SMIC also offers extraordinary opportunities to the engineers of its Taiwanese competitors (TSMC, UMC) willing to come and settle in Beijing or Qingdao.

In 2017, the turnover of Chinese companies in the sector (USD 31 billion) overall exceeded that of their Taiwanese competitors (22 billion). About 1,300 Taiwanese engineers are now working in China, as well as Korean and Japanese colleagues. The entire sector employs 400,000 engineers and technicians and is expected to grow to 720,000 by 2020.

Chips.

Differences are particularly significant for mobile phones chips, a sector dominated by Qualcomm, as well as for component manufacturing equipment and chips for the artificial intelligence sector, where the Chinese Cambrian represents less than 10% of its American competitor Nvidia. However, Huawei’s Kirin 980 processor, the first to feature two neural units with superior performance over Apple’s A11, which has only one, is entering mass production, as is its first Balong 5G01 chip with a transmission speed of 2.3Gb.

Alibaba and Tencent have also recently entered the race by buying Chinese manufacturers. Both will put their own neural chips into production in 2019. The objective is to break Intel’s and Microsoft’s monopoly on CPUs.

Future developments.

The research already completed and future developments of graphene technologies are also an axis of complement/substitution deployment to fill gaps initially considered domestic. Increasingly, they would also help to secure a new posture of conquest not anticipated by Westerners.

More interestingly, China already has a virtual monopoly on chips and equipment for cryptocurrency mining, as discussed below.

China also has a substantial lead in performance and supercomputer stock: of the 500 fastest computers in the world, 202 are in China compared to 143 in the United States according to the American consultant Eurasia Group.

The Sunway Taihu Light is by far the fastest in the world waiting for the arrival of quantum computers that Chinese companies are working on. The Chinese Academy of Sciences (CAS) is also developing a superconducting computer and the corresponding superconducting I.C. which could allow it to bypass the current semiconductor bottleneck and set new standards.

Otherwise, China’s weakness concerns mobile phone operating systems. Its manufacturers use Google’s Android and Chrome software for mobiles and Microsoft’s for computers, and despite massive investments by Huawei and others and their ads, no equivalent or superior Chinese software has yet been released.

Three other sectors included in the “Made in China 2025” plan have not yet seen any significant breakthroughs: high-tech medical and health equipment, agricultural equipment and new materials. The counterfeit vaccine scandal has once again highlighted the weakness of traceability controls in the pharmaceutical and food sectors.

2. China at the forefront

In various sectors, China is at the forefront.

Telecoms.

Alain Lejeune’s article on the development of the Chinese telecoms industry provides a detailed overview of the situation in this highly strategic sector due to the importance of 5G standards, of which the merger of China Telecom (282m of subscribers) and China Unicom (302m) should make it possible to rationalize and optimize deployment.

I.C.T. and internet services.

The plan of the Ministry of Industry, Information Technology and Development foresees a consumer market for information services of CNY 6,000 billion in 2020, expanding by 15% per year and stimulating a total market for associated products and services of CNY 15,000 billion.

At the end of June 2018, the number of Chinese Internet users was 802 million, or 58% of the total population. The development potential remains enormous to reach the OECD countries’ penetration rate of around 90%. Most Internet users use their mobile phones to manage their finances, make purchases, arrange travel and play online.

More than 490,000 online shops are run by rural households and 55m students follow courses on the Internet live. This gives industry leaders (the BATHX) unparalleled access to a huge mass of metadata to be processed using artificial intelligence. The first three dominate virtually all aspects of the sector with a combined turnover of USD 87 billion covering search engines, social networks, e-commerce, and entertainment. They control or support more than half of China’s 124 unicorns and have made more than 150 significant investments abroad.

WeChat, a subsidiary of Tencent, now has a global base of 1 billion users to whom 1 million mini-programs are offered and the record for daily transactions during the last Chinese New Year was 280 million.

In fact, Tencent made 62 investments this year in robotics and artificial intelligence as well as in video and online games or offline retail (USD 34 billion with JD in Wanda Properties). Agreements with various traditional retailers including Walmart and Carrefour are also on the way while a joint subsidiary with Goldman Sachs, Miss Fresh, guarantees the delivery of fresh produce in less than an hour to 100 cities through 10,000 warehouses.

The two leaders Alibaba and JD.com, which account for 50% of the world’s e-commerce and 40% of the corresponding deliveries (now by drone in China), are furthermore expanding in Southeast Asia and along the new silk routes.

