Welcome to Thoughts on the Market. I'm Shawn Kim, Head of Asia Technology Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about China Standards 2035, poised to reshape a multipolar world. It's Tuesday, June 1st, at 8:00 p.m. in Hong Kong.
For two and a half centuries, international technology standards have been an engine for wealth creation and dominance, largely belonging to the West. However, this is now changing. China is quickly stepping up, creating a new kind of competition that is no longer about technology superiority, but about rule making and system design. Standards define technology and technology defines the modern world.
And before I go any further, what are standards? Think of standards as tech specifications that outline how technologies like 5G or Wi-Fi works. It's what allows your smartphone or computer to connect to the Wi-Fi in New York, Paris or Tokyo. Standards are a set of technology protocols used around the world so that technology is interoperable.
Standards allow companies and nations to earn substantial returns through market dominance and royalties, and once established, standards are difficult to change, and those coming from behind cannot compete on the same terms as the established players. Consumers often don't know what standards mean, but if there are enough users of a particular protocol, it often becomes the standard of the masses and creates a domino effect for others to join rather than risk being left out.
In the mobile industry, for example, Google sets the standards with Android. The operating system is free, but the data capture is priceless. Another example is today's QR code, which is often overlooked. It comes from the barcode standard, which comes from Morse code and was invented in the U.S. back in 1949 - and its industrial adoption, beginning with the first Wrigley's chewing gum wrapper in 1971 before expanding to areas such as defense, logistics and health care, really put the U.S. significantly ahead of the rest of the world in terms of productivity and innovation. Leadership in standard setting can also quickly change hands as new technologies emerge - and you can see that with the telecom network industry, as an example, where Qualcomm took over dominance in standards at the expense of companies like Nokia, leading to a shift in billions of dollars annually from patents that are necessary for mobile phone systems. Today, Huawei has emerged as the new dominant player in 5G standards and is also leading the charge on 6G standards as well.
Standardization today is mainly a matter of private and self-regulation in the West. The Chinese approach is different - it's more top-down driven - but this is not unique from a historical perspective. The majority of nations that drove industrialization did so via capital and government support, just like what China did today. Industrialization in Germany and Japan was top-down driven, and if you look at the US semiconductor industry: also formed by state funding for military and space projects. So the present dynamic is actually quite similar to the past.
An ambitious blueprint in setting global standards for next generation technologies is currently underway via 'China Standards 2035' - just published six months ago. And if 'Made in China 2025' was really about the real economy, standards are about systematic influence - it's about dominance of industries. The blueprint lays out objectives on what could be game changing areas where China has market, technology, and application advantages - and implications are significant. There will be power shifts in many new emerging industries such as blockchain, quantum networks, autonomy, and the Internet of Things.
So while China may have missed out on the opportunity to shape standards in the past, it is quickly dominating fields that could drive the next industrial revolution. These are things like consumer Internet, automation, and green technology. And with US/China tensions and polarization continuing, global standards in technology will become bifurcated - probably into two or more solutions, and companies must be really prepared to face market share losses, while some becoming increasingly dependent on Chinese digital solutions in the future. And with that, comes a rethink of the valuation multiples of today's tech leaders, given that a large part of their market cap is in the terminal value.
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