Coming: A Silicon Delta for the PRD

Xi Jinping wants China to be a global leader in 10 chosen industries, including the Internet, big data, electric vehicles, semiconductors, robotics, pharmaceuticals
and artificial intelligence, by 2025 . . .

THE Pearl River Delta is morphing into what some now dub Silicon Delta, China’s answer to Silicon Valley in California.
China is home to some of the world’s most valuable ‘unicorns’ — private companies valued at US$1 billion or more — while its top tech companies now rank among the world’s tech leaders.
Such is the optimism surrounding China’s growing innovation potential that some believe the “next big thing” could well come out of Silicon Delta.
Addressing the HSBC Australia China Conference in Sydney in November, Frederic Neumann, HSBC‘s Co-Head Asian Economics, said China is making great advances in high-tech industries.
“One thing I really want to stress is that China is no longer a copycat market. Some of the most exciting innovations are happening in China,” he said.
Helen Wong, HSBC’s Chief Executive, Greater China, concurs: There was a time — not so long ago, actually — when Chinese tech companies were dismissed as mere copycats,” she says. “But not any more. China is now punching above its weight on innovation.

“We believe the next game-changing tech idea is as likely to come from the Pearl River Delta as it is from Silicon Valley.”
Neumann recalls a recent conversation with the Silicon Valley CEO of a company employing 25,000 software engineers.
When asked whether Silicon Delta is seen as a threat, the CEO, whose company is in the Internet space, said the Delta is now on par with Silicon Valley — but when it comes to implementation, Silicon Delta is moving at twice the speed of Silicon Valley.
The Chinese are adapting technology for Chinese consumers.  An example — WeChat, which is modelled on WhatsApp, a message app, has infinitely more functions, covering shopping, buying, payment and so on.
Neumann says one should look at how, in both fintech and e-commerce — China is leading the way. And what will make even more difference in coming years is that Beijing has thrown its weight behind innovation and R&D.
At the 19th CPC Congress in October, which saw consolidation of power into the hands of Jinping, he spelled out his new strategy for China’s economic development.
Xi wants China to be a global leader in 10 chosen industries by 2025.
These include the Internet, big data, electric vehicles, semiconductors, robotics, pharmaceuticals and artificial intelligence.
To achieve its objective, Beijing will dictate to State-owned enterprises and private enterprises that they invest in these sectors.
Neumann says: “Last year, 300,000 electric cars were sold in China. That figure will rise to seven million by 2025, making China, by far and away, the largest electric car market in the world.
“They are creating the infrastructure for this. China now has 120,000 electric vehicle-charging stations and, in the next three years, there will be 1.4 million of these.”
Two of the world’s biggest battery power makers are making sophisticated battery packs in China to run electric cars.
While Western marques still dominate the Chinese car market, Neumann predicts a change in mindset when large fleet owners start to buy Chinese electric cars. This will, in turn, lead to the export of electric cars — and that will be an emerging challenge to established global carmakers over the next decade.
The Chinese will also export the same high-value-added equipment and machinery that it is importing from developed countries today – at competitive prices.
“The challenge will be to manage the process in a way that doesn’t lead to any political tensions,” says Neumann.
Already, China is quickly catching up on tech-heavy and tech-savvy countries such as South Korea and Japan, clipping off the lead they have over China.
Commitment and money is where China has an edge over other countries.
Once a US$3-billion semiconductor foundry would have been considered a large investment. Not so in China, which is spending US$30 billion to establish a semiconductor foundry in Nanjing.
In January this year, China’s Tsinghua Unigroup announced plans for a US$30-billion memory chip factory. It will be tasked to win global markets in semiconductors.
China does not do things by half measures.
Today, the PRD is home to an increasingly high-end and high-tech region of manufacturing and design. “The entreneurial and innovative spirit found in the PRD is real,” says Helen Wong.
“When we talk about startups, we immediately think of unicorns. It is common knowledge that Uber is the world’s most valuable unicorn.
