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China accelerates the innovation engines

China accelerates the innovation engines

Like Japan in the 1960s, China will be the new innovation industry of the century.

The venture-capital (VC) industry is booming. American visitors return from Beijing, Hangzhou and Shenzhen blown away by the entrepreneurial work ethic. China would lead globally in artificial intelligence (AI) by 2030. The chinese government plan covers a startlingly vast range of activities, including developing smart cities and autonomous cars and setting global tech standards. China would be the new innovation industry of the century, like Japan in the 1960s.

“Tech american firms support 7m jobs at home that pay twice the average wage. Other industries benefit by using technology more actively and becoming more productive: American non-tech firms are 50% more ‘digitised’ than European ones”, says McKinsey, a consulting firm.

America sets many standards, for example on the design of USB ports, or rules for content online, that the world follows. And the $180bn of foreign profits that American tech firms mint annually is a boon several times greater than the benefit of having the world’s reserve currency.

As said by McKinsey, the overall conclusion is that China is still behind. Using the median of the yardsticks, its tech industry is 42% as powerful as America’s. But it is catching up fast. In 2012 the figure was just 15%.

Start with Chinese tech’s weak spots. Its total market value is only 32% of the figure for America’s industry. While there are two huge companies and lots of small ones, there are relatively few firms worth between $50bn and $200bn. China is puny in semiconductors and business-facing software. Tech products do not yet permeate the industrial economy: Chinese non-tech firms are relatively primitive and only 26% as digitised as American ones.

As for investment, Chinese tech’s absolute budget is only 30% as big as that of American tech. And it is still small abroad, with foreign sales of 18% of the total that American firms make. Apple rakes in more abroad in three days than Tencent does in a year.

The gap gets much smaller, however, when you look at the most dynamic parts of the tech industry. In the area of e-commerce and the internet, Chinese firms are collectively 53% as big as America’s, measured by market value. China’s unicorns, a proxy for the next generation of giants, are in total worth 69% of America’s, and its level of VC activity is 85% as big as America’s based on money spent since 2016. There is now a rich ecosystem of VC firms buttressed by Alibaba and Tencent, who seed roughly a quarter of VC deals, and by government-backed funds-of-funds.

China’s population of AI experts is only 6% of the size of America’s (if you include anyone of Chinese ethnicity this rises to 16%) and the best minds still work in the United States, for example at Alphabet (the Google mother firm). But now the number of cited AI papers by Chinese scientists is already at 89% of the American level. China has piles of data and notable companies in AI specialisms, for example Face++ in facial recognition and iFlytek in speech.

At the present pace China’s tech industry will be at parity with America’s in 10-15 years. This will boost the country’s productivity and create tech jobs. But the real prize is making far more profits overseas and setting global standards.