Rising Innovation in China

China Innovation Ecosystem

Development Report 2019
September 2019
Deloitte China
Rising Innovation in China |
 Chapter 1 Innovation as a new driver for economic growth

Contents
Key findings 2

Chapter 1 Innovation as a new driver for economic growth 5

1.1 Innovation has become the focus of global competition 5

1.2 China's innovation ecosystem is thriving 8

1.3 Characteristics of innovation ecosystems in developed countries 13

1.3.1 US: Innovation ecosystem driven by innovation clusters 13

1.3.2 Israel: Risk investment system led by the government 15

1.3.3 Germany: Stable and sustainable basis for innovation 18

Chapter 2 An analysis of China's innovation ecosystem 20

2.1 Evaluation system for innovation ecosystems 20

2.2 The innovation ecosystems of each city demonstrated tiered development 23

2.3 The characteristics of innovation ecosystems in each region are distinct 28

Chapter 3 Characteristics of development of leading industries in China's innovation 31

3.1 AI develops with a high level of penetration 31

3.2 Autonomous driving sees emerging opportunities 37

3.3 Advanced manufacturing to reduce costs and improve efficiency 43

Chapter 4 Challenges in the development of China’s innovation ecosystem 50

Chapter 5 New landscape of China's innovation ecosystem 59

Contact us 64

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 Rising Innovation in China |
 Key findings

Key findings
From the perspective of technological competition, countries around the world are
focusing their eyes on the key technologies like artificial intelligence (AI), advanced
manufacturing, semiconductor, quantum information science and 5G , which are shaping
the future economic development. Nations with strengths in the above areas begin to
take a protectionist approach to their own technologies. This, however, will also force
China to enhance its own innovation capability, and thus technological innovation in
China will see an unprecedented opportunity to thrive on its own feet.

Each of the innovation ecosystems in developed countries has its own merits. The US
emphasizes more on building an ecosystem led by innovation clusters; Israel is promoting
robust innovation development with a risk investment system driven by its government;
Germany focuses on a stable and sustained foundation for innovation. China, after
prioritizing innovation as a national core strategy, continues to open up its market,
committed to driving stable growth of its technological innovation capabilities through
ongoing and increasing investment in talents and technologies.

An innovation ecosystem can be evaluated by three indicators. The first is innovation

institution, which reflects the number of innovation entities in a city, and the city's
capability of conducting technological R&D and business innovation. The second is
innovation resource, which indicates whether the various factors owned by a city could
support innovation institutions to innovate. The third is innovation environment, which
shows whether a city could attract and retain the best innovation resources to create a
good external environment for a cluster of innovation institutions.

In terms of innovation ecosystems, cities in China can be ranked and divided into three
tiers based on their evaluated scores. Among the first tier, Tier 1 cities including Beijing,
Shanghai, Shenzhen and Guangzhou remain at the top, with Hangzhou rising to the forth
place in replace of Guangzhou. Nanjing, Chengdu and Wuhan are among the top few in the
second tier. The third tier mainly includes cities that promote breakthroughs of innovation
ecosystems via policy guidance, such as Dongguan, Foshan, Zhuhai and Guiyang.

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Rising Innovation in China |
 Key findings

From a regional perspective, China's innovation ecosystems have some distinct features.
As the core of the innovation ecosystem of the Beijing-Tianjin-Hebei region, Beijing
dominates the region in terms of innovation institutions and resources, and also takes the
lead in innovation environment. Innovation in the Yangtze River Delta region is generally
more mature than that of other regions, with strong drives from Shanghai and Hangzhou,
as well as Nanjing and Suzhou in the second tier innovation cities. The development
of Guangdong-Hong Kong-Macau Greater Bay Area (GBA) will be led by Shenzhen;
Dongguan, Foshan and Zhuhai could expect a promising future under the GBA planning
despite the absence of innovation advantages. Core cities in Central and Western China
are seeing a rapid development of innovation ecosystems driven by policies.

The best practice of innovation ecosystems in China is no doubt the AI industry. The
strength of China in AI not only comes from massive search data, a rich variety of product
lines and market advantages based on a wide range of industries, but also is driven
by efforts of tech giants in building open-source technological communities, which
have helped start-ups at AI application level break technological barriers to apply AI
technologies directly in R&D of terminal products. Fuelled by both policies and capital, the
number of AI enterprises is rising rapidly. Incomplete statistics shows that there are more
than 1,000 AI enterprises across China, with the most located in Beijing-Tianjin-Hebei
region, Pearl River Delta region and Yangtze River Delta region. A significant effect of
industry agglomeration is driving more complete ecosystems.

Manufacturing is the fundamental industry for the development of innovation in

China, where the advancement of smart manufacturing ecosystem would not be
possible without deep dive of user values. For example, enterprises could embed new
technologies during R&D and design to produce more intelligent and more diverse
products; provide equipment-related financial services at sales stage; monitor in real
time and collect data of equipment and products for aftersales, and offer performance
analysis and predictive maintenance, enhancing security while creating more service
opportunities for enterprises. That's why the whole smart manufacturing ecosystem
needs tech companies of intelligent products, financial services enterprises, data
collection and analysis enterprises, security performance testing firms, etc. China has
a complete set of supporting industries for manufacturing, and therefore could help
manufacturing enterprises go even further on the journey of smart upgrade.

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 Rising Innovation in China |
 Key findings

China still faces challenges in driving the development of innovation, and in particular
needs to catch up with developed countries in respect of core technologies. With
increased R&D investment and the number of patents, China's innovative enterprises
and innovative products have already obtained some competitive edges. However, in
areas of communications, manufacturing of electronic devices and precision instruments
as well as auto making, including semiconductor materials and production, ultra-high-
precision machine tools and electronic gasoline injection system, etc., China remains
at its infancy of development, yet to master core technologies in certain sectors, and
are highly dependent on foreign technologies. A main reason for this is the imbalance
of R&D input and output, with lack of R&D input at basic level. The government should
also consider in depth how to further enhance the execution of and improve supporting
policies. Lastly, the introduction and accumulation of talents remains a long process.

The booming digital economy is driving China's innovation to go global, and has become
an important source of GDP growth in China. In 2018, China's digital economy grew to a
size of RMB31.3 trillion, an increase of 20.9%, accounting for 34.8% of total GDP. Driven
by digitalization, China's innovative technologies and products are going global. In the
future, China could leverage more Internet-based innovation and upgrade to climb up
the international industry chain, cultivate new economic drivers, and optimize structures.

Capital markets led by the STAR Market provide full support for the continuous
optimization of China's innovation ecosystem. Launched in 2019, the STAR Market
primarily supports high-tech industries and strategic emerging industries, including
next generation information technologies, high-end equipment, new materials, new
energy, energy conservation and environmental protection, and biomedicine. Capital
markets have supported the development of innovation in China, and the STAR Market
as a branch of the secondary market is a symbol of growing capital support for China's
innovation ecosystem as capital markets respond to the call for innovation-driven
development and capture new opportunities brought by technological innovation.
Next, capital markets should further improve their dialectical relations with innovative
enterprises. They should enhance their inclusion and flexibility to technological and
innovative start-ups, working to strengthen the lead of capital in boosting technological
innovation and the support to energize market players; on the other hand, they should
also increase transparency of information in enterprises, improve screening mechanisms,
and prevent "false innovation" and overheat of capital.

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Rising Innovation in China |
 Chapter 1 Innovation as a new driver for economic growth

Chapter 1 Innovation as a new

driver for economic growth
1.1 Innovation has become the of a nation is being used increasingly has launched a series of national
focus of global competition by protectionists to restrict other strategies focusing on innovation,
Influenced by the slowdown of the economies. and allocated massive facilities to
world economy as a whole, risks are drive basic researches. Germany has
accelerating to build up, and shift of As science and technology becomes promulgated research enhancement
economic strength has triggered the increasingly important in driving policies on advanced production
reordering of international governance national economic development, technologies, which enabled the
and power. Rising unilateralism and governments all over the world are research and development digital
protectionism are impacting the placing innovation as a core strategy production technologies for the Fourth
international order and multilateral at national levels, presenting a new Industrial Revolution, also known
trade system. Under a downward pattern of competition for innovation as Industry 4.0, and has delivered
economic trend, countries around globally. Major countries have all multiple projects in cooperation
the world are stepping up efforts in deployed in advance future-oriented among the industry, academia and
promoting technological innovation technological innovation strategies the government. Japan, Korea and
to sustain their own strengths. At the and initiatives. Since the beginning of emerging economies including
same time, technological innovation the 21st century, the US as a global Russia, Brazil and India are all actively
as an indication of the overall strength leader in technological innovation introducing national innovation
development strategies or planning.

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 Rising Innovation in China |
 Chapter 1 Innovation as a new driver for economic growth

Figure 1: Major world economies are promoting innovation as a national strategy

Memorandum Our Plan For High-Tech Strat- France Europe 13th Five-year "Realizing eco-
on FY2019 Growth: Science egy (2014) 2020 (2015) Plan on National nomic co-pros-
Administration And Innovation Technological perity"
Research and (2014) Proposes to Proposes priority Innovation
Development concentrate on areas by 2020, (2016) Proposes "the
Budget Priori- Proposes 6 poli- areas that feature defines priority Fourth Industrial
ties cies to promote especially dynam- research direc- The National Revolution that
development of ic innovation tions and five the- Plan for Medium leads technologi-
Proposes to ad- top talent, invest- matic initiatives and Long-term cal development"
vance innovative ment in scientific to address top 10 Technological (one of the five
basic research, equipment, etc. societal chal- Development sets key strategies)
infrastructure, lenges in France, out the goal to and three "issues
and talent devel- Industrial Strat- emphasizes on develop as an in- of national
opment egy (2017) application-ori- novative country affairs" (the
ented research, by 2020, and the Fourth Industrial
Office of Manage- Proposes to raise and focuses on Outline of the Na- Revolution, creat-
ment and Budget, total R&D invest- addressing soci- tional Strategy of ing environment
Office of Science ment to 2.4% of etal challenges Innovation-Driven for technologi-
and Technology GDP by 2027 France faces Development de- cal innovation,
Policy fines the phased supporting young
goals by 2050 scientists and
basic research)

Source: Public information, Deloitte Research

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Rising Innovation in China |
 Chapter 1 Innovation as a new driver for economic growth

Data from UNESCO shows that total R&D investment has reached USD1.7 trillion globally. Developed countries still maintain
their distinctive lead in innovation, which, however, is shifting the presence eastwards. Innovation resources such as top
technological talents and patents are still dominated by developed countries, but the share of the US and Europe in total
R&D investment globally has dropped from 61% to 52%, and that of Asian economies has risen from 33% to 40%, with
significant increase in the share of BRICS nations.

Figure 2: Top 10 countries by R&D investment in 2018 (USD billion)

US
China
Japan
Germany
South Korea
France
UK
Russia
Italy
Canada

Source: UNESCO, Deloitte Research

From the perspective of technological innovation. This, however, will also

competition, countries around the force China to enhance its own
world are focusing their eyes on innovation capability, and thus
key technologies like AI, advanced technological innovation in China will
manufacturing, semiconductor, see an unprecedented opportunity to
quantum information science and thrive on its own feet.
5G , which are shaping the future
economic development. Nations with
strengths in the above areas begin Figure 3: Global R&D investment in 2018 by industry
to take a protectionist approach to
their own technologies. As a late
starter in technological innovation,
China is still lagging far behind in core
underlying technologies for emerging
strategic technological innovation,
such as upstream basic parts for
semiconductors, which still need to
be imported. From ZTE to Huawei,
cases of China being suppressed by
technologically advanced countries are ICT manufacturing Healthcare Automotive & transportation ICT services
not rare. With intensifying competition Industrial Chemical Aerospace & defense Others
for technological innovation across
the globe, China is facing enormous Source: IRI EU, Deloitte Research
challenges in promoting technological

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 Rising Innovation in China |
 Chapter 1 Innovation as a new driver for economic growth

1.2 China's innovation ecosystem is thriving

Where is China standing within the global innovation landscape? Has China gone beyond the "quick follower" type of
innovation, and grown gradually as a global leader in innovation? In the global innovation landscape, China has climbed
from the 26th place in 2016 up to the 14th in 2019, and is the only middle-income economy among the top 30.1 There has
been significant progress made by China in its innovation indicators from various aspects, ranking top in terms of domestic
patents, industrial design, original trademark, high-tech net exports and export of creative products, etc.2 China is entering
into a new stage of development for innovation.

Figure 4: China's standing in global innovation landscape

US

Germany

Israel

China

Germany

US

Israel

China

Germany

US

China

Israel

US

Israel

China

Germany

Israel

US

Germany

China

US

China

Israel

Germany

Germany

Israel

US
China
Score

Policy Human capital Infrastructure Market maturity Business Knowledge & Creative output
& research maturity technological
output

Source: Global Innovation Index 2019, Deloitte Research

The Chinese government has global financial crisis by stepping service industry. As of the first half of
attached great importance to up institutional innovation and 2018, strategic emerging industries
the core position of innovation in technological innovation. China has and service industry have grown
national economic development. developed national mid and long-term 30% faster than the overall growth
China officially established strategic plans for scientific and technological nationally, constantly leading economic
emerging industries in 1992 after development that set building an development. The growth of China's
reform and opening up, and started innovative nation as a strategic strategic emerging industries is driving
to explore deeper into technology- goal; put in place plans to develop GDP growth by over one percentage
driven governance in 2009, the second nine strategic emerging industries point annually in average, accounting
year after the global financial crisis. including next generation information for nearly 20% of total growth, far
Then it realized that the competition technologies, high-end equipment, higher than the share of these
of international economic and new materials, bio industry, new industries in total GDP.
technological development was energy vehicles, new energy, energy
growing intensified, and it could only conservation and environmental
overcome negative impacts of the protection, digital creativity and related

1
Based on rankings of Global Innovation Index reports from 2016 to 2019
2
Global Innovation Index 2019
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Rising Innovation in China |
 Chapter 1 Innovation as a new driver for economic growth

Figure 5: Contribution rate of strategic emerging industries to GDP in 2018

Next
generation Smart green Modern Modern Ecological
information manufacturing agricultural energy friendly
network technology technology technology technology
technology

Nearly
Contribution rate of strategic emerging industries to GDP 20%

Ocean and
space Smart city and Heath Modern Disruptive
advanced digital society technology service technology
applicable technology technology
technology

Source: Report on the Work of the Government, Deloitte Research

The Chinese government has been talents to start businesses and invest in terms of their R&D investment
actively supporting the development in China. However, there still remain in innovation. The Economics of
of innovative start-ups by creating significant gaps between China Industrial Research and Innovation
a favorable environment for them. and developed countries in terms (IRI), a research institution under the
In 2014, Premier Li Keqiang put of regulatory environment. Policy European Commission, publishes each
forward the concept of "mass makers should consider opening up year a list of top 2,500 companies
entrepreneurship and innovation" to more economic fields to bring in a across the world by the amount of
support the development innovative competitive market, and providing their R&D investment, and the number
start-ups. The policy provides a more legal protection for China's of Chinese companies included in the
sound growing environment for innovation system by strengthening list is stably increasing every year. Over
start-ups in China, and the Chinese protection of intellectual property the past decade, R&D investment of
government has created positive rights, developing consistent and Chinese companies listed has been
conditions for start-ups in terms of coordinated policies and improving the growing at a much faster rate than the
financial investment, tax preferences credit system for small and medium- world average growth.
and talent attraction. In 2017, the sized enterprises.
State Tax Administration issued
Guidelines on Tax Incentives for Mass China's investment in talents and
Entrepreneurship and Innovation, technology for innovation and R&D
which cuts corporate income tax of continues to rise.
micro businesses by half and gradually For a long time, China's significant
expands the scope of taxation from and continued investment in scientific
less than RMB300,000 of annual research has driven the country to
taxable income to less than RMB3 overtake traditional technological
million. In July 2019, the Ministry powers in a number of research
of Public Security introduced new indicators within just a few years.
immigration and exit-entry facilitation Chinese companies have begun to
policy to attract more top foreign emerge in the international community