Hence, China’s cross-border e-commerce in 2018 is overall expected to exceed USD 1,300 billion according to the China E-commerce Association.

Access to mobile payment for the significant portion of unbanked people is another essential and differentiating point of Chinese e-commerce compared to Western e-commerce; and a precursor to future advances on the African and Indian continents, where the growth levers are totally beyond the reach of Western players (visas, mastercards, amex, etc.).

In the luxury products segment, the Chinese market is estimated at USD 73 billion, e-commerce represents 7% of sales and is growing by 20% per year.

Fintech.

By 2016, Internet payments had reached the sum of USD 5,500 billion compared to 112 billion in the United States, of which 54% for Alipay and 38% for Wechat Pay.

Said differently, 527 million Internet users use electronic payment methods in China, not to mention the 135 million Chinese tourists for whom similar services have been deployed to date in 40 countries and who spend USD 115 billion per year. There, the VAT refund services are often offered by Alibaba and WeChat.

Their formidable customer base will be used by existing players to offer financial and wealth management services for which Baidu, Alibaba, Tencent and JD have now all been licensed. The outstanding loans on these 1,050,000 monthly unique users make Tencent/WeChat the new competitor of Alibaba/Ant Financials benefiting from the deployment of “social credit” scores validated by the Chinese government.

>> Related reading: Tech and Fintech Insights.

Shared transport.

Didi and Ofo, the two leaders in the sector, share 90% of the market for shared vehicles.

Controlled by Alibaba and Tencent, the Didi Group, with its 500 million users, invests more than USD 1 billion and continues to expand its mobility services internationally through organic and external growth, including in Japan in association with Softbank and in India with an investment in Oyo Rooms. The group also diversified into meal delivery, financial services, and automotive services. Ofo and Mobike are doing the same in a growing number of markets.

The Meituan Dianping platform, which competes with the two major players in the markets for shared bicycles, food deliveries and online bookings, is listing on the Hong Kong Stock Exchange, which is expected to increase its value to USD 50 billion.

Artificial intelligence, robotics.

In 2017, according to CB Insight, Chinese start-ups raised about half of the funds invested in Artificial Intelligence.

Softbank plans to invest USD 1 billion in the startup Sensetime. Alibaba, for its part, is investing USD 600m in rival facial recognition company Megvii Inc. China is aiming for world leadership in the sector by 2030 (which was also predicted by Eric Schmitt, former Google chairman) and Sensetime is among the champions identified by the government alongside Baidu, Tencent, Alibaba and speech recognition specialist iFlytek. The applications targeted range from driving autonomous vehicles to medical diagnosis and biotech, as well as the analysis of billions of data collected for the management of cities and their inhabitants.

The Chinese Academy of Sciences is also interested in artificial intelligence in fields as diverse as facial recognition and assistance to diplomatic services as well as military applications. Beijing and Shanghai are at the top of the list of ten cities designated to lead the battle of artificial intelligence.

By 2020, China is expected by IDC to account for 30% of global investment in robotics. Chinese industry is indeed becoming rapidly robotized, but the market share of foreign robots remained at 73% in 2016 with ABB and the Japanese FANUC. However, domestic production of industrial robots is increasing rapidly (141,000 units and +58% in 2017).

The acquisition of Kuka has provided the Midea group with the basis for a strong expansion in the sector (their new factory in China aims to produce 75,000 industrial robots in 2024). The acquisition for EUR 850m by Fosun of the German company FFT, a specialist in flexible automation (2,600 employees), has just been authorized by Brussels. Alibaba is also interested in robotics with the introduction of food server robots in its Shanghai HEMA stores and restaurant and the introduction of unmanned clothing stores.

Quantum communications and Blockchain investment.

Quantum computing and transmission are also receiving priority attention with the creation of a USD 1 billion quantum laboratory. Since the launch in 2016 of the Micius satellite with a quantum interface, China has conducted a series of indecipherable quantum transmissions with two quantum stations in Jinan and Tibet and set up a quantum optical cable between Beijing and Shanghai.

It has since integrated the two, the first draft of a global quantum network that should soon extend from Gwadar to Djibouti as part of the BRI. Shanghai’s Jiaotong University has developed a maritime version for underwater quantum transmission. China is working to improve the first quantum computer it produced in 2017.

>> Related Read: China leading on Blockchain and Quantum Computing?

