China Innovation Ecosystem Development Report 2019
Rising Innovation in China China Innovation Ecosystem Development Report 2019 September 2019 Deloitte China Rising Innovation in China | Chapter 1 Innovation as a new driver for economic growth
Contents
Key findings 2 Chapter 1 Innovation as a new driver for economic growth 5 1.1 Innovation has become the focus of global competition 5 1.2 China's innovation ecosystem is thriving 8 1.3 Characteristics of innovation ecosystems in developed countries 13 1.3.1 US: Innovation ecosystem driven by innovation clusters 13 1.3.2 Israel: Risk investment system led by the government 15 1.3.3 Germany: Stable and sustainable basis for innovation 18 Chapter 2 An analysis of China's innovation ecosystem 20 2.1 Evaluation system for innovation ecosystems 20 2.2 The innovation ecosystems of each city demonstrated tiered development 23 2.3 The characteristics of innovation ecosystems in each region are distinct 28 Chapter 3 Characteristics of development of leading industries in China's innovation 31 3.1 AI develops with a high level of penetration 31 3.2 Autonomous driving sees emerging opportunities 37 3.3 Advanced manufacturing to reduce costs and improve efficiency 43
Chapter 4 Challenges in the development of China’s innovation ecosystem 50 Chapter 5 New landscape of China's innovation ecosystem 59 Contact us 64
1 Rising Innovation in China | Key findings
Key findings
From the perspective of technological competition, countries around the world are focusing their eyes on the key technologies like artificial intelligence (AI), advanced manufacturing, semiconductor, quantum information science and 5G , which are shaping the future economic development. Nations with strengths in the above areas begin to take a protectionist approach to their own technologies. This, however, will also force China to enhance its own innovation capability, and thus technological innovation in China will see an unprecedented opportunity to thrive on its own feet.
Each of the innovation ecosystems in developed countries has its own merits. The US emphasizes more on building an ecosystem led by innovation clusters; Israel is promoting robust innovation development with a risk investment system driven by its government; Germany focuses on a stable and sustained foundation for innovation. China, after prioritizing innovation as a national core strategy, continues to open up its market, committed to driving stable growth of its technological innovation capabilities through ongoing and increasing investment in talents and technologies.
An innovation ecosystem can be evaluated by three indicators. The first is innovation institution, which reflects the number of innovation entities in a city, and the city's capability of conducting technological R&D and business innovation. The second is innovation resource, which indicates whether the various factors owned by a city could support innovation institutions to innovate. The third is innovation environment, which shows whether a city could attract and retain the best innovation resources to create a good external environment for a cluster of innovation institutions.
In terms of innovation ecosystems, cities in China can be ranked and divided into three tiers based on their evaluated scores. Among the first tier, Tier 1 cities including Beijing, Shanghai, Shenzhen and Guangzhou remain at the top, with Hangzhou rising to the forth place in replace of Guangzhou. Nanjing, Chengdu and Wuhan are among the top few in the second tier. The third tier mainly includes cities that promote breakthroughs of innovation ecosystems via policy guidance, such as Dongguan, Foshan, Zhuhai and Guiyang.
2 Rising Innovation in China | Key findings
From a regional perspective, China's innovation ecosystems have some distinct features. As the core of the innovation ecosystem of the Beijing-Tianjin-Hebei region, Beijing dominates the region in terms of innovation institutions and resources, and also takes the lead in innovation environment. Innovation in the Yangtze River Delta region is generally more mature than that of other regions, with strong drives from Shanghai and Hangzhou, as well as Nanjing and Suzhou in the second tier innovation cities. The development of Guangdong-Hong Kong-Macau Greater Bay Area (GBA) will be led by Shenzhen; Dongguan, Foshan and Zhuhai could expect a promising future under the GBA planning despite the absence of innovation advantages. Core cities in Central and Western China are seeing a rapid development of innovation ecosystems driven by policies.
The best practice of innovation ecosystems in China is no doubt the AI industry. The strength of China in AI not only comes from massive search data, a rich variety of product lines and market advantages based on a wide range of industries, but also is driven by efforts of tech giants in building open-source technological communities, which have helped start-ups at AI application level break technological barriers to apply AI technologies directly in R&D of terminal products. Fuelled by both policies and capital, the number of AI enterprises is rising rapidly. Incomplete statistics shows that there are more than 1,000 AI enterprises across China, with the most located in Beijing-Tianjin-Hebei region, Pearl River Delta region and Yangtze River Delta region. A significant effect of industry agglomeration is driving more complete ecosystems.
Manufacturing is the fundamental industry for the development of innovation in China, where the advancement of smart manufacturing ecosystem would not be possible without deep dive of user values. For example, enterprises could embed new technologies during R&D and design to produce more intelligent and more diverse products; provide equipment-related financial services at sales stage; monitor in real time and collect data of equipment and products for aftersales, and offer performance analysis and predictive maintenance, enhancing security while creating more service opportunities for enterprises. That's why the whole smart manufacturing ecosystem needs tech companies of intelligent products, financial services enterprises, data collection and analysis enterprises, security performance testing firms, etc. China has a complete set of supporting industries for manufacturing, and therefore could help manufacturing enterprises go even further on the journey of smart upgrade.
3 Rising Innovation in China | Key findings
China still faces challenges in driving the development of innovation, and in particular needs to catch up with developed countries in respect of core technologies. With increased R&D investment and the number of patents, China's innovative enterprises and innovative products have already obtained some competitive edges. However, in areas of communications, manufacturing of electronic devices and precision instruments as well as auto making, including semiconductor materials and production, ultra-high- precision machine tools and electronic gasoline injection system, etc., China remains at its infancy of development, yet to master core technologies in certain sectors, and are highly dependent on foreign technologies. A main reason for this is the imbalance of R&D input and output, with lack of R&D input at basic level. The government should also consider in depth how to further enhance the execution of and improve supporting policies. Lastly, the introduction and accumulation of talents remains a long process.
The booming digital economy is driving China's innovation to go global, and has become an important source of GDP growth in China. In 2018, China's digital economy grew to a size of RMB31.3 trillion, an increase of 20.9%, accounting for 34.8% of total GDP. Driven by digitalization, China's innovative technologies and products are going global. In the future, China could leverage more Internet-based innovation and upgrade to climb up the international industry chain, cultivate new economic drivers, and optimize structures.
Capital markets led by the STAR Market provide full support for the continuous optimization of China's innovation ecosystem. Launched in 2019, the STAR Market primarily supports high-tech industries and strategic emerging industries, including next generation information technologies, high-end equipment, new materials, new energy, energy conservation and environmental protection, and biomedicine. Capital markets have supported the development of innovation in China, and the STAR Market as a branch of the secondary market is a symbol of growing capital support for China's innovation ecosystem as capital markets respond to the call for innovation-driven development and capture new opportunities brought by technological innovation. Next, capital markets should further improve their dialectical relations with innovative enterprises. They should enhance their inclusion and flexibility to technological and innovative start-ups, working to strengthen the lead of capital in boosting technological innovation and the support to energize market players; on the other hand, they should also increase transparency of information in enterprises, improve screening mechanisms, and prevent "false innovation" and overheat of capital.
4 Rising Innovation in China | Chapter 1 Innovation as a new driver for economic growth
Chapter 1 Innovation as a new driver for economic growth
1.1 Innovation has become the of a nation is being used increasingly has launched a series of national focus of global competition by protectionists to restrict other strategies focusing on innovation, Influenced by the slowdown of the economies. and allocated massive facilities to world economy as a whole, risks are drive basic researches. Germany has accelerating to build up, and shift of As science and technology becomes promulgated research enhancement economic strength has triggered the increasingly important in driving policies on advanced production reordering of international governance national economic development, technologies, which enabled the and power. Rising unilateralism and governments all over the world are research and development digital protectionism are impacting the placing innovation as a core strategy production technologies for the Fourth international order and multilateral at national levels, presenting a new Industrial Revolution, also known trade system. Under a downward pattern of competition for innovation as Industry 4.0, and has delivered economic trend, countries around globally. Major countries have all multiple projects in cooperation the world are stepping up efforts in deployed in advance future-oriented among the industry, academia and promoting technological innovation technological innovation strategies the government. Japan, Korea and to sustain their own strengths. At the and initiatives. Since the beginning of emerging economies including same time, technological innovation the 21st century, the US as a global Russia, Brazil and India are all actively as an indication of the overall strength leader in technological innovation introducing national innovation development strategies or planning.
5 Rising Innovation in China | Chapter 1 Innovation as a new driver for economic growth
Figure 1: Major world economies are promoting innovation as a national strategy
Memorandum Our Plan For High-Tech Strat- France Europe 13th Five-year "Realizing eco- on FY2019 Growth: Science egy (2014) 2020 (2015) Plan on National nomic co-pros- Administration And Innovation Technological perity" Research and (2014) Proposes to Proposes priority Innovation Development concentrate on areas by 2020, (2016) Proposes "the Budget Priori- Proposes 6 poli- areas that feature defines priority Fourth Industrial ties cies to promote especially dynam- research direc- The National Revolution that development of ic innovation tions and five the- Plan for Medium leads technologi- Proposes to ad- top talent, invest- matic initiatives and Long-term cal development" vance innovative ment in scientific to address top 10 Technological (one of the five basic research, equipment, etc. societal chal- Development sets key strategies) infrastructure, lenges in France, out the goal to and three "issues and talent devel- Industrial Strat- emphasizes on develop as an in- of national opment egy (2017) application-ori- novative country affairs" (the ented research, by 2020, and the Fourth Industrial Office of Manage- Proposes to raise and focuses on Outline of the Na- Revolution, creat- ment and Budget, total R&D invest- addressing soci- tional Strategy of ing environment Office of Science ment to 2.4% of etal challenges Innovation-Driven for technologi- and Technology GDP by 2027 France faces Development de- cal innovation, Policy fines the phased supporting young goals by 2050 scientists and basic research)
Source: Public information, Deloitte Research
6 Rising Innovation in China | Chapter 1 Innovation as a new driver for economic growth
Data from UNESCO shows that total R&D investment has reached USD1.7 trillion globally. Developed countries still maintain their distinctive lead in innovation, which, however, is shifting the presence eastwards. Innovation resources such as top technological talents and patents are still dominated by developed countries, but the share of the US and Europe in total R&D investment globally has dropped from 61% to 52%, and that of Asian economies has risen from 33% to 40%, with significant increase in the share of BRICS nations.
Figure 2: Top 10 countries by R&D investment in 2018 (USD billion)
h erm o th ore Fr e t
Source: UNESCO, Deloitte Research
From the perspective of technological innovation. This, however, will also competition, countries around the force China to enhance its own world are focusing their eyes on innovation capability, and thus key technologies like AI, advanced technological innovation in China will manufacturing, semiconductor, see an unprecedented opportunity to quantum information science and thrive on its own feet. 5G , which are shaping the future economic development. Nations with strengths in the above areas begin Figure 3: Global R&D investment in 2018 by industry to take a protectionist approach to their own technologies. As a late starter in technological innovation, China is still lagging far behind in core underlying technologies for emerging strategic technological innovation, such as upstream basic parts for semiconductors, which still need to be imported. From ZTE to Huawei, cases of China being suppressed by technologically advanced countries are m t r e th re tomot e tr ort t o er e not rare. With intensifying competition tr hem ero e e e e ther for technological innovation across the globe, China is facing enormous Source: IRI EU, Deloitte Research challenges in promoting technological
7 Rising Innovation in China | Chapter 1 Innovation as a new driver for economic growth
1.2 China's innovation ecosystem is thriving Where is China standing within the global innovation landscape? Has China gone beyond the "quick follower" type of innovation, and grown gradually as a global leader in innovation? In the global innovation landscape, China has climbed from the 26th place in 2016 up to the 14th in 2019, and is the only middle-income economy among the top 30.1 There has been significant progress made by China in its innovation indicators from various aspects, ranking top in terms of domestic patents, industrial design, original trademark, high-tech net exports and export of creative products, etc.2 China is entering into a new stage of development for innovation.
