It's fair to say that China was once considered a technological backwater. No more. From e-commerce and social media to fintech and healthcare, the country has become a formidable digital player. In 2021, the digital economy was valued at CNY45.5 trillion (US$6.3 trillion), ranking second after the US.1
Beyond the consumer-driven digital economy, we're also beginning to see the adoption of digital technologies in more traditional industrial sectors. While still in its infancy, increased innovation here is already improving productivity, boosting competitiveness, and lowering costs.
Of course, last year's government crackdown on internet firms unnerved investors. However, these were targeted measures, with much of the digital economy untouched. Indeed, in October, policymakers confirmed regulations designed to bolster IT, corporate software, automation and more.
For international investors, there are domestic nuances that separate China's digital firms from overseas equivalents. The dynamics within the Chinese software sector are of particular interest. Here, companies tend to work more on a consulting basis, providing bespoke solutions for each client. True, this means lower operating leverage when compared to the western software as service model. However, it does result in stronger customer relations and consistent earnings.
The growth of China’s digital economy has been breathtaking
How does this look in practice?
A good example is China's largest third-party IT solutions vendor for financial firms, offering portfolio management and trading systems. Within China, it holds a 49% market share for securities brokers, 83% for mutual fund managers, and a whopping 92% for insurance groups. The formalization of trading and investing practices is vital to create fairer, more efficient and better-regulated capital markets in China. But the company is not content to tread water. Forward-looking initiatives involve data intelligence services, establishing R&D labs with financial institutions, and subscription payment models. We believe all of these should continue to help China's largest third-party IT solutions vendor achieve its goal of making finance easy.
Construction can be a costly business. Unforeseen delays, design faults, and supply issues can often cause budgets to balloon. Poor production methods and excess waste are also bad for the environment. Enter a software and solutions provider for architecture, engineering and construction firms. The software and solutions provider's products cover the entire value chain of a project, including planning and design, cost estimation, and construction management. For example, its software can accurately calculate the amount of steel needed to complete a project – right down to the length of each bar. It also offers products that help visualize 2D construction plans, map time schedules in 3D, and estimate a building's water usage. All of these improve efficiencies and cut costs. They also help limit and control a building's environmental profile. In our view, demand for these, and future digital solutions, will only grow as China seeks to build the smart cities of tomorrow.
They say seeing is believing – and a machine vision components and software supplier helps manufacturers do just that. The company makes industrial machine-vision systems (cameras, 3D laser sensors, light sources, code readers) used to inspect, evaluate and identify objects or images in an instant. On a production line, this could be anything from checking that jars have the right amount of liquid to ensuring car bodies are blemish free. In the automation space, the machine vision components and software supplier's systems ensure robotic arms can pinpoint objects and act according to their appearance. Meanwhile, its lighting solutions play an important role in the ever-expanding lithium battery-making market. We believe companies like the machine vision components and software supplier are therefore vital to help improve efficiencies and to lower costs for a host of industrial firms.
What's the long-term outlook?
The growth of China's digital economy has been breathtaking. The industry's value to GDP has doubled in 10 years to nearly 40%. The outlook is also encouraging. Policymakers want to create a more modern and socially equal society. Investment and policies designed to fuel innovation, drive technology localization, and enhance self-sufficiency are integral to this goal. For investors, this digital revolution should create opportunities across sectors and the market-cap scale.
Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. Past performance is not a guide to future results.
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- Source: Chinese Academy of Cyberspace Studies, November 2022