All roads lead to convergence of key technologies in China.
Business models are emerging that monetize 5G and artificial intelligence for a new phase of growth.
Every day on China’s highways the speed, mileage and driving time for almost the whole of the country’s heavy-duty truck fleet is monitored by one logistics firm. Data from recorders installed in every truck are sent by cellular or global positioning system (GPS) technology to a central platform. The company uses Big Data analytics, cloud computing and artificial intelligence (AI) to constantly calculate and monitor the speed of every one.
The platform knows exactly where each truck is and the speed limit at that location and sends a text message to the driver if it detects that limit being exceeded. With this information, the insurers numbered among the company’s clients gain a better understanding of the risks to which they are exposed. There is a positive social impact, too: accident rates are reduced.
Such use of technology is emblematic of one of the most dynamic new trends sweeping the country as it emerges from the Covid-19 crisis: technology convergence.
In the last decade, 4G created substantial opportunities for new Internet ecosystems in China, including shared mobility, online food delivery, mobile payments and video streaming.
But over the next decade, UBS believes that the three technologies of 5G, AI and the Internet of Things (IoT) will increasingly converge to drive new applications, from smart education to smart cities.
“This convergence is a key catalyst for the business models of the next decade,” says Natalie Cade, Head of UBS China 360, a new thematic China research offering that leverages data from UBS Evidence Lab, an alternative data provider, and partners with analysts across the globe.
China appears to be well placed to benefit from this trend, with the largest amount of data globally, about 350 start-up companies learning how to apply AI, and the potential to be among the first countries to complete 5G rollout.
A head start
A head start
UBS believes the country enjoys four advantages that are likely to accelerate the development and application of the above technologies.
First, there is strong policy support for the transition to an innovation-led economy, which has become more urgent as slowing economic growth and tensions with the United States have escalated.
The Chinese government’s new infrastructure initiative will channel around RMB1 trillion (US$140 billion) per year into areas including 5G, data centers, and charging stations for electric vehicles.
This investment has been especially effective in ensuring the commercialization of research and development (R&D), where China’s spending as a percentage of GDP is now larger than that of the European Union. It also outspent the U.S. in 2019 to become the world’s biggest spender in purchasing-power parity terms, UBS estimates.
“The way the government advocates for specific R&D uses by participating in the process right from the beginning means that ministry officials—many of them engineers or otherwise technically trained—are able to understand how the technology is progressing,” explains Ms. Cade.
Second, China’s advanced tech infrastructure is a solid foundation for the development of tech-related applications, and China’s main telecommunications players are investing heavily. UBS telecoms analysts expect that for every revenue dollar earned, Chinese operators will likely spend twice as much in aggregate as their U.S. and Japanese peers by 2021.
Third, there is a steady source of funding to support innovation. Private equity is abundant, funding about 45 percent of tech, media and telecommunications (TMT) investments, UBS China 360 estimates.
Finally, the Chinese are adopting new tech applications at a faster rate than many of the world’s consumers, and they are willing to pay more to access it. According to UBS Evidence Lab, despite having a lower average disposable income, Chinese consumers were prepared to spend more than $6 of premium per month for 5G subscription, significantly higher than their counterparts in the U.K., U.S. and Germany. Chinese mobile-phone users also tend to use their handsets for a shorter period of time before upgrading.
“Five years ago, we often talked about technology in terms of disruption,” says Selina Cheung, Head of Private Capital Markets, Asia-Pacific at UBS. “I think it’s no longer disruption, it’s a way of life.”
One area in which China lags behind has been data centers. It has trailed the U.S. and Europe in the number and sophistication of its technology patents, too.
However, UBS believes it is catching up, noting that Chinese tech giants’ data-center capital expenditure in the 2016-19 period grew faster, at a 58 percent compound annual growth rate, compared with that of the four largest U.S. tech firms at 44 percent over the same period. They are also a focus of the new infrastructure initiative.
Business models leverage technology
Business models leverage technology
For investors seeking to gain access to this dynamic new economic driver, it is not simply about technology innovation and levels of government support, but how tech convergence can be translated into business models that work.
Examples of how tech convergence can be effectively monetized are being sought. “Investors are looking for companies that own their own intellectual property,” explains Natalie Cade, “and are creating new business models through innovative use of that technology.”
“We think that the business models developed in China could eventually be models for the rest of the world.”
Views correct as at 3 September 2020