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 Rising Innovation in China |
 Chapter 1 Innovation as a new driver for economic growth

Figure 6: R&D investment growth of Chinese companies vs. global

companies in the top R&D list

R&D investment growth of R&D investment growth of

Chinese companies global companies

Source: IRI EU, Deloitte Research

China ranks top globally with the international academic journals, and
absolute number of researchers, the 2nd by the number of citations.4 As
scientific and technological publications to technological innovation, China ranks
and domestic patent applications. Its the 2nd by the number of PCT patent
R&D spending accounts for 2.1% of applicants after the US, and Huawei
total GDP, ranking the 15th globally.3 tops the world as company applicant
Scientific research strengths of Chinese in 2018.5 As PCT patent application is
universities and colleges have been an indicator proving the strength of
greatly improved and six universities a country in technological innovation,
in the Chinese Mainland rank among this shows that China has developed
the top 100 global universities in the into a major power in technological
QS World University Rankings 2020, innovation. However, China still needs
while the number was only four in to enhance the improvement of
2017. The focus of China's scientific productivity and the results brought by
research is shifting from pursuing the the commercialization of technologies
greatest number of research papers to driven by huge investment in scientific
enhancing the quality and international research, as China ranks 28th among
influence of such papers. In 2018, 54 countries in terms of R&D transfer,
China ranked the 4th globally by the far behind the US, Israel and other
number of papers published on key developed economies.6

3
Data from UNESCO database
4
Institute of Scientific and Technical Information of China, http://scitech.people.com.cn/n1/2018/1102/c1007-30378451.html
5
Based on 2018 WIPO statistics
6
Based on rankings of Global Entrepreneurship Monitor 2018/2019 Report

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Rising Innovation in China |
 Chapter 1 Innovation as a new driver for economic growth

Figure 7: Comparison of innovation indicators in scientific research

China US Germany Israel

Number of researchers Number of PCT patent Number of technological

(10K) applications (K) publications (10K)

Source: UNESCO UIS database, WIPO, WB database, Deloitte Research

Talent is the top resource and Innovation in China has

the driving force of technological developed alongside the growth
innovation, and policies on of communications and consumer
education and talents are one of internet sectors. ICT and internet
the core indicators for evaluating companies, led by Huawei, ZTE, Baidu,
the innovation system of a country. Alibaba, Tencent and JD.com, have
Over the past decades, China's emerged rapidly through leading-edge
investment in education from technologies and business models.
the state and the private sector Internet start-ups in China peaked
has provided a large number of in 2015, with 16,239 new companies
engineering and technological talents established. From 2016, the number
for entrepreneurship and innovation, of internet start-ups in China started
and is narrowing the gaps between to "cool down", and the number of
China and developed countries. China new internet companies established
stands at the 13th place in education in 2017 was 2,900, a decline of 64.9%
rankings, ahead of the US and Israel, from 2016. From the size of start-ups,
but falls far behind the average level however, China and the US house half
of developed countries in terms of of the world's unicorns. As of August
enrolment rate of higher education.7 2019, China has 96 unicorn start-
ups, ranking the 2nd in the world. In
The development of ICT and particular, Toutiao becomes the highest
Internet is driving industry valued unicorn across the globe with
innovation in China. market value of USD75 billion.8

7
Based on statistics from Global Innovation Index 2019 report.
8
CBINSIGHTS database, as of August 2019.

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 Rising Innovation in China |
 Chapter 1 Innovation as a new driver for economic growth

Figure 8: Number of unicorn start-ups (2019) China had 32 new unicorn start-ups
in 2018, a first drop in its global share
of new unicorns due to impact of
financial deleverage measures in the
country and other factors. As seen
from industry distribution, China's
unicorns mainly come from consumer
and service sectors, and they often
pursue innovation of business models
through the combination of traditional
industries with technologies such
as internet. There is a significant
gap between China and the US with
the number of unicorns engaged in
China US Germany Israel Other countries
technological innovation. Since 2018,
Source: CBINSIGHTS database, Deloitte Research however, high-tech unicorns led
by SenseTime are coming into the
spotlight from AI, robotics, new energy
vehicles and big data fields.

Figure 9: Unicorns in China by industry (2019) Venture capital and incubators are
the catalyst and nutrient for the
whole entrepreneurship ecosystem.
In 2018, China's total venture capital
amounted to USD93.8 billion, USD2.2
billion higher than that of the US in
the 2nd place, indicating that the US-
dominated global entrepreneurship
and innovation ecosystem is now
positively driven by China.9 From the
average amount of investment, China
tops the world with an average of
USD30 million per deal. In 2018, China
E-commerce AI Auto & transportation Education technology Hardware has more than 4,849 incubators and
6,959 maker spaces, which also rank
Healthcare Mobile communications Supply chain, logistics & distribution
top across the globe. More than 60%
Consumer & retail Others
of the incubators are run by private
Source: CBINSIGHTS database, Deloitte Research companies via market-based means.10

9
Crunchbase database
10
China Entrepreneurship Incubation Development Report 2019, Capital Institute of Science and Technology Development Strategy, Torch High Technology Industry
Development Center, Ministry of Science & Technology

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 Rising Innovation in China |
 Chapter 1 Innovation as a new driver for economic growth

1.3 Characteristics of innovation in innovation, the US's innovation Growth and Prosperity in 2011. The
ecosystems in developed countries leadership is facing various pressures US government has promoted and
1.3.1 US: Innovation ecosystem and challenges. maintained its leadership in global
driven by innovation clusters innovation via scientific research
The US has been leading the world The US government has always investment, legislation building and
in innovation. Especially after WWII, emphasized highly on the design of provision of financing channels.
massive investment in scientific innovation strategy, and published Currently, the US government
research for military purposes by the a series of policies from the invests over USD150 billion annually
government has further catalyzed and American Competition Law in 2007, to support the research of federal
improved its innovation ecological to the American Recovery and laboratories and commercialization
chain and entrepreneurship capital Reinvestment and the A Strategy for of scientific research results by
system. The US ranks the 3rd in global American Innovation: Driving towards universities.12 Moreover, the US has
innovation rankings, up three places Sustainable Growth and Quality Jobs developed a sound legal system and
from that in 2018.11 In recent years, in 2009, to the A Strategy for American a solid set of regulatory mechanisms
as the EU and China awake and rise Innovation: Securing Our Economic for technological innovation,
including intellectual property rights
policies and anti-monopoly law
Figure 10: R&D spending of public finance (2017) enforcement, providing a favorable
legal environment for investors and
Current PPP$ million

entrepreneurs. The US government

also provides multiple financing
channels for small and medium-sized
enterprises, and motivates them
via loans, tax incentives and fiscal
subsidies. But during the Trump
administration, the US government
has reduced to a certain extent the
support to technological innovation.
Spending in non-defense scientific
research by the US government has
dropped from 1.2% of total GDP in
US China Germany Israel
1976 to 0.7% in 2018.13 In 2016, tax
R&D spending by government finance Percentage in GDP (%) subsidy rate for R&D spending in the
US ranked 32nd among 35 countries,
Source: UNESCO UIS database, Deloitte Research behind China and Brazil.14

11
Based on Global Innovation Index 2018-2019 report
12
Data from the United States Studies Centre at the University of Sidney: https://www.ussc.edu.au/analysis/innovation-policy-in-the-united-states-and-australia
13
OECD database
14
Public Policy Initiative, the Wharton School of the University of Pennsylvania: http://publicpolicy.wharton.upenn.edu/live/news/1840-primer-innovation-policy-in-the-
united-states
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 Rising Innovation in China |
 Chapter 1 Innovation as a new driver for economic growth

The US has been surpassed by late ecosystem driven by innovation Most of the world's best incubators
starter such as China in the number of clusters is the Silicon Valley, which is and accelerators come from the US. Y
scientific researches, fiscal spending led by universities, government and Combinator, a well-known incubator
and other indicators. However, as entrepreneurs. The Silicon Valley is based in the US, has invested in
evaluated from university rankings, the pioneer of the semiconductor more than 1,500 start-ups, with total
patent applications and paper revolution, and the US Department of investment exceeding USD80 billion,
citations, the US tops the world by its Defense was its biggest client at the and helped many companies such as
quality of innovation. In 2018, total beginning of its development. In the Dropbox and Airbnb achieve success.
R&D spending of the US totalled field of scientific research, the Silicon As of August 2019, there are 191
USD543.2 billion, the highest across Valley has benefited from Stanford unicorn start-ups in the US, ranking top
the world, accounting for 2.8% of total University and University of California, across the world and accounting for
GDP.15 Twenty-nine US universities are Berkeley. At the same time, California almost half of the total in the world.19
included in the world's top 100 by the with a free and open economic system These start-ups mainly engage in
QS World University Rankings, with and labor market has attracted a great internet software and services, Fintech,
five of the top 10 based in the US, and number of high-tech immigrants. As AI and e-commerce. The volume
Massachusetts Institute of Technology local innovation ecosystem evolves of venture capital in the US in 2018
has been ranking top of the list for and develops, the Silicon Valley has exceeded USD130 billion, with deals
many years. 16 In 2016, there were become a paradise for angel investors involving corporate venture capital
more than 400,000 research papers and venture capitals, and large multi- functions more than doubled and total
published in the US, and, despite that national companies have also become volume of corporate VCs surpassing
China has become the largest country its backbone. traditional VCs for the first time. 20
around the world in the production of
scientific papers and that its number of
researches and papers has exceeded Figure 11: Unicorns in the US by industry (2019)
the US, the US remained ahead of
China by the most cited
1% articles. 17

Innovation clusters are the main

body of innovation in the US, where
there are six major innovation
clusters whose conditions for
sustainable development can be
summarized into six points-core
industry competitiveness, human
resources with technical expertise,
strong leadership, stable market
demand, sound infrastructure,
Intenet software & services Fintech AI E-commerce Healthcare
favorable regulatory environment
Data managment and analytics Consumer & retail
for innovation, and acceptance of
Supply chain, logistics & distribution Data managment and analytics Others
industry development by local people,
etc. 18 A typical model of innovation Source: CBINSIGHTS database, Deloitte Research

15
OECD database
16
QS World University Rankings 2020
17
Data from National Science Foundation, United States
18
Clusters and Innovation Districts: Lessons from the United States Experience, the Brookings Institution
19
CBINSIGHTS database
20
Pitchbook database
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 Rising Innovation in China |
 Chapter 1 Innovation as a new driver for economic growth

1.3.2 Israel: Risk investment especially in industries such as of high-tech companies per capita. It
system led by the government communications, internet, healthcare, follows Japan, Sweden, Switzerland
Israel ranks among the top 10 agriculture, biotechnology, security, and South Korea at the 5th globally by
globally for the first time in the Global sea water desalination, etc. R&D the number of patents per capita.21
Innovation Index in 2019. The country spending accounts for 4.6% of Israel's Though a small country with a land
has been in an invincible position GDP, far higher than that of the US, area of 21,000 square kilometers, a
for years in technological innovation, China and Germany. Israel has more population of eight million, scarcity
powered by its high quality talents, than 8,000 researchers in every million in natural resources and at war ever
entrepreneurship, spirit of bold of its population, with the number of since founded, it now is recognized
innovation, as well as the government's per capita almost doubling that of the as a global leading innovation center
long-term support for technology US, and it also ranks top across the known as the "land of entrepreneurs"
research. Start-ups from Israel are world by the number of innovative and "Silicon Valley of the world".
leading technological breakthroughs enterprises per capita and the number
in different areas around the world,

Figure 12: R&D spending (2017)

Current PPP$ million

US China Germany Israel

R&D spending Percentage of R&D spending in GDP (%)

Source: OECD database, the Global Competitiveness Report 2018, Deloitte Research

21
PCT database 2018
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 Rising Innovation in China |
 Chapter 1 Innovation as a new driver for economic growth

Figure 13: Comparison of innovation indicators per capita (2018)

China US Germany Israel

Number of researcher/million population Number of patents/billion PPP$GDP

Number of PCT patents/billion PPP$GDP Scientific & technological publications/billion PPP$GDP

Source: UNESCO UIS database, WIPO database, SCI, SSCI, Deloitte Research

Israel highly values education, with education spending accounting for 5.9% of its GDP, ranking 22nd across the world;
while education spending accounts for 5.0% of GDP in the US, ranking 28 places behind Israel. There are nine universities in
Israel, six of which make their names in the QS World University Rankings 2020.

Figure 14: Education spending (2017)

Percentage of GDP (%)

Israel US Germany China

Source: UNESCO UIS database, Global Innovation Index 2019, Ministry of Education, Deloitte Research

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Rising Innovation in China |
 Chapter 1 Innovation as a new driver for economic growth

Israel's strong competitiveness The support from the government has number of companies listed on
in innovation is the result of the given rise to venture capital in Israel. NASDAQ, following superpowers the
combination of government-led risk Total amount of venture capital in US and China. As of 2019, Israel has
investment policies and a culture of Israel reached USD4.5 billion in 2018, six unicorns23 and 392 incubators and
entrepreneurship. By undertaking 1.31% of GDP, much higher than that accelerators.24
high-risk investments, the government in the US and Europe, ranking 2nd
has paved the way for subsequent in the world. Investment of high-tech Thriving technological entrepreneurial
private capitals. The innovation venture funds in Israel amounted to activities in Israel have attracted
system of Israel is built based on the USD6.47 billion, up 17% from 2017, investors and large multinational
Yozma program implemented by the and more than twice of that in 2013. companies from the world. Over
Office of Chief Scientist. Through the Venture capital mainly covers Fintech, the past decades, more than 300
program, the government and private cyber security, software, AI and other multinationals (including IBM, Google
investors jointly set up collaborative high-tech industries. 70% of the and Microsoft) have set up R&D
funds, of which the government investment in Israeli start-ups comes centers in Israel, and some are even
provides 40% of the capital, to from overseas, including the US, running multiple centers across
help start-ups overcome financial China, Germany and the UK,22 with VC different fields. These R&D centers
limitations. The program has provided companies in the US being the most account for 50% of the company's R&D
support to a lot of entrepreneurial active player. spending. Over the years, multinational
start-ups and SMEs, laying a solid companies running R&D centers in
foundation for Israel's venture capital Large-scale capital investment Israel have acquired more than 100
industry, while creating large number has significantly promoted the Israeli start-ups. Frequent acquisitions
of jobs and driving continuous development and growth of Israeli by multinational companies have
economic growth. The mature venture companies. Now there are about provided inexhaustible power for
capital environment in Israel created 8,400 high-tech start-ups operating in Israel's innovation ecosystem assets:
by its national innovation policies Israel, and over 600 new companies leading technology, technologists,
has stimulated the passion of local are established every year, making corporate culture, technology
enterprises to pursue R&D, facilitated Israel No.1 in the world by the leadership and a sound ecosystem.
high-tech research in universities, number of start-ups per capita. Tel
and inspired entrepreneurship of the Aviv, Israel's second largest city, is
whole country. an emerging global entrepreneurial
center. Israel ranks the 3rd by the

