27 September 2017

Inside Tomorrow’s China: Innovation drive key to growth

A new era of innovation is dawning in China. The Beijing government, along with Chinese corporations, are now investing vast sums of money to upgrade industries, close the technology gap with advanced countries and acquire know-how.

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This plan marks a fundamental shift. China once had a reputation as the world’s centre for low-cost, labour intensive and copycat manufacturing.1 Now it is trying to move rapidly up the global value chain,2 upgrade the country’s position and set the pace in an age of smart technology.3

“Increased investment in innovation, combined with greater in-flows of foreign investment, should accelerate the development of higher-value industries and ultimately, a stronger and more sustainable Chinese economy,” explained Stuart Gulliver, Group Chief Executive of HSBC at the recent HSBC China & RMB Forum.

This comes at a time when there are concerns over domestic growth, rebalancing the economy4 and the rising incomes over time.5 “China is in the process of getting rid of the low-end jobs so that it can free up labour, that way the country can do better jobs,” states Dr Frank Tong, CEO of the Hong Kong Applied Science and Technology Research Institute.

In recent years, China has pumped billions of dollars into research, overseas mergers and acquisitions, as well as domestic subsidies in a bid to build tech know-how.6 “It's about empowering China to be able to produce world-class goods and become a huge centre for the production of technology,” says Michael MacDonald, Chief Technology Officer for Southeast Asia at Huawei.

A new industrial blueprint arises

Beijing is banking on an industrial blueprint called ‘Made in China 2025,’7 aimed at turning the country into one of the world’s leading industrialised nations. This is modelled on Germany’s Industry 4.08 and proposes leveraging automation, robotics, big data and cloud computing.6

“If you look at China right now we are hitting the middle-income trap. The GDP per capita is roughly US$8,000 per year. This is significant. If we don't engage innovative technologies then the GDP of the entire country will remain the same,” expresses Dr Tong. “We need all kinds of tech to push China to the next level and that's what the country is doing. ‘Made in China 2025’ will make this happen.”

The goal is for Chinese suppliers of high-technology to reach a domestic market share of 70 per cent by 2025,9 boosting ten industrial sectors from aerospace to electric vehicles.10 “The Made in China brand Is not purely about branding the country, it's about giving China the tool set and the capabilities so they can be dominant players in particular industries,” explains Mr MacDonald.

For instance, three out of the top five smart phone makers in the world are now Chinese companies in terms of the volume of shipments, according to data from the International Data Corporation.11 This is mainly due to the size of the country’s domestic market.

“China is trying to do something that's very challenging. It's trying to grow from an infrastructure and credit fuelled economy, a model that's worked phenomenally well over the last thirty years, to a much more consumer-driven and higher value-added economy,” states Bill Maldonado, Chief Investment Officer, Equities at HSBC Asset Management.

China has already broken the patent application record, accounting for more than a million domestic submissions, according to an annual report by the World Intellectual Property Organisation, more than the U.S. and Japan combined.12

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