Dec 13, 2017 11:27 AM

Opinion: China Tech Hits Stride, Set for High Gear Next Year

For tech in China, 2017 was a banner year. Not only did key industry leaders unveil groundbreaking initiatives centered on big data, artificial intelligence (AI), and machine learning, but capital markets sounded a roaring approval, sending shares of well-known stocks significantly higher, in some cases more than doubling from the start of the year.

Notable developments from the “BAT” — Baidu Inc., Alibaba Group Holding Ltd., and Tencent Holdings Ltd. — included the launch of an autonomous driving platform from Baidu called Apollo; Alibaba’s further blurring the line between online and offline shopping with the launch of its “New Retail” initiative; and the dominance of Tencent’s WeChat instant messaging app continuing to grow as the total number of users rose to nearly 1 billion, while its online games revenue staged enviable double-digit growth.

In capital markets, soaring stock prices revived demand for new issues, and there were several major IPOs in the U.S. and Hong Kong. The first internet-only insurer, ZhongAn Online Property & Casualty Insurance Co., raised the princely sum of nearly $1.5 billion in its Hong Kong initial public offering (IPO), and several financial technology (fintech) stocks achieved U.S. listings in the second half of the year, reversing a privatization trend of 2016 and establishing a global leadership role in leveraging technology in financial services.

For internet users, 2017 was the year of “right now,” as people broadcasting their lives in real time to online fans broke into the mainstream. This new kind of entertainment, ranging from the mundane to the outright bizarre, tapped into demand for unique and interesting content and quickly opened up a “distinctly China” business model in which internet celebrities hawk goods to their loyal fans and reap the rewards of their referrals.

In the offline word, China continued to move toward a nearly cashless society at a breakneck pace. Small black-and-white QR codes and digital wallets continued to experience viral adoption by merchants and customers alike, eager to streamline the transaction process and embrace new value-added services. Local handset manufacturer Huawei Technologies Co. Ltd. dethroned Apple Inc. in the second half of the year in terms of global unit sales, demonstrating that device-makers have broken free from legacy production to champion a “made in China” model — a copycat no longer.

Although predicting the future is often risky without a crystal ball, at least a few exciting trends appear to be on the horizon for China tech in 2018. First and most obvious, Chinese firms look set to continue pursuing a global leadership role in fintech. Owing to peculiarities in the nation’s financial system, big banks, which otherwise would be champions of using technology to streamline payments and consumer services, will remain largely on the sidelines as established fintech players remain in the driver’s seat.

This could mean that along with “conventional” applications of big data and AI in areas like credit scoring and process automation, 2018 could be the year that blockchain technology is deployed on a massive scale, uncoupled from its well-known application with cryptocurrencies. Both the growing prowess of technology firms to create, rather than imitate, and the rising demand for smarter solutions to legacy problems could be the fuel that powers the theme.

Technology will continue to disrupt traditional industries, which have thus far been slow to adapt to change. Authorities have not been shy about supporting innovation in domestic enterprises, which we think will emerge as a new source of potential economic growth as China’s manufacturing sector embraces technology to not only stay competitive but also to raise competitive pressure on rivals. As those first bets begin to pay off, further acceleration is likely, not only in the software sphere, but also in more-tangible applications like next-generation semiconductors, electronic vehicles and smart manufacturing.

Finally, an area that will likely start to emerge next year is the development and application of proven innovative technologies in corporate applications, springing forward from an earlier exclusive focus on consumers. Applying big data processing techniques and AI to solve problems in the business world will start to gain traction as success-of-use cases targeting consumers become well-accepted. Adoption is unlikely to be overnight, however, as handing over mission-critical functions to machines will demand both bold decision-making and a risk-taking mindset. But when weighing the cost of not leveraging cutting-edge computing to solve business challenges becomes clearer, the choice will be an easy one.

One near-certainty is that the pace of home-grown technology innovation in China will quicken. Not only is the talent pool steadily growing as new graduates are minted every year, but the potential to achieve parabolic growth in a single market filled with over 1 billion consumers is only going to make opportunities in tech more alluring.

Buckle up: 2018 is going to be another wild ride.

Ryan Roberts is an analyst at MCM Partners focusing on venture-backed Chinese companies listed on U.S. and Hong Kong stock exchanges.

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