22
Data from IVC Research Center
23
CBINSIGHTS database
24
Data from IVC Research Center
17
 Rising Innovation in China |
 Chapter 1 Innovation as a new driver for economic growth

1.3.3 Germany: Stable and outstanding performance in PCT patent of the country. In 2004, the federal
sustainable basis for innovation applications, PPP publications and government signed a Research and
As an established capitalist industrial R&D spending. From the perspective Innovation Agreement with state
power, Germany has always been of innovation inputs, R&D spending of governments to ensure sufficient
in a key position in the European Germany has maintained at a high level research funding for major research
and world economic geography, in recent years. In 2018, Germany's institutions. From 2006, Germany
with robust and strong momentum R&D spending accounted for 2.9% started to provide comprehensive
of economic development. Instead of its GDP, ranking the 10th globally. support for high-tech industry,
of stagnating in the glow of a Germany ranks the third by the index and issued the High-Tech Strategy
manufacturing power, Germany has of published scientific papers, following of Germany. In 2010, the German
maintained high performances in the US and the UK. Among over 120 government issued the High-Tech
innovation over the past decades. economies, Germany has 295 patents Strategy 2020 for Germany, with
per million population, ranking the increased funding for research
In the global innovation system, 5th, and 8,457 international patent to advance its 10 future scientific
Germany made itself back to the applications per million population, research programs and focus on
top 10 in 2016, and has remained ranking the 12th.27 As to education, globally oriented strategy making. In
in the 9th place ever since.25 In the three of the world's top 100 universities 2014, the new German government
global competitiveness rankings, the are based in Germany.28 published the New High-Tech Strategy
country ranks the third with a high – Innovations for Germany, aiming
score of 82.8, following the US and Stability highlights Germany's path to build Germany as a world-leading
Singapore.26 By virtue of its mature of innovation, with the government innovation country with priorities in
innovation ecosystem, Germany emphasizing on the consistency smart transportation, smart services
again becomes active in the forefront and systematicity of policy making and other innovations related to digital
of global innovation. Its innovation to support entrepreneurship and economy and Industry 4.0.
capability is mainly manifested in two innovation. In 1990, East and West
dimensions: intellectual property Germany merged, and the federal
rights and enterprise investment government started to implement
and innovation, with especially a package of innovation policies to
promote economic development

25
Based on the rankings of Global Innovation Index reports from 2016-2019
26
Global Competitiveness Report 2018
27
Global Competitiveness Report 2018
28
Based on QS World University Rankings 2020
18
Rising Innovation in China |
 Chapter 1 Innovation as a new driver for economic growth

In addition to strategic policies, organizations, such as chambers of

Germany has already established commerce, foundations, and overseas
an efficient scientific research and federal agencies, which act as the
innovation system with clear division glue for Germany. From top down,
of labor as early as in the 1960s institutions at each level cooperate
by pulling together the political, with each other with clear division
economic and social communities. of labor, working together for the
Politically, the federal government smooth operation of the country's
and state governments act as policy innovation system.
guides and sponsors for scientific
research, providing public funding for Innovation sector in Germany has
scientific research that accounts for been growing rapidly over the past
one third of the country's total R&D two decades, and it is now a thriving
spending. The economic community economic ecosystem. There were over
contributes nearly two thirds of 1,500 start-ups in Germany in 2018,30
funding for research and innovation and, as of 2019, Germany has given
in Germany, mostly in application- birth to 10 unicorns, mainly engaging
oriented research programs. 80% in e-commerce, healthcare, tourism,
of large corporations in Germany automotive and transportation,
have their own independent R&D Fintech, as well as data management
institutions.29 As to the social and analytics.31 Over the past few
community, other than the role of years, investment by the government
universities as executers of scientific and venture capital firms in high-tech
research, the most distinctive industry has been rising fast. Start-
advantage of Germany is its four non- ups in Germany attracted public
profit scientific research institutions investment of USD3.5 billion in 2017,
(Max Plank Society, Helmholtz up 51% from 2016.32 Total investment
Association, Fraunhofer Society, and by venture capital in Germany reached
Leibniz Association), which are key EUR4.4 billion in 2018, second only to
bases of technological innovation the UK in Europe.33
in Germany. Moreover, the German
society has well-developed interstitial

29
Yu Shencheng, The Development Path of Innovation-Driven Strategy in Germany [ J], Zhengce Liaowang, 2016, (10):49-50.
30
Europe Startup Monitor
31
CBINSIGHTS database
32
Crunchbase database
33
Annual European Venture Capital Report 2018, Dealroom.co

19
 Rising Innovation in China |
 Chapter 2 An analysis of China's innovation ecosystem

Chapter 2 An analysis of
China's innovation ecosystem
The term "innovation ecosystem" 2.1 Evaluation system for capital, innovation technologies and
refers to the stakeholders and innovation ecosystems makerspaces. Thirdly, innovation
resources necessary to achieve An innovation ecosystem can be environment reflects a city's ability
ongoing innovation in a modern evaluated through three indicators. to attract and retain outstanding
economy.34 From the perspective Firstly, innovation institutions innovation resources and create
of ecology, an array of factors such reflect the number of innovation a sound external environment for
as enterprises and innovation entities in a city and the strengths aggregating innovation institutions.
atmosphere in the country are of the city in carrying out scientific This includes innovation strategy,
considered as a whole with a stronger and technological research and innovation foundation, innovation
focus on the interconnectedness development (R&D) and business atmosphere and innovation cost;
and dependency among each innovation. This includes innovation innovation foundation refers to the
innovation elements. This is the companies (e.g. high and new state of construction of intelligent
biggest difference between the technology enterprises and the top infrastructure of the city, its economic
innovation ecosystem and previous 100 internet companies), unicorn competitiveness, and sustainability,
innovation theories. China's companies and scientific research and innovation atmosphere refers to
economic development has entered institutes. Secondly, innovation the city's Internet+ atmosphere.
the high-quality growth stage with resources reflect whether the various
increased supply of innovation elements of a city can adequately
and strengthened construction of support innovation activities in
innovation environment, creating innovation institutions. This includes
innovation ecosystem attractiveness innovation talents, innovation
favorable to the building of modern
economic system.

34
China's Innovation Ecosystem, World Economic Forum
20
Rising Innovation in China |
 Chapter 2 An analysis of China's innovation ecosystem

Figure 15: Innovation ecosystem evaluation indicators

Primary indicator Secondary indicator Implication

The number of high and new technology companies in

Innovation companies the city, the top 100 internet companies in China and the
number of unicorn companies
Innovation
institutions Number of higher education
Number of general higher education institutions in the city
institutions

Scientific research institutes Number of state key laboratories in the city

Percentage of AI talents among the total number of talents

Innovation talents
in the state
Innovation
Innovation Innovation capital Venture capital invested
ecosystem
resources
evaluation Innovation technologies Number of patent applications of the city
system
Makerspaces Number of makerspaces registered with the state

Innovation strategy Number of innovation policies from the government

The state of construction of intelligent infrastructure of the

Innovation foundation
Innovation city, its economic competitiveness, and sustainability
environment
Innovation atmosphere The city's Internet+ atmosphere

Basic innovation cost faced by entrepreneurs including

Innovation cost
level of salary and office rental

Source: Deloitte Research

21
 Rising Innovation in China |
 Chapter 2 An analysis of China's innovation ecosystem

This paper selects 19 cities across By setting up an innovation ecosystem

the five major city clusters including evaluation system, this paper
the Beijing-Tianjin-Hebei region, evaluated the innovation achievements
the Yangtze River Delta region, the and challenges of each city, in an effort
central region, the western Chengdu- to obtain a clear picture of the current
Chongqing region and the Guangdong- state of development of China's
Hong Kong-Macao Greater Bay Area. innovation ecosystem as well as the
With the launch of a range of policies characteristics of development of
supporting the development of the the innovation ecosystems in the five
new economy by the governments major regions and their directions for
of the above cities, emerging future enhancement.
industries have achieved remarkable
development in recent years.

Figure 16: Innovation ecosystem evaluation system and distribution of cities

Beijing-Tianjin-Hebei region
Beijing
Tianjin
Central region
Yangtze River Delta region
Xi'an
Chengdu- Chongqing region Nanjing
Zhengzhou Suzhou
Chengdu Shanghai
Wuhan Hefei
Hangzhou
Chongqing
Guiyang Changsha Guangdong-Hong Kong
-Macao Greater Bay Area
Guangzhou
Dongguan
Foshan
Zhuhai Shenzhen

Source: Deloitte Research

22
Rising Innovation in China |
 Chapter 2 An analysis of China's innovation ecosystem

2.2 The innovation ecosystems obtained. In Band 1, tier-one cities among the first in Band 2. In the third
of each city demonstrated tiered including Beijing, Shanghai, Shenzhen band were predominantly cities with
development and Guangzhou remained among remarkable achievements obtained by
In the rankings of China's innovation the leading positions, but Hangzhou policy-driven innovation ecosystems,
ecosystems, cities were divided into surpassed Guangzhou to rank fourth. such as Dongguan, Foshan, Zhuhai
three bands by the total scores they Nanjing, Chengdu and Wuhan were and Guiyang.

Figure 17: Rankings of China's innovation ecosystem

Band 1 Band 2 Band 3

ng
an
ou

u
en

ai
ha

ei
u
ai

g
ng

ou

n
u

jin
g

ua

ho
in
ho

an

uh
ef

ya
gh

'a
gd
jin

sh
zh
zh

gs
iji

zh

gq
an

Xi

gg

H
gz
uh
gz

ui
Be

Zh
an

en

Fo
an

Su

an
en

ng

on
Ti

en

G
on
an

W
Sh

Ch
N

Ch
Sh

ua

Ch

Zh
D
H

Source: Deloitte Research

23
 Rising Innovation in China |
 Chapter 2 An analysis of China's innovation ecosystem

In terms of innovation institutions, Beijing, Shanghai and Shenzhen ranked

top three. Under the sub-indicator of innovation enterprise, the numbers of high
and new technology enterprises owned by Beijing, Shanghai and Shenzhen were
among the top in the country. Besides, these three cities were home to 60% of
the top 100 internet companies in China, with 33% located in Beijing. In terms
of unicorn companies, there were 162 unicorn companies in Beijing, Shanghai,
Shenzhen and Hangzhou, accounting for 80% of the total number of unicorns in
China, mainly because these four cities were home to BATJ-level innovation giants
which incubated a huge amount of unicorns led by Alibaba and Tencent. In terms
of scientific research institutes, Beijing had strong innovation foundation and
sound innovation environment leveraging its higher education institutions and
scientific research bodies.

Figure 18: Rankings of cities by innovation institutions

Beijing
Shanghai
Band 1
Shenzhen
Hangzhou
Guangzhou
Nanjing
Chengdu
Tianjin
Band 2 Wuhan
Suzhou
Chongqing
Changsha
Hefei
Xi'an
Dongguan
Band 3 Guiyang
Foshan
Zhuhai
Zhengzhou

Source: Deloitte Research

24
Rising Innovation in China |
 Chapter 2 An analysis of China's innovation ecosystem

In terms of innovation resources, Beijing, Shanghai and Shenzhen were

among the top three, followed by Hangzhou, which rose to the fourth place. In
respect of the sub-indicators, the four cities hosted over 55% of AI talents in
China, with Beijing accounting for nearly 30%. In terms of innovation capital,
Beijing and Shanghai became the cities with the most capital inflow in 2018,
and Hangzhou surpassed Shenzhen to rank third. In terms of innovation
technologies, Shenzhen and Beijing ranked first and second respectively,
followed by Shanghai in the third place. In terms of makerspaces, Beijing and
Shanghai had the most makerspaces registered with the state, accounting for
nearly 20% of the total.

Figure 19: Rankings of cities by innovation resources

Beijing
Shanghai
Band 1
Shenzhen
Hangzhou
Guangzhou
Nanjing
Chengdu
Suzhou
Wuhan
Band 2
Tianjin
Chongqing
Xi'an
Zhengzhou
Changsha
Dongguan
Zhuhai
Band 3 Hefei

Foshan
Guiyang

Source: Deloitte Research

25
 Rising Innovation in China |
 Chapter 2 An analysis of China's innovation ecosystem

In terms of innovation environment, Shenzhen, Guangzhou, Beijing and

Shanghai were among the top four. These four cities had their respective
advantages. Shenzhen ranked first in innovation atmosphere, leading far
beyond other cities; the Guangzhou government is more focused on the
construction of innovation environment by launching a range of policies driving
innovation in 2018, making the city the first by number of policies; Beijing
performed well in innovation foundation with great development potential in
economy, topping the chart of construction of innovation infrastructure in China
while increasing innovation cost of enterprises as a result of higher salary level
and rentals.

Figure 20: Rankings of cities by innovation environment

Shenzhen
Guangzhou
Band 1
Beijing
Shanghai
Wuhan
Chengdu
Chongqing
Suzhou
Band 2
Hangzhou
Dongguan
Changsha
Tianjin
Zhengzhou
Nanjing
Foshan
Band 3 Xi'an
Hefei
Zhuhai
Guiyang

Source: Deloitte Research

26
Rising Innovation in China |
 Chapter 2 An analysis of China's innovation ecosystem

From the above innovation Figure 21: Distribution of start-ups led by Tencent by city (top 10)
ecosystems, we have the following
findings: Shenzhen
•• Aggregation of innovation
entities in tier-one cities is Beijing
more prominent. This is because
Shanghai
tier-one cities have brought
together major enterprises with
Guangzhou
advanced technologies, making
them the center for aggregation of Chengdu
technologies and resources in China.
Leading enterprises are drivers for Hangzhou
innovation-based start-ups, nurturing
a number of innovation start-up Wuhan

enterprises. For example, in 2018,

Xiamen
there were more than 1,300 start-
ups led by Tencent. The number of Chongqing
Tencent-led start-ups in Shenzhen
was significantly greater than that in Changsha
Beijing and Shanghai, accounting for
32% of the total. Source: Public information, Deloitte Research

•• There is a big gap between

Band 3 and Band 1 cities. This is
talents is higher than other regions smart upgrade of industries with
because the stronger innovation
due to financial support from the a focus on developing smart
resources are often drawn together.
government and society. However, industries including AI, IoT and smart
Tier-one cities with first-mover
the level of economic development hardware, and promote the smart
advantages have more advanced and
and scale of economy have limited upgrade of traditionally advantaged
large companies and higher levels
the expansion of innovation industries such as manufacturing
of talents, capital and technology
infrastructure and innovation industry. Developing cities focus
accumulation, resulting in continuous
investment in Band 3 cities. on a single area and create unique
amassing of innovation resources. In
innovation ecosystems due to
Band 3 cities, innovation resources •• Each city's innovation strategies
weaker technology and industry
lag behind in development due to are formulated based on
foundations. For example, Guizhou
economic level and other factors, its own level of economic
is building a big data whole industry
thus facing greater resistance in development with different
chain covering technological R&D,
subsequent development. In respect focuses. In advanced regions,
data aggregation, mining, analysis,
of talents, for example, AI talents cities such as Beijing, Shanghai
processing and application through
in China are unevenly distributed, and Shenzhen build AI innovation
the construction of the China Big
mainly found in the Beijing-Tianjin- system to promote research and
Data Industry Innovation Pilot Zone.
Hebei, Yangtze River Delta and Pearl commercial use of leading-edge
It also implemented the "cloud
River Delta regions. At the same time, technologies, develop whole industry
construction project" to promote the
the central and western regions have chains and create application
formation of big data cloud service
also aggregated a certain amount of scenarios. Cities with certain level
industry clusters and construction
talents, mainly along the coast of the of industry foundation such as
of big data transaction centers.
Yangtze River. This is mainly because Chongqing focus on developing
economically developed regions smart industry by integrating with
have aggregated many exceptional AI advantaged industries such as the
companies, and the salary level of AI manufacturing industry, promote

27
 Rising Innovation in China |
 Chapter 2 An analysis of China's innovation ecosystem

2.3 The characteristics of In terms of development of the were 82 unicorn companies in Beijing.
innovation ecosystems in each innovation ecosystem in the With the implementation of the city
region are distinct Beijing-Tianjin-Hebei region, strategy on national scientific and
On regional level, innovation Beijing has become the center technological innovation center, Beijing
ecosystems in China are distinct of innovation ecosystem. The city will achieve breakthroughs in leading-
in characteristics: innovation dominated in innovation enterprises edge technologies such as quantum
development in the Beijing-Tianjin- and innovation resources, and information, brain science and
Hebei region is centered in Beijing; ranked among the top in innovation brain-like intelligence technology, and
the overall level of development in the environment. In 2018, the number of AI through the construction of world-
Yangtze River Delta region is higher invention patents per 10,000 persons class new research and development
than other regions; the development in Beijing reached 111, ranking first institutions in the future.
in the Guangdong-Hong Kong-Macao among the state. As of 2019 Q1, there
Greater Bay Area is promising; the
central and western regions are
accelerating development.

