China’s Critical Role in Technology and Geopolitics

For some time now I have been concerned about the state of American competitiveness looking out a decade ahead. Innovation has been the lifeblood of our economic success, and nowhere has this been more apparent than in information technology since the advent of the Internet and the Smartphone. China has risen from being a largely agricultural economy when Mao died in 1976 to become the second most important economy in the world today. Still, many thought leaders believe its growth, even at modest rates, is unsustainable and that the country is good at copying the technology of others, but not as strong as an innovator of fundamental technologies on its own.

These observers are underestimating not only China’s economic momentum, but also the rate of progress they are making in innovation in all types of technology. Based on data compiled by the Industrial and Commercial Bank of China (ICBC), there are 214 private companies in the world valued at $1 billion or more, known as unicorns. Slightly more than half (108) are,as you would expect, based in the United States, but 55 are in China, with the remaining 51 located in other countries throughout the world, mainly India, South Korea, Germany and the United Kingdom. Of the top ten unicorns, China has four (including numbers two and three) and the U.S. has six. According to ICBC, China’s innovation has been engineering-based rather than science-based and it is consumer-focused and efficiency-driven. Baidu, Alibaba and Tencent together represent 16% of world net digital advertising revenue and 20% of world net mobile Internet ad revenue. Google and Facebook are the leaders with a combined 43% of net digital and 51% net mobile ad revenue.

In terms of world stock market capitalization, technology companies represent eight, or 40%, of the top 20 companies and two of these (Tencent and Alibaba) are Chinese. Chinese companies have made great strides in consumer applications. There are a billion “WeChat” accounts, Didi (the Uber equivalent in China) booked 1.4 billion rides in 2016 and close to $3 billion payments were made in China through Internet-based companies in 2016. There are 70 million active shared bike users.

China has 751 million Internet users and 658 million Smartphone users; North America has 242 million on Smartphones. This data is impressive, but what is most meaningful to me is the money China has earmarked for research and development. China will be spending more on research by 2019 than the U.S. In 2014, the last year for which data was compiled by Battelle Memorial Institute, China was spending close to $300 billion, more than half of the U.S. total of almost $500 billion. Japan has been pretty flat at $100 billion since 2000; the U.S. has been gradually rising from $300 billion in 2000. China was only at $50 billion in 2000 and, according to the OECD, is expected to be over $600 billion by 2024, when the U.S. will still be around $500 billion.

China believes that it has a competitive advantage in innovation, based largely on the strong support the central government is providing to a program that thrusts China into a leadership position in research. China’s huge market provides a strong incentive to any company developing an idea with commercial potential. Also the cost of doing research in China is lower than it is elsewhere in the world. Finally, for every stage of venture capital there is plenty of money available from both domestic and international investors. There were only 150 early stage investments in 2009; in 2014 there were 1886. Information technology accounted for 68% of early stage commitments; computer-related and electronics accounted for another 20%.