Asia's Information Technology Leap

Asia's information technology (IT) sector is at the forefront of several long-term, secular trends driving growth in the region. Rising spending among Asian consumers is fueling entirely new business ecosystems, from e-commerce to online gaming. China is currently the world's largest e-commerce market, with revenues expected to surpass US$1 trillion in 2020.1 We also see a need for increased labor productivity in Asia due to rising wages, creating a long runway for growth for software and automation solutions. Enterprise software sales in Asia are expected to grow to US$26 billion by 2026.2 Finally, innovation and services are playing increasingly important roles in developing markets.

Examining the broad architecture of IT today, companies tend to fall into two broad categories—software and hardware. Among software makers in Asia, we see entirely new paradigms emerging. The software side has historically included IT companies in India, as well as assorted software producers and providers across Asia. We now see the growth of enterprise software among business of all sizes. Smaller mom-and-pop businesses that traditionally used paper based payroll and accounting systems are moving to mobile-friendly, cloud-based systems. And larger business are starting to do more with their data, engaging in sophisticated data analytics for marketing and improving daily operations. Turning to hardware, we see an industry that has built a solid platform and is starting to advance in terms of its capability set. In Asia, the main manufacturers of semiconductors and microchips have historically been centered in South Korea and Taiwan. However, we also see traction for hardware within mainland China. Together, we believe software and hardware provide two compelling strands of the IT sector with attractive long-term growth potential for the Matthews Pacific Tiger strategy.

Software and hardware companies are supporting new forms of consumption in Asia, such as the growing popularity of online games. Is online gaming part of the IT sector? Should investors consider online gaming as part of the communication services or the consumer discretionary sectors? In one sense, gaming can logically be viewed as part of the IT sector because IT provides the backbone for the gaming ecosystem. In another sense, the surge of popularity of online games in Asia includes the way that many multiplayer games might function as a form of social media, with chat functions built into the platforms. Social media more traditionally falls in the communication services vertical. Online gaming also bleeds into the discretionary share of the consumer's income. Online games illustrate the ways in which technology is being woven into everyday life.

The Matthews Pacific Tiger strategy has historically been underweight the IT sector relative to its benchmark, the MSCI All Country Asia ex-Japan Index. The IT hardware sector in particular has been prone to short-term cycles in the past, often driven by global factors. Cyclicality in the sector remains, but encouragingly, we have also seen an evolution of the types of companies now available in the sector. With new companies joining the mix, we have increased our weight to the IT sector over the past year and we continue to look for opportunities in the sector from the bottom up. Within the sector, we are interested in companies that compete on intellectual property, companies with strong competitive moats and companies that capture the growth of consumer spending within the broader ecosystems supported by IT, including communication services. As always, we are interested in companies that can generate sustainable growth across a full market cycle.