Figure 22: Cities leading in various indicators

Innovation institutions
Innovation companies
Beijing, Shanghai, Shenzhen, Guangzhou
Beijing
Unicorn companies
Beijing, Shanghai, Hangzhou, Shenzhen
Scientific research institutes

Innovation resources Beijing, Shanghai, Wuhan, Nanjing

Innovation talents
Beijing, Shanghai, Shenzhen, Hangzhou
Beijing
Innovation capital
Beijing, Shanghai, Hangzhou, Shenzhen
Innovation technologies
Innovation strategy
Shenzhen, Beijing, Guangzhou, Shanghai
Innovation environment Guangzhou, Shanghai, Tianjin, Beijing
Makerspaces
Innovation foundation
Beijing, Shanghai, Nanjing, Shenzhen
Shenzhen Beijing, Shenzhen, Shanghai, Guangzhou
Innovation atmosphere
Shenzhen, Guangzhou, Beijing, Shanghai
Innovation cost
Zhengzhou, Harbin, Foshan, Wuxi

Source: Deloitte Research

28
Rising Innovation in China |
 Chapter 2 An analysis of China's innovation ecosystem

The level of comprehensive Its AI talents accounted for 6.5% of the entered into a strategic cooperation
innovation in the Yangtze River total amount of talents in China. agreement to explore the new
Delta region is generally higher mode of development by integrating
than other regions. Shanghai Innovation development in pharmaceutical and intelligence and
and Hangzhou have played a the Guangdong-Hong Kong- create a smart healthcare system
more significant role in driving Macao Greater Bay Area will together. Guangzhou Baiyun District
innovation. Nanjing and Suzhou be led by Guangzhou and Government and Huawei entered
both ranked among Band 2 Shenzhen. Guangzhou focuses on into a cloud industry strategic
innovation cities. Specifically, environment level and promotes the cooperation agreement to create a
Hangzhou began to rise with implementation of innovation by the next-generation information industry
its remarkable performance, government. In 2017, Guangzhou cluster. In terms of application,
demonstrating significant aggregation Municipal Government began to Shenzhen is more competitive, with
of AI talents and influx of innovation promote the IAB strategy (next- conglomerates such as Tencent, and
capital. In 2019 Q1, the number of generation information technology, deployment in the foundation layer,
unicorn companies in Hangzhou AI and biomedicine), which aims technology layer and application layer
surpassed that of Shenzhen. In 2018, to upgrade the manufacturing of AI. Meanwhile, Shenzhen offered
the annual capital inflow exceeded industry. Guangzhou Pharmaceutical a number of application scenarios
RMB160 billion, surpassing Shenzhen. Holdings and iFlytek officially and aggregated a range of innovation
enterprises covering robotics, mobile
phone, disease screening, finance and
Figure 23: Innovation in Hangzhou other areas.

Hangzhou: Dongguan, Foshan and Zhuhai

are relatively weaker in innovation
advantages, but their future
development is promising. With
progress in the construction of the
Unicorn companies
19 Guangdong-Hong Kong-Macao Greater
Bay Area, Dongguan and Foshan will
AI talents
take on some of the companies that
6.5%
moved out from Shenzhen. Meanwhile,
Capital inflow
RMB160 billion by leveraging the existing robust
foundation of the manufacturing
industry, these cities will make their
Top 100 presence felt in the development
Internet companies of the innovation ecosystem in the
6 Guangdong-Hong Kong-Macao Greater
Bay Area in the future.

Source: Deloitte Research

29
 Rising Innovation in China |
 Chapter 2 An analysis of China's innovation ecosystem

Figure 24: Complementary advantages of the Guangdong-Hong Kong-Macao Greater Bay Area cities in the
development of the innovation ecosystem

•• Solid R&D and manufacturing

•• Solid manufacturing
Dong Guang foundation
foundation and great potential
of integration guan zhou •• Strong aggregation of
resources (policy, funds,
companies)

•• With AI-focused enterprises

•• Home to Guangdong Fo and plenty of start-ups
Shen
Intelligent Manufacturing shan zhen •• Strong R&D capability
Innovation Demonstration Park
•• Provide plenty of
application scenarios
Source: Deloitte Research

Driven by policies, core cities in Development in Chengdu" have further Donghu New Technology Development
the central and western regions highlighted the aggregation effect of Zone reached 2,306, ranking fourth
enjoyed rapid development in high-level innovation talent. Donghu among new technology development
innovation ecosystems. The high New Technology Development Zone zones in China. It has fostered over
and new technology industry in the has become a key driver of innovation 2,000 Internet+ companies, more
core cities in the central and western in Wuhan. In 2018, the number of high than 40 of which have raised over
regions is undergoing the rising phase and new technology companies in RMB100 million.
of development. A complete industry
chain and innovation ecosystem are
being formed, and the size of the Figure 25: Rankings of cities in the central and western regions by
internal market is not sufficiently innovation ecosystem
large. However, leveraging policies on
household registration, taxation and
Innovation Innovation Innovation
others, the innovation environment Overall
institutions resources environment
of these cities has been optimized,
attracting companies and talents. In
Chengdu
particular, the central government has
rolled out policies strongly inclining
Wuhan
towards the central and western
regions to promote rapid development
Chongqing
of the innovation ecosystem, creating
a trend to catch up with Band 1 Changsha
cities by these cities. Chengdu and
Wuhan are known as the core area for Xi'an
innovation ecosystem development
in the western Chengdu-Chongqing Zhengzhou
region and central region respectively.
Chengdu's "Rongpiao" Project Guiyang
(Chengdu Drifters) and the "Twelve
New Rules with respect to Talent Source: Deloitte Research

30
Rising Innovation in China |
 Chapter 3 Characteristics of development of leading industries in China's innovation

Chapter 3 Characteristics of
development of leading industries in
China's innovation
3.1 AI develops with a high level of gradually applied in various industries 2. The effect of businesses
penetration since it was put into commercial aggregation is strong with shared
1. China's AI industry develops application in 2015. Its development supporting resources
rapidly prospect is widely recognized A vast industry and solution market is
The global AI market will experience by different sectors including a major advantage for AI development
phenomenal growth in the coming few governments and businesses. It has in China. Such advantage is composed
years. Gartner predicts that the global undoubtedly become a key influencer of the market advantage brought by
AI market will exceed USD5 trillion on China's economic development. the massive search data, extensive
by 2025 and the compound annual In 2018, the total size of investment product lines, and wide range of
growth rate for 2017-2025 will reach and financing in AI in China reached industries, as well as the promotion of
128%. China is one of the world's most RMB131.1 billion, with 597 financing open source technology communities
active countries in application of AI deals. As of 2018, the total amount of by domestic and foreign technology
technology. AI technology has been investment and financing in AI in China giants, which helps start-ups in the
accounted for 60% of the global total. AI application layer break through
technological barriers and apply AI
directly in R&D in the end product
Figure 26: Changes in investment and financing in AI layer. In terms of industry, AI has been
vertically applied in various sectors
Exploration stage Commercialization stage including medical and healthcare,
finance, education, and security.
Given such vast market spaces,
Chinese AI companies continue to
emerge. In addition, to promote
industry upgrade and replace old
economic drivers with new ones,
local governments across China have
begun to issue industry planning
guiding opinions related to the AI
industry, and offer tax incentives,
subsidies, talent introduction and
efficient administrative procedures to
enhance business environment and
attract competitive enterprises. These
contribute to the significant effect of
Funds raised (RMB100 million) Financing deals
aggregation of AI companies in China.
Source: Public information, Deloitte Research

31
 Rising Innovation in China |
 Chapter 3 Characteristics of development of leading industries in China's innovation

Figure 27: Distribution of AI companies in China

Beijing Shanghai Guangdong Zhejiang Jiangsu Anhui Fujian Shanxi Sichuan

Source: Public information, Deloitte Research

Driven by the dual forces of policy and need of a large number of traditional companies, all exceeding 90, ranked
capital, the number of AI companies manufacturing players to use the AI in Band 1. The effect of aggregation
rises rapidly. According to incomplete technology for intelligent upgrade and of companies enables the gradual
statistics, the number of AI companies the support of government policies, formation of the AI industry chain in
across China exceeded 4,000.35 Most the western Sichuan-Chongqing region China as well as the initial formation
of these companies are located in has become an area for aggregation of of characterized AI industry clusters
the Beijing-Tianjin-Hebei region, Pearl AI companies. In terms of city, Beijing, in regions including the Yangtze River
River Delta region and Yangtze River Shanghai, Shenzhen and Hangzhou Delta region, Pearl River Delta region
Delta region. Meanwhile, with the are cities with the largest number of AI and Beijing-Tianjin-Hebei region.

35
China AI Development Report 2018, Tsinghua University
32
Rising Innovation in China |
 Chapter 3 Characteristics of development of leading industries in China's innovation

3. Scientific research institutes At present, China's computer vision,

provide strong support to AI intelligent voice semantic processing,
As the AI technology continues to intelligent robots, intelligent driving,
advance, the spillover benefits of the and consumer drones will be in the
core basic technology are enhanced. forefront internationally, with an
In terms of algorithm, the deep outburst of application opportunities
learning algorithm has advantages for intelligent connected vehicles,
in the processing of massive data intelligent service robots and
using different types of deep neural intelligent drones.
networks. Their continuous application
in areas including computer vision Scientific research institutes and
and image recognition, and voice bodies are important places for the
recognition, will continue to transform research and development of the AI
the traditional computer algorithm technology. Since 2014, the amount
frameworks. In terms of computing of AI papers in China has surpassed
power, heterogeneous computing the United States, and far exceeded
models adopting CPU+X such as other countries. This is closely tied to
FPGA, FPU and ASIC can basically the rapid development of scientific
meet the requirements for faster, research institutes and bodies in
more efficient, and more convenient AI. Meanwhile, scientific research
use of processors. In terms of institutes and bodies also serve as the
data, the number of IoT connected major driver of AI patent applications.
devices and hyper-scale data centers Therefore, analyzing the AI scientific
worldwide will reach 20.4 billion and research institutes and bodies in
485 respectively by 2020. With the each city will help understand the
broadening application of distributed technological power of such city.
network transmission architecture,
accelerated commercialization of 5G
and rapid development of wearable
devices and intelligent connected
vehicles, the abilities to sense, acquire,
transmit, analyze and store large-scale
structured data have made a leap.

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 Rising Innovation in China |
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Figure 28: Characteristics of AI scientific research institutes and bodies in each city

Scientific research Government or scientific research

Characteristics Enterprise laboratories
institutes bodies and institute laboratories

Beijing •• Strongest scientific Host more than 50% More than 10: •• 360 •• Sinovation
research strength nationwide: •• Baidu Ventures
•• State Key Laboratory of Pattern
•• Tsinghua University Recognition •• Xiaomi •• Jinri Toutiao

•• Peking University •• State Key Laboratory of Intelligent •• Meituan •• Lenovo

•• Beihang University Technology and Systems •• JD.com •• UBTECH

•• Institute of Automation, •• State Key Laboratory of Deep

Chinese Academy of Learning Technology and Application
Sciences •• Institute for Artificial Intelligence,
Tsinghua University
•• Law and Artificial Intelligence
Laboratory, Peking University

Shanghai •• Mainly relies on higher Various higher education •• SJTU-Versa Computer Science and AI •• SAIC Motor •• Tencent
education institutions; institutions: Joint Lab •• Philips •• Squirrel AI
an academic foundation •• Shanghai Jiao Tong •• Parallel AI Adaptive Learning Joint •• SenseTime •• Microsoft
has been laid despite University Laboratory jointly established by
enterprise research
•• Fudan University Institute of Automation of Chinese
institutes/laboratories
•• Shanghai Tongji Academy of Sciences and Squirrel AI
second to Beijing
University

Shenzhen •• Mainly relies on •• Shenzhen University Mainly government driven: •• Tencent

companies •• Southern University of •• Shenzhen Academy of Robotics •• Huawei
Science and Technology •• Shenzhen Institute of Artificial •• ZTE
Intelligence and Big Data

Hangzhou •• Still lags behind Beijing, •• Zhejiang University •• Alibaba

Shanghai and Shenzhen •• NetEase
•• Geely Auto

Source: Public information, Deloitte Research

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Rising Innovation in China |
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The above four cities have their AI company example: SenseTime has maintained close cooperation
own characteristics in terms of AI SenseTime is a leader in artificial with global academic community.
institutes and bodies. Beijing has the intelligence in China, principally In September 2018, SenseTime
strongest scientific research strength, engaging in computer vision together with MIT, Shanghai
hosting more than 50% of scientific technology and deep learning Jiao Tong University and other
research institutes nationwide algorithms. It is an algorithm provider universities, initiated the Global
and over 10 national laboratories. in computer vision and deep learning, University Artificial Intelligence
Meanwhile, internet giants including and also a new generation of open Academic Alliance to promote
Baidu, JD.com and Meituan have set innovation platform of artificial international academic exchanges
up their enterprise laboratories in intelligence designated by the Ministry and talent cultivation, stimulating
Beijing, investing huge social capital of Science and Technology of China. As the long-term development of
in the research and development of a world's leading AI platform company, artificial intelligence research and
AI. Shanghai leverages the premium SenseTime succeeds in establishing an technology. In China, SenseTime has
resources of higher education innovation ecosystem in AI sector for jointly established labs or developed
institutions including Fudan University, the following four reasons. scientific research with the Chinese
Tongji University and Shanghai Jiao University of Hong Kong, Tsinghua
Tong University, ranking among the 1. Boast deep talent reserve and University, Peking University,
top nationwide in terms of AI strength. leading original technological Shanghai Jiao Tong University and
Shenzhen has a large number of strengths Zhejiang University.
technology companies, making its
As a technology giant, SenseTime
presence felt in the AI technology by 2. Enable multi-industries
relies on talents and technological
leveraging the strengths of leading commercially and establish
strengths to drive its development,
enterprises including Tencent, Huawei, industrial chain collaboration
enabling it to differentiate itself from
and ZTE. Meanwhile, the government mechanism
and win over its competitors in the
is playing its role by building the
market. Gasping the opportunity SenseParrots, an original deep
Shenzhen Academy of Robotics
of talent training and acquiring learning platform independently
and Shenzhen Institute of Artificial
the world's top talents from the developed by SenseTime, has
Intelligence and Big Data to further
source, SenseTime boasts an Asian more advantages in supporting
enhance technological strengths.
leading deep learning team, whose super-deep network scale, super-
Hangzhou still lags behind Beijing and
core has 20 years of scientific large data learning and complex
Shanghai in terms of the number of
research experience. At present, related applications. SenseTime
institutes, institute laboratories and
the company has more than 3,000 uses its deep learning platform to
enterprise laboratories. It mainly relies
employees, 200 of whom have promote industrial upgrading and
on internet giant Alibaba in conducting
gained their Ph.D. degree from top build artificial intelligence ecology.
AI research.
universities. Moreover, SenseTime In recent years, various computer