“What may not be common knowledge is that the world’s second, third and fourth most valuable unicorns are all located in China.”
Wong says Didi Chuxing, China’s top ride-hailing app, has surprised many by beating Uber at its own game. Uber exited China in 2016.
Xiaomi now ranks among the world’s leading smartphone vendors – having recently overtaken Fitbit and Apple as the world’s largest wearable vendor.  It is said to be looking at a US$50 billion public offering in 2018.
Then there is Meituan-Dianping, which offers on-demand services covering restaurant bookings, group buying, food delivery and movie ticketing. “Think of it as Yelp and Groupon, Deliveroo, Fandango and many more rolled into one,” she says.
Meanwhile, companies in Shenzhen now file more international patents than those in France or Britain.
Frederic Neumann says an important trend is for foreign multinationals to shift their research and development to China.
“Time and time again they tell me they are putting R&D dollars into China. We are talking about big engineering firms, manufacturers of medical equipment, pharmaceutical companies and car manufacturers.
“A large Germany carmaker is moving its global R&D into China,” he says.
China is no longer the world’s factory for cheap consumer goods. It is becoming a consuming nation as its economy evolves from manufacturing to services. Consumption today contributes two-thirds of the Chinese economy.
Neumann says:  “China is moving in the direction of an Internet economy, and I think China is often not given enough credit for that process.”
In 2000, just 1.7 per cent of Mainland Chinese people were online. Now, China has more than 730 million internet users — a penetration rate of 53.2 per cent. More than 95 per cent of them access the Internet via their phones.
China’s e-commerce sales soared from practically zero in 2003 to about US$600 billion in 2015 (the latest official figures available), and China has overtaken the US as the world’s largest online market. eMarketer, a research group, estimates China e-commerce sales will top US$2.4 trillion by 2020.
Online sales topped US$25 billion in this year’s so-called Singles Day, surging past last year’s total of US17.8 billion.  The 24-hour shopping frenzy generated sales which exceeded the combined sales of Black Friday and Cyber Monday in the US.
Helen Wong says China’s Alibaba and Tencent are now among the world’s top 10 most valuable companies – ranking them alongside US tech firms such as Apple, Alphabet, Facebook and Amazon.
“Alibaba and Tencent are two of the “Big Three” tech giants in China, the third is Baidu, and together they are colloquially referred to as BAT,” she says.
The rise of these made-in-China unicorns, Wong adds, reflects the country’s growing demand for services and consumer goods.
As she sees it, the PRD represents China’s future in more ways than one: there is both the tech aspect and the consumer aspect.
“To catch a glimpse of China as a consumption power, look no further than the PRD,” she says. “It is one of the most affluent regions in the country: GDP per capita in the PRD is more than twice the national average.”
“The PRD is spearheading the increase in income and consumption in China – and we at HSBC are seeing it first-hand in the banking arena.”
Newmann says the Chinese have moved away from setting growth targets, instead focussing on quality of growth because Xi wants China to avoid what is known as the “middle income” trap. A key to achieving Xi’s vision is to unlock China’s potential as an innovator and to lift productivity.
Until now, construction has played a vital role in the growth of the Chinese economy, contributing to as much as 25 per cent of GDP.  Between 2010 and 2012, China poured as much concrete as the United States did in the whole of the 20th century.
“This year alone, China will complete 105 skyscrapers, compared to the US which has built 189 in its entire history,” says Neumann.
But, the Chinese have recognised that such growth is not sustainable because it requires a lot of leverage and debt, and is also highly polluting.
XI wants the Chinese juggernaut to shift away from its reliance on construction to industrial policy — to push new technologies, and raise productivity.
As China moves from construction into capex, Neumann sees it importing more machinery, equipment and other high-value products from developed markets. So the next few years should be good for developed countries such as Germany and Japan that export capital equipment
Beyond that, China will become a competitor in more ways than one.