News & Insights Vincent Chan: China’s innovations try to solve the inefficiencies of the Chinese economy

Vincent Chan: China’s innovations try to solve the inefficiencies of the Chinese economy
Vincent Chan is Head of China Equity Strategy Research at Credit Suisse

What are some of the recent developments in China’s innovation landscape that have surprised you? Why?

Vincent Chan: The emergence of the huge internet platform companies, taking advantage of the unique and large domestic market, was the major surprise of China in the last 10 years, and they are crucial in terms of driving technological development in China.

When we analyze the characteristics of China’s “unicorn” companies, we find that they are predominantly internet companies focusing on the consumption market and the services sector. 

What are the fundamental differences between how China is approaching technology and innovation and its global peers? How do these differences impact China’s growth trajectory?

VC: China’s innovation is mainly business model innovation trying to solve the underdeveloped and/or inefficient part of the Chinese economy. Therefore, when we analyze the characteristics of China’s “unicorn” companies, we find that they are predominantly internet companies focusing on the consumption market and the services sector. In contrast, the number of hardware and high tech components/analytics companies is relatively small.

Can Chinese tech companies be dominant overseas and set global standards? Will national-security concerns mean the Chinese and American tech markets end up being largely closed to each other?

VC: In the foreseeable future, this is highly unlikely. As mentioned above, most of China’s new innovation companies are internet platform companies focusing on the domestic market, who are largely focused on China, and there is very little indication that they can achieve similar success in other countries.

Given the clear deterioration of the China-US (and Europe/Japan to a lesser extent) relationship amid national security concerns, I believe the connection between China and the US will become less close now.

Which sectors do you think could turn out to be China’s ‘dark horses’ (in both the technology space and across all sectors)?

VC: China could become very successful in areas related to Big Data analytics (it could be Artificial Intelligence (AI), surveillance and/or genetic biotech), considering that the Chinese are so active online, and the government also collects a lot of digital information from the general public, while the large population in China ensures that the genetic data from Chinese people could offer a lot to study.

What are three things investors should keep in mind when investing in Chinese innovations?

VC:

  1. No matter what industry you invest in, government or regulatory risk would always need to be priced-in. In China, government or regulatory intervention could exist in all industries even if they are normal business with no strategic importance, unlike other more free market driven societies.
  2. Focus on companies which try to address and reduce the inefficiency of the old system of the Chinese economy, for example, the success of e-commerce in China during the last 10 years has a lot to do with the inefficient consumer goods distribution network in China.
  3. China has a very large domestic market, so don’t rule out those companies which are dedicated to solving specific Chinese needs.