Investors spy global growth in Japan, Eu

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Sunrise Industries in Emerging Markets

Long stereotyped solely as export-driven hotbeds of industrial manufacturing, emerging markets are rapidly getting a makeover. Today, nations like China and India command newfound respect for their deep capital and fearless experimentation with nascent, “sunrise” technologies. At the same time, other nations, like Vietnam, Indonesia, and the Philippines, balance their factories with exciting ventures in digital technology.

In fact, one could make a strong argument that the center of gravity (for sunrise industries at least) has shifted from previous tech superpowers like the United States to many emerging markets. Let’s examine how this trend came about, and look at a factors behind the ascent of sunrise industries in the area.

What is a sunrise industry?

As the name implies, sunrise industry refers to a sector that is still in its youth, but growing quickly. Because much of the development is still in its infancy (relatively speaking), sunrise industries generally see lots of innovation, and an explosion of companies peddling radically different products. The willingness to tinker with and improve on totally new products and services is often a key feature, as well as a short timeline from concept to production.

Very often, this rapid growth brings with it the potential for plenty of riches, which are often reaped by early-adopters (or the companies which survive the initial winnowing and narrowing of the field). For instance, one sunrise industry is that of alternative energies, such as hydrogen fuel cells or algae-based biofuel. Both sectors, despite initial misgivings, have a huge amount of untapped potential: given the existential threat that climate change poses to human society, cheap, readily available, and environmentally-friendly sources of energy (especially for transport) are essential. One can see how the first few companies to produce viable, profitable options can come to dominate the market.

How did this shift from developed to emerging markets occur?

Yet it seems that despite the seeming strength of US- and Europe-based organizations, sunrise industries are in fact stronger outside these areas–particularly in emerging markets. The reasons are varied and complex, but easily identified.

Lack of Government Support

Perhaps no aspect of American society is a better analogy for its stagnation than that of infrastructure. Civilizations live and die by these structures: roads, bridges, tunnels, railroads, mass transit, and so forth. If products and people are the lifeblood of a nation, infrastructure serve as the arteries, carrying them to and fro. The best infrastructure can boost productivity; not only does building new (or upgrading existing) infrastructure create related jobs, it can also make cities and countries better places to live, and more importantly, more attractive destinations for corporations (and the capital they bring).

In fact, many sunrise industries are impossible without good infrastructure. Solar panels, for instance, require well-developed networks of transportation to move from one place to another. High-speed rail, the most obvious example, is both a form of infrastructure as well as a growth opportunity for jobs.

Yet for the most part, the center of infrastructure spending is in emerging markets. A 2015 McKinsey report states that, until 2030, the world will require at least $57 trillion to build critical infrastructure like roads, rails, and power plants. However, the emerging markets account for 60 percent of current infrastructure spending, with China alone (24 percent) accounting for more funds than the United States and Canada combined (20 percent). This is in spite of the fact that in America, civil engineers give infrastructure a near failing grade; one would think that this would spur governments to act.

Much of this has to do with twin issues: cost and political will. Not only is there much resistance against borrowing and spending now (thus raising the deficit) to set the groundwork for the future, but construction is incredibly expensive. In New York City, for instance, the newly-built Second Avenue Subway cost $2.7 billion per mile, in contrast to metro lines in Berlin and Paris, which cost from $400 to $368 million per mile, respectively.

In contrast, China is seeking to dominate sunrise industries and has had some major successes thanks to the support provided by the state in the form of research, land, subsidies, and even incentives for foreign companies to license information and knowhow. In only a decade, China’s high speed rail network has expanded to some 20,000 kilometers. The key, according to an Economist article, is that the government identifies priority industries–and quickly gets to work, a clear contrast to the gridlock that surrounds other similar, large-scale infrastructure projects.

Clearly, nations like the United States aren’t lacking the technical expertise. Instead, it’s a question of will and cost.

Strong, well-developed innovation ecosystem

Today, Da Jiang International (DJI), is one of the leading drone manufacturers in the world, with some $1.4 billion in revenue. Moreover, DJI destroys the old myth that emerging markets, especially China, are only cheap imitators; instead, their drones are top-of-the-line units, and have beat out a huge number of competitors, from France-based Parrot to San Francisco-based Lily Robotics.

One part of this arises from the innovation ecosystem where DJI, and other nascent sunrise industries, matured: the city of Shenzhen in the south of China. Formerly a fishing village along a picturesque river, today Shenzhen is a bustling city of some 10.7 million (its population having exploded by over 6,000 percent from 1985–2015).

Much of this was due to the multinationals that set up shop in Shenzhen, taking advantage of its low taxes and cheap labor. Famously, Apple and its manufacturer, Foxconn, built facilities in Shenzhen, though these two are but the tip of the tech iceberg; as more and more companies flocked to the city, Shenzhen developed its own, formidable base of highly-experienced engineers who could execute concepts quickly. In 2016, the vast majority of China’s patents (over 40 percent) were filed in Shenzhen, a clear indication that the city (and the country as whole) has moved past copycatting, and into innovation. In 2016, Shenzhen grew by an impressive 8.6 percent (whereas Beijing and Shanghai only grew by around 6.7 percent each), fueled by breakneck development in hardware tech, and helped along by a supportive government and a deep pool of engineers, programmers, and designers.

Leapfrogging

I’ve covered this before, but leapfrogging is actually a crucial aid to the explosion of innovation in emerging markets. In short, emerging markets bypass certain development steps (such as building a nationwide telecommunications grid for landlines) because they can take advantage of new technologies to make things faster, cheaper, and more seamless (such as using smartphones to skip over telecoms grids and internet cables).

This is especially evident in Africa, where an explosion of mobile phones has led to a meteoric increase in usage. Today, according to the Pew Research Center, some 89 percent of South Africans (as well as 83 percent of Ghanians and 82 percent of Kenyans) have cell phones; in the United States, that figure is about 89 percent. Correspondingly, landlines are a rare sight; Pew reports that on average, only 2 percent of households in these areas report using landlines.

This leapfrogging is a boon to sunrise technologies, especially given that so many of them are heavily reliant on devices like smartphones and computers. In fact, leapfrogging is partially responsible for the e-currency boom (M-Pesa being the most obvious example) of Kenya–to the point where some currencies are fast becoming outdated. A similar trend is occuring in China, where the rise of mobile payment apps (some standalone, others built-in to existing chat programs like WeChat) has led to the decline of physical cash.

Within the next few decades, sunrise industries may well be dominated by today’s emerging markets. Though they may have reached developed nation status by that time (and today’s sunrise industries will have matured), their early adopter advantage will have been the key to their domination of industries.


Originally published on pingjiangcapitalmanagement.com