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Investment bytes – Asia tech
Local solutions for local markets

We profile the growth of local Asia tech solutions for local markets, a promising trend we believe continues to thrive in the wake of COVID-19 and the US-China trade war.

The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

The Asia technology sector is now increasingly innovative, in our view, and is delivering more high-quality, customized solutions for local markets. It has evolved far beyond its historical scope of creating products for export or imitating products or services. Local companies have created their own value propositions relative to Western competitors, with potential advantages such as price, localized tax-accounting treatments, language packages, and extra services, among many others.

Along with the region’s significant regulatory and cultural barriers to entry for foreign companies, we think Asia’s growing technological skill set and bespoke product offerings persistently make 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 more driven by domestic growth. This includes the types of companies that are seeing accelerated demand for local products and services in the wake of these factors, as well as the firms that simply better cater to the nuances of the local markets.

The shift to domestic tech

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$1.4 trillion over six years to 2025 to build out its digital and 5G infrastructure, with a strong focus on domestic suppliers.1 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.2 Japan also recently passed a digital transformation bill to improve digitalization across its government entities.3

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. For example, forecasts show Asia is expected to be the leader in 5G adoption in 2025 (Figure 1). We think Asia’s earlier adoption of 5G could 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 US$29 billion semiconductor fund4 — is driving demand for both Japanese semiconductor equipment and Taiwanese wafers and integrated circuits. South Korea has also now pledged to spend US$450 billion over the next 10 years to maintain leadership in semiconductors.5

Figure 1

Asia forecast to lead 5G adoption

Bespoke local software

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 more than 80% of the Chinese market.6

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 compelling technology solution that addresses the customer’s needs. Fortunately, we believe Asia tech firms increasingly offer comparable or superior software products to their foreign counterparts.

Building supply-chain resilience

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 toward 5G.

Figure 2

Semiconductor revenue by region (US$ bil)

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. Chinese companies are increasingly relocating manufacturing to smaller Asian economies to help complement their domestic tech production and make supply more resilient.

This transition began as Chinese manufacturing labor was becoming more expensive, growing at an average of 14% annually for the last decade.7 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.8 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 broaden the opportunities for local Asia tech industries.

Potential risks for local Asia tech

The Asia tech sector is not without risks. In our view, there are several potential risks to our long-term outlook for the sector. Technology is an economically sensitive industry and may underperform if global growth slows. Local opportunities oriented toward domestic growth are also exposed to domestic economic cycles. In addition, tech is made up of subsectors that have their own mini cycles within the overall tech cycle, which can cause dispersion within the sector. Valuations in some areas are also a potential concern given the sector’s strong recent performance, making active management critical to the opportunity set, in our view. Furthermore, regulations are likely to have an increased impact on the sector as countries react to tech’s growing importance to consumers and economies alike. Finally, interest rates are very low today and if they do increase substantially, this could affect the sector’s outlook.

Why now for local Asia technology?

We believe local for local is a theme that is in its early innings and the progress of local Asia tech companies is part of a bigger multiyear trend in tech. These local Asia tech firms are experiencing growth that we believe could continue long after the COVID-19 crisis through expanding digitization and the advancement of AI, machine learning, and connected devices.

Importantly, Asia is home to more than half of humanity and contains many developing countries. It remains a massive and growing opportunity set with the majority of potential global demand for technology. The region’s 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.

1Bloomberg, May 2020. | 2“China to lead APAC tech spend, 5G race ahead of global markets”, ZDNet, March 2019. Figures represent business and government spending on tech goods and services. | 3Bloomberg, The Straits Times, May 2021. | 4Source: Wall Street Journal, “China Sets Up New $29 Billion Semiconductor Fund”, October 2019. | 5Bloomberg, May 2021. | 6Canalys, December 2020. | 7National Bureau of Statistics, as of 31 December 2018. | 8AmCham Shanghai and AmCham China, press release, as of May 2019.

Please refer to this important disclosure for more information. 

Please refer to the investment risks page for information about each of the following risks:

  • Common stock risks
  • Concentration risk
  • Emerging markets risk

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