Figure 4: China's standing in global innovation landscape r e r e r e r e r e r e r e h h h h h h h erm erm erm erm erm erm erm o ic man capita Infrastr ct re ar et mat rit siness now edge Creative o tp t research mat rit techno ogica core o tp t
Source: Global Innovation Index 2019, Deloitte Research
The Chinese government has global financial crisis by stepping service industry. As of the first half of attached great importance to up institutional innovation and 2018, strategic emerging industries the core position of innovation in technological innovation. China has and service industry have grown national economic development. developed national mid and long-term 30% faster than the overall growth China officially established strategic plans for scientific and technological nationally, constantly leading economic emerging industries in 1992 after development that set building an development. The growth of China's reform and opening up, and started innovative nation as a strategic strategic emerging industries is driving to explore deeper into technology- goal; put in place plans to develop GDP growth by over one percentage driven governance in 2009, the second nine strategic emerging industries point annually in average, accounting year after the global financial crisis. including next generation information for nearly 20% of total growth, far Then it realized that the competition technologies, high-end equipment, higher than the share of these of international economic and new materials, bio industry, new industries in total GDP. technological development was energy vehicles, new energy, energy growing intensified, and it could only conservation and environmental overcome negative impacts of the protection, digital creativity and related
1 Based on rankings of Global Innovation Index reports from 2016 to 2019 2 Global Innovation Index 2019 8 Rising Innovation in China | Chapter 1 Innovation as a new driver for economic growth
Figure 5: Contribution rate of strategic emerging industries to GDP in 2018
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ear Contri tion rate of strategic emerging ind stries to
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Source: Report on the Work of the Government, Deloitte Research
The Chinese government has been talents to start businesses and invest in terms of their R&D investment actively supporting the development in China. However, there still remain in innovation. The Economics of of innovative start-ups by creating significant gaps between China Industrial Research and Innovation a favorable environment for them. and developed countries in terms (IRI), a research institution under the In 2014, Premier Li Keqiang put of regulatory environment. Policy European Commission, publishes each forward the concept of "mass makers should consider opening up year a list of top 2,500 companies entrepreneurship and innovation" to more economic fields to bring in a across the world by the amount of support the development innovative competitive market, and providing their R&D investment, and the number start-ups. The policy provides a more legal protection for China's of Chinese companies included in the sound growing environment for innovation system by strengthening list is stably increasing every year. Over start-ups in China, and the Chinese protection of intellectual property the past decade, R&D investment of government has created positive rights, developing consistent and Chinese companies listed has been conditions for start-ups in terms of coordinated policies and improving the growing at a much faster rate than the financial investment, tax preferences credit system for small and medium- world average growth. and talent attraction. In 2017, the sized enterprises. State Tax Administration issued Guidelines on Tax Incentives for Mass China's investment in talents and Entrepreneurship and Innovation, technology for innovation and R&D which cuts corporate income tax of continues to rise. micro businesses by half and gradually For a long time, China's significant expands the scope of taxation from and continued investment in scientific less than RMB300,000 of annual research has driven the country to taxable income to less than RMB3 overtake traditional technological million. In July 2019, the Ministry powers in a number of research of Public Security introduced new indicators within just a few years. immigration and exit-entry facilitation Chinese companies have begun to policy to attract more top foreign emerge in the international community
9 Rising Innovation in China | Chapter 1 Innovation as a new driver for economic growth
Figure 6: R&D investment growth of Chinese companies vs. global companies in the top R&D list
e tme t ro th o e tme t ro th o h e e om e o om e
Source: IRI EU, Deloitte Research
China ranks top globally with the international academic journals, and absolute number of researchers, the 2nd by the number of citations.4 As scientific and technological publications to technological innovation, China ranks and domestic patent applications. Its the 2nd by the number of PCT patent R&D spending accounts for 2.1% of applicants after the US, and Huawei total GDP, ranking the 15th globally.3 tops the world as company applicant Scientific research strengths of Chinese in 2018.5 As PCT patent application is universities and colleges have been an indicator proving the strength of greatly improved and six universities a country in technological innovation, in the Chinese Mainland rank among this shows that China has developed the top 100 global universities in the into a major power in technological QS World University Rankings 2020, innovation. However, China still needs while the number was only four in to enhance the improvement of 2017. The focus of China's scientific productivity and the results brought by research is shifting from pursuing the the commercialization of technologies greatest number of research papers to driven by huge investment in scientific enhancing the quality and international research, as China ranks 28th among influence of such papers. In 2018, 54 countries in terms of R&D transfer, China ranked the 4th globally by the far behind the US, Israel and other number of papers published on key developed economies.6
3 Data from UNESCO database 4 Institute of Scientific and Technical Information of China, http://scitech.people.com.cn/n1/2018/1102/c1007-30378451.html 5 Based on 2018 WIPO statistics 6 Based on rankings of Global Entrepreneurship Monitor 2018/2019 Report
10 Rising Innovation in China | Chapter 1 Innovation as a new driver for economic growth
Figure 7: Comparison of innovation indicators in scientific research
h erm r e
m er o re e r her m er o te t m er o te h o o t o t o
Source: UNESCO UIS database, WIPO, WB database, Deloitte Research
Talent is the top resource and Innovation in China has the driving force of technological developed alongside the growth innovation, and policies on of communications and consumer education and talents are one of internet sectors. ICT and internet the core indicators for evaluating companies, led by Huawei, ZTE, Baidu, the innovation system of a country. Alibaba, Tencent and JD.com, have Over the past decades, China's emerged rapidly through leading-edge investment in education from technologies and business models. the state and the private sector Internet start-ups in China peaked has provided a large number of in 2015, with 16,239 new companies engineering and technological talents established. From 2016, the number for entrepreneurship and innovation, of internet start-ups in China started and is narrowing the gaps between to "cool down", and the number of China and developed countries. China new internet companies established stands at the 13th place in education in 2017 was 2,900, a decline of 64.9% rankings, ahead of the US and Israel, from 2016. From the size of start-ups, but falls far behind the average level however, China and the US house half of developed countries in terms of of the world's unicorns. As of August enrolment rate of higher education.7 2019, China has 96 unicorn start- ups, ranking the 2nd in the world. In The development of ICT and particular, Toutiao becomes the highest Internet is driving industry valued unicorn across the globe with innovation in China. market value of USD75 billion.8
7 Based on statistics from Global Innovation Index 2019 report. 8 CBINSIGHTS database, as of August 2019.
11 Rising Innovation in China | Chapter 1 Innovation as a new driver for economic growth
Figure 8: Number of unicorn start-ups (2019) China had 32 new unicorn start-ups in 2018, a first drop in its global share of new unicorns due to impact of financial deleverage measures in the country and other factors. As seen from industry distribution, China's unicorns mainly come from consumer and service sectors, and they often pursue innovation of business models through the combination of traditional industries with technologies such as internet. There is a significant gap between China and the US with the number of unicorns engaged in h erm r e ther o tr e technological innovation. Since 2018, Source: CBINSIGHTS database, Deloitte Research however, high-tech unicorns led by SenseTime are coming into the spotlight from AI, robotics, new energy vehicles and big data fields.
Figure 9: Unicorns in China by industry (2019) Venture capital and incubators are the catalyst and nutrient for the whole entrepreneurship ecosystem. In 2018, China's total venture capital amounted to USD93.8 billion, USD2.2 billion higher than that of the US in the 2nd place, indicating that the US- dominated global entrepreneurship and innovation ecosystem is now positively driven by China.9 From the average amount of investment, China tops the world with an average of USD30 million per deal. In 2018, China
E ommer e to tr ort t o E t o te h o o r re has more than 4,849 incubators and 6,959 maker spaces, which also rank e th re o e omm t o h o t tr t o top across the globe. More than 60% o mer ret ther of the incubators are run by private 10 Source: CBINSIGHTS database, Deloitte Research companies via market-based means.
9 Crunchbase database 10 China Entrepreneurship Incubation Development Report 2019, Capital Institute of Science and Technology Development Strategy, Torch High Technology Industry Development Center, Ministry of Science & Technology
12 Rising Innovation in China | Chapter 1 Innovation as a new driver for economic growth
1.3 Characteristics of innovation in innovation, the US's innovation Growth and Prosperity in 2011. The ecosystems in developed countries leadership is facing various pressures US government has promoted and 1.3.1 US: Innovation ecosystem and challenges. maintained its leadership in global driven by innovation clusters innovation via scientific research The US has been leading the world The US government has always investment, legislation building and in innovation. Especially after WWII, emphasized highly on the design of provision of financing channels. massive investment in scientific innovation strategy, and published Currently, the US government research for military purposes by the a series of policies from the invests over USD150 billion annually government has further catalyzed and American Competition Law in 2007, to support the research of federal improved its innovation ecological to the American Recovery and laboratories and commercialization chain and entrepreneurship capital Reinvestment and the A Strategy for of scientific research results by system. The US ranks the 3rd in global American Innovation: Driving towards universities.12 Moreover, the US has innovation rankings, up three places Sustainable Growth and Quality Jobs developed a sound legal system and from that in 2018.11 In recent years, in 2009, to the A Strategy for American a solid set of regulatory mechanisms as the EU and China awake and rise Innovation: Securing Our Economic for technological innovation, including intellectual property rights policies and anti-monopoly law Figure 10: R&D spending of public finance (2017) enforcement, providing a favorable legal environment for investors and entrepreneurs. The US government also provides multiple financing channels for small and medium-sized enterprises, and motivates them via loans, tax incentives and fiscal
rre t m o subsidies. But during the Trump administration, the US government has reduced to a certain extent the support to technological innovation. Spending in non-defense scientific research by the US government has dropped from 1.2% of total GDP in h erm r e 1976 to 0.7% in 2018.13 In 2016, tax R&D spending by government finance er e t e subsidy rate for R&D spending in the US ranked 32nd among 35 countries, Source: UNESCO UIS database, Deloitte Research behind China and Brazil.14
11 Based on Global Innovation Index 2018-2019 report 12 Data from the United States Studies Centre at the University of Sidney: https://www.ussc.edu.au/analysis/innovation-policy-in-the-united-states-and-australia 13 OECD database 14 Public Policy Initiative, the Wharton School of the University of Pennsylvania: http://publicpolicy.wharton.upenn.edu/live/news/1840-primer-innovation-policy-in-the- united-states 13 Rising Innovation in China | Chapter 1 Innovation as a new driver for economic growth
The US has been surpassed by late ecosystem driven by innovation Most of the world's best incubators starter such as China in the number of clusters is the Silicon Valley, which is and accelerators come from the US. Y scientific researches, fiscal spending led by universities, government and Combinator, a well-known incubator and other indicators. However, as entrepreneurs. The Silicon Valley is based in the US, has invested in evaluated from university rankings, the pioneer of the semiconductor more than 1,500 start-ups, with total patent applications and paper revolution, and the US Department of investment exceeding USD80 billion, citations, the US tops the world by its Defense was its biggest client at the and helped many companies such as quality of innovation. In 2018, total beginning of its development. In the Dropbox and Airbnb achieve success. R&D spending of the US totalled field of scientific research, the Silicon As of August 2019, there are 191 USD543.2 billion, the highest across Valley has benefited from Stanford unicorn start-ups in the US, ranking top the world, accounting for 2.8% of total University and University of California, across the world and accounting for GDP.15 Twenty-nine US universities are Berkeley. At the same time, California almost half of the total in the world.19 included in the world's top 100 by the with a free and open economic system These start-ups mainly engage in QS World University Rankings, with and labor market has attracted a great internet software and services, Fintech, five of the top 10 based in the US, and number of high-tech immigrants. As AI and e-commerce. The volume Massachusetts Institute of Technology local innovation ecosystem evolves of venture capital in the US in 2018 has been ranking top of the list for and develops, the Silicon Valley has exceeded USD130 billion, with deals many years. 16 In 2016, there were become a paradise for angel investors involving corporate venture capital more than 400,000 research papers and venture capitals, and large multi- functions more than doubled and total published in the US, and, despite that national companies have also become volume of corporate VCs surpassing China has become the largest country its backbone. traditional VCs for the first time. 20 around the world in the production of scientific papers and that its number of researches and papers has exceeded Figure 11: Unicorns in the US by industry (2019) the US, the US remained ahead of China by the most cited 1% articles. 17
Innovation clusters are the main body of innovation in the US, where there are six major innovation clusters whose conditions for sustainable development can be summarized into six points-core industry competitiveness, human resources with technical expertise, strong leadership, stable market demand, sound infrastructure, te et o t re er e F te h E ommer e e th re favorable regulatory environment t m me t t o mer ret for innovation, and acceptance of h o t tr t o t m me t t ther industry development by local people, etc. 18 A typical model of innovation Source: CBINSIGHTS database, Deloitte Research
15 OECD database 16 QS World University Rankings 2020 17 Data from National Science Foundation, United States 18 Clusters and Innovation Districts: Lessons from the United States Experience, the Brookings Institution 19 CBINSIGHTS database 20 Pitchbook database 14 Rising Innovation in China | Chapter 1 Innovation as a new driver for economic growth
1.3.2 Israel: Risk investment especially in industries such as of high-tech companies per capita. It system led by the government communications, internet, healthcare, follows Japan, Sweden, Switzerland Israel ranks among the top 10 agriculture, biotechnology, security, and South Korea at the 5th globally by globally for the first time in the Global sea water desalination, etc. R&D the number of patents per capita.21 Innovation Index in 2019. The country spending accounts for 4.6% of Israel's Though a small country with a land has been in an invincible position GDP, far higher than that of the US, area of 21,000 square kilometers, a for years in technological innovation, China and Germany. Israel has more population of eight million, scarcity powered by its high quality talents, than 8,000 researchers in every million in natural resources and at war ever entrepreneurship, spirit of bold of its population, with the number of since founded, it now is recognized innovation, as well as the government's per capita almost doubling that of the as a global leading innovation center long-term support for technology US, and it also ranks top across the known as the "land of entrepreneurs" research. Start-ups from Israel are world by the number of innovative and "Silicon Valley of the world". leading technological breakthroughs enterprises per capita and the number in different areas around the world,
Figure 12: R&D spending (2017) rre t m o
h erm r e e er e t e o e
Source: OECD database, the Global Competitiveness Report 2018, Deloitte Research
21 PCT database 2018 15 Rising Innovation in China | Chapter 1 Innovation as a new driver for economic growth
Figure 13: Comparison of innovation indicators per capita (2018)
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m er o re e r her m o o t o m er o te t o m er o te t o Scientific & technological publications/billion PPP$GDP
Source: UNESCO UIS database, WIPO database, SCI, SSCI, Deloitte Research
Israel highly values education, with education spending accounting for 5.9% of its GDP, ranking 22nd across the world; while education spending accounts for 5.0% of GDP in the US, ranking 28 places behind Israel. There are nine universities in Israel, six of which make their names in the QS World University Rankings 2020.
