Tech Titans of China (Book Review)

Forbes columnist Rebecca A. Fannin recently published the definitive guide to emerging technology investing in the PRC, Tech Titans of China: How China's Tech Sector is Challenging the World by Innovating Faster, Working Harder and Going Global. What Yelp is to restaurants, or, Lonely Planet is to travel books, Tech Titans of China is to technology companies in the Middle Kingdom. From startups to venture capitalists to publicly traded companies, some household names, some not, most are covered in the publication. It's a blueprint for allocating assets to China. With plenty of bullet lists and descriptive tables chock full of information, readers get their money's worth. If there's such a thing as a user-friendly technology investment book, this is it. A fine piece of journalism. 

Although there's nothing like American ingenuity, from Silicon Valley to Silicon Alley and all the flyover states in between, China is nipping at our heels for global technological dominance. It has a ways to go before catching up, but it's encroaching. Equity investors may be familiar with the BAT companies, Baidu (BIDU), Alibaba (BABA), Tencent (TCTZF) (TCEHY), but not as knowledgeable with some of the up-and-comers. Ms. Fannin refers to the next tier as the XTMD firms: Xiaomi (XIACF) (XIACY), Toutaio, TikTok (subsidiary of ByteDance), Meituan Dianping, and DiDi. Some of these stocks are controversial and in the news. For instance, this week a Microsoft (MSFT)/Walmart (WMT) consortium is attempting to buy TikTok because of a mandate from President Trump. Oracle (ORCL) is also in the running. Tech Titans of China is a book, so you're not going to get up-to-the-minute updates on current events, but you will gain a deep understanding of what these companies do. Detailed resumes of the founders and brief business histories, too. 

With roughly four and a half times the population of the United States, there's a huge untapped potential in China. Internet penetration is 58 percent in the PRC while in America, it's 89 percent. Twenty years ago, China was decades behind the United States in regards to technological advancement, but that's all changed now. The BAT firms rose from the ashes of the dotcom bust and were primarily copycat companies of the American high-tech conglomerates. China went from a technology backwater to a wireless powerhouse in a matter of years by leapfrogging the personal computer era and going straight into smartphones. Mobile payments, e-commerce and electric vehicles are niches where Chinese corporations best the United States. In the large urban areas, it's all mobile thanks to the backing of the Chinese government. "Even beggars in China's major cities carry smartphones with QR codes to receive donations. Cash and email are things of the past.".

The BAT companies have worldwide ambitions, but expansion into the United States has been thwarted from political pressure from both countries. "A takeover of San Diego-based chip maker Qualcomm (QCOM) by Singapore rival Broadcom (AVGO) was shot down over potential security risks in 2018, as an example of the tightening of foreign ownership.". This is from the Trump Administration. The powers that be in Beijing have also cracked down on Chinese firms acquiring American organizations. One way to get around this conundrum is for Chinese conglomerates to take a percentage of the American firms. In the past few years, Tencent has taken a 12% stake in Snap (SNAP) and a 5% stake in Tesla (TSLA). As the saber rattling continues between the two superpowers, China has partnered with Israel marrying capital and market potential in the R&D arena. They've also expanded into Southeast Asia: Vietnam, Indonesia, Malaysia and India, where the cultures are more similar with China. These Southeast Asian countries lag five years behind China's technology advances, so there's plenty of room for adoption and profits. 

On the surface, it would appear that there are just two forces at loggerheads, the governments in Washington DC and Beijing, but don't forget the third force, big money.  Venture capitalists have saturated China going back twenty years and expect to hit the mother lode. David Lam, general partner at cross-border investment firm Atlantic Bridge is quoted in the book: "Global supply chains are international, and the movement is unstoppable. It's already happened. So it's hard to turn back the clock.". I agree. It's beneficial for both China and the United States to work out their differences to help buoy their respective GDP's. In the current state of funding, "A two-way highway runs from Beijing's Zhongguancun Software Park to Menlo Park's Sand Hill Road (the miracle mile for VC firms), raising capital and funding startups hinged from both coasts of the Pacific Ocean.". These investments have been increasing even though tensions from the Trump Administration have been rising.

A good portion of the publication is dedicated to the venture capitalist firms. One such company  highlighted is Sequoia Capital China, a subsidiary of Sequoia Capital know for funding Apple (AAPL), Alphabet (GOOG)(GOOGL), and Oracle in their salad days. "Today, with nearly $20 billion to invest in China, Sequoia Capital China is the largest Valley-anchored firm prospecting in the Middle Kingdom and has an unbeatable track record.". Sequoia Capital China has invested in China Unicorns such as Meituan Dianping, Pinuoduo, Kuaishou, and NIO (NIO). China's mobile and savvy Gen Z and millennials make up more than half of China's population, roughly 700 million, compared to 100 million of the same demographic in the United States. These are the generations that are moving technology forward at an accelerated pace. With the Chinese government funding the race to be the global leader in 5G, those 700 million teens and young adults have the potential to incubate and deploy disruptive technologies in the next five years. 

The latter section of Tech Titans of China features chapters dedicated to specific sub-sectors in technology: AI, ride sharing, e-commerce, drones, robots, and electric vehicles. Like the previous sections of the book, all the chapters are well documented and researched. A Who's Who of up and coming companies are highlighted. I will briefly discuss the Electric Vehicle chapter because Tesla (TSLA) has been one of the hottest stocks of 2020. They have a lot of competition with the BAT companies funding startups such as NIO and Xpeng (XPEV), an IPO that went public the past few days. "Xpeng intends to have 1,000 super-charging stations nationwide in China by 2022 and partner with third parties to bring on 100,000 charging spots.". China is also producing fifty percent of the world's electric car batteries, but have a long way to go to catch up with Tesla's 300 mile range. The Chinese EV's are subsidized by the government. According to the author, when that practice stops and tariffs are lifted, look for Tesla to make more inroads in China as the playing field is leveled. 

About 100 years ago, Edwin Lefèvre wrote in Reminiscences of a Stock Operator, "There's nothing new on Wall Street. Speculation is as old as the hills.". There's plenty of speculating going on with Chinese securities. Many of these young firms operate at a loss. However, you can say the same thing about many of the cloud companies stateside, or Amazon for the first 15 years of its operating history. Although earnings count, young companies plow revenues back into the organization to to expand and make acquisitions. Out of all the companies that are featured in the book, my favorite is AI firm SenseTime, a $4.5 billion unicorn. Would I try to invest in it if it comes public on one of the American exchanges? No question about it, but only if I get my price.