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vision technologies of SenseTime technologies. Only by enabling and and deep learning technologies.
have been rapidly applied in commercializing AI technology in In addition, SenseTime has also
numerous industries. It has various industry, can SenseTime become a leading force in the
explored its unique model, gain sustainable development. The development of the new technology
"1 (basic research) + 1 (product and ability of commercialized landing and innovation center in the
solution) + X (industries)", to drive is also the competitive advantage Guangdong-Hong Kong-Macao
and enable hundreds of industries, of SenseTime in leading the Greater Bay Area and promotion of
and has successfully occupied the industry. In addition to developing the global layout of technology.
first place in the market share of AI technology independently, it
many vertical areas. In terms of is also committed to establishing 4. Recognized by the capital market
smart city industry, SenseTime industrial chain collaboration with access to sufficient financing to
promotes the application of face mechanism by investing in support development of innovative
recognition and intelligent video companies with industrial value or technologies
analysis technology. In the field vertical integration with itself. For
SenseTime is an AI tech unicorn
of smart retail, it helps traditional example, 51 VR is invested in AR
with the largest sum of funds raised
retail enterprises to enhance users' and VR applications, and Terminus
and highest valuation in the capital
shopping experience, improve the is invested in security. Thus, AI
market. It has raised record funds
operation of retail enterprises, and applications are expanded.
of USD400 million and USD600
achieve precision marketing. In the
million, and is valued at USD4.5
mobile phone industry, it provides 3. Establish cooperation relationship
billion in only four years since it was
technologies including facial with the government, promote
established. These funding serves
unlocking, smart beauty, smart aggregation of the technology and
as solid foundation for independent
filters, background blur and smart innovation industry, and leverage
R&D and industry integration.
photo albums for well-known mobile the opportunities brought by the
SenseTime will expand overseas
phone brands to comprehensively state's strategies and policies
markets and increase investment
enhance user experience. Currently In September 2018, China's in emerging areas, including smart
SenseTime is working with over Ministry of Science and Technology medical treatment and robots. It
700 world-renowned domestic announced that SenseTime would will strengthen the advantages of
and overseas companies and build the National Open Innovation science and technology platform
institutions, and provides them Platform for Next Generation and attract more and more artificial
with complete solutions based on Artificial Intelligence on Intelligent intelligence business ecology driven
face recognition, image recognition, Vision, becoming the fifth national by itself.
video analysis, autonomous AI open innovation platform after
driving, medical image recognition Alibaba, Tencent, Baidu and iFlytek
and other artificial intelligence with its strong computer vision

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3.2 Autonomous driving sees growth and expansion of the market. for Energy Saving and New Energy
emerging opportunities As estimated by Qianzhan Industry Vehicles published by China Society
1. Autonomous driving exhibits Research Institute, the global market of Automotive Engineers, the number
opportunities and vitality for autonomous driving market of intelligent vehicles in China will
Autonomous driving, a high-level will worth hundreds of billions of reach 15 million by 2020. In respect of
automated driving technology, is dollars by 2020; China will play an commercial use, China has taken the
a product resulted from the deep important part in the autonomous lead in putting autonomous cleaning
application of the AI technology driving market with its strong growth trucks, autonomous electric trucks and
in the car industry. It has epoch- momentum in recent years. The autonomous express delivery vehicles
making revolutionary significance. future of the autonomous driving into use. In respect of technological
In recent years, with advances in the market is promising. R&D, although China’s autonomous
AI technology, innovation entities driving still lags behind the world’s
continue to devote efforts in the In China’s innovation ecosystem, advanced level, there are some
autonomous driving market. They autonomous driving exhibits outstanding players in the industry,
form a joint force with other players development opportunities and vitality. such as Baidu-BAIC, which are highly
in the field globally, promoting the According to the Technology Roadmap competitive in the global autonomous
driving market.

Figure 29: Size of the Chinese autonomous driving market in

2014-2018 (RMB100 million)

Source: Qianzhan Industry Research Institute, Deloitte Research

The ultimate goal of autonomous driving is to achieve real autonomy, which

enables passengers to do other activities in addition to paying attention to
road conditions. Nevertheless, the process of replacing cars with autonomous
vehicles is long and progressive, and consideration must first be given to how
autonomous vehicles and human drivers coexist. In the current progress of
development, there are still many problems and challenges to be addressed from
the road test stage to pilot application stage.

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2. Aggregation of the automobile and launching of autonomous cars. advantages, many current players in
industry allows complementation For instance, Changan Automobile the autonomous industry hope to set
of premium resources is cooperating with Baidu, Ali and up their core innovation departments
China's autonomous driving Intel, with a plan to achieve a product in where the automobile industry and
industry has formed an innovation portfolio share of 10% for autonomous internet industry aggregate to take
ecosystem involving strong alliance vehicles by 2020 and realize the better part in market cooperation.
and collaboration between the operation of autonomous vehicles Therefore, Beijing, Shanghai and
traditional automobile companies by 2025; BAIC is cooperating with Shenzhen are widely favored by
and internet companies. Traditional Baidu and Robert Bosch with a plan companies engaging in innovation of
automobile companies may to deploy autonomous driving and the autonomous driving technology.
manufacture autonomous vehicles intelligent connection technologies
at a lower cost but on a larger in all car models by 2020; Geely, Many autonomous driving start-ups
scale for internet companies, and GWM, and Chery are cooperating tend to set up their headquarters in
use sophisticated automobile with internet companies respectively Suzhou, Nanjing, Tianjin and Changsha.
manufacturing technologies to enable to launch autonomous car models; However, their R&D centers are
internet companies to implement among foreign traditional automobile predominantly located in major tier-
the technologies they developed and companies, BMW also joins hands one cities including Beijing, Shanghai
gain practical data and experience. with Tencent to build an autonomous and Shenzhen. Such significant
Internet companies may help driving research and development advantage is primarily derived from
traditional automobile companies center in Shanghai, which will be collaboration between industries
in transformation and upgrade, their sole autonomous driving R&D relying on talents and technological
accelerating their application of center overseas. Given such close resources from higher education
autonomous driving technologies cooperation and complementary institutions and those relying on
industry chains.

Figure 30: Locations of R&D centers of major autonomous driving start-ups in China (by city)

Beijing Shanghai Shenzhen Suzhou Guangzhou Wuhan Wuxi Changsha Tianjin Nanjing Xiamen

Source: Deloitte Research

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From the perspective of innovation were incubated from student teams or as reflected in the China Intelligent
entities, there are two main types of laboratories. Many higher education Vehicles Future Challenge, a contest
innovation entities in autonomous institutions and research bodies of the highest level and largest scale
driving in China: higher education have dedicated laboratories and R&D in autonomous driving in China, the
institutions and companies. Higher teams related to intelligent vehicles. better-performed higher education
education institutions offer companies Some higher education institutions institutions and research bodies in
with proactive technological guidance have also established cooperation recent years were mainly located in
and sufficient talent resources. Indeed, relationship with the industry and have Beijing, Shanghai and Suzhou. This
a lot of autonomous driving start-ups obtained remarkable achievements highly echoes the establishment
in autonomous driving. For example, locations of R&D centers.

Figure 31: Awardees of China Intelligent Vehicles Future Challenge in recent years and their respective locations

City Awardee

Beijing Union University, Institute of Automation of Chinese Academy of Sciences, Beijing Institute of Technology,
Beijing
Beihang University

Shanghai Shanghai Jiao Tong University, Tongji University

Suzhou Suzhou Automotive Research Institute of Tsinghua University, Suzhou Vocational University

Nanjing Nanjing University of Science & Technology

Zhenjiang Jiangsu University

Xiamen Xiamen University

Wuhan Wuhan University

Changsha National University of Defense Technology

Xi'an Xi'an Jiaotong University

Source: Public information, Deloitte Research

3. Autonomous driving application and the fastest time to achieve L5 stage, the application of autonomous
scenarios are gradually extended (fully automatic) mass production is driving technology can be extended
Industry experts predict that from 2028. The difficulty of autonomous to logistics, public transport, port and
2019 to 2020, autonomous driving L3 driving in different scenarios is dock, shared mobility, park, sanitation,
(conditional automatic) vehicles will different. For some scenarios with mining, retail and other low-speed and
achieve mass production, and after relatively single traffic environment, limited scenarios.
2022, some enterprises will achieve L4 autonomous driving may land
(highly automatic) mass production, commercially in a short time. At this

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Figure 32: Autonomous driving application scenarios

Logistics

APOLLO, UISEE, Public

VIPioneers, Transportation Shared Mobility
RoadStar,Haylion, Sanitation
APOLLO, MAXIEYE, Momenta, LEAP Park Ports and Docks
Smarter Eye, Plus
UISEE, TSINTEL, MOTOR, Shouqi APOLLO,
AI, TuSimple, CCIV, APOLLO, APOLLO,
Horizon Robotics, Limousine & VIPioneers,
Jingchi, CHJAutomotive, Zongmu, WESTWELL,
Roadefend, IN- Chauffeur, Jingchi,
NAVINFO, IN-Driving, Leadgen, UISEE, Plus AI,
Driving, Leadgen, Meituan taxi, IDRIVERPLUS,
IDRIVERPLUS, Neolix, Qingfei, Jingchi, TAGE, Leadgen,
CowaRobot, JIMU, Didi tax, Caocao, NAVINFO,
HOLOMATIC, Leadgen, CCIV, IN-Driving, HOLOMATIC,
Haylion, Jingchi, HOLOMATIC, CowaRobot,
CIDI CowaRobt Kuandeng, Qingfei
HOLOMATIC, Jingchi HOLOMATIC
Kuandeng

Source: Deloitte Research

•• Logistics lead in trial operation in Changzhou and autonomously stop at the

The development of intelligent and Xiong'an. On November 7, 2018, station. On January 22, 2019, the
logistics has broad prospects, and IDRIVERPLUS announced that its first autonomous driving bus
major enterprises are competing unmanned logistics and distribution in Shandong, which was a L4
for layout. The core of logistics vehicle “Wobida” has entered the unmanned intelligent trial vehicle
is scheduling, and that of the stage of mass production. The designed by China Heavy Truck
intermediate transportation link is vehicle is mainly used for unmanned R&D Center, was applied into use.
safety and costs. With the help of logistics distribution in residential On January 18, 2019, the Panda
autonomous driving technology, areas or parks. Intelligent Bus, which was developed
logistics such as loading, unloading, by Deepblue, was officially launched
•• Public transportation
transportation, receiving and at the Summit on the Future
Bus has met the basic standard of
warehousing will gradually become Development of New Generation
autonomous driving because of its
unmanned and machined, Artificial Intelligence. It has been
slow speed, short distance, fixed
stimulating the logistics industry to tested in Deyang, Changzhou,
route and bus lane. Autonomous
reduce costs and increase efficiency Quzhou and Chizhou.
driving system applied to buses
and promoting the innovation
can react to emergencies in time,
and upgrading of the industry. On
able to detect pedestrians and
July 4, 2018, Baidu, together with
other vehicles, slow down and
Neolix, released the L4-class mass
avoid cars, stop the bus under
producted unmanned logistics
emergencies, pass round obstacles
vehicle - "Neolix AX1", and took the

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•• Ports and docks demonstration operation. In addition,

China boasts numerous ports, where the ports of Qingdao, Xiamen,
a large volume of cargo is handled Tianjin and other cities took the lead
each year, demonstrating a huge in launching the unmanned and
demand for truck drivers. The only automated application, becoming the
way for these ports to keep pace high-tech automated port. With the
with those world first-class ones is to active layout of Internet companies
realize the automation of horizontal and automobile companies, and the
container transportation with emergence of autonomous driving
economically feasible schemes. The technology start-ups, the domestic
application of autonomous driving strength in the field of autonomous
technology in ports and docks can driving is growing. In the future, with
effectively solve the problems of the development and evolution of
inaccurate driving line, blind sight environmental awareness, navigation
area caused by turning and fatigue and positioning, path planning,
driving of drivers, and save labor decision-making control and other
costs. At present, many domestic technologies, the commercial landing
ports have taken a key step. On April of autonomous driving technology
19, 2018, FAW Jiefang released the products will gradually move forward
ICV (intelligent container) specially from low-speed to high-speed and
designed for port operation. This from closed to open.
is the first intelligent driving vehicle
in China that realizes L4 class port

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4. Local governments roll out Information Technology issued the and Technology have stated that they
supportive policies, and the Medium- and Long-term Development will drive the development of the IoV
central and western regions begin Plan of the Automobile Industry, industry and autonomous driving.
to thrive stating that autonomous driving
The autonomous driving industry will be the focus of AI development Secondly, many local governments
has been strongly supported by the in the coming decade in China. In have rolled out policies to facilitate
central government and many local 2018, the Ministry of Industry and development of the autonomous
governments. Firstly, the Chinese Information Technology issued the driving industry. It is particularly
government has created a sound Action Plan for the Development of noteworthy that governments
environment for autonomous the Internet of Vehicles (IoV) Industry, nationwide are relatively equal
driving innovation in respect of reiterating the goals including in terms of the support given to
development plans and approaches. "driving leaping development of the autonomous driving innovation; the
Autonomous driving is regarded as IoV industry through continuous governments of tier-one cities are not
a key transformation approach for efforts after 2020", and "gradual particularly advantageous. Currently,
the automobile industry by the state. mass commercialization of high-level 18 cities have rolled out policies
In 2017, the National Development autonomous intelligent connected related to testing of autonomous
and Reform Commission (NDRC), the vehicles and 5G-V2X". In many other driving to designate intelligent driving
Ministry of Science and Technology, occasions, the NDRC, the Ministry of test areas and issue test licences for
and the Ministry of Industry and Transport, and the Ministry of Science autonomous driving companies.