Figure 14: Education spending (2017)
er e t e o
r e erm h
Source: UNESCO UIS database, Global Innovation Index 2019, Ministry of Education, Deloitte Research
16 Rising Innovation in China | Chapter 1 Innovation as a new driver for economic growth
Israel's strong competitiveness The support from the government has number of companies listed on in innovation is the result of the given rise to venture capital in Israel. NASDAQ, following superpowers the combination of government-led risk Total amount of venture capital in US and China. As of 2019, Israel has investment policies and a culture of Israel reached USD4.5 billion in 2018, six unicorns23 and 392 incubators and entrepreneurship. By undertaking 1.31% of GDP, much higher than that accelerators.24 high-risk investments, the government in the US and Europe, ranking 2nd has paved the way for subsequent in the world. Investment of high-tech Thriving technological entrepreneurial private capitals. The innovation venture funds in Israel amounted to activities in Israel have attracted system of Israel is built based on the USD6.47 billion, up 17% from 2017, investors and large multinational Yozma program implemented by the and more than twice of that in 2013. companies from the world. Over Office of Chief Scientist. Through the Venture capital mainly covers Fintech, the past decades, more than 300 program, the government and private cyber security, software, AI and other multinationals (including IBM, Google investors jointly set up collaborative high-tech industries. 70% of the and Microsoft) have set up R&D funds, of which the government investment in Israeli start-ups comes centers in Israel, and some are even provides 40% of the capital, to from overseas, including the US, running multiple centers across help start-ups overcome financial China, Germany and the UK,22 with VC different fields. These R&D centers limitations. The program has provided companies in the US being the most account for 50% of the company's R&D support to a lot of entrepreneurial active player. spending. Over the years, multinational start-ups and SMEs, laying a solid companies running R&D centers in foundation for Israel's venture capital Large-scale capital investment Israel have acquired more than 100 industry, while creating large number has significantly promoted the Israeli start-ups. Frequent acquisitions of jobs and driving continuous development and growth of Israeli by multinational companies have economic growth. The mature venture companies. Now there are about provided inexhaustible power for capital environment in Israel created 8,400 high-tech start-ups operating in Israel's innovation ecosystem assets: by its national innovation policies Israel, and over 600 new companies leading technology, technologists, has stimulated the passion of local are established every year, making corporate culture, technology enterprises to pursue R&D, facilitated Israel No.1 in the world by the leadership and a sound ecosystem. high-tech research in universities, number of start-ups per capita. Tel and inspired entrepreneurship of the Aviv, Israel's second largest city, is whole country. an emerging global entrepreneurial center. Israel ranks the 3rd by the
22 Data from IVC Research Center 23 CBINSIGHTS database 24 Data from IVC Research Center 17 Rising Innovation in China | Chapter 1 Innovation as a new driver for economic growth
1.3.3 Germany: Stable and outstanding performance in PCT patent of the country. In 2004, the federal sustainable basis for innovation applications, PPP publications and government signed a Research and As an established capitalist industrial R&D spending. From the perspective Innovation Agreement with state power, Germany has always been of innovation inputs, R&D spending of governments to ensure sufficient in a key position in the European Germany has maintained at a high level research funding for major research and world economic geography, in recent years. In 2018, Germany's institutions. From 2006, Germany with robust and strong momentum R&D spending accounted for 2.9% started to provide comprehensive of economic development. Instead of its GDP, ranking the 10th globally. support for high-tech industry, of stagnating in the glow of a Germany ranks the third by the index and issued the High-Tech Strategy manufacturing power, Germany has of published scientific papers, following of Germany. In 2010, the German maintained high performances in the US and the UK. Among over 120 government issued the High-Tech innovation over the past decades. economies, Germany has 295 patents Strategy 2020 for Germany, with per million population, ranking the increased funding for research In the global innovation system, 5th, and 8,457 international patent to advance its 10 future scientific Germany made itself back to the applications per million population, research programs and focus on top 10 in 2016, and has remained ranking the 12th.27 As to education, globally oriented strategy making. In in the 9th place ever since.25 In the three of the world's top 100 universities 2014, the new German government global competitiveness rankings, the are based in Germany.28 published the New High-Tech Strategy country ranks the third with a high – Innovations for Germany, aiming score of 82.8, following the US and Stability highlights Germany's path to build Germany as a world-leading Singapore.26 By virtue of its mature of innovation, with the government innovation country with priorities in innovation ecosystem, Germany emphasizing on the consistency smart transportation, smart services again becomes active in the forefront and systematicity of policy making and other innovations related to digital of global innovation. Its innovation to support entrepreneurship and economy and Industry 4.0. capability is mainly manifested in two innovation. In 1990, East and West dimensions: intellectual property Germany merged, and the federal rights and enterprise investment government started to implement and innovation, with especially a package of innovation policies to promote economic development
25 Based on the rankings of Global Innovation Index reports from 2016-2019 26 Global Competitiveness Report 2018 27 Global Competitiveness Report 2018 28 Based on QS World University Rankings 2020 18 Rising Innovation in China | Chapter 1 Innovation as a new driver for economic growth
In addition to strategic policies, organizations, such as chambers of Germany has already established commerce, foundations, and overseas an efficient scientific research and federal agencies, which act as the innovation system with clear division glue for Germany. From top down, of labor as early as in the 1960s institutions at each level cooperate by pulling together the political, with each other with clear division economic and social communities. of labor, working together for the Politically, the federal government smooth operation of the country's and state governments act as policy innovation system. guides and sponsors for scientific research, providing public funding for Innovation sector in Germany has scientific research that accounts for been growing rapidly over the past one third of the country's total R&D two decades, and it is now a thriving spending. The economic community economic ecosystem. There were over contributes nearly two thirds of 1,500 start-ups in Germany in 2018,30 funding for research and innovation and, as of 2019, Germany has given in Germany, mostly in application- birth to 10 unicorns, mainly engaging oriented research programs. 80% in e-commerce, healthcare, tourism, of large corporations in Germany automotive and transportation, have their own independent R&D Fintech, as well as data management institutions.29 As to the social and analytics.31 Over the past few community, other than the role of years, investment by the government universities as executers of scientific and venture capital firms in high-tech research, the most distinctive industry has been rising fast. Start- advantage of Germany is its four non- ups in Germany attracted public profit scientific research institutions investment of USD3.5 billion in 2017, (Max Plank Society, Helmholtz up 51% from 2016.32 Total investment Association, Fraunhofer Society, and by venture capital in Germany reached Leibniz Association), which are key EUR4.4 billion in 2018, second only to bases of technological innovation the UK in Europe.33 in Germany. Moreover, the German society has well-developed interstitial
29 Yu Shencheng, The Development Path of Innovation-Driven Strategy in Germany [J], Zhengce Liaowang, 2016, (10):49-50. 30 Europe Startup Monitor 31 CBINSIGHTS database 32 Crunchbase database 33 Annual European Venture Capital Report 2018, Dealroom.co
19 Rising Innovation in China | Chapter 2 An analysis of China's innovation ecosystem
Chapter 2 An analysis of China's innovation ecosystem
The term "innovation ecosystem" 2.1 Evaluation system for capital, innovation technologies and refers to the stakeholders and innovation ecosystems makerspaces. Thirdly, innovation resources necessary to achieve An innovation ecosystem can be environment reflects a city's ability ongoing innovation in a modern evaluated through three indicators. to attract and retain outstanding economy.34 From the perspective Firstly, innovation institutions innovation resources and create of ecology, an array of factors such reflect the number of innovation a sound external environment for as enterprises and innovation entities in a city and the strengths aggregating innovation institutions. atmosphere in the country are of the city in carrying out scientific This includes innovation strategy, considered as a whole with a stronger and technological research and innovation foundation, innovation focus on the interconnectedness development (R&D) and business atmosphere and innovation cost; and dependency among each innovation. This includes innovation innovation foundation refers to the innovation elements. This is the companies (e.g. high and new state of construction of intelligent biggest difference between the technology enterprises and the top infrastructure of the city, its economic innovation ecosystem and previous 100 internet companies), unicorn competitiveness, and sustainability, innovation theories. China's companies and scientific research and innovation atmosphere refers to economic development has entered institutes. Secondly, innovation t h e c i t y ' s I n te r n e t+ a t m o s p h e re. the high-quality growth stage with resources reflect whether the various increased supply of innovation elements of a city can adequately and strengthened construction of support innovation activities in innovation environment, creating innovation institutions. This includes innovation ecosystem attractiveness innovation talents, innovation favorable to the building of modern economic system.
34China's Innovation Ecosystem, World Economic Forum 20 Rising Innovation in China | Chapter 2 An analysis of China's innovation ecosystem
Figure 15: Innovation ecosystem evaluation indicators
Primary indicator Secondary indicator Implication
The number of high and new technology companies in Innovation companies the city, the top 100 internet companies in China and the number of unicorn companies Innovation Number of higher education institutions Number of general higher education institutions in the city institutions
Scientific research institutes Number of state key laboratories in the city
Percentage of AI talents among the total number of talents Innovation talents in the state Innovation Innovation Innovation capital Venture capital invested ecosystem resources evaluation Innovation technologies Number of patent applications of the city system Makerspaces Number of makerspaces registered with the state
Innovation strategy Number of innovation policies from the government
The state of construction of intelligent infrastructure of the Innovation foundation Innovation city, its economic competitiveness, and sustainability environment Innovation atmosphere The city's Internet+ atmosphere
Basic innovation cost faced by entrepreneurs including Innovation cost level of salary and office rental
Source: Deloitte Research
21 Rising Innovation in China | Chapter 2 An analysis of China's innovation ecosystem
This paper selects 19 cities across By setting up an innovation ecosystem the five major city clusters including evaluation system, this paper the Beijing-Tianjin-Hebei region, evaluated the innovation achievements the Yangtze River Delta region, the and challenges of each city, in an effort central region, the western Chengdu- to obtain a clear picture of the current Chongqing region and the Guangdong- state of development of China's Hong Kong-Macao Greater Bay Area. innovation ecosystem as well as the With the launch of a range of policies characteristics of development of supporting the development of the the innovation ecosystems in the five new economy by the governments major regions and their directions for of the above cities, emerging future enhancement. industries have achieved remarkable development in recent years.
Figure 16: Innovation ecosystem evaluation system and distribution of cities
ei in ian in e ei re ion e Central re ion an t e iver elta re ion Chen Chon in re ion he ho ho h h he e e h ho ho h h an on on on acao reater ay Area ho o Fo h h h he he
Source: Deloitte Research
22 Rising Innovation in China | Chapter 2 An analysis of China's innovation ecosystem
2.2 The innovation ecosystems obtained. In Band 1, tier-one cities among the first in Band 2. In the third of each city demonstrated tiered including Beijing, Shanghai, Shenzhen band were predominantly cities with development and Guangzhou remained among remarkable achievements obtained by In the rankings of China's innovation the leading positions, but Hangzhou policy-driven innovation ecosystems, ecosystems, cities were divided into surpassed Guangzhou to rank fourth. such as Dongguan, Foshan, Zhuhai three bands by the total scores they Nanjing, Chengdu and Wuhan were and Guiyang.
Figure 17: Rankings of China's innovation ecosystem
an an an
i'an efei ei in ho oshan h hai an in han ian in iyan han hai hen hen Chen Chan sha an ho Chon in on an hen ho an ho
Source: Deloitte Research
23 Rising Innovation in China | Chapter 2 An analysis of China's innovation ecosystem
In terms of innovation institutions, Beijing, Shanghai and Shenzhen ranked top three. Under the sub-indicator of innovation enterprise, the numbers of high and new technology enterprises owned by Beijing, Shanghai and Shenzhen were among the top in the country. Besides, these three cities were home to 60% of the top 100 internet companies in China, with 33% located in Beijing. In terms of unicorn companies, there were 162 unicorn companies in Beijing, Shanghai, Shenzhen and Hangzhou, accounting for 80% of the total number of unicorns in China, mainly because these four cities were home to BATJ-level innovation giants which incubated a huge amount of unicorns led by Alibaba and Tencent. In terms of scientific research institutes, Beijing had strong innovation foundation and sound innovation environment leveraging its higher education institutions and scientific research bodies.
Figure 18: Rankings of cities by innovation institutions
e h h an he he ho ho he an 2 h ho ho h h e e o an Fo h h h he ho
Source: Deloitte Research
24 Rising Innovation in China | Chapter 2 An analysis of China's innovation ecosystem
In terms of innovation resources, Beijing, Shanghai and Shenzhen were among the top three, followed by Hangzhou, which rose to the fourth place. In respect of the sub-indicators, the four cities hosted over 55% of AI talents in China, with Beijing accounting for nearly 30%. In terms of innovation capital, Beijing and Shanghai became the cities with the most capital inflow in 2018, and Hangzhou surpassed Shenzhen to rank third. In terms of innovation technologies, Shenzhen and Beijing ranked first and second respectively, followed by Shanghai in the third place. In terms of makerspaces, Beijing and Shanghai had the most makerspaces registered with the state, accounting for nearly 20% of the total.
Figure 19: Rankings of cities by innovation resources
e h h an he he ho ho he ho h an 2 ho he ho h h o h h an e e Fo h
Source: Deloitte Research
25 Rising Innovation in China | Chapter 2 An analysis of China's innovation ecosystem
In terms of innovation environment, Shenzhen, Guangzhou, Beijing and Shanghai were among the top four. These four cities had their respective advantages. Shenzhen ranked first in innovation atmosphere, leading far beyond other cities; the Guangzhou government is more focused on the construction of innovation environment by launching a range of policies driving innovation in 2018, making the city the first by number of policies; Beijing performed well in innovation foundation with great development potential in economy, topping the chart of construction of innovation infrastructure in China while increasing innovation cost of enterprises as a result of higher salary level and rentals.
