China Sector Analysis: Information Technology

While growth in e-commerce sales through PC devices stagnates, e-commerce sales through mobile devices has grown explosively, in part because of the rapid growth of mobile payments.

  • Increased Technology Adoption: China is quickly adopting technologies both old and new. China’s internet coverage rate rose from 38.3% in 2011 to 59.6% in 2018.23 Although this number is still low compared to developed countries, some of which have internet penetration rates above 90%, China’s massive population means that it has 3 times as many internet users and 3.75 times as many mobile phone users as the US. The rapid 4G adoption rates of these online consumers provides the backbone for data-intensive media consumption, mobile payments, and chat features. China is currently rolling out 5G technology to enhance internet speeds. It has already installed around 700,000 5G bases and plans on installing 600,000 more by the end of 2021.24 A functional and integrated 5G network could form a critical foundation for the emerging Internet of Things industry and artificial intelligence, helping give China a competitive edge over other major economies.

  • Growing Foreign Demand for Technology Made in China: While Chinese tech companies are still building their global presence, their products are gaining popularity abroad. As of Q4 2020, Xiaomi, Huawei, Vivo and Oppo phones made up 11%, 8%, 8% and 9% of global market share respectively.25 In Europe, Huawei went from having a near negligible market share of 1% back in 2013 to hovering around 18% for most of 2019 and 2020, putting it at third place behind Apple and Samsung. There are some markets where Chinese products are already preferred, like India where Xiaomi sold 41mn phones in 2020, putting it at first place with a market share of 27%.26 Meanwhile, Lenovo came in first place for the most worldwide PC vendor unit shipments in Q4 2020, with a total of 21,491,000 units shipped.27

Oppo, Xiaomi, Huawei, and Vivo (all Chinese brands) comprised 36% of global sales in Q4 2020. Huawei noticeably dropped down to 8% in Q4 2020 from 14% in Q4 2019, likely due to pressure from US sanctions.

  • Capital Markets Expansion: As a result of decades of regulatory reform, China’s markets continue to open up. This has allowed more Chinese IT sector companies to obtain foreign capital. In 2009, the Shenzhen Stock Exchange launched the ChiNext board, which is focused on technology stocks. Over the last two years, the ChiNext platform has grown substantially and now has 912 listed companies and a total of $1.66 trillion in stock market value.28 In 2019, the Shanghai Stock Exchange launched its Science and Technology Innovation Board, also known as the STAR Market, which aspires to be a NASDAQ-like platform. Just two years after its founding, the STAR market now has 230 listed stocks and a total of $519.68bn in market capitalization.29

Headwinds and Scrutiny:

The IT industry is important for national security and the sudden rise of Chinese tech giants has been met with scrutiny in the West, sometimes in the form of sanctions or trade restrictions. In 2019, the Trump administration restricted the export of US technology to Huawei. In 2020, the US Department of Commerce sent a letter to American companies stating that certain exports to SMIC would require a special license. And in 2021, Xiaomi was banned from listing in the US for alleged ties to the Chinese military (it is currently listed in Hong Kong). These sanctions have not been fatal to the aforementioned companies, which have focused most of their growth on the domestic and regional markets, but present a significant political risk worth consideration.

Conclusion

The Chinese IT sector has made leaps and bounds since the formation of Zhongguancun and the establishment of the Shenzhen SEZ. It has been able to do so in no small part due to its large population and quick adoption of digital technologies. Going forward, there are long-term tailwinds that should continue to push growth in the Chinese IT sector as it aspires to be a global competitor taking on giants in Silicon Valley, Seoul and Tokyo.

 

 

 


FOOTNOTES

1. Statista, as of Nov 24, 2020.

2. CNBC, “China says it now has nearly one billion internet users,” Feb 4, 2021.

3. China National Bureau of Statistics, “Q4 2020 and Annual Domestic GDP Preliminary Calculation Results,” Jan 19, 2021.

4. Bloomberg as of March 24, 2021.

5. Forbes, “A Look Inside Shenzhen’s High-Tech Empire,” Jul 14, 2016.

6. KrASIA, “How Zhongguancun Became the Innovation Hub Powering China’s Tech Aspirations,” Dec 16, 2020.

7. China Ministry of Commerce, as of Mar 2021.

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