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The China Opportunity

China has become home to dynamic digital innovators and is a leading global investor in the latest technologies. This has happened relatively recently; as an example of this growth, only 25% of Chinese people used the Internet in 2013 yet by 2016 this figure was 68%, and in the same year the value of mobile payments made for goods for individual consumption was £600 billion, 11 times more than that seen in the United States. Furthermore, one in three of the world’s 262 unicorn companies are Chinese, making up 43% of the global value of these companies.

The Chinese government has made technology, digitalisation, and next generation ICT (e.g. 5G services) priority sectors in its 13th Five Year plan, which runs from 2016 to 2020. It is currently giving all Chinese digital companies the opportunity to act outside of stated regulations in order to encourage innovation and experimentation, and is also an active supporter of such companies through its investment and procurement of their products and services. The Chinese government is doing this in part because it is aware of the wide variation in the levels of digitalisation among differing sectors within China and also of this difference between China and many advanced economies. It has also launched the Made in China 2025 strategy, which emphasises the importance of intelligent and digital manufacturing to bridge these gaps. China intends to become a world-leader in harnessing new and transformational technologies, including big data, artificial intelligence, machine learning, the Internet of Things, 5G, and high performance computing.

Some sectors, including information and communication technologies, media, finance, and insurance, have seen a relatively high level of digitalisation, while others, often traditional industries such as advanced manufacturing, mining, agriculture, and construction, lag behind. This results in a range of opportunities for digital companies: applying new IT solutions to industrial upgrading, healthcare, finance, smart cities, and agriculture, collaborating with leading Chinese technology companies, such as Baidu, Alibaba, Tencent (collectively known as bBAT”), and JD; and working with medium and large manufacturing companies that are aiming to improve the digitalisation and automation capabilities in their supply chains.

Business Issues
A number of regulatory barriers exist for companies exporting digital and technological products to China: hardware suppliers need to ensure that equipment shipped to China has received China Compulsory Certification (“CCC”) approval, while software vendors are required to register with the China Software Industry Association. It is also usually necessary to find a Chinese distributor or agent to act as an importer, so as to assist in dealing with Chinese regulatory issues and to minimise any delays caused during inspections carried out by the China Inspection and Quarantine (“CIQ”) authority.

Certain policies to encourage innovation within China also serve to inhibit market access for British technology firms by excluding them from government procurement contracts. Any companies entering into joint ventures with Chinese partners are required to share technology and intellectual property (ntellewith their Chinese partner, and to commit to jointly developing new IP in Chinese research centres. While this has had some positive effects, such as the development of new global standards for mobile LTE, it also presents a challenge to companies looking to protect their core IP assets.

Protecting IP remains a major challenge for international digital and technology companies entering the China market. Although IP rights legislation in China continues to be strengthened (the fact that more applications for patents are made in China than in any other country is a testament to this) inconsistencies in enforcement remain. Registering IP in China, carrying out due diligence checks on potential Chinese partners, and constant innovation are all needed by digital and technology firms looking to protect their IP rights when entering the Chinese market.

Growing concerns about cybersecurity in China have led to policies restricting opportunities for international participation in a number of technology projects. The Chinese government has issued almost 300 new national standards related to cybersecurity in recent years, including those for software, routers, switches, and firewalls.

Key Locations
The digital and technology sector in China is spread across a number of key cities. Shenzhen is a large tech hub, particularly for electronics and hardware manufacturing, and is home to the leading telecoms firms Huawei and ZTE. First-tier cities, including Beijing and Shanghai, also have significant numbers of technology parks and clusters, as well as the Chinese or global headquarters of many Chinese and international technology companies. Over 140 companies in the integrated circuit industry and over 300 companies in the software development, E-publishing, online games, and animation industries are located in the Shanghai Zhangjiang High-Tech Park, and Zhongguancun Technology and Software Parks in Beijing are hubs for leading Chinese universities and are homes for a high concentration of research and development organisations. Many science parks have been created in Zhongguancun District in Beijing, with the support of both central and local Chinese government bodies.

Outside of the first-tier cities, Hangzhou is home to Alibaba, while Chengdu and Dalian have both developed into important centres for software, cloud computing, and outsourcing.

UK Strengths
The UK is the technology capital of Europe, generating more output and attracting more technology-driven investment than any other European country. It is well-known as the leading global centre of innovation for big data analytics and AI, while London is a leading global centre for fintech innovation. All of this is of interest to Chinese investors and companies, especially in those areas where there is a technology gap between China and the UK. When compared with the United States, which also has a strong technology sector, Chinese investors and companies generally find collaborating with the UK to be more affordable.

The UK’s strength in tech innovation is driven by a strong talent pool, world-leading universities (with Oxford, Cambridge, Imperial College London, and UCL being particularly prominent in the technology field), and the ease of access to venture capital funding that promotes early-stage innovation.

The UK’s industrial strategy will continue to promote the development of technologies in the following areas:

AI and the Data-Driven Society
China is one of the world’s leading investors in AI technology, a trend that is strongly supported by both its companies and by a number of government initiatives, to the extent that 48% of the total funding for AI start-ups worldwide came from China in 2017. There are therefore significant opportunities for UK companies to take advantage of in this sector.

Electronic and autonomous vehicles also receive strong government support. By 2030 all vehicles in China will be electric vehicles, while in Beijing alone, 44 roads are currently being used in autonomous driving pilot programmes.

These successes, in addition to China’s developmental goals, should lead to more commercial opportunities for UK technology firms across a number of industries.

Technology currently accounts for a small proportion of UK exports, and only a small proportion of these go to China. There are three main reasons for this:
  • High regulatory barriers;
  • Cultural differences;
  • The large number of resources required to establish a market presence.
While the current direction of travel is towards stricter regulatory barriers in the IT sector, there continue to be many opportunities to find a suitable Chinese partner and be successful in the Chinese market.

Key Dates
Trade Fairs and Exhibitions: Missions and Events:
  • CBBC Big Data Trade Mission (May/June, multiple cities)
  • CBBC China Outbound Conference (November 2018, Shanghai)
  • CBBC Innovation Mission-Season 2019: Future Mobility (January 2019, multiple cities)
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