Figure 20: Rankings of cities by innovation environment
he he ho an e h h h he ho ho an 2 ho o h h he ho Fo h an e e h h
Source: Deloitte Research
26 Rising Innovation in China | Chapter 2 An analysis of China's innovation ecosystem
From the above innovation Figure 21: Distribution of start-ups led by Tencent by city (top 10) ecosystems, we have the following findings: he he ••Aggregation of innovation entities in tier-one cities is e more prominent. This is because h h tier-one cities have brought together major enterprises with ho advanced technologies, making them the center for aggregation of he technologies and resources in China. Leading enterprises are drivers for ho innovation-based start-ups, nurturing a number of innovation start-up h enterprises. For example, in 2018, me there were more than 1,300 start-
ups led by Tencent. The number of ho Tencent-led start-ups in Shenzhen was significantly greater than that in h h Beijing and Shanghai, accounting for 32% of the total. Source: Public information, Deloitte Research ••There is a big gap between Band 3 and Band 1 cities. This is talents is higher than other regions smart upgrade of industries with because the stronger innovation due to financial support from the a focus on developing smart resources are often drawn together. government and society. However, industries including AI, IoT and smart Tier-one cities with first-mover the level of economic development hardware, and promote the smart advantages have more advanced and and scale of economy have limited upgrade of traditionally advantaged large companies and higher levels the expansion of innovation industries such as manufacturing of talents, capital and technology infrastructure and innovation industry. Developing cities focus accumulation, resulting in continuous investment in Band 3 cities. on a single area and create unique amassing of innovation resources. In innovation ecosystems due to Band 3 cities, innovation resources ••Each city's innovation strategies weaker technology and industry lag behind in development due to are formulated based on foundations. For example, Guizhou economic level and other factors, its own level of economic is building a big data whole industry thus facing greater resistance in development with different chain covering technological R&D, subsequent development. In respect focuses. In advanced regions, data aggregation, mining, analysis, of talents, for example, AI talents cities such as Beijing, Shanghai processing and application through in China are unevenly distributed, and Shenzhen build AI innovation the construction of the China Big mainly found in the Beijing-Tianjin- system to promote research and Data Industry Innovation Pilot Zone. Hebei, Yangtze River Delta and Pearl commercial use of leading-edge It also implemented the "cloud River Delta regions. At the same time, technologies, develop whole industry construction project" to promote the the central and western regions have chains and create application formation of big data cloud service also aggregated a certain amount of scenarios. Cities with certain level industry clusters and construction talents, mainly along the coast of the of industry foundation such as o f b i g d a t a t r a n s a c t i o n c e n t e r s . Yangtze River. This is mainly because Chongqing focus on developing economically developed regions smart industry by integrating with have aggregated many exceptional AI advantaged industries such as the companies, and the salary level of AI manufacturing industry, promote
27 Rising Innovation in China | Chapter 2 An analysis of China's innovation ecosystem
2.3 The characteristics of In terms of development of the were 82 unicorn companies in Beijing. innovation ecosystems in each innovation ecosystem in the With the implementation of the city region are distinct Beijing-Tianjin-Hebei region, strategy on national scientific and On regional level, innovation Beijing has become the center technological innovation center, Beijing ecosystems in China are distinct of innovation ecosystem. The city will achieve breakthroughs in leading- in characteristics: innovation dominated in innovation enterprises edge technologies such as quantum development in the Beijing-Tianjin- and innovation resources, and information, brain science and Hebei region is centered in Beijing; ranked among the top in innovation brain-like intelligence technology, and the overall level of development in the environment. In 2018, the number of AI through the construction of world- Yangtze River Delta region is higher invention patents per 10,000 persons class new research and development than other regions; the development in Beijing reached 111, ranking first institutions in the future. in the Guangdong-Hong Kong-Macao among the state. As of 2019 Q1, there Greater Bay Area is promising; the central and western regions are accelerating development.
Figure 22: Cities leading in various indicators
Innovation institutions nnovation companies e h h he he ho ei in nicorn companies e h h ho he he Scientific research institutes
Innovation resources e h h h nnovation talents e h h he he ho ei in nnovation capital e h h ho he he nnovation technolo ies nnovation strate y he he e ho h h Innovation environment ho h h e a erspaces nnovation fo n ation e h h he he hen hen e he he h h ho nnovation atmosphere he he ho e h h nnovation cost he ho r Fo h
Source: Deloitte Research
28 Rising Innovation in China | Chapter 2 An analysis of China's innovation ecosystem
The level of comprehensive Its AI talents accounted for 6.5% of the entered into a strategic cooperation innovation in the Yangtze River total amount of talents in China. agreement to explore the new Delta region is generally higher mode of development by integrating than other regions. Shanghai Innovation development in pharmaceutical and intelligence and and Hangzhou have played a the Guangdong-Hong Kong- create a smart healthcare system more significant role in driving Macao Greater Bay Area will together. Guangzhou Baiyun District innovation. Nanjing and Suzhou be led by Guangzhou and Government and Huawei entered both ranked among Band 2 Shenzhen. Guangzhou focuses on into a cloud industry strategic innovation cities. Specifically, environment level and promotes the cooperation agreement to create a Hangzhou began to rise with implementation of innovation by the next-generation information industry its remarkable performance, government. In 2017, Guangzhou cluster. In terms of application, demonstrating significant aggregation Municipal Government began to Shenzhen is more competitive, with of AI talents and influx of innovation promote the IAB strategy (next- conglomerates such as Tencent, and capital. In 2019 Q1, the number of generation information technology, deployment in the foundation layer, unicorn companies in Hangzhou AI and biomedicine), which aims technology layer and application layer surpassed that of Shenzhen. In 2018, to upgrade the manufacturing of AI. Meanwhile, Shenzhen offered the annual capital inflow exceeded industry. Guangzhou Pharmaceutical a number of application scenarios RMB160 billion, surpassing Shenzhen. Holdings and iFlytek officially and aggregated a range of innovation enterprises covering robotics, mobile phone, disease screening, finance and Figure 23: Innovation in Hangzhou other areas.
Hangzhou: Dongguan, Foshan and Zhuhai are relatively weaker in innovation advantages, but their future development is promising. With progress in the construction of the nicorn companies Guangdong-Hong Kong-Macao Greater Bay Area, Dongguan and Foshan will A talents take on some of the companies that moved out from Shenzhen. Meanwhile, Capital inflow illion by leveraging the existing robust foundation of the manufacturing industry, these cities will make their op presence felt in the development nternet companies of the innovation ecosystem in the Guangdong-Hong Kong-Macao Greater Bay Area in the future.
Source: Deloitte Research
29 Rising Innovation in China | Chapter 2 An analysis of China's innovation ecosystem
Figure 24: Complementary advantages of the Guangdong-Hong Kong-Macao Greater Bay Area cities in the development of the innovation ecosystem
•• Solid R&D and manufacturing •• Solid manufacturing foundation foundation and great potential Dong Guang of integration guan zhou •• Strong aggregation of resources (policy, funds, companies)
•• With AI-focused enterprises •• Home to Guangdong Fo Shen and plenty of start-ups Intelligent Manufacturing shan zhen Innovation Demonstration Park •• Strong R&D capability •• Provide plenty of application scenarios Source: Deloitte Research
Driven by policies, core cities in Development in Chengdu" have further Donghu New Technology Development the central and western regions highlighted the aggregation effect of Zone reached 2,306, ranking fourth enjoyed rapid development in high-level innovation talent. Donghu among new technology development innovation ecosystems. The high New Technology Development Zone zones in China. It has fostered over and new technology industry in the has become a key driver of innovation 2,000 Internet+ companies, more core cities in the central and western in Wuhan. In 2018, the number of high than 40 of which have raised over regions is undergoing the rising phase and new technology companies in RMB100 million. of development. A complete industry chain and innovation ecosystem are being formed, and the size of the Figure 25: Rankings of cities in the central and western regions by internal market is not sufficiently innovation ecosystem large. However, leveraging policies on household registration, taxation and Innovation Innovation Innovation Overall others, the innovation environment institutions resources environment of these cities has been optimized, attracting companies and talents. In particular, the central government has Chengdu rolled out policies strongly inclining Wuhan towards the central and western regions to promote rapid development Chongqing of the innovation ecosystem, creating a trend to catch up with Band 1 Changsha cities by these cities. Chengdu and Wuhan are known as the core area for Xi'an innovation ecosystem development in the western Chengdu-Chongqing Zhengzhou region and central region respectively. Chengdu's "Rongpiao" Project Guiyang (Chengdu Drifters) and the "Twelve New Rules with respect to Talent Source: Deloitte Research
30 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
Chapter 3 Characteristics of development of leading industries in China's innovation
3.1 AI develops with a high level of gradually applied in various industries 2. The effect of businesses penetration since it was put into commercial aggregation is strong with shared 1. China's AI industry develops application in 2015. Its development supporting resources rapidly prospect is widely recognized A vast industry and solution market is The global AI market will experience by different sectors including a major advantage for AI development phenomenal growth in the coming few governments and businesses. It has in China. Such advantage is composed years. Gartner predicts that the global undoubtedly become a key influencer of the market advantage brought by AI market will exceed USD5 trillion on China's economic development. the massive search data, extensive by 2025 and the compound annual In 2018, the total size of investment product lines, and wide range of growth rate for 2017-2025 will reach and financing in AI in China reached industries, as well as the promotion of 128%. China is one of the world's most RMB131.1 billion, with 597 financing open source technology communities active countries in application of AI deals. As of 2018, the total amount of by domestic and foreign technology technology. AI technology has been investment and financing in AI in China giants, which helps start-ups in the accounted for 60% of the global total. AI application layer break through technological barriers and apply AI directly in R&D in the end product Figure 26: Changes in investment and financing in AI layer. In terms of industry, AI has been vertically applied in various sectors ploration stage Commerciali ation stage including medical and healthcare, finance, education, and security. Given such vast market spaces, Chinese AI companies continue to emerge. In addition, to promote industry upgrade and replace old economic drivers with new ones, local governments across China have begun to issue industry planning guiding opinions related to the AI industry, and offer tax incentives, subsidies, talent introduction and efficient administrative procedures to enhance business environment and attract competitive enterprises. These contribute to the significant effect of F r e m o F e aggregation of AI companies in China. Source: Public information, Deloitte Research
31 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
Figure 27: Distribution of AI companies in China
e h h o he h F h h
Source: Public information, Deloitte Research
Driven by the dual forces of policy and need of a large number of traditional companies, all exceeding 90, ranked capital, the number of AI companies manufacturing players to use the AI in Band 1. The effect of aggregation rises rapidly. According to incomplete technology for intelligent upgrade and of companies enables the gradual statistics, the number of AI companies the support of government policies, formation of the AI industry chain in across China exceeded 4,000.35 Most the western Sichuan-Chongqing region China as well as the initial formation of these companies are located in has become an area for aggregation of of characterized AI industry clusters the Beijing-Tianjin-Hebei region, Pearl AI companies. In terms of city, Beijing, in regions including the Yangtze River River Delta region and Yangtze River Shanghai, Shenzhen and Hangzhou Delta region, Pearl River Delta region Delta region. Meanwhile, with the are cities with the largest number of AI and Beijing-Tianjin-Hebei region.
35 China AI Development Report 2018, Tsinghua University 32 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
3. Scientific research institutes At present, China's computer vision, provide strong support to AI intelligent voice semantic processing, As the AI technology continues to intelligent robots, intelligent driving, advance, the spillover benefits of the and consumer drones will be in the core basic technology are enhanced. forefront internationally, with an In terms of algorithm, the deep outburst of application opportunities learning algorithm has advantages for intelligent connected vehicles, in the processing of massive data intelligent service robots and using different types of deep neural intelligent drones. networks. Their continuous application in areas including computer vision Scientific research institutes and and image recognition, and voice bodies are important places for the recognition, will continue to transform research and development of the AI the traditional computer algorithm technology. Since 2014, the amount frameworks. In terms of computing of AI papers in China has surpassed power, heterogeneous computing the United States, and far exceeded models adopting CPU+X such as other countries. This is closely tied to FPGA, FPU and ASIC can basically the rapid development of scientific meet the requirements for faster, research institutes and bodies in more efficient, and more convenient AI. Meanwhile, scientific research use of processors. In terms of institutes and bodies also serve as the data, the number of IoT connected major driver of AI patent applications. devices and hyper-scale data centers Therefore, analyzing the AI scientific worldwide will reach 20.4 billion and research institutes and bodies in 485 respectively by 2020. With the each city will help understand the broadening application of distributed technological power of such city. network transmission architecture, accelerated commercialization of 5G and rapid development of wearable devices and intelligent connected vehicles, the abilities to sense, acquire, transmit, analyze and store large-scale structured data have made a leap.
