Silicon Valley Might not be the World Tech Hub for Much Longer

In a space about half the size of Melbourne you can find some of the most powerful companies in the world.

Silicon Valley is home to companies like Facebook, Inc. [NASDAQ:FB], Apple Inc. [NASDAQ:APPL] and Alphabet Inc. [NASDAQ:GOOG].

Thanks to these giants, the neighbourhood is worth around US$3 trillion.

For a long time, the Valley has always been the tech hub of the world. In the 1800s, it was home to the telegraph and radio industries. Heading into the 1900s, it was the place for aerospace and military technology.

The teeming tech scene saw researchers and scientists fly in from all over the world.

But what is it in the Valley that fosters technology?

According to AnnaLee Saenian, Dean of the School of Information, it’s an ecosystem which is quick to adapt to change.

What I learned was that being able to innovate very quickly, being able to be first to market with new products, being able to adapt to crises and to change quickly was much more of an enduring advantage for the region.

The dynamism of Silicon Valley was rooted in a structure that was very decentralized and very flat and allowed for very rapid change.

But in the background, teeming tech cities are rapidly gaining on the Valley.

These incubators in the East may soon rival and even surpass the Valley in the coming years.

And there’s plenty of growth potential in it for you, along the way.

17 Silicon Valley’s in the East

Ben Hu is an ex-Googler.

Like most ex-Googlers, Ben wanted to start his own business. His idea was to create an artificial intelligence (AI) system which could teach languages.

Ben was already familiar with the Valley. But that wasn’t the location of choice for his start-up.

Instead Ben made the trip to Shanghai, which is growing as a tech metropolis in the East.

Not only was this a great incubator for his start-up. Ben would have access to a much larger market.

Millions of students in China want to learn English to broaden their horizons. So it was relatively easy for Ben to scale his start-up to more than 600,000 users.

I truly believe in many specific tech sectors, such as artificial intelligence; being in China offers entrepreneurs a bigger chance to leapfrog companies in Silicon Valley,’ Ben said.

And Ben’s story is just one of many.

Thousands of tech entrepreneurs flock to China. They all have dreams to create their own unicorns (start-ups worth a billion).

But unlike the US, China has tech hubs all over the place. In most major cities China has created tech incubators, to rapidly grow the industry.

Thousands of tech entrepreneurs flock to China. They all have dreams to create their own unicorns (start-ups worth a billion). 07-03-2018

Source: South China Morning Post
[Click to enlarge]

South China Morning Post wrote late last year:

As many as 17 national-level innovation demonstration zones, from coastal Shenzhen to inland Chengdu, have been handpicked by the State Council, or China’s cabinet, and allowed to offer favourable policies to spur innovation and drive regional economic growth based on their respective strengths and geographical advantages.

‘…The mega cities, with a sound economy and rich pool of talent, are also home to some of the most valuable tech Chinese firms.

One of those firms is Tencent Holdings Ltd [HKG:0700], the Facebook of China.

For a long time, Western tech has been excluded from China. Tech innovators seldom followed China’s strict censorship requirements.

This is a roadblock China will have to remedy. I’ll talk more on that soon.

But because China has initially sheltered their tech industry, companies like Tencent have been able to flourish.

Like Facebook, you could call Tencent a social networking business. Yet over time they’ve grown into something more.

Tencent is not just a social network. They offer banking, retail, gaming, online streaming and many other services.

I suspect if China was to let down their Great Firewall, Facebook might not have much of a chance.

If China can create more tech giants like Tencent, they could become a supreme tech super power.

They’re already the number one place for fintech (financial technology) start-ups. They’re also not far behind the US when it comes to AI, robotics and autonomous driving.

But if they want their tech industry to keep growing, they’ll need to solve some problems.

Freedom fixes everything

When talking at US Universities, Yaron Brooks holds up his iPhone. No government could ever design something as beautiful as this, he says.

And he’s right. No committee could design something as innovative as the iPhone.

This is the first hurdle China needs to jump over. To become the world’s tech superpower, they’ve got to remove government control and let entrepreneurs innovate.

Of course, this isn’t going to happen tomorrow. But over time, it could be the most important growth factor for China’s tech industry.

China also needs to continue encouraging more talent to come to their shores.

At the moment this is largely incentivised by governments. Reported by the Financial Times:

Private and state-backed investors in China have set up venture capital funds to target executives and senior researchers at companies such as Google, Apple, Airbnb and Facebook, betting on the rapid development of the domestic tech sector to produce high returns on the investments.

Other initiatives include a programme set up by China’s Communist party that focuses on Chinese graduates and academics at foreign universities.

But again, the remedy might be for the government to take their hands off the reins, and let their tech culture flourish.

If China can get these two things right, they could soon surpass the Valley.

That means there’s a massive opportunity here.

Chinese tech is booming. And if continues to grow, it might be the only investment idea you need for 2018.

Tech companies like Yonyou Network Technology Co. [SHA:600588], Easysight Supply Chain Management Co. [SHA:600093] and B-Soft Co. [SHA:300451] are up 93%, 51% and 50% already in 2018.

Tech companies like Yonyou Network Technology Co. [SHA:600588], Easysight Supply Chain Management Co. [SHA:600093] and B-Soft Co. [SHA:300451] are up 93%, 51% and 50% already in 2018. 07-03-2018

Source: Google Finance
[Click to enlarge]

You could invest abroad in 2018. Alternatively you could look locally to invest in Chinese tech stocks.

From 2014 to 2017, more than 414 Chinese companies came down under to go public.

2018 could be another big year for Chinese listings on the ASX. This could mean more opportunities for you as the Chinese tech industry booms.

Kind regards,

Harje Ronngard,
Editor, Money Morning

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia