ in China, and an increased focus on the localization of supply chains. Given the bright prospects these three trends offer, we believe this is where some of the most interesting opportunities are to be found.

1 Source: R&D World, April 2021.
2 Hale, T., 27 July 2021, “US and China face bumpy ride as talk of decoupling intensifies”, Financial Times news article.
3 NEVs are vehicles which are not fueled by common energy sources, such as unleaded petrol or diesel fuel, for example. These include in particular, plug-in electric vehicles, either plug-in hybrid electric ones or an all-electric plug-in battery electric ones.
4 Li, D., Tong, T. W., and Xiao, Y., 18 February 2021, “Is China Emerging as the Global Leader in AI?”, Harvard Business Review article.
5 United Nations Conference on Trade and Development (UNCTAD), February 2021 “Technology and innovation report 2021 – Catching technology waves: Innovation with equity”, UN Report.
6 International Energy Agency , April 2020, “Global EV Outlook 2021”, report.

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