Nearly one-third of the world’s startups, each valued at more than $1 billion, or enjoying the “unicorn” status, have China as their home address. In fact, despite an economic slowdown and a prolonged trade war with the US, the country fostered 97 unicorns last year, according to market research firm Hurun Research Institute, with the likes of ByteDance, Ant Financial and Didi Chuxing leading the charge.

Still, China lags far behind the US in producing genuine hi-tech unicorns in artificial intelligence (AI), robotics and biotech, says investment banking company Credit Suisse in its new report, “Unicorns, Preparing to Gallop”.

The Growth Rate

The report notes that although China accounted for nearly one third of the world’s 326 unicorns, itsshare of start-ups valued at US$1 billion or more in sectors requiring more advanced scientific research capability such as AI, big data, robotics and software was just 14 per cent, compared to 40 per cent in the US.

“It is fair to say that … there are probably more genuine hi-tech companies among US unicorns at this stage,” say the report’s authors.

Despite China and the US dominating the unicorn scene, the characteristics of their respective unicorns are quite different, they say. It is fair to say that Chinese unicorns are driven more by business model innovation which takes advantage of the large, fast-growing but fragmented consumer market in the Asian country, while there are probably more genuine high-tech companies among US unicorns at this stage.

They add that the sector breakdown of Chinese unicorns is quite similar to that of all other countries (ex-US), implying the possibility of similar factors influencing their business environment. To illustrate the point, they broke down the business of Chinese and US unicorns into seven categories: Internet/e-commerce/O2O/Games, which usually are companies focused on business model innovations and directly serving consumer demand; AI/Big Data/Robotics/Software, which mostly serve companies rather than consumers; Fintech; traditional Old Economy business; Hardware/semiconductor manufacturers, including both final products for consumers or components; Auto/Machinery; and Healthcare/Biotech.

Of 93 Chinese unicorns, 49, or 53 per cent are, in the Internet/e-commerce/O2O/Games space, similar to 48 per cent of all other countries, excluding the US. When it comes to America, the ratio is only 29 per cent. Indeed, in the US, the ratio of unicorns in sectors requiring more advanced scientific research capability, such as AI/Big Data/Robotics/Software (40 per cent versus 14 per cent in China and 23 per cent in Others) and healthcare/biotech (9 per cent versus 4 per cent and 5 per cent), is higher than in China and other countries.

“The reason for this divergence is that compared to the US, other countries’ level of scientific research is still in the catch-up phase, but emerging markets such as China and India have a very large and fast-growing consumer market. The characteristics of Chinese unicorns reflect the country’s stage of development as well as the absolute size of its economy,” the report says.

The Upward March

It’s true China has caught up quickly in the past few years. Its investment in R&D, which, as the report mentions, drives technology development and provides the foundation for the emergence of unicorns, however, was only 1.2 per cent of GDP from 2000-09, way below that of the OECD (2.2 per cent). By 2017, the R&D reached 2.1 per cent of GDP but it is still much lower than smaller economies like Japan, Korea, Taiwan, Sweden, Germany, Israel and Finland, which have invested heavily in technology.

A key source of new unicorns has been in the rise in venture capital (VC) funding in Asia. Seven years ago, VC funding in the region was only around US$5 billion, and only around 15 per cent of North America. By 2017, VC funding in Asia, mainly driven by China, was similar to that of North America but way ahead of Europe. In 2018, VC funding in North America surged almost 30 per cent to US$102 billion, while that of Asia only went up 11 per cent, resulting in the gap between the two regions widening again.

In the next few years, the authors believe Internet sector will still be dominant among Chinese unicorns, “given the large room for China’s consumer market to grow, and the inefficiency of traditional consumer services (like distribution) in the country. Given the increased R&D spending in last the few years, we should also see the emergence of some unicorns being much more technology- rather than business model-focused. Most notably, two sectors, biotech and AI/Big Data, will likely stand out. Apart from the large amount of new research spend in these two sectors, China also has a big advantage in terms of its large available data, given the significant amount of consumer activities on line, which help to generate a lot of data for analytical purposes.”