Did you know that China ranked 14th in the Global Innovation Index*, although they are only 56th in the world in terms of GDP per capita?
* the Global Innovation Index is a study conducted since 2007 and co-published by Cornell University and the UN’s World Intellectual Property Organisation
Over the last decade, China has become one of the rising stars of global innovation in terms of its ground-breaking advances in key sectors like e-commerce and cashless payment.
According to the Global Innovation Index, “China stands out for producing innovations that are comparable to those of the high-income group”.
Is there a possibility that they would actually overtake the rest of the world?
Let’s take a look:
In the survey done by the Boston Consulting Group (BCG) that ranked the top 50 most innovative companies in 2020, 5 out of the 50 companies were from China:
- Huawei- 6th rank (from rank 42 in 2019)
- Alibaba- 7th rank (from rank 16 in 2019)
- Tencent- 14th rank (remain)
- Xiaomi-24th rank (remain)
- JD.com- 31th rank (Newly added)
Research & Development Spending
Both China and the U.S. understand the importance of research and development (R&D), as scientific and technological competition has become the main battleground of global power rivalry. Both countries will be focusing on basic research like AI, semiconductors, biotech and quantum computing.
China has been putting a greater emphasis on R&D over the years. The rewards are now being reaped as China companies have started making it into the top 50 list of most innovative companies.
R&D is one of the key indicators of innovation and China had been increasing its R&D expenses over the years. As you can see from the picture below, China is the second highest spender on R&D.
China is projected to overtake the U.S. in terms of the R&D expenditure in 2021.
And we will probably be seeing the effects of their R&D in the next few years.
The U.S. will not seat back and allow China to bypass them nor risk falling back.
A US$250 billion Bill was passed by the Senate under the U.S. Innovation and Competition Act. This Bill aims to counter China’s technological ambitions that we’ve seen on the headlines recently. This US$250 billion will be used to fund scientific research, subsidies for chipmakers and robot makers, and an overhaul of the National Science Foundation.
Likewise, according to an industrial report, China’s spending in the IT sector had grown 10% YOY to over 2.21 trillion yuan (US$346.1 billion) in the year 2021, as reported by Xinhua. The article merely stated that this is part of China’s 14th Five-Year Plan to drive growth in the IT sector.
Patents
A patent gives an inventor exclusive rights to their invention, and the ability to stop others from making, using or selling from their invention.
In 2016, China broke the world record for the number of patent applications submitted in a year! They were the first country that filed over a million patent applications in 2016, as reported by the World Intellectual Property Organisation.
5G Patent Race
Thus far, Huawei has declared 3007 different 5G patent families, the highest out of any company in the world. (as reported in a study by intellectual property research organization GreyB)
The 5G mobile internet technology is one of the areas that China and the U.S. had been competing in. China had been investing more on 5G technology since 2015.
In a study done by Deloitte, it was estimated that the equipment required to add a 5G carrier in China is around 35% cheaper than that of the U.S. This means that the U.S. might need to spend 2.67X the amount that China does, for the same amount of wireless network capacity.
The report also stated that “China and other countries may be creating a 5G tsunami, making it near impossible to catch up.”
Blockchain Patent Race
Other than 5G, China has a dominant position in terms of blockchain patent filing volume.
The companies leading the blockchain patent race are Ant Group, followed by Tencent and Ping An Group, as reported by Intellectual Asser Management (IAM) Magazine citing data from the Derwent World Patents index.
Jiang Guofei, president of Advanced Technology Business Group in Ant Group highlighted that the Ant Chain (Ant Group’s blockchain–based technology solutions) has the most blockchain patent applications for four consecutive years since 2017.
Wrapping Up
There is no doubt that China is a big market and many Chinese tech companies can prosper simply by serving their own huge domestic middle class.
But the Chinese government is not clueless. They have hit the Chinese tech companies hard with the antitrust saga. Going forward, Chinese tech companies would be forced to focus even more on innovation rather than “monopolistic” strategies. This move would drive more organic growth based on innovation, allowing these Chinese tech companies to become stronger players and competitors in the global arena.
At the same time, we’ve seen a significant increase in patent applications from China.
It’s natural that not every patent application will be granted. Even so, the number of patents being granted to China has increased in recent years, an example is Huawei’s sheer volume of 5G patents.
That said, my take is that the U.S. is still considered the leading tech power house of the world. However, we are experiencing China’s attempt to inch forward, as suggested by the increase in their R&D spending and patent applications.
Through these, we have also seen that China has taken the lead in certain areas of tech advancements, instead of just playing catching up with other countries. For example, China had started working on its own digital currency since the year 2014. This is going to be the first digital Yuan that will give Beijing the power to track spending in real-time.
We’ve also seen the recent smooth landing of the Tianwen-1 probe on Mars earlier. On top of that, China is gearing up for a record-breaking 40 plus launches to space in 2021 alone.
Even if we assume that China eventually loses to the U.S. in terms of innovation, based on China’s many initiatives towards R&D and Innovation, they could still remain as a strong number 2.
Top 10 Countries for International Patent Applications (1991-2020)
This is just one of the reasons why we’re bullish about China’s future potential. I’ve also shared about what’s holding the China stock market back, and why Charlie Munger is investing in China regardless of these issues.
If you see opportunities in China and would like to know more about China Stocks, do join me at my live webinar where I will be sharing on:
- How to grow your portfolio by riding on China’s growth?
- Why we’re bullish on China stocks, and why you should have some exposure in them for crazy potential growth, in the coming years
- 3Cs: The unique framework designed for China investors
- Where to find unlimited China Stocks investing ideas?
- and more
