Can Emerging Asia dethrone Silicon Valley?

11.30.18

Emerging Asia is solidifying its place in the global technology landscape where the region has evolved from copycat to pioneer. Long led by Silicon Valley, the future of innovation is gradually shifting to areas of the world previously viewed as a hub for low-cost manufacturing or assembly. Emerging Asian countries, such as China, South Korea and India, are investing billions of dollars to position themselves as key innovators in the future of technology.

KEY POINTS
  • Despite recent geopolitical turmoil, the fundamental backdrop of innovation and investment by emerging Asia may lead to potential long-term opportunities.
  • Emerging Asian countries are investing, in some cases, upwards of $1 trillion to establish their presence as leaders in global technology.
  • Mobile payments, artificial intelligence and automation and robotics are key areas we believe present growing investment opportunities in emerging Asia.

Shifting the technology landscape

The emerging Asia region is innovating rapidly. Many countries are unburdened by older technologies and are able to leapfrog decades of innovation to adopt and pour capital into the most innovative technologies. Chinese technology leaders Tencent, JD.com, Baidu and Alibaba have backed 41% of all unicorns (start-ups worth more than $1 billion) in Asia.1

Regional governments also are heavily investing in innovation. In 2017, China spent 2.1% of its gross domestic product (GDP) on research and development (R&D); that number in absolute terms has quadrupled in the past 10 years.2 Much of that growth is driven by the “Made in China 2025” plan, which outlines a 10-year goal of making innovation a key growth driver of its economy. As part of the strategy, it intends to invest $750 billion in three areas — artificial intelligence (AI), semiconductors and telecommunications.

The structural backdrop of innovation and investment by emerging Asia may be leading to attractive, long-term potential opportunities. Three areas we believe present the most opportunity from advancements in emerging Asia include: 1) mobile payments, 2) AI and 3) automation and robotics.

Mobile payments

Emerging Asia possesses a distinct advantage over western countries in the adoption and usage of certain technology, most notably mobile payments. At the end of 2017, China’s mobile payment user base grew to more than 525 million, an increase of roughly 60 million, with a utilization rate of 70%.3 In terms of volume, in 2017 China had $15.4 trillion of payment transactions via third-party Chinese mobile platforms. That is up from $1.90 trillion in 2015, and is 40 times the dollar volume processed by the U.S.4

At the forefront are Alibaba (Alipay) and Tencent (QQ Wallet). Alipay has more than 520 million global users transacting with its mobile wallet, while QQ Wallet has 652 million monthly active users. The pace of mobile payments is likely to increase in the foreseeable future as businesses adapt to consumers’ expectations of being able to pay for anything with a mobile wallet. This trend may further be engrained by the 50% of the world's Millennials who live in the region. As a generation born into the digital age, it is a segment of users that welcomes and rapidly adopts leading edge technology.

Mobile payment growth in China
Transactions handled by nonbank institutions (in Trillions) Oil and gas equipment and services and oil and gas exploration and production

Source: iResearch

China's mobile payment user base
Number of people using mobile payments (in Millions) Oil and gas equipment and services and oil and gas exploration and production

Source: eMarketer

Artifical intelligence

Emerging Asia is making inroads in areas of technology in which no country has an edge. For instance, AI has been around for many years but remains a nascent industry with significant growth potential in many industries. The AI market is forecast to reach $70 billion globally by 2020, making it one of the fastest-growing markets in the world.5 In 2017, 48% of global equity funding of AI start-ups originated in China, which is in addition to the $250 billion the Chinese government intends to invest in AI as part of its Made in China 2025 initiative.6 With emerging Asia, notably China, at the forefront of AI development, the region stands to generate many potential investment opportunities.

China ahead of the U.S. in global AI funding

U.S. vs. China total equity funding for AI startups in 2017

Oil and gas equipment and services and oil and gas exploration and production

Source: "In AI, China> US," CB Insights.

We believe industries most likely to benefit from this trend include cloud computing and semiconductors. At its core, AI is entirely dependent on data in order to enhance learning, which means the more data that is generated, the more advanced the AI technology will become. The massive amounts of data generated from emerging Asia’s connected user base also is likely to enhance the need for cloud infrastructure providers and memory chips.

Automation and robotics

While often used interchangeably with AI, automation is focused on technology that can conduct a repetitive task, whereas AI is focused on machine learning. Automation is an area in which emerging Asia is clearly on the leading edge as the region uses two-thirds of the world’s industrial robots.7 Despite that figure, some countries with the highest percentage of work activities susceptible to automation are found in emerging Asia.

The trend of automation is beginning to spread as companies look to relocate elements of their global supply chains. Consequently, many are turning to automation equipment to address increasing labor issues or shortages. We believe the trend in automation can present opportunities for many component suppliers found in emerging Asia, including providers of robotics, lasers and semiconductors.

What percent of work activities could be automated?

Japan

55.7

Thailand

54.6

Qatar

52.0

South Korea

51.9

Indonesia

51.8

India

51.8

Malaysia

51.4

China

51.2

Russia

50.3

Philippines

47.9

Percentage of work activities that could be automated by adapting current technology
Source: Harvard Business Review

Sources: ¹,⁶ CB Insights, ² OECD (2018), Gross domestic spending on R&D, ³ eMarketer, "The Mobile Payments Series: China." ⁴ iResearch, WSJ, " China Tech Giants’ Costly Wars to Go Cashless." ⁵PwC, "Bot.Me: A revolutionary partnership." ⁷ IMF, "Asia's Digital Revolution."⁸ Harvard Business Review, "The Countries Most (and Least) Likely to be Affected by Automation."


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Past performance is not a guarantee of future results. The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

Investment return and principal value will fluctuate, and it is possible to lose money by investing. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets.