White paper: China innovation

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Innovation has transformed the world over the past two centuries. This “perennial gale of creative destruction” as described by Joseph Schumpeter in 1942, has resulted in:

  • an eight-fold increase in global population;
  • driven over 50% of productivity growth; and
  • impacted everything from the way we travel, communicate, work and even find a date.

The pace of this “gale” has only intensified in recent times, as shown by the increased pace of adoption. For example, it took 70 years for the washing machine to reach full penetration, 20 years for the colour TV, yet only 5 years for social media. Interestingly, winners from these waves of innovation aren’t necessarily the incumbents. This is no more evident than in the turnover of the leading companies in the S&P 500, where the average lifespan has declined from 60 years in 1958 to 24 years in 2016 and is forecast to reach just 12 years by 2021.

We expect the next innovation waves will drive exponential growth in companies that develop, enable and adopt these disruptive forces. Meanwhile, those companies that don’t embrace innovation will likely meander in a linear growth world, gradually losing their relevance.

From a geographical perspective, China is at the forefront of the next wave of innovation, partly due to its significant structural advantages. As the “godfather of Artificial Intelligence (AI) in China”, Kai-Fu Lee once said “data is the new oil, and China is the new Saudi Arabia”. Data creation, access and analysis is paramount to the development of the next generation of innovations. China has created more data than any other country and continues to outgrow global data growth. Additionally, the country is uniquely positioned at the crossroads of innovations - both as a source and a destination for the most innovative companies. Domestically, government policy and regulations have long been supportive of innovation, an effect that is now materializing. For example, China now has:

  • 8.3x more STEM graduates than the US;
  • is home to the largest number of leading innovative companies;
  • was granted 31% of global patents - more than any other country; and
  • has overtaken the US to become the largest producer of global research papers.

At the same time, China is a critical destination for globally innovative companies attracted to a population of increasingly connected, affluent and global citizens. China has the largest population of smartphone users, most of which are digital natives accustomed to living their life online. Furthermore, it is increasingly becoming the home to supply chains for high value added products. Hence, the country offers global companies a fertile ground for innovation, a huge market and the ability to scale up successful innovation. For us, these are key factors that companies with genuine and unique IP, cannot ignore.

Although the types of innovations will evolve over time, we believe the innovation theme and China’s leadership is perpetual in nature.