Trade War Could Drive Tech Innovation in China: Analysts

The ongoing trade and tech war between the U.S. and China could nudge the domestic technology sector to invest more in basic research to build self-reliance. It could also spark the flight of talented Chinese researchers back to the mainland.

That’s what analysts who closely follow “unicorn companies” — privately held companies with a valuation of more than $1 billion — told Caixin at a conference on emerging companies hosted by Credit Suisse this week in Beijing.

But building an independent technology ecosystem would likely take many years as growth will be restricted in the immediate future due to a lack of alternatives in fields such as chip design, they said.

Speaking at the conference, Vincent Chan, head analyst of China equities research at Credit Suisse, discussed a new report from the consultants at the investment bank, which compares unicorn companies in the U.S. and China.

The report, “China Unicorns: Preparing to Gallop,” found Chinese unicorns tend to be driven by “business model innovation” that capitalizes on China’s large, fast-growing, but fragmented consumer market. In contrast there are “probably more genuine high-tech companies among US unicorns at this stage,” it said.

Research spending is a major issue, the report found.

While China has been catching up in tech innovation, its investment in research and development (R&D), which “drives technology development and provides the foundation for emerging unicorns,” is still quite low.

“If China really wants to catch up with global innovation, it needs to spend much more on basic research, which is expensive and slow to yield results,” the report says. Between 2010 to 2017, about 6% of China’s total R&D spending went to basic research. That was “way behind” other nations. As a proportion of gross domestic product (GDP), the U.S. spent five times more in absolute terms.

Meanwhile China’s large, fast-growing yet underdeveloped consumer market will continue to provide rich opportunities for internet unicorns. Significant basic research spending would be needed for it to do the same for AI, big data, and biotechnology.

China is only second to the U.S. as a source of emerging unicorns, according to database CB Insights. As of Feb. 20, there were 326 unicorns globally with a total value of around $1.08 trillion. China contributes 29% of the companies and 30% of the total value, whereas U.S. companies make up 48% of all the unicorns and 52% of the total valuation.

China’s large consumer market will continue to provide rich opportunities for internet unicorns, but significant basic research spending would be needed for it to do the same for AI and other high-tech industries, a report said. Photo: IC Photo

According to OECD data, China’s R&D spending as a percentage of GDP is still much lower than many other smaller economies that have invested heavily in technology, such as Japan, South Korea, Sweden, Germany, Israel and Finland, among others.

But trade tensions with the U.S. might provide a needed nudge, Chan said. Ongoing trade talks and uncertainties regarding the relationship between the two largest economies in the world could motivate Chinese companies to develop core technologies themselves, according to Chan.

“The cost will be higher and the cycle will be longer for China’s technology start-ups to develop a more guaranteed and self-reliant supply chain,” he said. “However, the talent decoupling is likely to also bring more overseas researchers back home who might help fill in the gap, and Chinese tech companies in the up-stream will have to be more open to emerging domestic alternatives in the supply chain.”

Contact reporter Isabelle Li (liyi@caixin.com)