The sectors powering Asia’s new economy
Green energy, cutting-edge technology and healthcare are set to drive future growth in China and the rest of the region
Evelyn Yeo,
Head of Investments in Asia
at Pictet Wealth Management
Dong Chen,
Senior Asia Economist
at Pictet Wealth Management
In July 2020, as Covid-19 cases peaked again in the US, a Chinese electric-vehicle (EV) manufacturer debuted on the Nasdaq stock exchange, raising more than $1bn and seeing the business valued at about $10bn.
The maker’s initial public offering (IPO) was a show of American appetite for Chinese technology stocks. It was also a sign of how much China’s corporate and manufacturing landscape has changed over the past two decades.
Today, a wave of new companies in the green energy and technology sectors is helping drive the next phase of growth in Asia. Between January and May 2021 alone, Chinese start-ups raised a total of $37.4bn in more than 1,300 venture-capital funding deals, the highest amount among Asia-Pacific countries, according to data and analytics experts GlobalData.
“In terms of green technology, China has emerged as the leader right now,” says Dong Chen, Senior Asia Economist at Pictet Wealth Management. “With the increase in demand for renewable energy and clean technology, it stands as one of the big growth sectors in the coming years.”
Electric vehicles
Already the dominant global force in photovoltaic technology, China is now making its mark as the world’s largest producer of electric vehicles, rolling out 991,000 battery-powered EVs in 2020, a rise of 9.4 per cent over the previous year. In addition, the country is by far the largest consumer of EVs – a fact likely to continue unchallenged given the size of its population and the government’s commitment to become carbon neutral by 2060. Sales of plug-in electric passenger vehicles reached 1.25m in 2020 – more than four times the volume of second-place Germany.
China has also become the world’s largest supplier of EV components such as batteries for many European and US manufacturers. “It’s not just the finished vehicles you have to consider,” says Chen. “China is now the leading player throughout the EV value chain.”
Research and development
In its latest five-year plan announced earlier this year, the Chinese government revealed it would boost research and development (R&D) spending by more than 7 per cent every year – signalling the country’s shift from low-cost manufacturing built on cheap labour to greater technological innovation.
“China is gradually climbing up the value chain,” says Chen. “As it approaches the frontier of technology, it has to start producing its own R&D to improve productivity.”
It’s a similar story in Taiwan, which has emerged as the world centre of the semiconductor industry with 63 per cent of the global market share, making it the leading producer of the chips found in everything from smartphones to vehicles.
The island nation’s biggest manufacturer plans to spend $100bn over the next three years on R&D and expanding production – more than double the amount it put in during the previous three years – in anticipation of higher demand with the rollout of 5G services and more electronics sales in the wake of Covid-19.
All this is bolstering Asia’s rising influence on global R&D, with the region now accounting for 81 per cent of the world’s strong patents – patents with big claims – and half of venture capital and IPO funding for mobile services. According to consultancy McKinsey, as much as 20 per cent of Asia’s future growth is likely to come from the development of so-called “super apps” that offer multiple services in one platform.
Healthcare
Evelyn Yeo, Head of Investments in Asia at Pictet Wealth Management, adds that the region’s healthcare sector is also likely to provide an additional engine of growth in the coming years, due to the increasing depth of medical research, such as the development of Covid-19 vaccines, and the need to look after older generations.
“It’s a very broad story,” says Yeo. “And it’s one that goes all the way from Chinese innovations in medical science to the growth of the wellness industry for ageing populations in Japan and Singapore.”
Complementing that trend is India’s evolving prowess in the global pharmaceuticals industry. The country now produces about 20 per cent of all generic drugs and 62 per cent of the world’s vaccines.
With average annual growth rates of 7 to 8 per cent in recent years, the industry is expected to reach $90bn by 2030, compared with just $38bn in 2018. Moreover, India’s pharmaceutical companies are building pipelines of trailblazing drugs, with aspirations to move beyond generics into biologics and new drug development.
One particularly promising area lies at the intersection of Asia’s health and wellness needs and digital innovation. Investors have been drawn to digital health, gaining exposure to the sector through multiple channels. Investments in digital health saw a compound annual growth rate (CAGR) of 38 per cent between 2015 and 2020, and Asia today accounts for an estimated 44 per cent of global venture-capital and private-equity flows into the sector.
Despite these auspicious trends, Yeo acknowledges that there are some challenges. For example, China’s technology crackdown earlier this year wiped billions of dollars in value from the country’s biggest tech enterprises as authorities moved to curb their growing power.
While further measures are expected to be introduced to control the reach of these businesses, some investors continue to hold a bullish long-term outlook. In August 2021, they piled into a debt offering from a Chinese tech company, helping it raise $1bn in a heavily oversubscribed bond sale.
“China is shifting rapidly to a new-economy model, and some government messages haven’t been immediately understood by investors,” says Yeo. “But it’s really more a case of short-term pain for the long-term sustainability of a new era of growth.”