Domestic Consumption Driving Economy Higher
The tech industry in China substantially benefited from the country’s gradual economic recovery after the pandemic, its focus on domestic consumption, as well as digital trends that emerged after the outbreak.
“On the user behavior side [in China], the pandemic gave an impetus to the penetration of several major digitization businesses, helping some of them grow significantly to reach the necessary scale and achieve economic efficiency in a short time,” said Charlie Chai, an analyst at 86 Research.
“On the other hand, a countervailing force is a cut in investment on the business side, as major industry leaders including BAT (Baidu, Alibaba, Tencent) prioritize margins amid a potentially turbulent economic and geopolitical environment.”
The US technology companies have also seen their businesses thrive during the pandemic as lockdown measures forced the Americans to stay at home, investing their time and money in platforms like Zoom, Amazon, and Netflix.
Following the outbreak in February, China had to shut down more than half of operations and businesses across the country to curb the effects. This resulted in a 6.8% drop in growth in the first quarter. As Chinese businesses began reopening in March, the country’s GDP recovered by 3.2% in Q2.
Stay-At-Home Businesses Thriving
Just like in the US, Chinese citizens were also forced to stay at home during the pandemic and turned to e-commerce and video games.
“Because of the virus, China is more hungry for technology than ever before,” said Abishur Prakash, a geopolitical specialist at the Center for Innovating the Future (CIF), a US consulting company. “From health care to transportation to finance, projects are underway that will rewire China — and put technology at the heart of everything.”
This has been of great help to Chinese tech giants. Shares of Alibaba are 30% in the green year-to-date while its revenue rose 34% year-over-year in the quarter through June.
“We were well-positioned to capture growth from the ongoing digital transformation, which has been accelerated by the pandemic, in both consumption and enterprise operations,” said Daniel Zhang, chairman and Chief Executive of Alibaba.
Tencent, the Chinese conglomerate company reported strong earnings and outshined Q2 analyst forecasts by far, mostly thanks to gaming.
Chai added that tech companies are now “moving back to full speed” as they’re trying to digitize and transfer their operations to the cloud. Furthermore, remote work and collaboration services have also seen substantial growth in China, just like in the US and Europe, naming Alibaba’s DingTalk platform and the business version of Tencent’s messaging app WeChat as two beneficiaries.
The health care sector has also presented appealing opportunities for China tech companies during the pandemic as they invested in services like online doctor consultations and algorithms they claim can help the vaccine development.
Meanwhile, one of the largest AI and internet companies in the world, Baidu, is in talks with investors to secure up to $2 billion in the next three years to create a new biotech company. Also, online healthcare company JD Health International has filed for a Hong Kong IPO, according to the Wall Street Journal report on Monday.
In the meantime, the trade disputes between the US and China continue to intensify, backfiring on the tech companies. Earlier this year, the US imposed sanctions on Chinese giant Huawei, banning its access to US technology and removing it from significant chip supplies.
Furthermore, the US government also imposed sanctions on China’s biggest semiconductor maker, SMIC, which could severely hurt China’s plans to grow its domestic semiconductor sector.
Moreover, Chinese video-sharing platform TikTok has been named a national security threat in the United States, which accused it of accumulating American user data and sending it to the Chinese government.
Prakash said that all this fuss in the technology sector, which has been caught in the crossfire of European and American regulators will create ‘new business realities’ for the tech companies.
Technology companies in China have recorded impressive gains during the coronavirus pandemic, however, the tech industry is still surrounded by economic and geopolitical uncertainties.
About the Author
As an analyst of global affairs, Adriaan has an MSC from Oxford, with diverse interests in the digital economy, entertainment, and business. He is a specialist trainer in Advanced Analytics & Media.