Figure 33: Proportion of number of road test licences for autonomous

driving in different cities (as of 2019 H1)

Beijing Changsha Guangzhou Chongqing Deqing, Zhejiang Shanghai

Pingtan, Fujian Hangzhou Changchun Changzhou Wuxi Suzhou
Tianjin Xiangyang Shenzhen Jinan Baoding Zhaoqing

Source: Deloitte Research

These cities are mainly located in the developed eastern region. However, in the
central and western region, Changsha and Chongqing have demonstrated strong
enthusiasm in autonomous driving. Indeed, the sum of licences issued in both
cities accounted for over one-third (36%) of the total number of road test licences
issued. Furthermore, Changsha became the first autonomous driving city in the
world in 2019.

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3.3 Advanced manufacturing automation and makes it flexible, smart manufacturing is making a much
to reduce costs and improve intelligent and highly integrated. greater contribution to corporate
efficiency profitability. Third, in terms of typical
1.China's smart manufacturing The Chinese government publishes applications, China has become the
products and services' profitability Made in China 2025 in 2015 to clarify largest consumer of industrial robots,
is improving significantly the priority of smart manufacturing. supported by fast-growing demand.
Smart manufacturing covers the whole Through strengthening top-level
product life cycle and aims to realize design, establishing pilots and With the integration of IT and
information-based manufacturing demonstration areas, constructing industrialization in China and the
under ambient ubiquity conditions. standard systems and cultivating development of the industrial IoT,
Based on advanced technologies such system solution providers, the among other initiatives, manufacturers
as modern sensing technology, Internet development of smart manufacturing have made massive improvements to
technology, automation technology and has produced remarkable results, their digital capacity and quality, with
personified intelligent technologies, ushering in a period of rapid growth. the majority now focusing on vertical
smart manufacturing technology uses The growth of smart manufacturing integration of data. As revealed in the
intelligent sensing, human-machine in China is manifested in three main Deloitte survey, 81% of respondents
interaction as well as decision making aspects. First, Chinese industrial have completed computerization.
and execution technologies to realize enterprises have benefited from a Of these enterprises, 41% are in the
intelligent design and manufacturing, higher level of digital capacity and connectivity stage, 28% are in the
which is the deep integration of IT, quality, laying a strong foundation for visualization stage and 9% are in the
intelligent technology and equipment the future analysis, prediction and self- transparency stage. Enterprises in the
manufacturing technology. It updates adaptation of manufacturing systems. prediction stage and self-adaptation
the concept of manufacturing Second, in terms of financial benefits, stage each account for 2%.

Figure 34: The industry 4.0 progress of enterprises (self-assessment)

What stage is your enterprise at?

Computerization Connectivity Visualization Transparency Prediction Self-adaptation

Source: Deloitte Smart Manufacturing Enterprise Survey 2018, Deloitte Research

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China has become the world’s largest the ability of smart manufacturing
robot market and maintained rapid to produce profitable products and
growth since 2013. China’s robot sales services has risen sharply.
exceeded the total amount of the
US and Europe in 2017. The Chinese The profits brought to enterprises
market for industrial robots was valued by smart manufacturing were not
at USD4.2 billion in 2017, or 27% of obvious in 2013 when 55% of surveyed
the global market, and will expand businesses reported a contribution
to USD5.9 billion by 2020. According of 0%-10% to net profit through
to data from the International products and services derived from
Federation of Robotics (IFR), Robot smart manufacturing. In comparison,
sales are expected to reach 160,000, only 11% of respondents in 2017
195,000 and 238,000 units in China reported a profit contribution in
in 2018, 2019 and 2020 respectively, this range, whereas 41% reported
representing a CAGR of 22%. a profit contribution of 11%-30%.
Automotive, advanced equipment As a percentage of respondents,
manufacturing, and electronics and enterprises reporting a profit
electrical appliances remain the major contribution of more than 50%
users of industrial robots. rose from 14% in 2013 to 33% in
2017. The profit contribution of
Upgrading to industry 4.0 brings real smart manufacturing has risen
and visible benefits to manufacturers. markedly, a result of increased
In a Deloitte survey, if 200 production efficiency and higher
manufacturers across the country value products and services.
in 2013, smart manufacturing in
China was found to be in its infancy,
generating meagre margins. However,
after five years of rapid development,

Figure 35: Smart manufacturing products and services are making a

much larger contribution to profits

Profit contribution of
smart manufacturing

Source: Deloitte Smart Manufacturing Enterprise Survey 2018, Deloitte Research

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2. Smart manufacturing ecosystem can be divided into two categories. and circuit of air conditioner and
can’t go without in-depth user First, it is the enterprises engaged build new production lines based on
value extraction in emerging technology innovation. Changhong’s existing air conditioner
The ecosystem is well-developed. They focus on the research of production capabilities to guarantee
Amid growing market competition professional technologies in the production of Xiaomi’s intelligent
and increasingly transparent product segments and provide equipment and air conditioners. Such collaboration
pricing, manufacturers have little technology services for manufacturing significantly improves production
alternative but to seek new sources of enterprises. Second is the traditional efficiency and corporate revenues.
value. Extracting value from equipment manufacturing enterprises, which
is manufacturers’ lifeblood. For boast manufacturing background, Talent supply is abundant. Since
example, R&D design incorporates proprietary products or solid industrial robot field has high
new technology to produce smarter technological foundation. These professional technology requirements,
or more diversified products. At enterprises keep up with the universities and scientific research
the sales stage, equipment-related development trend of smart institutions are playing important
financial services can be provided. manufacturing in the new era and roles. Many business founders and
After sales, data on equipment and independently develop or introduce experts are from universities and
products shipped from the factory are smart manufacturing technologies scientific research institutions. The
collected and monitored in real-time. to improve efficiency, reduce costs industrial planning of Anhui provincial
Performance analysis and predictive and complete transformation and government suggests to encourage
maintenance can then improve upgrading. Collaboration between talents from domestic and overseas
security and create more service the two categories of enterprises can universities to establish industrial
opportunities for the enterprise. maximize benefits, providing practical technology institutes in strategic
Therefore, smart manufacturing technology application scenarios, emerging industry clusters such as
ecosystem requires the participation helping manufacturing enterprises Hefei, Wuhu and Maanshan. Xi’an
of tech intelligent product companies, realize transformation and upgrading also proposes to fully tap talent
financial service companies, data and increase output. For example, resources, scientific research facilities
collection and analysis companies. Xiaomi includes Changhong into its and achievements of local universities
China has developed complete smart manufacturing ecosystem chain including Xi'an Transportation
manufacturing-supporting industries; to promote R&D and mass production University and Northwest Industrial
they can help manufacturing of intelligent air conditioner University and introduce more
enterprises achieve greater progress products with Changhong’s strong talents to develop industrial robots.
in intelligence upgrading. manufacturing capabilities and Moreover, many enterprises also
advanced technologies. Changhong team up with universities to research
Technology drives manufacturing. and Xiaomi establish a joint lab to smart manufacturing technologies
Smart manufacturing enterprises redefine the appearance, structure and applications. It can be seen that
university talents and technology
resources are crucial for the
development of industrial robots. For
instance, Xiaomi introduces innovation
activities into universities by organizing
National Collegian Programming
Contest since 2018 and invests tens of
million yuan to establish a joint AI lab
with Wuhan University, with an attempt
to find more talents and technologies
for innovative development of
smart manufacturing.

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Domestic advantages increase. Figure 36: Industrial robot sales in China in 2016-2018 (sets)
Domestic industrial robot segment
maintains stable growth and domestic
industrial robot sales in 2016 to
2018 is narrowing the gap with
overseas brands. However, the sales
of industrial robot sales of foreign
brands experienced significant decline
in 2018, with less market shares. This
is because with the globalization of
mainstream core industrial robot
component suppliers, the price, cost
and quality gaps between domestic
and foreign industrial robots are
narrowing. In terms of software
algorithm, although the gap still exists,
some domestic robot enterprises
are making technological progress
constantly, breaking the technology
monopoly of foreign brands. For
Domestic industrial robots Foreign funded industrial robots
example, China overcame technical
difficulties in developing high
Source: IFR, China Robot Industry Alliance (CRIA), Deloitte Research
performance control systems in 2017.
The motion system technology owned
by large foreign robot enterprises
competitiveness of domestic industrial optimal choice. Therefore the market
such as ABB was firstly mastered
robots. Moreover, based on various share of domestic industrial robots
by Pokae in 2017, making industrial
advantages such as lower costs and improves constantly.
robots more precise, rapid and stable,
emphasis on client services, domestic
and this effectively improves the
industrial robots have become the

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3. Capital market performs well Year Action Plan for Promoting the actively apply relevant technologies
under synergy effect between Development of AI Industry (2018- in line with market rules. To respond
policy and market demands 2020) and the Smart Manufacturing to policies released by the central
Under the synergy effect between Development Plan (2016-2020). Then government and meet the demands
policy and market demands, the it releases policy instructions to of developing local manufacturing
capital market is confident about help local governments to develop industries, many Chinese provinces
developing smart manufacturing relevant policies according to their and cities announce favourable smart
industry through investments and advantages and guide enterprises to manufacturing policies.
developing a healthy innovation
ecosystem. From 2010-2014,
investment and financing activities Figure 37: Investment and financing activities in China’s smart
in smart manufacturing industry manufacturing industry (2015-2018)
were inactive. Smart manufacturing
attracted wide attention of capital
market since 2015, with significant
increase in the number of transactions
and financial scale. From 2016-2018,
China’s smart manufacturing industry
gained strong growth momentum,
approaching the peak of financing
activities. In 2018, the total financing
scale peaked at USD32.515 billion,
accounting for nearly 15% of the total
financing scale and 12.22% of the total
942 transactions. We can see that
smart manufacturing industry is widely
favored by capital.

With high attention on the

development of smart manufacturing
and industrial robot, the Chinese Financing volume (USD100 million) No. of transactions
government has published many
favourable policies including the Source: ChinaVenture Capital Research Institute, Deloitte Research

Development Plan for the Robotics

Industry (2016-2020), the Three-

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Figure 38: Industrial robot policies announced by local governments

Beijing
Inner Mongolia & Shanxi
Henan, Hebei, Liaoning, Jiangxi & Yunnan •• Research smart manufacturing
•• Encourage leading enterprises core technologies and foster
•• Support the development of advanced to develop intelligent products smart manufacturing industry
equipment manufacturing industry clusters
•• Promote in-depth application
Qinghai, Ningxia, Guangxi, Hainan & Anhui of smart manufacturing
Heilongjiang
•• Promote multi-scenario and multi-domain technologies and establish
application of smart manufacturing innovation application bases
technologies Nei Mongol Jinlin •• Plan to reach a revenue of
Liaoning RMB12-15 billion by 2020 and
Beijing
Gansu, Sichuan, Jilin, Fujian Gansu RMB60 billion by 2025
•• Master intelligent robot Tianjin

component technology Qinghai Shanxi Shandong

Jiangsu, Shaanxi & Heilongjiang
Shaanxi
Chongqing Henan Shanghai •• Support leading enterprises to take
leading roles in developing industry
•• Plan to reach an output value Sichuan Hubei Anhui
cluster and smart manufacturing
of RMB30 billion in intelligent Chongqing
Zhejiang technologies
manufacturing by 2020 and Hunan
RMB40 billion by 2022 Guizhou Jiangxi
Fujian
Yunnan Guangxi Shenzhen Shanghai
Guizhou
•• Increase application scenarios for the deep
•• Develop smart manufacturing integration of smart manufacturing with
with big data industries
•• Plan to reach RMB60-80 billion in robotics
industry by 2020
Shenzhen
•• Build AI-based manufacturing
innovation center to promote
Hunan, Hubei & Guangdong: Zhejiang
technology R&D
•• Advance the industrialization and •• Increase application scenarios for the deep
scaling–up of smart manufacturing integration of smart manufacturing with industries
•• Plan to reach an output value of •• Support the development of advanced equipment
RMB100 billion in robotics and manufacturing industry and plan to reach
related industry in Guangdong by an output value of RMB138.2 billion in robot
2020, to reach a revenue of RMB10 manufacturing by 2020
billion in industrial robots sales in
Hubei by 2020, and to reach RMB20
billion in Hunan by 2020

Weak
Smart manufacturing innovation potential

Strong

Source: Government websites, Deloitte Research

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Rising Innovation in China |
 Chapter 3 Characteristics of development of leading industries in China's innovation

Smart manufacturing company smart manufacturing framework

example: Haier Group system based on Internet factory model
Haier Group, established in 1984, to provide standardized Internet factory
is one of the world’s largest home models and help enterprises complete
appliance manufacturers. It ranked the transformation from traditional
first among global large home manufacturing to smart manufacturing.
appliance brands in sales for eight
consecutive years from 2009 to 2016. 2. Innovate based on user demands.
It increased global revenues by 10% Haier Group’s Internet factories
year on year to RMB266.1 billion adopt a user-centric approach,
in 2018, leading the whole home which customizes products based
appliance industry. As a pioneer in the on user demands and realizes
home appliance industry, Haier Group flexible production with smart
started to construct Internet factories manufacturing technologies in the
since 2012. Now it has successfully era of Industry 4.0. On one hand, for
built several Internet factories and the lack of technological innovation
developed the first industrial Internet and diversified products, Haier
platform COSMOPlat, ushering into Group has to spend a lot in pre-
the era of smart manufacturing. In research and production. In order
2018, Haier Group was shortlisted in to gain advantages in fierce market
Fortune Global 500. Haier Group’s competition, Haier embraces smart
smart manufacturing innovation manufacturing and establishes Internet
activities have two main traits: factories to reduce manufacturing
costs and increase profits. On the
1. Develop smart manufacturing other hand, Haier Group shifts the
ecosystem. Haier Group finds that main purpose of Internet factories
China’s manufacturing industry from product manufacturing to
has the most complete industrial service offering and firstly rolls
system although the manufacturing out industrial Internet platform to
technologies are still inferior to provide individualized and massively
developed countries. Therefore, customized solutions and help
Haier Group changes the mindset enterprises to transform and upgrade
in innovating smart manufacturing from traditional manufacturing to
by giving up developing special smart manufacturing.
smart manufacturing technologies
and products, but focusing on
building industrial Internet platform
COSMOPlat to establish an inclusive
smart manufacturing ecosystem
for China’s huge industrial system.
COSMOPlat provides advanced
technologies and applications centrally
for Chinese manufacturing enterprises,
customizes solutions for enterprises
through cooperation with upstream
or downstream enterprises to satisfy
individualized demands with high
accuracy, and develops a standardized

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 Rising Innovation in China |
 Chapter 4 Challenges in the development of China’s innovation ecosystem

Chapter 4 Challenges in
the development of China’s
innovation ecosystem
1. Core technologies to be further Figure 39: Patent application and authorization activities in
improved China (2014-2018)
China’s tech innovation ecosystem has
achieved high-speed development.
Innovative applications are ubiquitous
and remarkable achievements
have been made in tech, medical,
financial and auto industries.
Moreover, driven by innovation,
education, manufacturing, culture &
entertainment and transportation
sectors have been optimized and
upgraded, driving coordinated
development of various industries.

