The digitization of China’s industries and enterprise

In the post-Covid era, industrial digitalization has become an economic necessity for China’s development. As an early stage VC fund specializing on enterprise technology since 2014, Yunqi Partners is a first mover and thought leader in China’s enterprise technology sector. Yipin Ng, Managing Partner at Yunqi Partners and key speaker at SuperReturn China Virtual 2022, examines the digitization of China’s industries and enterprise.

A new era

Since 2020, the global coronavirus pandemic rapidly accelerated the process of digitization in China, changing the way people work and live, and spawning more scenarios of remote and online working. For instance, China’s cloud infrastructure services market grew by 45% to US$27.4 billion in 2021 according to Canalys. IDC predicts that the global share of China’s public cloud service market will increase from 6.5% in 2020 to more than 10.5% by 2024.

Enterprises from all industries are now motivated to explore ways to utilize digital tools to find efficient business solutions, from remote collaboration, cost reduction and efficiency improvement, to human-computer interaction.

Two decades of consumer internet proliferation have equipped China with a solid digital infrastructure, while new technologies such as artificial intelligence, big data, cloud computing and 5G are facilitating the digitization of China’s industries. The massive demands for industrial digitization heralds the emergence of world-class enterprises technology companies in the field.

Favorable Policy Tailwinds

The Chinese government has attached considerable importance to enterprise technologies to power the country’s future economic growth. China faces the concurrent challenges of an aging population, declining labor pool and a desire to increase self reliance in key technologies. The 14th five-year plan encourages Chinese companies to pivot their focus towards quality rather than growth, while policies in new energy, digital China and technological innovations indicate a call for upgrades in all industries to counter these challenges and ensure long term sustainable growth.

As China continues to roll out favorable policies, industrial developments are leading to growing needs for structural change. These structural changes in turn create space for both innovative technologies and new disruptive business models in the enterprise space. Like in the consumer internet space where initially companies were inspired by concepts elsewhere, over time, China’s internet titans have pioneered their own business models and innovation far eclipsing some of their Western counterparts.

As the 'Workshop of the World', China has a stronger starting position in the industrial space, as a significant part of the world’s production capacity with decades of expertise is already present. This is a fertile ground for industrial innovation in artificial intelligence to be applied to manufacturing. While still at an earlier stage, new business models and enterprise software innovations related to industrial digitization have already started to sprout and the next generation of titans is being founded in these years.

Investment firms have followed the trend in the industrial digitization through increased investment dollars; and entrepreneurs are voting with their feet by shifting away from consumer internet and starting companies in the enterprise internet space.

Positioning to win

Despite the sector’s attraction, investing into enterprise technologies presents some challenges that successful investors have to navigate.

First, the enterprise tech space is both broad and deep and can be roughly broken into:

• Upstream companies if the digital economy span from semiconductor, infrastructure as a service (IaaS), 5G, to other hardware infrastructure companies.
• Midstream has such components as the operation system, databases and other basic software.
• Downstream includes application software and company solutions that are applied in different industries.

Second, for enterprise companies, details are crucial to success and many industries have significant differences in supply chains, value-added processes and barriers to entry. This requires a continuous learning to be insightful and identify trends that will allow a firm to see and invest into companies early. For example, in advanced manufacturing, robots play a crucial role, but it may be more lucrative in certain industries to invest in the computer-aided engineering (“COE”) software that powers the prototyping of the products being developed. Applying this simple example to many sub industries and players within those segments, explains the need for specialization when investing and why the opportunity for numerous players is significant and attractive.

Successfully investing and building a reputation with such complexity requires time and experience. In the past five years, we are already seeing a number of outstanding Software as a Service (“SaaS”) enterprise companies in China, with the leaders crossing > $100 million in Annual Recurring Revenue (“ARR”).

There will be more outstanding startups in the field of industrial digitization in China. After 40 years of manufacturing and consumer led growth, the digitization of industries in China is a big macro trend and will last for another 10-15 years.

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Under the spotlight: Yipin Ng

To hear more insights on China from Yipin Ng and other industry leaders, join us at SuperReturn China Virtual 2022 >>