China to surpass US R&D spend

James Riley
Editorial Director

Given the sheer size of the Chinese market and the pointed focus on innovation and technology in serial government announcements in recent years, it had to happen sometime.

Now investment banker Credit Suisse has put a date on it: 2020, the year when Chinese R&D spending will surpass that in the United States. At least, that’s the case in terms of purchasing power parity (PPP), a measure that this columnist has always tended to eye fairly warily.

Regardless, here is the math as presented by Credit Suisse analysts to the group’s 7th Annual China Investment Conference (CIC).

China: The People’s Republic will spend more on R&D than the US by 2020

China’s Gross Development Expenditure on Research and Development (GERD) totaled US$228 billion in 2015, according to official data. Adjusted for (PPP), this corresponds to US$373 billion.

Unsurprisingly, China ranks second globally in terms of R&D spending, although its level of investment still remains about 25 per cent below that of the United States.

As regular readers should know by now, the Chinese Government is committed to driving “innovation” – and in this context that largely means technology – and has set a target for R&D spending of 2.5 per cent of GDP by 2020, up from 2 per cent in 2015.

It may not sound like much 0.5 per cent, but the quantum is massive. China’s R&D spending is expected to be 73 per cent higher by 2020 than in 2015, surpassing the US in PPP terms, according to the information.

“China has ‘leapfrogged’ other countries in terms of technology development over the past 15 years, transforming itself from an adopter to an innovator, and producing many of today’s global leaders in the sector.

“The potentially disruptive implications of China’s innovation drive should not be underestimated,” said Credit Suisse’ Head of China Macro Research, Vincent Chan.

Let’s put the fairly critical question of what that actually means to one side for a moment while we take a look at where that spending is being directed, and its provenance.

Credit Suisse identifies the telecom equipment and Internet sectors as ones that have been successfully driven by substantial levels of R&D investment.

“The leaders of these two sectors not only invest 10 per cent or more of sales revenues in R&D, but are also among the top-25 R&D spenders in China,” Mr Chan said.

“The telecom equipment sector is one of the three knowledge-intensive sectors where China is at least on a par with the rest of the world in terms of R&D investments and capability and exceeds global peers in profitability,” he said.

“Chinese telecom equipment companies generated an average return on invested capital (ROIC) of 21 per cent for the period from 2013 to 2015 and spent 11 per cent of sales revenues on R&D, compared to the global average of 10.5 per cent ROIC and 14 per cent of R&D as a percentage of sales.

“The Internet is another sector where China was an early entrant into the marketplace.”

“Although China is not a pioneer in many key domains, new Chinese entrepreneurs in the Internet sector are well attuned to the global Internet trends and are swift to identity new business models with potential in China, and to improve on those models and adapt them to the unique market conditions in China.”

“At present, China is the global leader in certain niche areas and in Internet technology, such as e-commerce, mobile internet, mobile payments, online finance, etc.”

That should provide some good guideposts for Australian technology companies looking to enter the Chinese market, especially those seeking investors. And there is no doubt that there is money to burn in China.

But despite the ebullient forecasts, back in the real world, “new” industries are struggling more than they should as China’s economic malaise continues.

The MasterCard Caixin BBD China New Economy Index (NEI – what a mouthful – which was launched in March this hear slid to 29.2 – measure of the proportion that industries designated as new in October, down from a peak of 30.1 the previous month, according to Caixin, China’s best regarded business publication.

The NEI measures the labor, capital and technology that go into up-and-coming industries such as IT services, green energy, biotechnology, finance and legal services.

Caixin explains that this means the new economy accounted for 29.2 per cent of the overall inputs into the economy last month. This is the second-lowest level since the index was publicly released in March.

The decrease is mainly a result of a drop in investments, one of the NEI’s three sub-indexes, which fell to 27.9 from 30.9 in September.

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