With the increase of scientific research

investments and patent volumes,
No. of patent application (10,000) No. of patent authorization (10,000)
China’s innovation companies and
innovative products have gained some Source: National Bureau of Statistics of China, Deloitte Research
competitiveness. Core technology,
as one of the most important factors
when measuring the innovative such as synchronous satellite system progress. Communications giant
development of a country, is in the communications industry, Huawei submitted 5,405 international
closely related with sustainable vaccine R&D in the pharmaceutical patent applications in 2018, covering
development of enterprises and industry (including HBVae, EHF-IgM, innovative research on 5G, array
their international positions. Chinese SARS vaccine etc.) and high precision camera, chip R&D etc.
enterprises have mastered the core bearing in the manufacturing industry
technologies of many industries, etc. and achieved remarkable

50
Rising Innovation in China |
 Chapter 4 Challenges in the development of China’s innovation ecosystem

However, in communications, electric Figure 40: China’s integrated circuit imports (2010-2018)
equipment and precision instrument
and auto manufacturing sectors,
especially in terms of semiconductor
materials manufacturing, ultra-high
precision machine tool production
and electronic fuel injection system
research, Chinese enterprises are
still at the early development stage.
They have not yet mastered the core
technologies of some industries and
heavily rely on external technology
assistance. For example, the import
of integrated circuit has maintained
growth since 2010. In 2018, China’s
integrated circuit imports increased
by 19.8% to RMB2058.41 billion, with Import value (USD100 million) Y-o-Y growth (%)
deficit exceeding USD200 billion.
Source: National Bureau of Statistics of China, Deloitte Research

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 Rising Innovation in China |
 Chapter 4 Challenges in the development of China’s innovation ecosystem

Chip is the cornerstone for the Figure 41: Geographic distribution of global top 15 semiconductor
development and application of manufacturers (2018)
communications and electronic
component manufacturing. Chip
manufacturing and research play
important roles in tech innovation
industries. However, no Chinese
enterprises ranked in global top 15
semiconductor manufacturers in 2018.
Considering the high performance
and high efficiency brought by import,
Chinese enterprises import nearly
90% of core chips. From resistance,
electronic components to chip
design and manufacturing, Chinese US Korea Europe Japan Taiwan (China)
enterprises are still at the middle and
low end of global industrial chain, while Source: ICInsights, Deloitte Research
only package and testing can compete
with leading global enterprises.

Chinese high-tech enterprises’ heavy recent years, further improvement is enterprises are importing drugs
reliance on foreign technologies still necessary. developed by Chinese enterprises
directly leads to increase in patent with growing transaction size.
fees. Taking the communications However, on the other hand, all
In terms of capital, China’s overall
industry as an example, Chinese the 12 most important new drugs
R&D expenditures increase year by
mobile makers have to pay several selected by the State Food and Drug
year, but the returns on investment
millions of RMB to Qualcomm every Administration were developed by
in different industries are uneven,
year for using its patents in the 4G foreign enterprises. It is obvious
and some industries can’t receive
era. With the implementation of 5G that the investment demand for
enough investments. For example,
technology, Qualcomm will receive pharmaceutical research is growing.
while pharmaceutical industry holds
RMB1 trillion patent fees from China Improving the returns on investment
the second largest patent volumes,
within the coming 5 years. and injecting limited resources into
it obtains the least investments
industries with the largest potential
in eight industries. On one hand,
China lags behind in core technologies and innovation value have become
Chinese pharmaceutical enterprises
for three reasons: capital, talent and the major topics.
are gaining stronger cutting-edge
policy. Although significant progress drug research capabilities, and more
has been made in many aspects in and more foreign pharmaceutical

52
Rising Innovation in China |
 Chapter 4 Challenges in the development of China’s innovation ecosystem

Figure 42: Comparison of R&D investment and patent volume in eight industries

g
al

t
rin

rin

rin

l
g en

a
tu d
g
tic
t

et
ac n
rin
en

tu

tu

tu
rin m
uf y a
ui s

eu

sm
eq ion

tu ip
ac

ac

ac
pm

ac

an ner

ac qu
uf

uf

uf

ou
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an

an
uf l e
t m chi
g on ic

rr
ar
rin tr un

an ra
tm

Fe
Ph

en ma

m ene
tu lec m

to

ls
en

ica
ac e m

Au
pm l
ui ica

G
pm
uf er , co

em
eq ctr
ui
an th r

Ch
m d o ute

e
eq

El
an mp

ial
ec
Co

Sp

Average patent No. of enterprises above designated size R&D expenditures in 2017 (RMB100 million)

Source: National Bureau of Statistics of China, Yiou.com, Deloitte Research

Talents are important for innovative Top-level design can accelerate and manufacturing. Besides, growing
development of high-tech industries and propel innovation in various domestic demands will help China
such as AI industry. High-quality talents industries. Government’s policy achieve greater innovation results.
can support innovative development support enables start-ups to focus on Core technologies are fundamental
of enterprises with their skills and research and lay solid development for the development of innovative
experience. Looking at domestic foundation. The government can industries. If we only focus on a small
talent supply, domestic university help build innovation ecosystem part of the industrial chain and don’t
graduates don’t obtain enough skills via tax incentives, capital support, develop independent and controllable
and experience with less access to special projects and favourable core technologies, nothing will be
education resources than universities talent policies, but how to further achieved. The most important task
in developed countries such as the improve the execution efficiency and for China now is to develop core
US. However, talents coming from make detailed rules requires serious technologies that can compete with
foreign companies or entrepreneurs consideration. advanced countries under capital,
graduating from foreign universities talent and policy support.
might face risks such as financing Regarding future development,
difficulties and fast technology Chinese manufacturers still have
iteration. On the other hand, strategic huge opportunities to catch up with
M&As and talent introduction foreign peers holding advanced
measures of foreign companies also technologies. External political
pose challenges for China to attract factors force Chinese enterprises to
more innovation talents. concentrate on independent research

53
 Rising Innovation in China |
 Chapter 4 Challenges in the development of China’s innovation ecosystem

2. “False innovation” disrupts these techs, AI is the most widely and The government has increased
innovation environment most maturely applied. However, research expenditures and
In essence, innovation means using some products such as AI-based investments in recent years.
original technologies, new production stock investment apps and wealth Meanwhile, approval procedures
methods and management models management robots just borrow the should also be stricter and more
to add vitality for the market and concept of AI but have never applied effective, so as to prevent the
industry and increase value. Innovative innovative AI technologies. It seems intervention of administrative rights
enterprises need a free competition that some P2P online lending products and monopoly, avoid resource
environment to grow and increase adopt innovative models, but actually, mismatch, and help government’s
value. If enterprises lacking innovation they are just fabricating information investments in innovative industries
capabilities and research investments with rule loopholes, finally damaging produce effective results. In this
use innovation products without the interests of users. Another process, policy innovation is becoming
innovation value to compete with example is that some companies more and more important. Facilitating
other enterprises, this will increase roll out business expenditure multi-function coordination and
expansion costs and disrupt the management apps based on intelligent establishing anti-monopoly platforms
innovation ecological environment, scanning technologies. They boast can help create healthy innovation
leading to the tragedy that genuine of their mature AI technologies environment and make enterprises
innovative ideas will be nipped in application, while in fact, they hire gain more innovation motivations.
the bud. New methods and models human workers to process invoices to On one hand, patent review agencies
contain more uncertainties and risks read and transcript documents. should pay more attention to the
than existing mature models, but they originality and industrialization
can bring real growth momentum for High returns on innovation attract possibility of patents. On the other
industries. Under such circumstance, some enterprises to obtain the hand, local governments should
we should be alert that some attention and trust of customers consider whether applicants have
enterprises would attract capital in and investors via “false innovation” innovation capabilities, whether they
the name of innovation and make or to monopoly the market by using can boost the development of local
unreasonable request. Their practice favorable innovation policies. Such innovative industries and whether they
is contrary to the original purpose of behaviors not only waste public can help local business environment
innovation. resources, but also inhibit real thrive and diversify.
innovation motivation. For the market
In recent years, AI, blockchain and and individuals, how to identify real
big data have become hot words in innovation is indeed a science. For
the innovation field. The hotter these the government, how to use policy
words are, the more active “false support to promote justice and equity
innovation” enterprises will be. Many and prevent false innovation is also an
innovative technologies have been important issue.
applied in the financial sector. Among

54
Rising Innovation in China |
 Chapter 4 Challenges in the development of China’s innovation ecosystem

3. Excessively pursuing crash in developing them as pushing for

innovation a leap straight to innovation brings
Innovative companies need to evolve nothing but harm to the market
from incubation to maturity, and and companies.
during this process, capital acts
as incubator and driver. However, For example, in the sharing economy,
lured by capital, an increasing a hot area in recent years, bicycle
number of companies are pursuing sharing unicorns are suffering from
crash innovations and financing broken capital chains and pledging
maximization by attracting investors massive bicycles for borrowings. The
via concepts for imagination root cause is that expanding too fast
instead of focusing on developing cannot match with their immature
innovative technologies and projects. profit models. How to help companies
If an innovative project lacks core gain profits and prevent from capital
competitiveness and focuses only losses should be considered before
on opportunity and speed, even the companies’ gaining the next round of
strongest capital incubator cannot funding, but pursuing speedy model
develop a valuable company. innovations distorts priorities
of companies and hampers
The activity and prosperity of the innovative practices.
venture capital market where
companies shorten innovation Innovation should be built on robust
cycles with an intention to obtain basic research to develop valuable
short-term funding is not reflected in products that satisfy market needs
real economy. The value bubbles of through technology-led innovations
innovative projects under the irrational and ultimately add values to industries.
exuberance will burst upon a period For innovators, funding means both
of value accumulation. Excessive opportunity and risk. What matters
capital hype has adverse effects for most is the transition of role and mind-
companies to build technology and set from followers to pioneers and
talent bases. In recent years, many the utilization of capital. For investors,
companies have only spent three investing in companies with innovative
or two years or even 17 months value and preparing for medium
going public from establishment and and long-term investment as well as
gained numerous clients in a short reasonable valuation is the best way to
time through platform subsidies and fight against cash crunch and increase
income statements with negative net return on investment.
earnings, focusing too much on speed.
When finding new business models
and potential markets, companies
need to take some patience and time

55
 Rising Innovation in China |
 Chapter 4 Challenges in the development of China’s innovation ecosystem

4. A wide talent gap

Technological developments and established applications increase demands in communication and instrument
manufacturing and development, new retail, finance, new energy and new materials, while there is a shortage of innovative
talents, e.g. a lack of over 1.5 million Fintech talents. Besides, regions have no agglomeration advantages with lower talent
concentration. Combined with fewer quality talents at home than abroad, the wide talent gap leads to weak innovative
strength. Innovative companies are challenged by bringing in and developing talents.

Figure 43: Expected talent gap in certain industries Figure 44: Proportion of AI experts with
in 2025 doctoral education
Talent gaps in related industries
(10,000 people)

ta d g
da an e
g hicl n olog
y
ca
l in
g i m
Bi i n r
fo
r
av ve tio hn e
er
y s ergy era tec n um ine - p
g h
er n en on nd ac igh
En w e xt g ati h -e l m e /h U.S. UK Canada Germany
e e
n Ne form g o
Hi ntr
n
ici evic France China Others
i n o e d d
c l
om ca
Bi edi
m

Source 1: Ministry of Education, Ministry of Human Resources and Social Security, Ministry of Industry and Information Technology, Tsinghua University
School of Economics and Management, Deloitte Research
Source 2: LinkedIn, Deloitte Research

Introducing talents plays an important prevent from resource fragmentation guide talents to join research and
role in the context of a wide talent in order to help companies first high-level technology workforce,
gap. All regions are competing for settle in areas with industrial bases optimize disciplines and launch new
top talents as Shanghai, Shenzhen, and build a complete closed loop of majors properly in higher education
Nanjing and Tianjin have introduced talent resources from universities and institutions according to market needs.
policies to bring in overseas talents brought in from overseas as well as For example, Chinese universities need
and attract excellent technicians and leading companies and high-tech start- to offer more AI related majors against
developers in entrepreneur services, ups with a focus on innovation. the backdrop of the fast growing AI
settlement, and residence visa as industry and the increasing percentage
well as cash subsidies. The release of In order to attract numerous quality across the globe.
talent introduction policies by many talents and respond to the growing
regions indicates the vigilance and market, China should place priority
attention of local governments on on developing educational resources
talent gaps. Moreover, they need to and relevant professionals. It should
maintain industry concentration and build strong basic disciplines, actively

56
Rising Innovation in China |
 Chapter 4 Challenges in the development of China’s innovation ecosystem

Figure 45: Number of higher education institutions offering AI related majors in the world in 2018

Canada China

Nether
Australia lands
UK

Sweden Brazil

U.S. India Germany Israel

Source: www.chyxx.com, Deloitte Research

In addition to offering relevant majors, with innovative thinking and adjusting active in innovation. As the premise
universities should provide courses the structure of educational industry of innovation is product quality and
that are highly relevant to practical by learning advanced educational safety, poor-quality innovations
application in terms of educational experience are the only way to may negatively impact on consumer
contents. Companies and universities develop talents who can drive and lead experience. Besides, placing less
can work together in developing innovations. emphasis on quality will make it
quality talents for specific segments harder to scale up and commercialize
and training skilled and experienced 5. No quality mind in innovation innovations in relevant sectors and
technicians. The talent structure Quality is the foundation for even lower market recognition of
adjustment model in Germany is innovation and the economic climate the value of products in the context
available for reference: as the new is essentially dependent on the growth of increasing market attention on
mode of production centered on of quality innovation. Innovation reputation and reducing tolerance for
intelligent manufacturing changes the serves real economy rather than safety incidents.
traditional manufacturing, German capital markets. If companies only
occupational training schools respond pursue seemingly innovative popular In the manufacturing industry, the
to the trend by adjusting their courses concepts and models instead of trend of automation drives companies
to focus more on information literacy focusing on improving the quality of to innovate and connect more
and skill training for students. They innovative products, they just develop manufacturing facilities with automatic
adjust the proportions of information imitations without sense of innovation controlling networks. However, some
technology, engineering and math and cannot create highly valuable companies have no network security
based on market needs and provide products. measures in place while innovating
more digital hardware in classrooms In the new energy vehicle (NEV) the mode of production, leading
to stress the application and improve industry, for example, the ownership to data loss and even large-scale
students’ abilities in knowledge transfer. of electric vehicles in China was 2.11 shutdown. Companies’ file loss and
million in 2018 while over 40 battery terminals losing control caused by
Talent is the core of innovative fire incidents have happened as ransomware virus in recent years
industry development while there of 21 October 2018, raising public is a typical example. In the internet
is no short cut to expand talent doubts about vehicle security. The industry, taken as another example,
development channels. Developing overall NEV market tends to be the first batch of innovators have
educational resources in universities

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 Rising Innovation in China |
 Chapter 4 Challenges in the development of China’s innovation ecosystem

gained benefits from the internet and among which quality innovation
improved the quality of consumption is the most fundamental and
in mobile social networks and favorable aspect to improve
e-commerce. Currently, different customer experience and promote
concepts and terms are springing the development of real economy.
up, such as social network fission, Providing high-quality products and
access to users in less developed services is the essential motivation
areas and privately-owned access to for enterprises to achieve sustainable
users that gains popularity this year. growth while innovation can help
All of these are in fact variants of improve the competitiveness and
internet marketing. Several companies quality of products. Enhancing
look to gain a little cake from the quality awareness and independent
internet model through such so-called innovation capability of enterprises
innovations. However, the simple and actively carrying out quality
innovation of form will be a flash in innovation are very important for
the pan if it is not backed by quality preventing economic downturn.
technology and design, not to mention
making contribution to real economy. Higher quality awareness is the core
Latecomers should focus on internet- pillar of innovative development. New
based product research and design to products and models need to be
innovate and integrate cutting-edge supported by secure and achievable
technologies with real economy. applications. A healthy and favorable
Product quality, business model innovation environment could attract
and talent structure create some more innovative participants who value
development space for innovation, quality to provide reliable ground-
breaking products for the market.