33 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
Figure 28: Characteristics of AI scientific research institutes and bodies in each city
Scientific research Government or scientific research Characteristics Enterprise laboratories institutes bodies and institute laboratories
Beijing •• Strongest scientific Host more than 50% More than 10: •• 360 •• Sinovation research strength nationwide: Ventures •• State Key Laboratory of Pattern •• Baidu •• Tsinghua University Recognition •• Xiaomi •• Jinri Toutiao •• Peking University •• State Key Laboratory of Intelligent •• Meituan •• Lenovo •• Beihang University Technology and Systems •• JD.com •• UBTECH •• Institute of Automation, •• State Key Laboratory of Deep Chinese Academy of Learning Technology and Application Sciences •• Institute for Artificial Intelligence, Tsinghua University •• Law and Artificial Intelligence Laboratory, Peking University
Shanghai •• Mainly relies on higher Various higher education •• SJTU-Versa Computer Science and AI •• SAIC Motor •• Tencent education institutions; institutions: Joint Lab •• Philips •• Squirrel AI an academic foundation •• Shanghai Jiao Tong •• Parallel AI Adaptive Learning Joint •• SenseTime •• Microsoft has been laid despite University Laboratory jointly established by enterprise research •• Fudan University Institute of Automation of Chinese institutes/laboratories Academy of Sciences and Squirrel AI second to Beijing •• Shanghai Tongji University
Shenzhen •• Mainly relies on •• Shenzhen University Mainly government driven: •• Tencent companies •• Southern University of •• Shenzhen Academy of Robotics •• Huawei Science and Technology •• Shenzhen Institute of Artificial •• ZTE Intelligence and Big Data
Hangzhou •• Still lags behind Beijing, •• Zhejiang University •• Alibaba Shanghai and Shenzhen •• NetEase •• Geely Auto
Source: Public information, Deloitte Research
34 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
The above four cities have their AI company example: SenseTime has maintained close cooperation own characteristics in terms of AI SenseTime is a leader in artificial with global academic community. institutes and bodies. Beijing has the intelligence in China, principally In September 2018, SenseTime strongest scientific research strength, engaging in computer vision together with MIT, Shanghai hosting more than 50% of scientific technology and deep learning Jiao Tong University and other research institutes nationwide algorithms. It is an algorithm provider universities, initiated the Global and over 10 national laboratories. in computer vision and deep learning, University Artificial Intelligence Meanwhile, internet giants including and also a new generation of open Academic Alliance to promote Baidu, JD.com and Meituan have set innovation platform of artificial international academic exchanges up their enterprise laboratories in intelligence designated by the Ministry and talent cultivation, stimulating Beijing, investing huge social capital of Science and Technology of China. As the long-term development of in the research and development of a world's leading AI platform company, artificial intelligence research and AI. Shanghai leverages the premium SenseTime succeeds in establishing an technology. In China, SenseTime has resources of higher education innovation ecosystem in AI sector for jointly established labs or developed institutions including Fudan University, the following four reasons. scientific research with the Chinese Tongji University and Shanghai Jiao University of Hong Kong, Tsinghua Tong University, ranking among the 1. Boast deep talent reserve and University, Peking University, top nationwide in terms of AI strength. leading original technological Shanghai Jiao Tong University and Shenzhen has a large number of strengths Zhejiang University. technology companies, making its As a technology giant, SenseTime presence felt in the AI technology by 2. Enable multi-industries relies on talents and technological leveraging the strengths of leading commercially and establish strengths to drive its development, enterprises including Tencent, Huawei, industrial chain collaboration enabling it to differentiate itself from and ZTE. Meanwhile, the government mechanism and win over its competitors in the is playing its role by building the market. Gasping the opportunity SenseParrots, an original deep Shenzhen Academy of Robotics of talent training and acquiring learning platform independently and Shenzhen Institute of Artificial the world's top talents from the developed by SenseTime, has Intelligence and Big Data to further source, SenseTime boasts an Asian more advantages in supporting enhance technological strengths. leading deep learning team, whose super-deep network scale, super- Hangzhou still lags behind Beijing and core has 20 years of scientific large data learning and complex Shanghai in terms of the number of research experience. At present, related applications. SenseTime institutes, institute laboratories and the company has more than 3,000 uses its deep learning platform to enterprise laboratories. It mainly relies employees, 200 of whom have promote industrial upgrading and on internet giant Alibaba in conducting gained their Ph.D. degree from top build artificial intelligence ecology. AI research. universities. Moreover, SenseTime In recent years, various computer
35 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
vision technologies of SenseTime technologies. Only by enabling and and deep learning technologies. have been rapidly applied in commercializing AI technology in In addition, SenseTime has also numerous industries. It has various industry, can SenseTime become a leading force in the explored its unique model, gain sustainable development. The development of the new technology "1 (basic research) + 1 (product and ability of commercialized landing and innovation center in the solution) + X (industries)", to drive is also the competitive advantage Guangdong-Hong Kong-Macao and enable hundreds of industries, of SenseTime in leading the Greater Bay Area and promotion of and has successfully occupied the industry. In addition to developing the global layout of technology. first place in the market share of AI technology independently, it many vertical areas. In terms of is also committed to establishing 4. Recognized by the capital market smart city industry, SenseTime industrial chain collaboration with access to sufficient financing to promotes the application of face mechanism by investing in support development of innovative recognition and intelligent video companies with industrial value or technologies analysis technology. In the field vertical integration with itself. For SenseTime is an AI tech unicorn of smart retail, it helps traditional example, 51 VR is invested in AR with the largest sum of funds raised retail enterprises to enhance users' and VR applications, and Terminus and highest valuation in the capital shopping experience, improve the is invested in security. Thus, AI market. It has raised record funds operation of retail enterprises, and applications are expanded. of USD400 million and USD600 achieve precision marketing. In the million, and is valued at USD4.5 mobile phone industry, it provides 3. Establish cooperation relationship billion in only four years since it was technologies including facial with the government, promote established. These funding serves unlocking, smart beauty, smart aggregation of the technology and as solid foundation for independent filters, background blur and smart innovation industry, and leverage R&D and industry integration. photo albums for well-known mobile the opportunities brought by the SenseTime will expand overseas phone brands to comprehensively state's strategies and policies markets and increase investment enhance user experience. Currently In September 2018, China's in emerging areas, including smart SenseTime is working with over Ministry of Science and Technology medical treatment and robots. It 700 world-renowned domestic announced that SenseTime would will strengthen the advantages of and overseas companies and build the National Open Innovation science and technology platform institutions, and provides them Platform for Next Generation and attract more and more artificial with complete solutions based on Artificial Intelligence on Intelligent intelligence business ecology driven face recognition, image recognition, Vision, becoming the fifth national by itself. video analysis, autonomous AI open innovation platform after driving, medical image recognition Alibaba, Tencent, Baidu and iFlytek and other artificial intelligence with its strong computer vision
36 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
3.2 Autonomous driving sees growth and expansion of the market. for Energy Saving and New Energy emerging opportunities As estimated by Qianzhan Industry Vehicles published by China Society 1. Autonomous driving exhibits Research Institute, the global market of Automotive Engineers, the number opportunities and vitality for autonomous driving market of intelligent vehicles in China will Autonomous driving, a high-level will worth hundreds of billions of reach 15 million by 2020. In respect of automated driving technology, is dollars by 2020; China will play an commercial use, China has taken the a product resulted from the deep important part in the autonomous lead in putting autonomous cleaning application of the AI technology driving market with its strong growth trucks, autonomous electric trucks and in the car industry. It has epoch- momentum in recent years. The autonomous express delivery vehicles making revolutionary significance. future of the autonomous driving into use. In respect of technological In recent years, with advances in the market is promising. R&D, although China’s autonomous AI technology, innovation entities driving still lags behind the world’s continue to devote efforts in the In China’s innovation ecosystem, advanced level, there are some autonomous driving market. They autonomous driving exhibits outstanding players in the industry, form a joint force with other players development opportunities and vitality. such as Baidu-BAIC, which are highly in the field globally, promoting the According to the Technology Roadmap competitive in the global autonomous driving market.
Figure 29: Size of the Chinese autonomous driving market in 2014-2018 (RMB100 million)
Source: Qianzhan Industry Research Institute, Deloitte Research
The ultimate goal of autonomous driving is to achieve real autonomy, which enables passengers to do other activities in addition to paying attention to road conditions. Nevertheless, the process of replacing cars with autonomous vehicles is long and progressive, and consideration must first be given to how autonomous vehicles and human drivers coexist. In the current progress of development, there are still many problems and challenges to be addressed from the road test stage to pilot application stage.
37 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
2. Aggregation of the automobile and launching of autonomous cars. advantages, many current players in industry allows complementation For instance, Changan Automobile the autonomous industry hope to set of premium resources is cooperating with Baidu, Ali and up their core innovation departments China's autonomous driving Intel, with a plan to achieve a product in where the automobile industry and industry has formed an innovation portfolio share of 10% for autonomous internet industry aggregate to take ecosystem involving strong alliance vehicles by 2020 and realize the better part in market cooperation. and collaboration between the operation of autonomous vehicles Therefore, Beijing, Shanghai and traditional automobile companies by 2025; BAIC is cooperating with Shenzhen are widely favored by and internet companies. Traditional Baidu and Robert Bosch with a plan companies engaging in innovation of automobile companies may to deploy autonomous driving and the autonomous driving technology. manufacture autonomous vehicles intelligent connection technologies at a lower cost but on a larger in all car models by 2020; Geely, Many autonomous driving start-ups scale for internet companies, and GWM, and Chery are cooperating tend to set up their headquarters in use sophisticated automobile with internet companies respectively Suzhou, Nanjing, Tianjin and Changsha. manufacturing technologies to enable to launch autonomous car models; However, their R&D centers are internet companies to implement among foreign traditional automobile predominantly located in major tier- the technologies they developed and companies, BMW also joins hands one cities including Beijing, Shanghai gain practical data and experience. with Tencent to build an autonomous and Shenzhen. Such significant Internet companies may help driving research and development advantage is primarily derived from traditional automobile companies center in Shanghai, which will be collaboration between industries in transformation and upgrade, their sole autonomous driving R&D relying on talents and technological accelerating their application of center overseas. Given such close resources from higher education autonomous driving technologies cooperation and complementary institutions and those relying on industry chains.
Figure 30: Locations of R&D centers of major autonomous driving start-ups in China (by city)
e h h he he ho ho h h h me
Source: Deloitte Research
38 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
From the perspective of innovation were incubated from student teams or as reflected in the China Intelligent entities, there are two main types of laboratories. Many higher education Vehicles Future Challenge, a contest innovation entities in autonomous institutions and research bodies of the highest level and largest scale driving in China: higher education have dedicated laboratories and R&D in autonomous driving in China, the institutions and companies. Higher teams related to intelligent vehicles. better-performed higher education education institutions offer companies Some higher education institutions institutions and research bodies in with proactive technological guidance have also established cooperation recent years were mainly located in and sufficient talent resources. Indeed, relationship with the industry and have Beijing, Shanghai and Suzhou. This a lot of autonomous driving start-ups obtained remarkable achievements highly echoes the establishment in autonomous driving. For example, locations of R&D centers.
Figure 31: Awardees of China Intelligent Vehicles Future Challenge in recent years and their respective locations
City Awardee
Beijing Union University, Institute of Automation of Chinese Academy of Sciences, Beijing Institute of Technology, Beijing Beihang University
Shanghai Shanghai Jiao Tong University, Tongji University
Suzhou Suzhou Automotive Research Institute of Tsinghua University, Suzhou Vocational University
Nanjing Nanjing University of Science & Technology
Zhenjiang Jiangsu University
Xiamen Xiamen University
Wuhan Wuhan University
Changsha National University of Defense Technology
Xi'an Xi'an Jiaotong University
Source: Public information, Deloitte Research
3. Autonomous driving application and the fastest time to achieve L5 stage, the application of autonomous scenarios are gradually extended (fully automatic) mass production is driving technology can be extended Industry experts predict that from 2028. The difficulty of autonomous to logistics, public transport, port and 2019 to 2020, autonomous driving L3 driving in different scenarios is dock, shared mobility, park, sanitation, (conditional automatic) vehicles will different. For some scenarios with mining, retail and other low-speed and achieve mass production, and after relatively single traffic environment, limited scenarios. 2022, some enterprises will achieve L4 autonomous driving may land (highly automatic) mass production, commercially in a short time. At this
39 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
Figure 32: Autonomous driving application scenarios
Logistics
APOLLO, UISEE, Public VIPioneers, Transportation Shared Mobility RoadStar,Haylion, Sanitation Momenta, LEAP Smarter Eye, Plus APOLLO, MAXIEYE, Park Ports and Docks UISEE, TSINTEL, MOTOR, Shouqi APOLLO, AI, TuSimple, CCIV, APOLLO, APOLLO, Horizon Robotics, Limousine & VIPioneers, Jingchi, CHJAutomotive, Zongmu, WESTWELL, Roadefend, IN- Chauffeur, Jingchi, NAVINFO, IN-Driving, Leadgen, UISEE, Plus AI, Driving, Leadgen, Meituan taxi, IDRIVERPLUS, IDRIVERPLUS, Neolix, Qingfei, Jingchi, TAGE, Leadgen, CowaRobot, JIMU, Didi tax, Caocao, NAVINFO, HOLOMATIC, Leadgen, CCIV, IN-Driving, HOLOMATIC, Haylion, Jingchi, HOLOMATIC, CowaRobot, CIDI CowaRobt Kuandeng, Qingfei HOLOMATIC, Jingchi HOLOMATIC Kuandeng
Source: Deloitte Research
••Logistics lead in trial operation in Changzhou and autonomously stop at the The development of intelligent and Xiong'an. On November 7, 2018, station. On January 22, 2019, the logistics has broad prospects, and IDRIVERPLUS announced that its first autonomous driving bus major enterprises are competing unmanned logistics and distribution in Shandong, which was a L4 for layout. The core of logistics vehicle “Wobida” has entered the unmanned intelligent trial vehicle is scheduling, and that of the stage of mass production. The designed by China Heavy Truck intermediate transportation link is vehicle is mainly used for unmanned R&D Center, was applied into use. safety and costs. With the help of logistics distribution in residential On January 18, 2019, the Panda autonomous driving technology, areas or parks. Intelligent Bus, which was developed logistics such as loading, unloading, by Deepblue, was officially launched ••Public transportation transportation, receiving and at the Summit on the Future Bus has met the basic standard of warehousing will gradually become Development of New Generation autonomous driving because of its unmanned and machined, Artificial Intelligence. It has been slow speed, short distance, fixed stimulating the logistics industry to tested in Deyang, Changzhou, route and bus lane. Autonomous reduce costs and increase efficiency Quzhou and Chizhou. driving system applied to buses and promoting the innovation can react to emergencies in time, and upgrading of the industry. On able to detect pedestrians and July 4, 2018, Baidu, together with other vehicles, slow down and Neolix, released the L4-class mass avoid cars, stop the bus under producted unmanned logistics emergencies, pass round obstacles vehicle - "Neolix AX1", and took the
40 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
••Ports and docks demonstration operation. In addition, China boasts numerous ports, where the ports of Qingdao, Xiamen, a large volume of cargo is handled Tianjin and other cities took the lead each year, demonstrating a huge in launching the unmanned and demand for truck drivers. The only automated application, becoming the way for these ports to keep pace high-tech automated port. With the with those world first-class ones is to active layout of Internet companies realize the automation of horizontal and automobile companies, and the container transportation with emergence of autonomous driving economically feasible schemes. The technology start-ups, the domestic application of autonomous driving strength in the field of autonomous technology in ports and docks can driving is growing. In the future, with effectively solve the problems of the development and evolution of inaccurate driving line, blind sight environmental awareness, navigation area caused by turning and fatigue and positioning, path planning, driving of drivers, and save labor decision-making control and other costs. At present, many domestic technologies, the commercial landing ports have taken a key step. On April of autonomous driving technology 19, 2018, FAW Jiefang released the products will gradually move forward ICV (intelligent container) specially from low-speed to high-speed and designed for port operation. This from closed to open. is the first intelligent driving vehicle in China that realizes L4 class port
41 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
4. Local governments roll out Information Technology issued the and Technology have stated that they supportive policies, and the Medium- and Long-term Development will drive the development of the IoV central and western regions begin Plan of the Automobile Industry, industry and autonomous driving. to thrive stating that autonomous driving The autonomous driving industry will be the focus of AI development Secondly, many local governments has been strongly supported by the in the coming decade in China. In have rolled out policies to facilitate central government and many local 2018, the Ministry of Industry and development of the autonomous governments. Firstly, the Chinese Information Technology issued the driving industry. It is particularly government has created a sound Action Plan for the Development of noteworthy that governments environment for autonomous the Internet of Vehicles (IoV) Industry, nationwide are relatively equal driving innovation in respect of reiterating the goals including in terms of the support given to development plans and approaches. "driving leaping development of the autonomous driving innovation; the Autonomous driving is regarded as IoV industry through continuous governments of tier-one cities are not a key transformation approach for efforts after 2020", and "gradual particularly advantageous. Currently, the automobile industry by the state. mass commercialization of high-level 18 cities have rolled out policies In 2017, the National Development autonomous intelligent connected related to testing of autonomous and Reform Commission (NDRC), the vehicles and 5G-V2X". In many other driving to designate intelligent driving Ministry of Science and Technology, occasions, the NDRC, the Ministry of test areas and issue test licences for and the Ministry of Industry and Transport, and the Ministry of Science autonomous driving companies.
