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INSIGHTS / THE BIG PICTURE

China’s startups have much to gain from the US-China trade war

China · Mar 11, 2019 · By Wang Xiao'e

The prolonged trade conflict may be exactly what Chinese startups need to strengthen their technological capabilities

As speculation mounts that the US-China trade war could soon draw to a close, with the nations reaching a deal by the end of March, for China the conflict has also created unique opportunities. 

In the longer run, Chinese startups may actually gain from the tensions between the world’s two largest economies. 

Tariffs levied by the US were designed to strike a direct blow at Chinese enterprises selling the affected items, e.g., high-tech medical devices, biological medicine, new materials and industrial robots, abroad.

Yet for the Chinese startups with strong core technologies, any pain ensuing from the trade war seems to have been minimal. Shanghai-based exoskeleton robotics company Fourier Intelligence, for instance, remains confident that its products will sell. 

“We offer our robot for only one-third of its US counterparts’ cost. Despite the tariff increase, the price edge is still there,” said founder and CEO Gu Jie.

Indeed, two months into the trade war, the Chinese company sold Fourier M2, an exoskeleton robot for the rehabilitation of upper limbs, to the Barrow Neurological Institute in Phoenix, Arizona. The M2 also happens to be the first Chinese rehab robot approved for medical use by the US Food and Drug Administration.

To be sure, the trade spat hasn’t left the Chinese economy unscathed. Last year, the economy grew 6.6%, the slowest pace since 1990. This year the government is forecasting growth of 6–6.5%, versus 6.8% in 2017.

Wang Jiaxin, founder and CEO of Help Stem Cell Innovations, a Nanjing-based startup, warned that “sharp increases in material and production costs” would “weaken the competitiveness of Chinese enterprises in the global market.”

More money 

Even before Donald Trump became a US presidential nominee in 2016, the Chinese government was already wary of being too dependent on foreign technologies.

In 2015, the Chinese government launched the Made in China 2025 program with the aim of shifting the country’s economy toward higher-value-added manufacturing sectors, including robotics, aerospace and electric vehicles. Aware that technological independence cannot be achieved overnight, the Chinese government committed to investing generously in high-tech sectors in recent years.

China decided that the best way to ride out the trade war was to strengthen its own technological capabilities, rather than levying retaliatory tariffs, so as not to be manipulated during negotiations. The Trump administration’s targets are mainly the sectors China had emphasized in its 10-year plan.

In January 2018, Beijing allocated RMB 13.8 billion to build an AI industrial park in suburban Mentougou district. When finished, the park is expected to house about 400 firms with an annual output of RMB 50 billion.

That same month, state-backed funds started supporting a number of AI startups, including AI neural network chipmaker Cambricon Technologies and computer vision firm SenseTime.

The actions of the Trump administration have only added urgency to the mission of achieving technological breakthroughs. The Chinese government's support of homegrown technology is likely to intensify if the trade war continues. 

Additionally, because the Trump administration has imposed restrictions on Chinese investment in US businesses, especially tech firms, Chinese VCs are also likely to move more of their money into local startups.

More stimuli

In order to offset the economic losses caused by the decrease in exports, China has the ability to further stimulate domestic consumption by augmenting salaries and reducing taxes on enterprises.

To boost spending power, local governments have increased the minimum wage frequently in recent years. Except in 2009 after the global financial crisis, Shanghai has increased the earnings threshold on a yearly basis. The threshold rose from RMB 210 in 1993 to RMB 2420 in 2018, a growth rate higher than inflation measured by the CPI.

In October 2018, China raised the national personal income tax threshold to RMB 5,000 from RMB 3,500. Asian investment bank Nomura has estimated that the tax reduction alone will increase domestic consumption by RMB 240 billion in 2019.

The government has also sought to lower the financial burden on businesses. In January, China’s state council announced plans to cut tax rates for small- and micro-sized firms by US$29 billion a year for the next three years.

Chinese startups stand to benefit both from customers’ increased purchasing power and lower tax burdens.

More infrastructure

Many countries try to fight economic slowdowns by scaling up infrastructure investment. US President Franklin Roosevelt’s New Deal to bolster a failing economy through infrastructure projects during the Great Depression is a prime example.

In recent years, China has been spending money not only on railways and bridges, but also on facilities for electric cars, telecommunications, 5G and more, to help absorb some of the impact of the trade war on the economy. Startups in these sectors will get a boost via the creation of or an increase in market demand for their products.

Zhejiang province is building China’s first superhighway for autonomous vehicles. State-backed China Mobile has agreed to invest RMB 1 billion in the first 5G highway project in Hubei province in central China. Once the 2,000 5G base stations are built in 2019, they will be able to support testing of self-driving cars, a boon for autonomous driving startups such as Pony.ai, Momenta and Roadstar.ai.

The built infrastructure should also stimulate other markets. A shortage of charging stations and piles is currently a significant obstacle for the Chinese electric vehicle (EV) market, which is trying to sell to drivers worried about being stranded without the ability to charge their car batteries. 

According to the China Electric Vehicle Charging Infrastructure Promotion Alliance, as of November 2018, China had installed 290,000 public charging piles, and the rate of pile construction will only accelerate in the next two years. A widespread charging network should encourage more customers to purchase EVs from emerging automakers such as NIO and Xpeng.

More talents

In addition to the escalating trade war, a battle for high-tech talents is also heating up. Talent shortage has been a major headache for Chinese enterprises. The Ministry of Industry and Information Technology has estimated an urgent need of more than five million AI professionals. Many startups complain that it is hard to find qualified employees. 

China is now planning to include AI education in primary and high school, and many Chinese universities already offer courses in artificial intelligence. The Ministry of Education has launched the world’s largest AI talent training program, which is set to train at least 100 university teachers yearly.

In addition, the central government has introduced a string of policies, including the Thousand Talents Plan, to expand the country’s talent pool. Launched in 2008, the Thousand Talents Plan has so far brought more than 6,000 top talents back to China from overseas, including Dr. Yu Kai, co-founder and chief scientist of Suzhou-based voice recognition startup AISpeech.

Unexpected opportunities

As the trade war drags on, US startups that depend on Chinese investors to raise money are getting pinched. In January, California-based augmented reality startup Meta was forced to sell its assets after failing to secure US$20 billion in funding from two Chinese firms in September 2018. 

Prior to going under, the firm was planning to set up a subsidiary in China. “That way Chinese investors can directly fund the local entity in RMB,” said former Meta CEO Meron Gribetz.

Last September, US oil giant ExxonMobile announced it would spend US$10 billion to build its first wholly owned chemical plant in China, which will both create jobs and bring in tax dollars. Other US companies that desire fiscal support from the world’s second largest economy, or would like to sidestep tariff increases, may be open to doing the same.

Rather than wilting under the pressure of US tariffs, the Chinese government has instead used the trade war as an opportunity to improve its internal technological capabilities, a move that bodes well for the country’s longer-term economic future.

Edited by Wendy Lovinger (With additional editing by Bernice Tang)

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