China: The Next Tech Powerhouse?

Author Gary Moreau
Author Gary Moreau

Not that long ago it was conventional wisdom in Western circles that China could make things on the cheap but would not be able to stimulate the creativity and innovation necessary to compete with developed countries in the age of technology. How wrong that wisdom was.

The most common explanation for the inability to innovate was laid at the feet of the Chinese educational system that relies heavily on rote learning and standardized testing. Chinese teachers teach and the students absorb. The students, so the thinking went, were simply educationally unequipped to create the next Apple or Google.

It’s always a mistake to try and drive your car by looking in the rear view mirror, however, and this false perception was no exception. So, where did the ‘pollsters’ go wrong?

For starters, there were more than 300,000 Chinese studying at US universities in the 2014-2015 academic year, according to the nonprofit Institute of International Education (IIE). That’s roughly one-third of ALL international students studying in the US at the time and represents a five-fold increase in the number of Chinese studying in the US in just over a decade. The competition among Chinese students for entry into US universities is becoming so intense, in fact, that middle class Chinese families are now routinely sending their children to attend high school in the US as well, believing that will give them a leg up for US college admissions. (I personally know two families who have followed this strategy.)

The Chinese government is also doing its share. Beijing has sponsored numerous tech incubators and created huge amounts of business infrastructure to support the nascent but rapidly growing tech sector. Beijing itself, in fact, is quickly becoming another Silicon Valley and has the world-class local universities to support it.

Social media, I believe, has also helped to stimulate the boom. While Facebook, Twitter, and other US social media sites are blocked in China, they have their own versions of each. And the Chinese population has embraced them completely. The average Chinese teenager, I would hazard to guess, may be even more wired into social media than their US counterpart, in part because they don’t have as many other options to gather news and have social interaction with their peers. (Chinese educational institutions are generally limited to traditional education – no sports, drama club, or proms. They have special schools devoted to athletics and the arts.)

Understanding China is now available at Amazon in paper and electronic formats.
Understanding China is now available at Amazon in paper and electronic formats.

In effect, while the academic institutions of China may not provide the right mix of innovation and rote learning just yet, the young Chinese have essentially taught each other. Through prolific sharing they have, in essence, complemented academia, with its heavy emphasis on mathematics and science, with the tools necessary to apply that knowledge effectively and to disburse it widely.

On November 11 for example, the informal anti-Valentines holiday celebrated by single Chinese, Alibaba, the online shopping giant, has created the largest shopping spree on the planet. During this year’s Singles’ Day, also called Double-11, Alibaba sold $17.4 billion (yes, USD) of merchandise in just 24 hours. That’s more than Black Friday and Cyber Monday combined – and that’s one company. (More than 80% of the volume in the first few hours, moreover, was conducted via smart phones.)

The surge in China’s tech sector is not due solely to the growth in e-tailing and social media, however. The number of patents granted in the first nine months of 2016 grew by 44% compared to the prior year. And tech manufacturing grew by more than 10% over the same period. The sector, in fact, may currently account for as much as 15% of China’s total GDP.

It’s been a seldom-acknowledged revolution outside of China, for sure. Western politicians are still focused on China’s dominance of the global steel, rare earth metals, and toy markets. The Western political narrative, in other words, has been all about jobs, not innovation and technology.

While these statistics about the growth of the tech sector in China are telling, moreover, they don’t begin to tell the whole story. That requires context.

Fully 70% of the US economy – the largest in the world – is driven by consumer spending. In China, by contrast, consumer spending currently accounts for less than 40% of GDP and that is up considerably over the last five years. And China, of course, has 1.4 billion residents, compared to 315 million residents in the US. You can do the math in terms of future growth opportunities in China. (Scale is critical to advancements in technology, of course.)

Now consider the fact that the top ten brands in China over the last decade or two were virtually all foreign brands. In the tech sector, up until recently, Apple was the brand to beat. Samsung and LG, both Korean brands, have given Apple and others a run for the money but it is the Chinese brands – Huawei, Hisense, Haier, Xiaomi, in addition to Alibaba and Tencents’ WeChat, that are the brands to watch going forward.

Part of the reason China’s tech future is so bright, I submit, is that a solid brand is easier to build in the electronic and tech spaces than in the apparel and fashion spaces. The tech consumer is motivated by features and value, whereas the fashion industry is driven more by intangibles such as country of origin, longevity, perception, etc. (Value can, in fact, be an inhibitor.)

Add to the mix that the Chinese are uber-nationalistic and motivated by value and it’s easy to make the case that the future of Chinese tech is bright indeed. China has incredible scale, has shown itself able to innovate, and has the economic infrastructure and government support it needs to make good on the opportunity.

If you are an investor or manage a US tech company you’d better get over there before the boat leaves the dock. It is the future. Of tech, no less.