Figure 33: Proportion of number of road test licences for autonomous driving in different cities (as of 2019 H1)
e h h ho ho e he h h t F ho h h h ho ho he he o h o
Source: Deloitte Research
These cities are mainly located in the developed eastern region. However, in the central and western region, Changsha and Chongqing have demonstrated strong enthusiasm in autonomous driving. Indeed, the sum of licences issued in both cities accounted for over one-third (36%) of the total number of road test licences issued. Furthermore, Changsha became the first autonomous driving city in the world in 2019.
42 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
3.3 Advanced manufacturing automation and makes it flexible, smart manufacturing is making a much to reduce costs and improve intelligent and highly integrated. greater contribution to corporate efficiency profitability. Third, in terms of typical 1.China's smart manufacturing The Chinese government publishes applications, China has become the products and services' profitability Made in China 2025 in 2015 to clarify largest consumer of industrial robots, is improving significantly the priority of smart manufacturing. supported by fast-growing demand. Smart manufacturing covers the whole Through strengthening top-level product life cycle and aims to realize design, establishing pilots and With the integration of IT and information-based manufacturing demonstration areas, constructing industrialization in China and the under ambient ubiquity conditions. standard systems and cultivating development of the industrial IoT, Based on advanced technologies such system solution providers, the among other initiatives, manufacturers as modern sensing technology, Internet development of smart manufacturing have made massive improvements to technology, automation technology and has produced remarkable results, their digital capacity and quality, with personified intelligent technologies, ushering in a period of rapid growth. the majority now focusing on vertical smart manufacturing technology uses The growth of smart manufacturing integration of data. As revealed in the intelligent sensing, human-machine in China is manifested in three main Deloitte survey, 81% of respondents interaction as well as decision making aspects. First, Chinese industrial have completed computerization. and execution technologies to realize enterprises have benefited from a Of these enterprises, 41% are in the intelligent design and manufacturing, higher level of digital capacity and connectivity stage, 28% are in the which is the deep integration of IT, quality, laying a strong foundation for visualization stage and 9% are in the intelligent technology and equipment the future analysis, prediction and self- transparency stage. Enterprises in the manufacturing technology. It updates adaptation of manufacturing systems. prediction stage and self-adaptation the concept of manufacturing Second, in terms of financial benefits, stage each account for 2%.
Figure 34: The industry 4.0 progress of enterprises (self-assessment)
What stage is your enterprise at?
om ter t o o e t t t o r re re t o e t t o
Source: Deloitte Smart Manufacturing Enterprise Survey 2018, Deloitte Research
43 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
China has become the world’s largest the ability of smart manufacturing robot market and maintained rapid to produce profitable products and growth since 2013. China’s robot sales services has risen sharply. exceeded the total amount of the US and Europe in 2017. The Chinese The profits brought to enterprises market for industrial robots was valued by smart manufacturing were not at USD4.2 billion in 2017, or 27% of obvious in 2013 when 55% of surveyed the global market, and will expand businesses reported a contribution to USD5.9 billion by 2020. According of 0%-10% to net profit through to data from the International products and services derived from Federation of Robotics (IFR), Robot smart manufacturing. In comparison, sales are expected to reach 160,000, only 11% of respondents in 2017 195,000 and 238,000 units in China reported a profit contribution in in 2018, 2019 and 2020 respectively, this range, whereas 41% reported representing a CAGR of 22%. a profit contribution of 11%-30%. Automotive, advanced equipment As a percentage of respondents, manufacturing, and electronics and enterprises reporting a profit electrical appliances remain the major contribution of more than 50% users of industrial robots. rose from 14% in 2013 to 33% in 2017. The profit contribution of Upgrading to industry 4.0 brings real smart manufacturing has risen and visible benefits to manufacturers. markedly, a result of increased In a Deloitte survey, if 200 production efficiency and higher manufacturers across the country value products and services. in 2013, smart manufacturing in China was found to be in its infancy, generating meagre margins. However, after five years of rapid development,
Figure 35: Smart manufacturing products and services are making a much larger contribution to profits
Profit contribution of smart manufacturing
Source: Deloitte Smart Manufacturing Enterprise Survey 2018, Deloitte Research
44 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
2. Smart manufacturing ecosystem can be divided into two categories. and circuit of air conditioner and can’t go without in-depth user First, it is the enterprises engaged build new production lines based on value extraction in emerging technology innovation. Changhong’s existing air conditioner The ecosystem is well-developed. They focus on the research of production capabilities to guarantee Amid growing market competition professional technologies in the production of Xiaomi’s intelligent and increasingly transparent product segments and provide equipment and air conditioners. Such collaboration pricing, manufacturers have little technology services for manufacturing significantly improves production alternative but to seek new sources of enterprises. Second is the traditional efficiency and corporate revenues. value. Extracting value from equipment manufacturing enterprises, which is manufacturers’ lifeblood. For boast manufacturing background, Talent supply is abundant. Since example, R&D design incorporates proprietary products or solid industrial robot field has high new technology to produce smarter technological foundation. These professional technology requirements, or more diversified products. At enterprises keep up with the universities and scientific research the sales stage, equipment-related development trend of smart institutions are playing important financial services can be provided. manufacturing in the new era and roles. Many business founders and After sales, data on equipment and independently develop or introduce experts are from universities and products shipped from the factory are smart manufacturing technologies scientific research institutions. The collected and monitored in real-time. to improve efficiency, reduce costs industrial planning of Anhui provincial Performance analysis and predictive and complete transformation and government suggests to encourage maintenance can then improve upgrading. Collaboration between talents from domestic and overseas security and create more service the two categories of enterprises can universities to establish industrial opportunities for the enterprise. maximize benefits, providing practical technology institutes in strategic Therefore, smart manufacturing technology application scenarios, emerging industry clusters such as ecosystem requires the participation helping manufacturing enterprises Hefei, Wuhu and Maanshan. Xi’an of tech intelligent product companies, realize transformation and upgrading also proposes to fully tap talent financial service companies, data and increase output. For example, resources, scientific research facilities collection and analysis companies. Xiaomi includes Changhong into its and achievements of local universities China has developed complete smart manufacturing ecosystem chain including Xi'an Transportation manufacturing-supporting industries; to promote R&D and mass production University and Northwest Industrial they can help manufacturing of intelligent air conditioner University and introduce more enterprises achieve greater progress products with Changhong’s strong talents to develop industrial robots. in intelligence upgrading. manufacturing capabilities and Moreover, many enterprises also advanced technologies. Changhong team up with universities to research Technology drives manufacturing. and Xiaomi establish a joint lab to smart manufacturing technologies Smart manufacturing enterprises redefine the appearance, structure and applications. It can be seen that university talents and technology resources are crucial for the development of industrial robots. For instance, Xiaomi introduces innovation activities into universities by organizing National Collegian Programming Contest since 2018 and invests tens of million yuan to establish a joint AI lab with Wuhan University, with an attempt to find more talents and technologies for innovative development of smart manufacturing.
45 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
Domestic advantages increase. Figure 36: Industrial robot sales in China in 2016-2018 (sets) Domestic industrial robot segment maintains stable growth and domestic industrial robot sales in 2016 to 2018 is narrowing the gap with overseas brands. However, the sales of industrial robot sales of foreign brands experienced significant decline in 2018, with less market shares. This is because with the globalization of mainstream core industrial robot component suppliers, the price, cost and quality gaps between domestic and foreign industrial robots are narrowing. In terms of software algorithm, although the gap still exists, some domestic robot enterprises are making technological progress constantly, breaking the technology monopoly of foreign brands. For ome t tr ro ot Fore e tr ro ot example, China overcame technical difficulties in developing high Source: IFR, China Robot Industry Alliance (CRIA), Deloitte Research performance control systems in 2017. The motion system technology owned by large foreign robot enterprises competitiveness of domestic industrial optimal choice. Therefore the market such as ABB was firstly mastered robots. Moreover, based on various share of domestic industrial robots by Pokae in 2017, making industrial advantages such as lower costs and improves constantly. robots more precise, rapid and stable, emphasis on client services, domestic and this effectively improves the industrial robots have become the
46 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
3. Capital market performs well Year Action Plan for Promoting the actively apply relevant technologies under synergy effect between Development of AI Industry (2018- in line with market rules. To respond policy and market demands 2020) and the Smart Manufacturing to policies released by the central Under the synergy effect between Development Plan (2016-2020). Then government and meet the demands policy and market demands, the it releases policy instructions to of developing local manufacturing capital market is confident about help local governments to develop industries, many Chinese provinces developing smart manufacturing relevant policies according to their and cities announce favourable smart industry through investments and advantages and guide enterprises to manufacturing policies. developing a healthy innovation ecosystem. From 2010-2014, investment and financing activities Figure 37: Investment and financing activities in China’s smart in smart manufacturing industry manufacturing industry (2015-2018) were inactive. Smart manufacturing attracted wide attention of capital market since 2015, with significant increase in the number of transactions and financial scale. From 2016-2018, China’s smart manufacturing industry gained strong growth momentum, approaching the peak of financing activities. In 2018, the total financing scale peaked at USD32.515 billion, accounting for nearly 15% of the total financing scale and 12.22% of the total 942 transactions. We can see that smart manufacturing industry is widely favored by capital.
With high attention on the development of smart manufacturing and industrial robot, the Chinese F o me m o o o tr t o government has published many favourable policies including the Source: ChinaVenture Capital Research Institute, Deloitte Research Development Plan for the Robotics Industry (2016-2020), the Three-
47 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
Figure 38: Industrial robot policies announced by local governments
Beijing Inner Mongolia & Shanxi Henan, Hebei, Liaoning, Jiangxi & Yunnan •• Research smart manufacturing •• Encourage leading enterprises core technologies and foster •• Support the development of advanced to develop intelligent products smart manufacturing industry equipment manufacturing industry clusters •• Promote in-depth application Qinghai, Ningxia, Guangxi, Hainan & Anhui eilong iang of smart manufacturing •• Promote multi-scenario and multi-domain technologies and establish application of smart manufacturing innovation application bases technologies ei ongol inlin •• Plan to reach a revenue of iaoning RMB12-15 billion by 2020 and ei ing Gansu, Sichuan, Jilin, Fujian ansu RMB60 billion by 2025 ian in •• Master intelligent robot component technology inghai han i handong Jiangsu, Shaanxi & Heilongjiang haan i Chongqing enan hanghai •• Support leading enterprises to take leading roles in developing industry •• Plan to reach an output value ichuan nhui u ei cluster and smart manufacturing of RMB30 billion in intelligent Chong ing he iang technologies manufacturing by 2020 and unan ui hou iang i RMB40 billion by 2022 u ian unnan Shanghai uang i hen hen Guizhou •• Increase application scenarios for the deep •• Develop smart manufacturing integration of smart manufacturing with with big data industries •• Plan to reach RMB60-80 billion in robotics industry by 2020 Shenzhen •• Build AI-based manufacturing innovation center to promote Hunan, Hubei & Guangdong: Zhejiang technology R&D •• Advance the industrialization and •• Increase application scenarios for the deep scaling–up of smart manufacturing integration of smart manufacturing with industries •• Plan to reach an output value of •• Support the development of advanced equipment RMB100 billion in robotics and manufacturing industry and plan to reach related industry in Guangdong by an output value of RMB138.2 billion in robot 2020, to reach a revenue of RMB10 manufacturing by 2020 billion in industrial robots sales in Hubei by 2020, and to reach RMB20 billion in Hunan by 2020
Weak Smart manufacturing innovation potential
Strong
Source: Government websites, Deloitte Research
48 Rising Innovation in China | Chapter 3 Characteristics of development of leading industries in China's innovation
Smart manufacturing company smart manufacturing framework example: Haier Group system based on Internet factory model Haier Group, established in 1984, to provide standardized Internet factory is one of the world’s largest home models and help enterprises complete appliance manufacturers. It ranked the transformation from traditional first among global large home manufacturing to smart manufacturing. appliance brands in sales for eight consecutive years from 2009 to 2016. 2. Innovate based on user demands. It increased global revenues by 10% Haier Group’s Internet factories year on year to RMB266.1 billion adopt a user-centric approach, in 2018, leading the whole home which customizes products based appliance industry. As a pioneer in the on user demands and realizes home appliance industry, Haier Group flexible production with smart started to construct Internet factories manufacturing technologies in the since 2012. Now it has successfully era of Industry 4.0. On one hand, for built several Internet factories and the lack of technological innovation developed the first industrial Internet and diversified products, Haier platform COSMOPlat, ushering into Group has to spend a lot in pre- the era of smart manufacturing. In research and production. In order 2018, Haier Group was shortlisted in to gain advantages in fierce market Fortune Global 500. Haier Group’s competition, Haier embraces smart smart manufacturing innovation manufacturing and establishes Internet activities have two main traits: factories to reduce manufacturing costs and increase profits. On the 1. Develop smart manufacturing other hand, Haier Group shifts the ecosystem. Haier Group finds that main purpose of Internet factories China’s manufacturing industry from product manufacturing to has the most complete industrial service offering and firstly rolls system although the manufacturing out industrial Internet platform to technologies are still inferior to provide individualized and massively developed countries. Therefore, customized solutions and help Haier Group changes the mindset enterprises to transform and upgrade in innovating smart manufacturing from traditional manufacturing to by giving up developing special smart manufacturing. smart manufacturing technologies and products, but focusing on building industrial Internet platform COSMOPlat to establish an inclusive smart manufacturing ecosystem for China’s huge industrial system. COSMOPlat provides advanced technologies and applications centrally for Chinese manufacturing enterprises, customizes solutions for enterprises through cooperation with upstream or downstream enterprises to satisfy individualized demands with high accuracy, and develops a standardized
49 Rising Innovation in China | Chapter 4 Challenges in the development of China’s innovation ecosystem
Chapter 4 Challenges in the development of China’s innovation ecosystem
1. Core technologies to be further Figure 39: Patent application and authorization activities in improved China (2014-2018) China’s tech innovation ecosystem has achieved high-speed development. Innovative applications are ubiquitous and remarkable achievements have been made in tech, medical, financial and auto industries. Moreover, driven by innovation, education, manufacturing, culture & entertainment and transportation sectors have been optimized and upgraded, driving coordinated development of various industries.
