A New Hub?

Silicon Valley has a new competitor.

Photo: Victor Hanacek. Source: Picjumbo

For years California has been the leader in generating, funding, and bringing new information technologies to the market. From Intel to Apple to Google to Facebook, Silicon Valley has been a nexus of technological innovation and economic growth. The last serious competitor to the Valley was Route 128 outside of Boston. Both areas had strong sources of human and financial capital, but Silicon Valley benefited from a more free-wheeling, less hierarchical, and more risk-taking culture than New England.

But there’s a new kid in town: China. The massive wealth generated by liberalizing an economy with a billion consumers is now being deployed into key areas: AI, semiconductors, consumer-facing apps, and data-driven analysis. Ten years ago, the US provided almost 80% of global venture funding. Last year the US invested 45% of all startup money, while China shelled out 25% — up from a tiny fraction a decade ago.

Shenwuman Gate in Beijing. Photo: Kallgan. Source: Wikimedia

And China is increasingly the target – as well as the source – of new investment. Last year the US received $60 billion in venture funding, while China garnered $42 billion. Internet giants Tencent, Alibaba, and Baidu are identifying and funding local startups at a record pace. China is now creating unicorns – startups valued at a billion dollars or more – at much the same rate as the US. And the Japanese investment group Softbank has tapped Middle Eastern money to create the world’s largest technology-oriented venture fund.

These technology investments are intended to build long-term access and long-term value. While US companies believe they can build a better app and the world will beat a path to their door, the Chinese approach is to go local: find and fund a home-grown partner to stave off American advances. Joe Tsai, Vice Chairman at Alibaba, described it as a game of go, where the strategic objective is to place your pieces on the board in a manner to surround your opponent.

Public Domain. Source: Wikimedia

Where this is leading is anyone’s guess. Competition is generally good for consumers and good for innovation. It spurs us to cut costs and implement new ideas. But for this to happen there must be rules of the road: ways to interact and resolve conflict that don’t destroy value. Because in the end, all capital – whatever the source – seeks returns.

In 1972, when Henry Kissinger asked Chinese Premier Zhou Enlai what he thought of the French Revolution (of 1789), Zhou replied, “It’s too early to tell.” The comment has been used as a supposed illustration of China’s long view of history, but Zhou actually thought Kissinger was referring to the Paris student revolts of April 1968. Another diplomat present at the time found the misunderstanding “too delicious to invite correction.” Let’s hope our investment infrastructure – exchanges, accounting, reporting, information – don’t invite similar misunderstandings.

Douglas R. Tengdin, CFA

Charter Trust Company

“The Best Trust Company in New England”

By |2018-04-24T07:42:26+00:00April 24th, 2018|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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