According to the White Paper of the Ministry of Industry and Information Technology, 40% of the 456 Chinese startups focusing on blockchain have appeared since 2017 and there are currently 249 fundraising events in this promising sector.

Alibaba and its subsidiary Ant Financial, which filed for 10% of the world’s blockchain patents in 2017, are also present here. With Tencent and Baidu, China thus reaches a figure of 56% of global Blockchain patents, compared to 22% for the United States. Applications range from cryptocurrencies (the Chinese central bank is studying the issuance of a sovereign one), more than half of which China “mines”, to invoicing, asset management, and other admintech and insuretech.

Alibaba already uses the blockchain to provide authentication and traceability services for Chinese rice, New Zealand milk (in association with PwC) and mailings and Ant has operated secure remittances with its subsidiary in the Philippines. Baidu and Tencent use the blockchain to provide billing services, photo storage and intellectual property royalty management and collection, as well as to fight tax fraud.

New Energies.

China has also decided to reduce its dependence on coal, which is to be replaced in 2030 as the main energy source by gas and clean energy, which is expected to account for more than half of all energy sources by 2045.

A proactive policy has been put into place to position China at the forefront of wind, solar and nuclear technologies. The United States has therefore imposed tariffs on Chinese solar equipment and China has filed a complaint with the WTO. Note, also, that an increasing number of investments in solar or wind infrastructure projects are taking place in BRI countries and the Middle East.

China has implemented an ambitious strategy of intelligent ultra-high voltage electricity distribution networks with a potentially global reach, designed to optimize flows according to geography, seasons and weather.

State Grid, China Three Gorges and China Southern Power Grid have embarked on a policy to acquire national grids in Brazil, Australia as well as in Europe as highlighted in a recent article in Le Monde) where they are increasingly confronted with the reluctance of the countries concerned.

China is finally ahead in the nuclear sector. In June, it started up the Taishan EPR and the first AP1000 power plant in Sanmen, Zhejiang. Its export ambitions for 3rd generation power plants are undeniable. A futuristic fusion nuclear power plant project is expected to be approved soon for Shanghai, Hefei or Chengdu with an estimated budget of USD 15 billion and a commissioning target in 2035.

Transportation.

China has been the world’s largest automotive market in 8 years.

More than 28 million vehicles were manufactured and sold in the country in 2016, including 517,000 using new energies. The existing 250,000 charging stations will be merged into the same company to ensure their compatibility.

All its manufacturers now have ambitious electric vehicle projects and some have opted for all-electric vehicles (Volvo, a Geely subsidiary, which is investing USD 9 billion). They have had great export success, such as BYD, which sells its electric buses in 50 countries and has just signed a USD 689m contract with Brazil for its monorail.

The autonomous vehicle is another priority and many digital and automotive players work in competition or cooperation, such as Baidu, which has just delivered its first 100 autonomous electric buses. 34 permits were granted for field tests. Following Daimler, most foreign manufacturers are increasing their investments in China in electric vehicles in order to have a solid base when quotas for tax incentives are introduced based on market share.

The world leader for air drones: DJI, which already holds 70% of the global market for domestic and recreational drones, is multiplying its professional applications (agreement with Syngenta in agriculture, logistics and construction) and the big players in e-commerce are setting up drones delivery services with manufacturers or logistics specialists. JD.com is building a national network of 150 UAV bases that will allow it to deliver same-day to hard-to-reach Chinese provinces. SF Express will offer the services of a UAV with a capacity of one ton of freight, a wingspan of 20m and a speed of 250km/h, currently in the process of being certified. The army is also working twice as hard on military drones and anti-drone lasers.

The sea is also the subject of spectacular advances in submarine drones, scientific exploration submarines and autonomous submarines with several private companies and, of course, the Chinese Navy, which is developing a series of Extra Large Unmanned Undersea Vehicles (XLUUV). China uses the largest test base for surface and depth marine drones in Zhuhai.

Aeronautics.

Hainan Airlines has just announced the purchase from COMAC of 200 J219 aircraft (medium-haul twin-engine aircraft with first flight in 2017) and 100 ARJ21s (90 seats 3,700km radius in commercial service since 2016) while AVIC has so far delivered 57 MA60/600 and 103 Y-12 turboprop aircraft in 28 B.R.I. countries.

