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The COVID-19 pandemic is accelerating the long-term trend of Asia tech firms offering new local solutions for local markets. Along with the region’s significant regulatory and cultural barriers to entry for foreign companies, we think Asia’s growing technological skill set increasingly makes the case for domestic firms. This shift is impacting all aspects of the Asia technology sector, from software to hardware supply chains.
We believe these local companies will see lasting growth that is less susceptible to external factors like the ongoing US-China trade war and COVID-19, especially as firms continually adapt to these threats.
The growth of domestic tech solutions in China and broader Asia is not just a long-term trend. It is often a stated strategic goal to build up tech infrastructures and manufacturing bases to supply technology domestically. These efforts are frequently supported by regulations and outright government spending. For example, China is projected to invest US$273 billion in technology in 2020, with a strong focus on domestic suppliers. Japan, South Korea, India, Taiwan and Singapore are among numerous other Asian countries with significant tech expenditures each year. In some, this includes dedicated training for the local population on new technologies like artificial intelligence.1
Furthermore, many of the region’s markets are closed or heavily regulated to outside competition or require a local partnership. Others are so intricate that local knowledge, language ability and an understanding of the local consumer is necessary to capture and maintain market share.
Long-term efforts to develop tech capabilities in Asia have had promising results. In the last few years, for instance, China has invested US$24 billion more into 5G than the US.2 Now, nine of the top 13 companies contributing to the development of 5G are located in Asia,3 with four of these in China alone (versus two in the US). We think Asia’s earlier adoption of 5G will enable local firms to take leading positions in other areas of progress like edge computing. In addition, China’s aim to build a domestic semiconductor industry — including a new US$29 billion semiconductor fund4 — is driving demand for both Japanese semiconductor equipment and Taiwanese wafers and integrated circuits.
However, even if an Asia tech firm can manufacture every component of, say, a smartphone, it would still need an operating system, which has traditionally come from US software companies. Local software for local uses is therefore a growing market. For example, domestic cloud services providers now make up 70% of the Chinese market.5
Historically, many foreign software companies have asked local customers to adapt to their global products. We believe local Asia tech companies are now offering cheaper solutions that better fit Asian markets. For example, in South Korea, a domestic enterprise software provider has significantly disrupted a major US software firm’s market share by better catering to local customers.
Domestic champions like this can sprout up and thrive, in particular in areas with specific cultural and language needs. Additional examples of software opportunity sets experiencing domestic-driven disruption are the payments industry in Japan and accounting software in Australia.
Importantly, no matter how much cheaper or more bespoke a local solution is, it still needs to be a high-quality piece of technology that solves the customer’s needs. Fortunately, we believe Asia tech firms increasingly offer comparable or superior software products to their foreign counterparts.
The bulk of global technology supply is manufactured in Asia. Notably, a growing majority of global demand is also in the region. For instance, the majority of semiconductor sales are in Asia (Figure 2) and, as stated above, the region is also driving the push towards 5G.
Though the scale of the region’s supply and demand has the potential to make Asia more resilient to external factors, the US-China trade war and the COVID-19 pandemic have highlighted the urgency of addressing these types of risks. In response, Chinese companies are increasingly relocating manufacturing to smaller Asian economies to help make their domestic tech hardware industries more resilient.
This transition began as Chinese manufacturing labor was becoming more expensive, growing at an average of 14% annually for the last decade.6 In recent years, the shift was significantly accelerated by the US-China trade war, which made 37% of China-based companies consider moving supply chains to other Asian countries.7 Finally, for many companies, the COVID-19 era has reaffirmed the need to diversify the location of their supply chains. We believe this growing trend will help make local Asia tech industries more stable than their US competitors.
Given the recent downturn in the market, we think it may be a good entry point for investments in local Asia tech companies that we believe will play a much larger role in the technology of the future.
The COVID-19 pandemic has led to a significant increase in our global reliance on technology. For example, data usage has exploded as people are forced to stay home. In Chinese education alone, 276 million students moved online in February 2020. Combined with the significant growth in working from home, streaming entertainment and other digital solutions, this has increased the need for data centres and cloud services. To help these students, consumers and businesses navigate this transition, many online education and cloud providers in Asia are offering their services free of charge during the crisis.8
These local Asia tech firms are experiencing growth that we believe will continue long after the crisis through expanding digitisation and the advancement of AI, machine learning and connected devices.
Though the world is a distinctly uncertain place in the COVID-19 era, Asia remains a massive and growing opportunity set with the majority of potential global demand for technology. Asia tech companies are proactively adapting to the new environment, with consistent support from their governments. We believe these local firms will increasingly meet this demand with compelling solutions for their local markets.
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