China innovation - exploring tomorrow's growth engine
Innovation and rapidly accelerating tech advancements are a cornerstone of China’s economic growth plans.
China has long reiterated that innovation-driven development is a key engine of its future growth, with tech self-sufficiency and digitization top priorities on its drive to becoming economically self-sufficient.
The key question is where, then, are these sources of innovation likely to emerge?
Advanced manufacturing, tech hardware and new infrastructure, amongst others, could help facilitate China's push for digitization, including more online penetration and transformation of traditional sectors. China also has plans to increase R&D spending, enhance IP protection and offer more market incentives to researchers, as well as encourage further corporate involvement. “We expect companies to reinvest in 2023 after very tight cost constraints last year. Companies are trying to leverage innovation and technology to create an edge in what is an increasingly zero sum game as macro growth slows and online penetration is already high,” according to Jerry Liu, Head of China/HK Internet at UBS Global Research.
We expect companies to reinvest in 2023 after very tight cost constraints last year.
China’s technology ecosystem
China’s technology ecosystem
Given how rapidly technology is evolving, it will remain central to China’s innovation dreams, providing many entry points for newcomers to compete, especially as China develops its own ecosystem in this space.
“Those opportunities in China,“ says Nick Gaudois, Head of APAC Tech, UBS Global Research, “encompass industries such as health tech and climate tech, software that enhances industrial productivity, as well as AI and cloud-computing technology, to name but a few. These applications are adding depth and breadth to China’s existing strengths in consumer tech, e-commerce, computer vision and natural language processing”.
AI hardware and confronting tech decoupling concerns
AI hardware and confronting tech decoupling concerns
The ongoing buzz created by ChatGPT underscores that enterprises and governments are likely to increase their focus and investment in artificial intelligence, and the broader market could grow to USD90bn by 2025. China has reiterated this will be a strategic emerging industry and the big tech companies have rushed to announce plans to fund further development in conversational AI.
This is dwarfed, however, by the investment in the semiconductor industry. With a move back towards fabrication and production of chips in US, Europe and Japan, the future of technology is in a transitional phase – governments are incentivizing, companies are developing and investing.
Countries | Countries | United States | United States | European Union | European Union | India | India | Mainland China | Mainland China | Taiwan | Taiwan | South Korea | South Korea | Japan | Japan |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Countries | Semi Manufacturing Capacity (12”, k wpm) | United States | 743k wpm (8%) | European Union | 580k wpm (5%) | India | (> 2%) | Mainland China | 1,620k wpm (18%) | Taiwan | 2.070k wpm (22%) | South Korea | 2,113k wpm (23%) | Japan | 1,337k wpm (14%)
|
Countries | Incentives overview | United States | CHIPS & Science Act of 2022
| European Union | Digital Compass Plan & EU CHIPS Act | India | Self-reliant India Plan | Mainland China | 14th Five-Year Plan | Taiwan | Statute for Industrial Innovation | South Korea | K-Semiconductor Belt Strategy | Japan | National Semis Project |
Countries | Period | United States | 2022-2022 | European Union | 2022-2030 | India | Not specified | Mainland China | 2021-2025 | Taiwan | 2023-2029 | South Korea | 2022-2031 | Japan | 2022-2025 |
Countries | Est. value of incentives (USD bn) | United States | USD74bn (USD52bn, Incentives) (USD22bn; Tax credit)
| European Union | USD30-45bn | India | Up to USD10bn in Incentives (Up to 50% govt co-funding) | Mainland China | Up to USD150bn* | Taiwan | USD15-20bn (25% tax credit for leading edge R&D; 5% for adv. manufacturing equipment) | South Korea | USD55-65bn (R&D tax credits up to 50%; up to 20% for new facility spend) | Japan | Up to USD7bn (Mainly for leading edge production; up to 50% setup cost subsidy) |
De-globalizing, decoupling, or neither?
De-globalizing, decoupling, or neither?
Against a backdrop of persistent geopolitical tensions, re-shoring and export controls in full swing, investors should be questioning whether the tech industry and associated supply chains will undergo some degree of ‘de-globalization’, or at the extreme, a decoupling. According to a Q-Series study by UBS across multiple sectors as well as macro teams, the short answer is: unlikely so.
The tech industry has also evolved into the most globally integrated supply chain in the world, representing 9% of global trade. Globalization, clusterization and specialization have been the three key drivers since the 1990s, according to Nick Gaudois, leading to the emergence of systematically essential technology enablers who, to a large extent, enable a global tech industry worldwide that generated over USD700bn of net profits in 2021. This growth trajectory is set to continue.
Notwithstanding the impact of deepening US export restrictions and US government subsidy programs to incentivize reshoring of semiconductor manufacturing, UBS forecasts that the US will only account for 10% of global semiconductor capacity by 2026, noting the USD120 billion investment in Chinese semiconductor industry under the ‘Made In China 2025’ program.
The global tech ecosystem is highly integrated and accounts for at least 9% of global trade
The global tech ecosystem is highly integrated and accounts for at least 9% of global trade
- USD120bn invested to date in the semis industry under the ‘Made in China 2025’ campaign
- Subsidy programs for the semis industry for the next 7 years total USD350-400bn
- Taiwan accounts for 29% of logic / analog worldwide semis capacity
- South Korea accounts for 42% of Memory semis capacity
- The US will likely be around 10% of the global semis capacity by 2026
Source. UBS data
Another aspect to consider is that competition breeds innovation, with autonomous driving a case in point.
China’s approach plays to its infrastructural advantages.
Autonomously driving into the future
Autonomously driving into the future
UBS argues that autonomous driving is positioned to be the next technological revolution in the auto space, potentially a more significant megatrend than electrification. China, it notes, has the potential to lead the self-driving cars race, as the country benefits from a large domestic market with high acceptance of autonomous driving, a comprehensive ecosystem, an efficient supply chain, supportive policies and infrastructure.
Paul Gong, Head of China Auto, UBS Global Research, notes that the key players in the autonomous passenger car race, US and China, are taking divergent developmental routes: the US taking a minimalist AI-led route, and Chinese automakers opting for a hardware-led approach combining mapping with laser sensors and radar technology. “China’s approach plays to its infrastructural advantages,” Paul Gong explains. “The combination of strong communication networks and rapidly advancing infrastructure is likely to engender a level of ‘vehicle road collaboration’ required to generate the amount and quality of data to enable AI, laser and radar to work in unison.”
China is also able to exploit autonomous driving opportunities that lie beyond passenger vehicles. Closed-loop areas such as industrial zones and ports have the potential to become commercially viable relatively quickly, given the relative simplicity of the technology and China’s ability to build infrastructure at speed.
Whichever way you look at it, China is emerging as a global innovation powerhouse, with technology developments at its core. It has already displayed great potential for leadership in several areas, including supercomputers, space exploration, AI, quantum computing and high-speed rail. Given supportive government policy, ongoing investment and a hyper-adaptive population who are pushing the boundaries of what’s desired rather than simply required, innovation is firmly poised to drive China’s economic recovery and sustainable growth.