With the increase of scientific research investments and patent volumes, o o te t t o o o te t thor t o China’s innovation companies and innovative products have gained some Source: National Bureau of Statistics of China, Deloitte Research competitiveness. Core technology, as one of the most important factors when measuring the innovative such as synchronous satellite system progress. Communications giant development of a country, is in the communications industry, Huawei submitted 5,405 international closely related with sustainable vaccine R&D in the pharmaceutical patent applications in 2018, covering development of enterprises and industry (including HBVae, EHF-IgM, innovative research on 5G, array their international positions. Chinese SARS vaccine etc.) and high precision camera, chip R&D etc. enterprises have mastered the core bearing in the manufacturing industry technologies of many industries, etc. and achieved remarkable
50 Rising Innovation in China | Chapter 4 Challenges in the development of China’s innovation ecosystem
However, in communications, electric Figure 40: China’s integrated circuit imports (2010-2018) equipment and precision instrument and auto manufacturing sectors, especially in terms of semiconductor materials manufacturing, ultra-high precision machine tool production and electronic fuel injection system research, Chinese enterprises are still at the early development stage. They have not yet mastered the core technologies of some industries and heavily rely on external technology assistance. For example, the import of integrated circuit has maintained growth since 2010. In 2018, China’s integrated circuit imports increased by 19.8% to RMB2058.41 billion, with m ort e m o o ro th deficit exceeding USD200 billion. Source: National Bureau of Statistics of China, Deloitte Research
51 Rising Innovation in China | Chapter 4 Challenges in the development of China’s innovation ecosystem
Chip is the cornerstone for the Figure 41: Geographic distribution of global top 15 semiconductor development and application of manufacturers (2018) communications and electronic component manufacturing. Chip manufacturing and research play important roles in tech innovation industries. However, no Chinese enterprises ranked in global top 15 semiconductor manufacturers in 2018. Considering the high performance and high efficiency brought by import, Chinese enterprises import nearly 90% of core chips. From resistance, electronic components to chip design and manufacturing, Chinese ore E ro e h enterprises are still at the middle and low end of global industrial chain, while Source: ICInsights, Deloitte Research only package and testing can compete with leading global enterprises.
Chinese high-tech enterprises’ heavy recent years, further improvement is enterprises are importing drugs reliance on foreign technologies still necessary. developed by Chinese enterprises directly leads to increase in patent with growing transaction size. However, on the other hand, all fees. Taking the communications In terms of capital, China’s overall the 12 most important new drugs industry as an example, Chinese R&D expenditures increase year by selected by the State Food and Drug mobile makers have to pay several year, but the returns on investment Administration were developed by millions of RMB to Qualcomm every in different industries are uneven, foreign enterprises. It is obvious year for using its patents in the 4G and some industries can’t receive that the investment demand for era. With the implementation of 5G enough investments. For example, pharmaceutical research is growing. technology, Qualcomm will receive while pharmaceutical industry holds Improving the returns on investment RMB1 trillion patent fees from China the second largest patent volumes, and injecting limited resources into within the coming 5 years. it obtains the least investments industries with the largest potential in eight industries. On one hand, and innovation value have become China lags behind in core technologies Chinese pharmaceutical enterprises the major topics. for three reasons: capital, talent and are gaining stronger cutting-edge policy. Although significant progress drug research capabilities, and more has been made in many aspects in and more foreign pharmaceutical
52 Rising Innovation in China | Chapter 4 Challenges in the development of China’s innovation ecosystem
Figure 42: Comparison of R&D investment and patent volume in eight industries
h rm e t Ferro met
to m t r e er e me t m t r
E e tr m h er hem m t r e me t m t r
om ter omm t o other e e tro e me t e e me t m t r m t r
er e te t o o e ter r e o e e te e e e t re m o
Source: National Bureau of Statistics of China, Yiou.com, Deloitte Research
Talents are important for innovative Top-level design can accelerate and manufacturing. Besides, growing development of high-tech industries and propel innovation in various domestic demands will help China such as AI industry. High-quality talents industries. Government’s policy achieve greater innovation results. can support innovative development support enables start-ups to focus on Core technologies are fundamental of enterprises with their skills and research and lay solid development for the development of innovative experience. Looking at domestic foundation. The government can industries. If we only focus on a small talent supply, domestic university help build innovation ecosystem part of the industrial chain and don’t graduates don’t obtain enough skills via tax incentives, capital support, develop independent and controllable and experience with less access to special projects and favourable core technologies, nothing will be education resources than universities talent policies, but how to further achieved. The most important task in developed countries such as the improve the execution efficiency and for China now is to develop core US. However, talents coming from make detailed rules requires serious technologies that can compete with foreign companies or entrepreneurs consideration. advanced countries under capital, graduating from foreign universities talent and policy support. might face risks such as financing Regarding future development, difficulties and fast technology Chinese manufacturers still have iteration. On the other hand, strategic huge opportunities to catch up with M&As and talent introduction foreign peers holding advanced measures of foreign companies also technologies. External political pose challenges for China to attract factors force Chinese enterprises to more innovation talents. concentrate on independent research
53 Rising Innovation in China | Chapter 4 Challenges in the development of China’s innovation ecosystem
2. “False innovation” disrupts these techs, AI is the most widely and The government has increased innovation environment most maturely applied. However, research expenditures and In essence, innovation means using some products such as AI-based investments in recent years. original technologies, new production stock investment apps and wealth Meanwhile, approval procedures methods and management models management robots just borrow the should also be stricter and more to add vitality for the market and concept of AI but have never applied effective, so as to prevent the industry and increase value. Innovative innovative AI technologies. It seems intervention of administrative rights enterprises need a free competition that some P2P online lending products and monopoly, avoid resource environment to grow and increase adopt innovative models, but actually, mismatch, and help government’s value. If enterprises lacking innovation they are just fabricating information investments in innovative industries capabilities and research investments with rule loopholes, finally damaging produce effective results. In this use innovation products without the interests of users. Another process, policy innovation is becoming innovation value to compete with example is that some companies more and more important. Facilitating other enterprises, this will increase roll out business expenditure multi-function coordination and expansion costs and disrupt the management apps based on intelligent establishing anti-monopoly platforms innovation ecological environment, scanning technologies. They boast can help create healthy innovation leading to the tragedy that genuine of their mature AI technologies environment and make enterprises innovative ideas will be nipped in application, while in fact, they hire gain more innovation motivations. the bud. New methods and models human workers to process invoices to On one hand, patent review agencies contain more uncertainties and risks read and transcript documents. should pay more attention to the than existing mature models, but they originality and industrialization can bring real growth momentum for High returns on innovation attract possibility of patents. On the other industries. Under such circumstance, some enterprises to obtain the hand, local governments should we should be alert that some attention and trust of customers consider whether applicants have enterprises would attract capital in and investors via “false innovation” innovation capabilities, whether they the name of innovation and make or to monopoly the market by using can boost the development of local unreasonable request. Their practice favorable innovation policies. Such innovative industries and whether they is contrary to the original purpose of behaviors not only waste public can help local business environment innovation. resources, but also inhibit real thrive and diversify. innovation motivation. For the market In recent years, AI, blockchain and and individuals, how to identify real big data have become hot words in innovation is indeed a science. For the innovation field. The hotter these the government, how to use policy words are, the more active “false support to promote justice and equity innovation” enterprises will be. Many and prevent false innovation is also an innovative technologies have been important issue. applied in the financial sector. Among
54 Rising Innovation in China | Chapter 4 Challenges in the development of China’s innovation ecosystem
3. Excessively pursuing crash in developing them as pushing for innovation a leap straight to innovation brings Innovative companies need to evolve nothing but harm to the market from incubation to maturity, and and companies. during this process, capital acts as incubator and driver. However, For example, in the sharing economy, lured by capital, an increasing a hot area in recent years, bicycle number of companies are pursuing sharing unicorns are suffering from crash innovations and financing broken capital chains and pledging maximization by attracting investors massive bicycles for borrowings. The via concepts for imagination root cause is that expanding too fast instead of focusing on developing cannot match with their immature innovative technologies and projects. profit models. How to help companies If an innovative project lacks core gain profits and prevent from capital competitiveness and focuses only losses should be considered before on opportunity and speed, even the companies’ gaining the next round of strongest capital incubator cannot funding, but pursuing speedy model develop a valuable company. innovations distorts priorities of companies and hampers The activity and prosperity of the innovative practices. venture capital market where companies shorten innovation Innovation should be built on robust cycles with an intention to obtain basic research to develop valuable short-term funding is not reflected in products that satisfy market needs real economy. The value bubbles of through technology-led innovations innovative projects under the irrational and ultimately add values to industries. exuberance will burst upon a period For innovators, funding means both of value accumulation. Excessive opportunity and risk. What matters capital hype has adverse effects for most is the transition of role and mind- companies to build technology and set from followers to pioneers and talent bases. In recent years, many the utilization of capital. For investors, companies have only spent three investing in companies with innovative or two years or even 17 months value and preparing for medium going public from establishment and and long-term investment as well as gained numerous clients in a short reasonable valuation is the best way to time through platform subsidies and fight against cash crunch and increase income statements with negative net return on investment. earnings, focusing too much on speed. When finding new business models and potential markets, companies need to take some patience and time
55 Rising Innovation in China | Chapter 4 Challenges in the development of China’s innovation ecosystem
4. A wide talent gap Technological developments and established applications increase demands in communication and instrument manufacturing and development, new retail, finance, new energy and new materials, while there is a shortage of innovative talents, e.g. a lack of over 1.5 million Fintech talents. Besides, regions have no agglomeration advantages with lower talent concentration. Combined with fewer quality talents at home than abroad, the wide talent gap leads to weak innovative strength. Innovative companies are challenged by bringing in and developing talents.
Figure 43: Expected talent gap in certain industries Figure 44: Proportion of AI experts with in 2025 doctoral education e t re te tr e eo e
t
E er erm e e er e t e er t o eh e h e mer Fr e h ther orm t o te h o o o tro m h e ome e h h er orm me e e
Source 1: Ministry of Education, Ministry of Human Resources and Social Security, Ministry of Industry and Information Technology, Tsinghua University School of Economics and Management, Deloitte Research Source 2: LinkedIn, Deloitte Research
Introducing talents plays an important prevent from resource fragmentation guide talents to join research and role in the context of a wide talent in order to help companies first high-level technology workforce, gap. All regions are competing for settle in areas with industrial bases optimize disciplines and launch new top talents as Shanghai, Shenzhen, and build a complete closed loop of majors properly in higher education Nanjing and Tianjin have introduced talent resources from universities and institutions according to market needs. policies to bring in overseas talents brought in from overseas as well as For example, Chinese universities need and attract excellent technicians and leading companies and high-tech start- to offer more AI related majors against developers in entrepreneur services, ups with a focus on innovation. the backdrop of the fast growing AI settlement, and residence visa as industry and the increasing percentage well as cash subsidies. The release of In order to attract numerous quality across the globe. talent introduction policies by many talents and respond to the growing regions indicates the vigilance and market, China should place priority attention of local governments on on developing educational resources talent gaps. Moreover, they need to and relevant professionals. It should maintain industry concentration and build strong basic disciplines, actively
56 Rising Innovation in China | Chapter 4 Challenges in the development of China’s innovation ecosystem
Figure 45: Number of higher education institutions offering AI related majors in the world in 2018
Canada China
Nether Australia lands UK
Sweden Brazil
U.S. India Germany Israel
Source: www.chyxx.com, Deloitte Research
In addition to offering relevant majors, with innovative thinking and adjusting active in innovation. As the premise universities should provide courses the structure of educational industry of innovation is product quality and that are highly relevant to practical by learning advanced educational safety, poor-quality innovations application in terms of educational experience are the only way to may negatively impact on consumer contents. Companies and universities develop talents who can drive and lead experience. Besides, placing less can work together in developing innovations. emphasis on quality will make it quality talents for specific segments harder to scale up and commercialize and training skilled and experienced 5. No quality mind in innovation innovations in relevant sectors and technicians. The talent structure Quality is the foundation for even lower market recognition of adjustment model in Germany is innovation and the economic climate the value of products in the context available for reference: as the new is essentially dependent on the growth of increasing market attention on mode of production centered on of quality innovation. Innovation reputation and reducing tolerance for intelligent manufacturing changes the serves real economy rather than safety incidents. traditional manufacturing, German capital markets. If companies only occupational training schools respond pursue seemingly innovative popular In the manufacturing industry, the to the trend by adjusting their courses concepts and models instead of trend of automation drives companies to focus more on information literacy focusing on improving the quality of to innovate and connect more and skill training for students. They innovative products, they just develop manufacturing facilities with automatic adjust the proportions of information imitations without sense of innovation controlling networks. However, some technology, engineering and math and cannot create highly valuable companies have no network security based on market needs and provide products. measures in place while innovating more digital hardware in classrooms In the new energy vehicle (NEV) the mode of production, leading to stress the application and improve industry, for example, the ownership to data loss and even large-scale students’ abilities in knowledge transfer. of electric vehicles in China was 2.11 shutdown. Companies’ file loss and million in 2018 while over 40 battery terminals losing control caused by Talent is the core of innovative fire incidents have happened as ransomware virus in recent years industry development while there of 21 October 2018, raising public is a typical example. In the internet is no short cut to expand talent doubts about vehicle security. The industry, taken as another example, development channels. Developing overall NEV market tends to be the first batch of innovators have educational resources in universities
57 Rising Innovation in China | Chapter 4 Challenges in the development of China’s innovation ecosystem
gained benefits from the internet and among which quality innovation improved the quality of consumption is the most fundamental and in mobile social networks and favorable aspect to improve e-commerce. Currently, different customer experience and promote concepts and terms are springing the development of real economy. up, such as social network fission, Providing high-quality products and access to users in less developed services is the essential motivation areas and privately-owned access to for enterprises to achieve sustainable users that gains popularity this year. growth while innovation can help All of these are in fact variants of improve the competitiveness and internet marketing. Several companies quality of products. Enhancing look to gain a little cake from the quality awareness and independent internet model through such so-called innovation capability of enterprises innovations. However, the simple and actively carrying out quality innovation of form will be a flash in innovation are very important for the pan if it is not backed by quality preventing economic downturn. technology and design, not to mention making contribution to real economy. Higher quality awareness is the core Latecomers should focus on internet- pillar of innovative development. New based product research and design to products and models need to be innovate and integrate cutting-edge supported by secure and achievable technologies with real economy. applications. A healthy and favorable Product quality, business model innovation environment could attract and talent structure create some more innovative participants who value development space for innovation, quality to provide reliable ground- breaking products for the market.