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Rising Innovation in China |
 Chapter 5 New landscape of China's innovation ecosystem

Chapter 5 New landscape of

China's innovation ecosystem
1. The booming digital economy Mobile payment is also going global. connection will help traditional
drives the globalization of China's With over 250 partnerships, Ant industries enhance industrial
innovation ecosystem Financial is connected with hundreds base and technology innovation
As one of the country's key GDP of thousands of merchants across 54 capabilities, and promote integration
growth drivers, China's digital countries and regions. By providing of manufacturing with modern service
economy reached RMB31.3 trillion technical support, Alipay has launched industry to tap complementary
in 2018 with an increase of 20.9%, nine localized "Alipays" with local advantages. Internet innovation
accounting for 34.8% of the total partners along the Belt and Road. In is also likely to drive "intelligent +"
GDP. The digital economy is rapidly addition, prominent sharing-economy development, saving significant labor
integrating with the real economy to player Mobike has expanded its cost and enabling transformation of
help the latter, which has reached a business to 19 countries, covering traditional manufacturing.
bottleneck, get out of the slowdown. more than 200 million users.
In recent years, with the rapid As one of the countries with the most
development of internet model and Digitalization is essentially a process labor resources, China will see a large
big data, the concept of digitalization of sharing. Driven by digital economy, proportion of jobs replaced by AI.
has penetrated into various industries information, resources, platforms and Such trend will enhance job mobility
and sectors. Driven by digitalization, customers are shared by network and drive people to learn new skills
China's innovative technologies and end users. China's innovation can and knowledge, therefore promoting
products are going global. go global with the support of digital labor transformation and upgrading
economy, when it is competitive industry to high-end sectors of the
China's e-commerce, mobile payment enough. In the future, China can make industrial chain. Internet innovation
and bike sharing, the world-leading better use of internet innovation stimulates mass entrepreneurship.
innovative models, are closely and upgrade to extend to high-end Upgrading digital economy will bring
connected with digital economy. Take sectors of the industrial chain, about closer connection between
online retail as an example, China, the cultivate new growth drivers and internet and real economy, releasing
world's biggest online retail market, optimize the economic structure. more new industry models and
is taking the leadership in the new markets. Based on internet, shared
digital-driven retail revolution. As Low labor cost is no longer economy and platform economy
estimated by internet retailers, China an advantage for China to win will stride forward and trigger
accounts for approximately RMB9 competition in the international further development of mass
trillion of the USD2.86 trillion spent market. Internet innovation is entrepreneurship and innovation,
by global consumers buying retail facilitating the upgrading and creating more creative industries and
goods online in 2018, suggesting that development of traditional and economic development opportunities
China's online sales are 1.78 times emerging industries, as well as labor and delivering high-quality products
of the global average. E-commerce optimization. Internet innovation will and services to the world.
giant Alibaba provides a platform for serve as a new driver for traditional
global sourcing and its global website industries, as internet connects
has expanded online sales to 190 not only people, but also objects,
countries and regions. companies and industries. Internet

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 Rising Innovation in China |
 Chapter 5 New landscape of China's innovation ecosystem

2. Regional economic integration further synergizes and allocates innovation resources

Yangtze River Delta, Guangdong-Hong Kong-Macau Region and Beijing-Tianjin-Hebei Region are China's three major city
clusters developing in a synergetic manner. Other economic clusters include the Northeastern Region, central China, middle
reaches of Yangtze River, Chengdu-Chongqing Region, Guanzhong Plain and Beibu Gulf economic zone. The synergetic
effect of regional economic clusters is significant, as evidenced by nearly 50% of China's total GDP in 2018 contributed by
three major city clusters, which have been playing an important role in driving the country's economic growth. Based on
such advantages, innovation industry leverages integrated and derivative resources and mixed industrial elements, shaping
a new landscape of interactive development.

Figure 46: Contribution of each region to China's total GDP

Yangtze River Delta Guangdong-Hong Kong-Macau Beijing-Tianjin-Hebei Region Other regions of China
Greater Bay Area

Source: IMF, National Bureau of Statistics, the World Bank, Deloitte Research

As a good example of regional serves as the technology innovation number of top universities across the
economic integration in China, engine of the area. Over the past area have been playing leading roles
Guangdong-Hong Kong-Macau 40 years of reform and opening up, in technology innovation research.
Greater Bay Area has benefited Shenzhen has been developed to a The University of Hong Kong, the
from complementary resources, as city with leading innovation mind-set Hong Kong University of Science and
each city in the area stands out for and strength in China. Five of the Technology, Sun Yat-sen University and
its competitive industry (Hong Kong country's top 10 venture capitals are South China University of Technology
for finance, Shenzhen for hi-tech, from Shenzhen. The city accounts for in particular, have world-leading
Macau for tourism, Dongguan for nearly one-third of China's venture technology innovation capabilities and
manufacturing and Guangdong for capital funds and projects. Shenzhen's serve as a large platform to attract
logistics). It has provided a favorable complete industrial chain leads to elites in all fields, proving high-end
environment for the integration of faster product manufacturing than talents for technology innovation of
technology innovation resources. With Silicon Valley. Favorable innovation the Greater Bay Area.
booming digital economy, the Greater environment allows Shenzhen
Bay Area's advantages have laid a solid to develop to be the undisputed
foundation for technology innovation. technology innovation center of the
As China's innovation hub, Shenzhen Greater Bay Area. As for talents, a large

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Rising Innovation in China |
 Chapter 5 New landscape of China's innovation ecosystem

Favorable policies are accelerating the 3. Increasingly innovative better nowadays. Firstly, with great
integration of technology innovation private companies drive the policy support including the launch of
resources in each region. Report on transformation and upgrading Science and Technology Innovation
the Work of the Government 2018 has across various industries in China Board, it becomes less difficult for
proposed to drive innovation along Private companies have been playing private companies to raise fund in
the Yangtze River economic zone and a key role in driving China's economic an easing financing environment.
the construction of "central technology growth since the reform and opening In addition, private companies
innovation zone, technology resource up. At present, China's private are faced with a better business
sharing zone, technology-enabled companies have contributed more environment, including easier market
livable zone and technology industry than 60% of GDP, over 80% of urban access, more streamlined approval
creation zone" in the region. Outline job opportunities, as well as over process, greater legal protection and
of the Development Plan for the 70% of technological innovations. As more slashing taxes and fees. All the
Guangdong-Hong Kong-Macao China shifts the focus of economic above have added momentum to
Greater Bay Area has defined the development from rapid growth the transformation and upgrading of
roles of major cities in innovation and to high quality, the innovation and private companies.
highlighted policies and measures upgrading of private companies
to facilitate cross-boundary flow of become critical to the transformation Private companies are driving
innovative elements and regional and sound development of China's China's industrial transformation and
integration. Measures to drive economy. upgrading through self-dependent
integrated innovation development innovation. Unlike state-owned
across Beijing-Tianjin-Hebei Region, Innovation of private companies is enterprises, private companies have
including the establishment of Tianjin an economic imperative supported their own distinctive characteristics.
Binhai-Zhongguancun Science Park by the government. At the second Highly flexible and market sensitive,
and issuance of Blue Book on the session of the 13th National People's private companies are well positioned
Development of Beijing-Tianjin-Hebei Congress, President Xi Jinping joined to accelerate the development of
Region, have proved the government's deliberation with deputies from competitive products, drawing on
determination to promote regional Fujian Province, and urged solid scientific achievements by universities
economic integration. implementation of the policies and and research institutes. Large-scale
measures to encourage, guide and application of newly developed
With the rapid development of regional support the development of the high-tech products in the market is
economy, Guangdong-Hong Kong- private sector. He also stressed required for subsequent update to
Macau Greater Bay Area, metropolitan creating favorable conditions meet ever-changing client needs.
interlocking region across Yangtze for entrepreneurs while driving This process is quite demanding on a
River Delta, Beijing-Tianjin-Hebei innovation of private companies. company's technological capabilities,
ecosystem, Xiamen megalopolis and business proposition, cost, service as
Changchun megalopolis are emerging Private companies used to face well as foresight, and requires years of
fast. Regional economy is likely to shift many challenges in innovative iteration on a large scale. Therefore, it
from regional economic and trade development. On the one hand, is necessary for a company to sustain
cooperation to collaborative innovation high operational cost has greatly its profitability for continuous and
and from co-building production hindered the development of private long-term investment in R&D, in order
chains to co-building quality life cycles, companies, making it difficult for to form a complete loop featuring
so as to comprehensively attract and them to get financing. In terms of "develop-go to market-develop". High-
allocate talents, businesses, industries business environment, more efforts tech private companies are generally
and other innovation resources. are needed to foster greater fairness doing well in this regard.
in the market with market-oriented
economic system to be further
improved. Yet things are getting

61
 Rising Innovation in China |
 Chapter 5 New landscape of China's innovation ecosystem

4. Key mechanism and policy order to cultivate top innovative

innovation become the driving talents, it is necessary to increase
engine of China's innovation investment in basic education,
According to the Guidelines on Tax strengthen discipline construction,
Incentives for Mass Entrepreneurship develop a high-quality faculty via
and Innovation issued by the State various approaches including higher
Taxation Administration in June 2019, salaries, and inspire creative thinking
China has launched 89 preferential by establishing research institutes.
tax measures in succession with As for the conversion and application
respect to vital sectors and key of research results, it is advisable to
areas of business startup and ensure effective activity management
employment, covering the entire and ease financing environment to
life cycle of an enterprise. The new boost innovation.
edition incorporates relevant policies
that further help enterprises gather China has officially launched a
funds, making it easier for micro reform on its science and technology
and small enterprises and individual mechanism, with diverse focuses at
businesses to get loans from financial different stages, including identifying
institutions. In terms of the entire objectives, raising awareness on the
innovation industry, most preferential importance of science and technology,
policies tend to favor self-dependent strengthening the construction of
innovative companies across various scientific research team, facilitating
industries including biomedicine, big basic researches, opening up
health, virtual reality, 3D printing, technological market, improving self-
green finance, and new energy power dependent innovative capabilities,
generation through an increasingly establishing technological innovation
diversified manner. The first thing is systems through industry-university-
to further protect intellectual property research cooperation, and promoting
while increasing the penalties for industrialization. By adapting to market
breaches. Other measures include dynamics and demands at different
higher financial subsidies, lower taxes, stages, mechanism and policy reforms
new management models, talent have paved the way for high-quality
attraction policies and new platforms scientific innovation, thereby adding
and channels, etc. momentum to innovation. China has
initiated a new round of institutional
Innovation is not possible without reform by establishing new research
government and policy support. institutes to integrate all sorts of
More favorable institution setup, resources. The aim is to narrow the
mechanisms and policies are critical gap among science, technology and
drivers of innovation. Major policies to product, thereby shifting the focus
accelerate China's innovation include from industry management to function
increasing relevant investment and management. At present, China's
creating a more favorable environment increasingly mature science and
for innovative companies and talent technology mechanism has become a
development. Fundamentally, in key driver of China's innovation, fully

62
Rising Innovation in China |
 Chapter 5 New landscape of China's innovation ecosystem

5. China's innovation ecosystem investment focus. Nowadays, China's

continues to expand with support venture capital market mainly relies
from the capital market especially on domestic channels for fundraising.
the launch of Science and
Technology Innovation Board In response to the reform towards
China's Science and Technology innovation-powered development,
Innovation Board was launched in top-level design of the capital market
2019, with a key focus on companies needs to focus on opportunities from
in high-tech and strategic emerging scientific and technological innovation.
sectors such as next-generation IT, Moving forward, the capital market
advanced equipment, new materials, should further balance its relationship
new energy, energy saving and with innovative companies. On the
environmental protection, and one hand, the capital market should
biomedicine. The new board will reform and innovate to satisfy evolving
provide greater financing support for corporate and market demands, in
innovative companies, and strengthen order to increase its inclusiveness
the connection among science and and adaptability. Meanwhile, it is
technology, capital and real economy, necessary to highlight the role of
thereby accelerating the conversion capital as the driving force of scientific
of scientific findings to productivity. innovation by adding momentum to
Previously, companies which seek market dynamics. In addition, it is
listings must get approval from necessary to increase transparency of
Issuance Examination Committee corporate information and improve
and meet certain requirements, selection mechanism to avoid pseudo-
significantly limiting the development innovation and overheated capital
of innovative companies. With a investment.
registration-based system, the
Science and Technology Innovation In a healthy and sustainable
Board has adopted more diversified innovation ecosystem, the capital
standards, allowing strong tech market serves as an accelerator
startups to quickly get listed via Q&As instead of the basis for growth.
based on information disclosure. Only those with strong innovation
capabilities and mature models will
Capital market is a key pillar of benefit from the market mechanism.
China's innovation. As part of the Capital does not guarantee quality
second-tier market, the Science and technological innovation, though it
Technology Innovation Board signifies may help startups expand business
greater capital support to China's scale. Therefore, it is imperative for
innovation ecosystem. In the venture entrepreneurs to adhere to long-term
capital market, both the volume goals through strategic planning.
and the frequency of investment Doubtlessly, with full support from
in innovation have grown year by the capital market, more excellent
year, with tech startups in AI, new tech startups and entrepreneurs will
materials, biomedicine and advanced emerge and thrive.
manufacturing becoming the

63
Contact us
Deloitte China Innovation Department

Dora Liu Steven Feng Annie Yu

Deloitte China Deloitte China Deloitte China
Innovation Sponsor Innovation Department and Innovation Department
Tel: +86 21 6141 1848 Greenhouse Partner Senior Manager
Email: [email protected] Tel: +86 21 6141 1575 Tel: +86 21 6141 1857
Email: [email protected] Email: [email protected]

Deloitte Strategy and Market Research

Xu, Sitao Lydia Chen Iris Li

Deloitte China Chief Economist Deloitte Research Deloitte Research
Deloitte Research Leader, Partner Director Senior Manager
Tel: +86 10 8512 5601 Tel: +86 21 6141 2778 Tel: +86 10 8520 7038
Email: [email protected] Email: [email protected] Email: [email protected]

Roger Chung Hu, Yi Wang, Qingyi

Deloitte Research Deloitte Research Deloitte Research
Senior Manager Senior Specialist Senior Specialist
Tel: +86 21 2316 6657 Tel: +86 23 8817 8295 Tel: +86 21 2312 7486
Email: [email protected] Email: [email protected] Email: [email protected]

Jane Zhang
Deloitte Research
Specialist
Tel: +86 23 8969 2513
Email: [email protected]

64
About Deloitte China Innovation Department

Founded in 2011, Deloitte China Innovation Department is dedicated to providing the clients with "high-value,
high-tech and high-touch" services and experience, and promoting Deloitte's innovation development in China by
collaborating with 17 innovation departments of Deloitte Global network. By leveraging SPEED SET, a revolutionary
acceleration model on Greenhouse platform, Deloitte China Innovation Department senses and engages global
cutting-edge and disruptive innovation technologies, connects internal and external resources, facilitates innovation
transformation and builds win-win innovation ecosystem by connecting enterprises, government institutions,
universities, incubators and innovative technology companies.

For more information,

please send email to [email protected]

Or please visit the official website

https://www2.deloitte.com/cn/en/pages/innovation/topics/innovation.html

You can also scan the QR code on the left to enter the webpage

65
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