The engine technologies still pose some problems, particularly for the largest jet projects, but cooperation with Airbus and Boeing is developing. A project for a hypersonic aircraft at Mach 7 is progressing; the C.A.S. is building a 265m wind tunnel that will allow aerodynamic tests of hypersonic aircraft, scramjets and probably missiles with a record Mach 25 performance. The attempt by Shaanxi’s Ligeance to acquire the British aircraft component manufacturer Northern Aerospace was aborted for national security reasons.

Railways.

Technical progress in the railway sector continues and CRRC Zhuzhou has successfully sold 20 hybrid shunting locomotives in line with European standards to Deutsche Bahn after exporting electric locomotives to Hungary and express trains to Serbia.

Its magnetically levitated suburban train has been in service since 2016 with a maximum speed of 100km/h and an interurban version with a speed of 200km/h will be introduced in 2019 to complement the Fuxin high-speed trains, which run commercially at 350km/h and are capable of reaching 420km/h.

The sector is prominent in the public-private cooperation agreement for infrastructure between China and Japan, the first act of which could be a joint bid under the BIS for the TGV high-speed train to link Thailand’s three main airports, at an estimated cost of USD 45 billion, a formidable competition for our European manufacturers.

Shipbuilding.

Sea trials of the new 50,000-ton Chinese designed aircraft carrier are underway in Dalian. It will join the Liaoning in service since 2012 and will be equipped with J15 fighters and various helicopters. 12,000 pieces of equipment were supplied by 532 companies, most of them civilian, according to China Shipbuilding Corp., its manufacturer, which will be merged with its competitor China State Shipbuilding Corp.

In response to the demand from Chinese cruise passengers and tourists, China is also launching into the cruise ship market in collaboration with Fincantieri with the creation of a cruise hub in Baoshan. The threat is becoming clearer for Saint-Nazaire.

>> Related reading: China’s sea strategy analyzed.

China is also developing an electromagnetic launch rail and a naval electric gun.

Space industry.

The probe and the lunar rover Chang’e 4, which will soon explore the hidden side of the Moon, were presented to the press in August. The development of solid fuel launchers (LD1…) has reached the testing stage and the China Academy of Engineering, which is developing the next generation of Long March 8 launchers, has adapted the plans to allow the recovery and reuse of its first stage and two boosters, which would enable China to offer even more competitive conditions for satellite launches.

Household appliances.

Midea is the world leader in air conditioners and a major player in robotics after the acquisition of the German company Kuka. Haier is a world leader in white goods, with 40% of its turnover generated internationally, 10 R&D centers, 108 factories, 24 industrial parks, 66 sales centers worldwide and 7,000 patents filed.

Wrap up: R&D and Education – The nexus of the technological war.

China’s remarkable technological progress, to conclude this insight, is largely due to the R&D efforts to which China devotes 2.2% of its GDP (0.6% in 1995 and 2.5% expected in 2020) under the leadership of the National Science and Technology Leading group chaired by Xi Jinping.

STEM (Science, Technology, Engineering and Mathematics) education is a national priority and the Qianren Jihua Plan (1,000 talents) aims to attract talent from around the world to China. Of the 362,000 Chinese students in the United States, 42% are in the STEM sector. Their visas have just been limited to 1 year and are subject to special authorization if they collaborate with strategic institutions.

While most Chinese students abroad were pursuing their careers outside China, 82% of the 550,000 students in 2016 returned to work in the country, attracted by career prospects and high salaries (an average of USD 50,000 for the 10,000 Chinese graduates who started a postdoctoral fellowship in 2017).

The number of Chinese patent filings exceeded one million in 2017, but this figure is not indicative of their value. Also worth noting, in 2017, Chinese authors of scientific publications accounted for 37% of the world total, a sharp increase in both quantity and quality: the number of world publications citing Chinese sources rose from 30% in 2000 to 70% in 2017. In 2016, China spent more than USD 10 billion on fundamental research, including quantum research.

The education budget has increased from 2.3% in 2008 to 5% in 2017, 19 university datalabs have been established and tax incentives are offered to companies for their R&D investments, which for companies like Huawei and ZTE represent 10 to 15% (similar to Intel) and up to 25% for the leader in 3D Shining printers.

Foreign research centres in China have increased from 24 in 1997 to 1,800 in 2013. This reflects the growing interest of international companies in capturing the talents and latest technological innovations of China’s sectors of excellence. This phenomenon is expected to increase as the tables rotate and the flow of licensing and related royalties is reversed.