58 Rising Innovation in China | Chapter 5 New landscape of China's innovation ecosystem
Chapter 5 New landscape of China's innovation ecosystem
1. The booming digital economy Mobile payment is also going global. connection will help traditional drives the globalization of China's With over 250 partnerships, Ant industries enhance industrial innovation ecosystem Financial is connected with hundreds base and technology innovation As one of the country's key GDP of thousands of merchants across 54 capabilities, and promote integration growth drivers, China's digital countries and regions. By providing of manufacturing with modern service economy reached RMB31.3 trillion technical support, Alipay has launched industry to tap complementary in 2018 with an increase of 20.9%, nine localized "Alipays" with local advantages. Internet innovation accounting for 34.8% of the total partners along the Belt and Road. In is also likely to drive "intelligent +" GDP. The digital economy is rapidly addition, prominent sharing-economy development, saving significant labor integrating with the real economy to player Mobike has expanded its cost and enabling transformation of help the latter, which has reached a business to 19 countries, covering traditional manufacturing. bottleneck, get out of the slowdown. more than 200 million users. In recent years, with the rapid As one of the countries with the most development of internet model and Digitalization is essentially a process labor resources, China will see a large big data, the concept of digitalization of sharing. Driven by digital economy, proportion of jobs replaced by AI. has penetrated into various industries information, resources, platforms and Such trend will enhance job mobility and sectors. Driven by digitalization, customers are shared by network and drive people to learn new skills China's innovative technologies and end users. China's innovation can and knowledge, therefore promoting products are going global. go global with the support of digital labor transformation and upgrading economy, when it is competitive industry to high-end sectors of the China's e-commerce, mobile payment enough. In the future, China can make industrial chain. Internet innovation and bike sharing, the world-leading better use of internet innovation stimulates mass entrepreneurship. innovative models, are closely and upgrade to extend to high-end Upgrading digital economy will bring connected with digital economy. Take sectors of the industrial chain, about closer connection between online retail as an example, China, the cultivate new growth drivers and internet and real economy, releasing world's biggest online retail market, optimize the economic structure. more new industry models and is taking the leadership in the new markets. Based on internet, shared digital-driven retail revolution. As Low labor cost is no longer economy and platform economy estimated by internet retailers, China an advantage for China to win will stride forward and trigger accounts for approximately RMB9 competition in the international further development of mass trillion of the USD2.86 trillion spent market. Internet innovation is entrepreneurship and innovation, by global consumers buying retail facilitating the upgrading and creating more creative industries and goods online in 2018, suggesting that development of traditional and economic development opportunities China's online sales are 1.78 times emerging industries, as well as labor and delivering high-quality products of the global average. E-commerce optimization. Internet innovation will and services to the world. giant Alibaba provides a platform for serve as a new driver for traditional global sourcing and its global website industries, as internet connects has expanded online sales to 190 not only people, but also objects, countries and regions. companies and industries. Internet
59 Rising Innovation in China | Chapter 5 New landscape of China's innovation ecosystem
2. Regional economic integration further synergizes and allocates innovation resources Yangtze River Delta, Guangdong-Hong Kong-Macau Region and Beijing-Tianjin-Hebei Region are China's three major city clusters developing in a synergetic manner. Other economic clusters include the Northeastern Region, central China, middle reaches of Yangtze River, Chengdu-Chongqing Region, Guanzhong Plain and Beibu Gulf economic zone. The synergetic effect of regional economic clusters is significant, as evidenced by nearly 50% of China's total GDP in 2018 contributed by three major city clusters, which have been playing an important role in driving the country's economic growth. Based on such advantages, innovation industry leverages integrated and derivative resources and mixed industrial elements, shaping a new landscape of interactive development.
Figure 46: Contribution of each region to China's total GDP
t e er e t o o o e e e e o ther re o o h re ter re
Source: IMF, National Bureau of Statistics, the World Bank, Deloitte Research
As a good example of regional serves as the technology innovation number of top universities across the economic integration in China, engine of the area. Over the past area have been playing leading roles Guangdong-Hong Kong-Macau 40 years of reform and opening up, in technology innovation research. Greater Bay Area has benefited Shenzhen has been developed to a The University of Hong Kong, the from complementary resources, as city with leading innovation mind-set Hong Kong University of Science and each city in the area stands out for and strength in China. Five of the Technology, Sun Yat-sen University and its competitive industry (Hong Kong country's top 10 venture capitals are South China University of Technology for finance, Shenzhen for hi-tech, from Shenzhen. The city accounts for in particular, have world-leading Macau for tourism, Dongguan for nearly one-third of China's venture technology innovation capabilities and manufacturing and Guangdong for capital funds and projects. Shenzhen's serve as a large platform to attract logistics). It has provided a favorable complete industrial chain leads to elites in all fields, proving high-end environment for the integration of faster product manufacturing than talents for technology innovation of technology innovation resources. With Silicon Valley. Favorable innovation the Greater Bay Area. booming digital economy, the Greater environment allows Shenzhen Bay Area's advantages have laid a solid to develop to be the undisputed foundation for technology innovation. technology innovation center of the As China's innovation hub, Shenzhen Greater Bay Area. As for talents, a large
60 Rising Innovation in China | Chapter 5 New landscape of China's innovation ecosystem
Favorable policies are accelerating the 3. Increasingly innovative better nowadays. Firstly, with great integration of technology innovation private companies drive the policy support including the launch of resources in each region. Report on transformation and upgrading Science and Technology Innovation the Work of the Government 2018 has across various industries in China Board, it becomes less difficult for proposed to drive innovation along Private companies have been playing private companies to raise fund in the Yangtze River economic zone and a key role in driving China's economic an easing financing environment. the construction of "central technology growth since the reform and opening In addition, private companies innovation zone, technology resource up. At present, China's private are faced with a better business sharing zone, technology-enabled companies have contributed more environment, including easier market livable zone and technology industry than 60% of GDP, over 80% of urban access, more streamlined approval creation zone" in the region. Outline job opportunities, as well as over process, greater legal protection and of the Development Plan for the 70% of technological innovations. As more slashing taxes and fees. All the Guangdong-Hong Kong-Macao China shifts the focus of economic above have added momentum to Greater Bay Area has defined the development from rapid growth the transformation and upgrading of roles of major cities in innovation and to high quality, the innovation and private companies. highlighted policies and measures upgrading of private companies to facilitate cross-boundary flow of become critical to the transformation Private companies are driving innovative elements and regional and sound development of China's China's industrial transformation and integration. Measures to drive economy. upgrading through self-dependent integrated innovation development innovation. Unlike state-owned across Beijing-Tianjin-Hebei Region, Innovation of private companies is enterprises, private companies have including the establishment of Tianjin an economic imperative supported their own distinctive characteristics. Binhai-Zhongguancun Science Park by the government. At the second Highly flexible and market sensitive, and issuance of Blue Book on the session of the 13th National People's private companies are well positioned Development of Beijing-Tianjin-Hebei Congress, President Xi Jinping joined to accelerate the development of Region, have proved the government's deliberation with deputies from competitive products, drawing on determination to promote regional Fujian Province, and urged solid scientific achievements by universities economic integration. implementation of the policies and and research institutes. Large-scale measures to encourage, guide and application of newly developed With the rapid development of regional support the development of the high-tech products in the market is economy, Guangdong-Hong Kong- private sector. He also stressed required for subsequent update to Macau Greater Bay Area, metropolitan creating favorable conditions meet ever-changing client needs. interlocking region across Yangtze for entrepreneurs while driving This process is quite demanding on a River Delta, Beijing-Tianjin-Hebei innovation of private companies. company's technological capabilities, ecosystem, Xiamen megalopolis and business proposition, cost, service as Changchun megalopolis are emerging Private companies used to face well as foresight, and requires years of fast. Regional economy is likely to shift many challenges in innovative iteration on a large scale. Therefore, it from regional economic and trade development. On the one hand, is necessary for a company to sustain cooperation to collaborative innovation high operational cost has greatly its profitability for continuous and and from co-building production hindered the development of private long-term investment in R&D, in order chains to co-building quality life cycles, companies, making it difficult for to form a complete loop featuring so as to comprehensively attract and them to get financing. In terms of "develop-go to market-develop". High- allocate talents, businesses, industries business environment, more efforts tech private companies are generally and other innovation resources. are needed to foster greater fairness doing well in this regard. in the market with market-oriented economic system to be further improved. Yet things are getting
61 Rising Innovation in China | Chapter 5 New landscape of China's innovation ecosystem
4. Key mechanism and policy order to cultivate top innovative innovation become the driving talents, it is necessary to increase engine of China's innovation investment in basic education, According to the Guidelines on Tax strengthen discipline construction, Incentives for Mass Entrepreneurship develop a high-quality faculty via and Innovation issued by the State various approaches including higher Taxation Administration in June 2019, salaries, and inspire creative thinking China has launched 89 preferential by establishing research institutes. tax measures in succession with As for the conversion and application respect to vital sectors and key of research results, it is advisable to areas of business startup and ensure effective activity management employment, covering the entire and ease financing environment to life cycle of an enterprise. The new boost innovation. edition incorporates relevant policies that further help enterprises gather China has officially launched a funds, making it easier for micro reform on its science and technology and small enterprises and individual mechanism, with diverse focuses at businesses to get loans from financial different stages, including identifying institutions. In terms of the entire objectives, raising awareness on the innovation industry, most preferential importance of science and technology, policies tend to favor self-dependent strengthening the construction of innovative companies across various scientific research team, facilitating industries including biomedicine, big basic researches, opening up health, virtual reality, 3D printing, technological market, improving self- green finance, and new energy power dependent innovative capabilities, generation through an increasingly establishing technological innovation diversified manner. The first thing is systems through industry-university- to further protect intellectual property research cooperation, and promoting while increasing the penalties for industrialization. By adapting to market breaches. Other measures include dynamics and demands at different higher financial subsidies, lower taxes, stages, mechanism and policy reforms new management models, talent have paved the way for high-quality attraction policies and new platforms scientific innovation, thereby adding and channels, etc. momentum to innovation. China has initiated a new round of institutional Innovation is not possible without reform by establishing new research government and policy support. institutes to integrate all sorts of More favorable institution setup, resources. The aim is to narrow the mechanisms and policies are critical gap among science, technology and drivers of innovation. Major policies to product, thereby shifting the focus accelerate China's innovation include from industry management to function increasing relevant investment and management. At present, China's creating a more favorable environment increasingly mature science and for innovative companies and talent technology mechanism has become a development. Fundamentally, in key driver of China's innovation, fully
62 Rising Innovation in China | Chapter 5 New landscape of China's innovation ecosystem
5. China's innovation ecosystem investment focus. Nowadays, China's continues to expand with support venture capital market mainly relies from the capital market especially on domestic channels for fundraising. the launch of Science and Technology Innovation Board In response to the reform towards China's Science and Technology innovation-powered development, Innovation Board was launched in top-level design of the capital market 2019, with a key focus on companies needs to focus on opportunities from in high-tech and strategic emerging scientific and technological innovation. sectors such as next-generation IT, Moving forward, the capital market advanced equipment, new materials, should further balance its relationship new energy, energy saving and with innovative companies. On the environmental protection, and one hand, the capital market should biomedicine. The new board will reform and innovate to satisfy evolving provide greater financing support for corporate and market demands, in innovative companies, and strengthen order to increase its inclusiveness the connection among science and and adaptability. Meanwhile, it is technology, capital and real economy, necessary to highlight the role of thereby accelerating the conversion capital as the driving force of scientific of scientific findings to productivity. innovation by adding momentum to Previously, companies which seek market dynamics. In addition, it is listings must get approval from necessary to increase transparency of Issuance Examination Committee corporate information and improve and meet certain requirements, selection mechanism to avoid pseudo- significantly limiting the development innovation and overheated capital of innovative companies. With a investment. registration-based system, the Science and Technology Innovation In a healthy and sustainable Board has adopted more diversified innovation ecosystem, the capital standards, allowing strong tech market serves as an accelerator startups to quickly get listed via Q&As instead of the basis for growth. based on information disclosure. Only those with strong innovation capabilities and mature models will Capital market is a key pillar of benefit from the market mechanism. China's innovation. As part of the Capital does not guarantee quality second-tier market, the Science and technological innovation, though it Technology Innovation Board signifies may help startups expand business greater capital support to China's scale. Therefore, it is imperative for innovation ecosystem. In the venture entrepreneurs to adhere to long-term capital market, both the volume goals through strategic planning. and the frequency of investment Doubtlessly, with full support from in innovation have grown year by the capital market, more excellent year, with tech startups in AI, new tech startups and entrepreneurs will materials, biomedicine and advanced emerge and thrive. manufacturing becoming the
63 Contact us
Deloitte China Innovation Department
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64 About Deloitte China Innovation Department
Founded in 2011, Deloitte China Innovation Department is dedicated to providing the clients with "high-value, high-tech and high-touch" services and experience, and promoting Deloitte's innovation development in China by collaborating with 17 innovation departments of Deloitte Global network. By leveraging SPEED SET, a revolutionary acceleration model on Greenhouse platform, Deloitte China Innovation Department senses and engages global cutting-edge and disruptive innovation technologies, connects internal and external resources, facilitates innovation transformation and builds win-win innovation ecosystem by connecting enterprises, government institutions, universities, incubators and innovative technology companies.
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