China Sector Analysis: Information Technology

SUB-INDUSTRY LEADERS: Xinyi Solar, Huahong, Longi Green Energy

  • TECHNOLOGY, HARDWARE, STORAGE & PERIPHERALS

China’s tech and hardware industry has grown quickly with some companies already establishing notable footprints abroad. Lenovo acquired the now well-known ThinkPad laptop line from IBM in 2005 and is today a globally renowned brand. Leading smartphone-makers Xiaomi and Huawei are now formidable competitors with brands like Apple and Samsung in certain regions, including Europe. China produces 90% of the world’s PCs, 90% of mobile phones and 70% of televisions.13 China’s evolving role in the global hardware industry simply cannot be understated.

SUB-INDUSTRY LEADERS: Xiaomi, Lenovo, Ninestar

  • SOFTWARE

Chinese tech giants that specialize in hardware, e-commerce or telecommunication also tend to have a strong presence in the software industry. In 2020, the Chinese Ministry of Industry and Information Technology (MIIT) published a list of the top 100 software companies in China and the top positions were occupied by companies known for other lines of business, like smartphone-makers Huawei, ZTE, Xiaomi and appliance-maker Haier.14 One notable characteristic of the Chinese software industry is the lack of software-as-a-service (SaaS) giants. Concerns over data security and the reluctance of large companies and state-owned enterprises to shift away from pre-existing investments in traditional software solutions are both factors that prevented the emergence of SaaS giants.15 Whereas eight of the top twenty American software companies in 2019 had a SaaS business model, the same could not be said for any of the top twenty Chinese software companies.16 This is indicative of how there is still room for growth in the software industry as Chinese companies embrace the latest technologies.

SUB-INDUSTRY LEADERS: Kingdee, Kingsoft, China Youzan

  • COMMUNICATIONS EQUIPMENT

China’s massive domestic market with nearly 1bn internet users has directly benefitted China’s communications equipment industry. Huawei and ZTE are major global leaders in 5G equipment with 28% and 9% of global market share of networking equipment, respectively.17 Both of these companies must contend with US sanctions implemented during the Trump administration, yet continue to benefit domestically from China’s extensive rollout of 5G networks. The establishment of a national 5G network should support innovation and experimentation across other emerging industries in China, such as the IoT, AI, and telemedicine.

SUB-INDUSTRY LEADERS: BYD Electronic, ZTE, Hengtong Optic

  • IT SERVICES

Some of the leaders in Chinese IT services are DHC Software, GDS Holdings, TravelSky and Kingsoft. GDS Holdings has data centers around the country and provides cloud services to a wide array of firms. As the name would suggest, TravelSky provides IT solutions primarily to airlines and other tourism-related businesses. Meanwhile, DHC Software specializes in industry software development and other IT services for a diverse range of industries.18

SUB-INDUSTRY LEADERS: GDS Holdings, TravelSky, Kingsoft Cloud

 

For Top 10 Holdings for the fund please click here. Holdings are subject to change. Current and future holdings are subject to risk.

Long Term Tailwinds for China’s IT Sector

  • National Strategic Policy: The Made in China 2025 plan was issued by the State Council in May 2015. The 10 year plan, which takes some inspiration from Germany’s Industry 4.0 plan, is designed to comprehensively upgrade China’s manufacturing so that the country can maintain medium to high-speed growth.19 Among the ten critical industries targeted for increased growth are Information Technology, artificial intelligence, power equipment, chipmaking and advanced robots. Chipmaking stands out because of how crucial it is to the competitive power of the Chinese tech industry. Although China has the world’s fourth largest chip foundry, SMIC, its technology still lags competitors in South Korea, Japan, Taiwan and the US. As the recent sanctions against Huawei demonstrated, Chinese tech companies can be vulnerable to foreign policy. Huawei’s smartphone sales tanked by 40% in the last quarter of 2020 because of US sanctions.20 One of the goals of Made in China 2025 is to fix this vulnerability. Beijing’s consternation over dependence on foreign technology was palpable in the 14th Five-Year Plan (FYP), which was approved in March 2021 at the 13th National People’s Congress (NPC). The 14th FYP stands out because of its emphasis on technological innovation and fostering a dual-circulation economy that can withstand external shocks. In particular, the plan sets out a goal of maintaining 7% annual growth in R&D spending over the next five years. Both Made in China 2025 and the 14th FYP underscore Beijing’s increasing prioritization of the IT sector.
  • Growth of E-commerce: The growth of China’s e-commerce market over the last 15 years has been closely linked to the growth of domestic smartphones and internet services. In 2005, China’s e-commerce market accounted for less than 1% percent of the global market, compared to the US market which accounted for 34.9%. By 2016, China’s E-commerce market made up 42% of global sales, compared to 24.1% by the US.21 Chinese E-commerce has been boosted by a broad adoption of mobile payments, as evidenced by the fact China’s mobile payment penetration rate stood at 81% in 2019, compared to 29% in the US.22 Continued growth of e-commerce in China will likely propel significant smart phone sales and 5G investments across the country.
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Disclosure: The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate ...

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