In 2007, China overtook the United States to become the number one country in the world for exports, and in 2011 it did the same with industrial production. It is expected that in about 2030 it will also happen with GDP, but the real economic challenge that China and the United States will face in the coming years is another: that relating to technology companies.
In November 2017, Eric Schmidt, former executive chairman of Alphabet, the holding that controls Google, speaking about China during an international conference on artificial intelligence (AI) in Washington: “By 2020 they will have reached us. By 2025 they will be better than us. By 2030 they will dominate the artificial intelligence industry ». Not all forecasts in the economic and technological fields are right for us, but in this case it is not just a forecast: it is the Chinese government that has set itself this goal. It is one of the reasons why the Chinese tech sector will become more and more important around the world, further changing the economy around it.
The development of Chinese technology companies to date
In the ranking of the largest technology companies by Forbes magazine, there is only one company in the top ten Chinese: Tencent, in eighth place. First there are Apple, Samsung, Microsoft, Alphabet, Intel, IBM and Facebook: all US companies, with the exception of Samsung which is South Korean, and all brands well known to the average Western consumer, unlike Tencent. The latter is the WeChat company, the most used app in China: it simultaneously performs the functions of services such as WhatsApp, Facebook, Twitter, PayPal / Apple Pay, and apps for calling taxis or ordering a meal at home, among other things. In a sense, WeChat has overlapped with the internet in China: for many users it's the same thing. The service has more than a billion active users every month: more than 1.3 billion people live in China, practically everyone uses it.
We often talk about Tencent together with Baidu, a search engine, and Alibaba, the main Chinese e-commerce site: the three companies are collectively referred to by the acronym “BAT”. Along with Tencent, the strongest of the three is Alibaba, which has a higher market value ($ 499 billion versus Tencent's $ 491 billion) but is not on Forbes' list of the largest tech companies because it is considered part of another category. Founded by entrepreneur Jack Ma in 1999, it has grown tremendously thanks to the size of the Chinese market and the speed with which Chinese people have become accustomed to shopping online – to the point that people begging on the streets use QR codes to receive donations. Today the e-commerce sector in China is already double the size of the American one.
The great growth of Chinese technology companies has been made possible by the particular geopolitical characteristics of China: for years the possibility of copying Western technology products has allowed local companies to become competent in their own field by learning from others, subsequently the protectionism of the country has allowed them to develop original technologies without suffering competition from foreign companies.
Thanks to the so-called “Great Chinese firewall”, the virtual and legislative wall that ensures that information harmful to the Chinese Communist Party does not enter the Chinese internet, Google, Twitter and Facebook (and with it Instagram, WhatsApp and Messenger) do not they are widespread in China and WeChat was able to assert itself comfortably. You can imagine how things could have gone differently if there hadn't been state censorship by looking at the case of India, another large Asian market for technological products: the most used search engine there is Google, the most widespread social network. it's Facebook.
Where will Chinese technology companies go?
In the coming years, in line with the government's target on AI systems development, a lot of research will be done in China and development in the field of self-driving cars, systems to make cities (as well as homes) “smart”, as they say, and technological standards, i.e. technologies such as 5G and USB ports, which they are the same everywhere.
The Chinese government's commitment to AI has already had an effect, as an article in The Economist explains. The number of people involved in artificial intelligence in China is far less than in the United States: for every 100 AI experts in the United States, there are only six in China, and the best of all globally work for American companies. like Alphabet. However, those who study AI systems in China are particularly active and this can be seen from the quality of the scientific articles on AI-related topics that are published by Chinese researchers: they are cited by other studies (in the academic and research world it is the way to measure importance and influence) almost as much as those of American researchers. It means that Chinese studies have interesting results and conclusions for the whole sector.
In China in particular there are companies that are specializing in some specific sectors in which AI is used: for example Face ++ with facial recognition and iFlytek with voice recognition.
# China's tech industry is catching up with Silicon Valley: In e-commerce and mobile payments, it has already overtaken America via @economist pic.twitter.com/qoX9OJrGzE
– Analyze Asia (@analyseasia) May 19, 2018
The Chinese technology sector will probably develop further also in terms of the diffusion of its products in the different markets of the world. A few months ago Andrew Cainey, an expert on Asian countries at the British think tank Chatham House, explained to the Telegraph that Chinese brands, thanks to cheaper prices than the average, have spread more in countries where the average income is lower. This is especially true for African markets, where China is doing business in many sectors: overall, Chinese technology companies are dominant in both the telecommunications infrastructure and digital payments sectors.
The issues facing Chinese tech companies
Another major Chinese tech company is Huawei: it is China's largest privately held tech company and in 2018 it had overtook Apple in production volumes, becoming the second largest smartphone maker in the world after Samsung. It was born working on products similar to those of Western companies and has expanded by selling them at lower prices; how Amazon has reasoned for years making long-term profit strategies to take the time to develop new technologies. Today China is one of the market leaders in smartphone manufacturing and 90 percent of Chinese smartphones (virtually everyone has one) are manufactured by Chinese companies. In 2018, Huawei's sales increased by 19.5 percent.
Despite this, in recent months there has been talk of this company for its problems in relations with the United States. The matter is rather complicated, but summing up it can be said that the United States does not want Huawei to collaborate in the construction of the infrastructure necessary for 5G, the new generation mobile networks that will replace the current 4G by making the internet connection faster, because they fear that this will increase the Chinese government's control over the exchange of information around the world. In fact, the United States believes that Huawei, despite being a private company, gives information to the Chinese government, a circumstance always denied by the company.
At the moment, the biggest obstacle facing Chinese companies is the tariffs imposed by the Donald Trump administration. The case of Huawei, regardless of the specific circumstances of the affair, however, highlights one of the problems that the Chinese technology sector could encounter in the coming years in its path of expansion and development: the relationship between companies and the Chinese government, in particular regarding privacy and the use of user data. In the long run, the question of data protection could be more relevant: Chinese companies will have to find adequate solutions, perhaps even taking as an example the mistakes made by Facebook with the management of privacy and by Google in relation to competition rules in the European Union. . Chinese online payment systems may also have some problems, mainly due to the lack of transparency of the banking system.
The other weaknesses of the Chinese technology sector, highlighted by the Economist, are for example the fact that for now China has few really big companies and many much smaller – while in the United States there are many and many in-between – and that few are aimed at other companies, rather than consumers: also for this reason, unlike private citizens, Chinese companies that work in other sectors are very little digitized. Furthermore, for now, sales in foreign markets are reduced, equal to 18 percent of those of American companies, and investments are also much lower: 30 percent of American ones if we consider the entire sector.
Meanwhile, according to forecasts by market research firm Forrester, the Chinese technology sector will continue to grow: by 4 percent in 2019 and 7 percent in 2020, despite the trade war with the United States.
This article is part of a project sponsored by Fidelity International, one of the largest investment fund management companies in the world.
