China, a global innovation powerhouse in the making?
Kévin Net, Manager, Head of the Asia Division, La Financière de l’Échiquier (LFDE) | February 2025
A few days before the start of the Year of the Wood Snake, China surprised the world with DeepSeek, an artificial intelligence (AI) model developed by the Chinese start-up of the same name at a small fraction of the cost of those developed by OpenAI and other American competitors. This is all the more remarkable as it comes against a backdrop of extreme rivalry between the United States and China, and increasingly restricted access to Western technology for Chinese companies.
While many eyes are now on DeepSeek’s potential impact on the AI value chain, as well as the spending of US hyperscalers, this achievement – even if some grey areas remain – illustrates the strength of Chinese innovation. Capacity for innovation is crucial to staying in the economic and technological race with the United States.
And China is investing heavily. Every year, nearly 1.5 million engineers graduate from Chinese universities – a third of the world’s engineering graduates. The number of researchers has reached 2.4 million, a significant increase from 2011, when it was 1.3 million. The gap is widening with the United States, where the number of researchers rose from 1.1 million to 1.6 million over the same period.[1] Research and development (R&D) expenditure has followed the same trend, rising from $246 billion in 2011 to $811 billion in 2022. Over the same period, R&D expenditure in the United States increased from $427 billion to $923 billion.[2] And China accounted for 46.8% of global patent filings in 2022.[3]
An emblematic example of Chinese innovation is the electric car. China has succeeded in establishing itself as the leader in the electric transition. In 2023, the country already produced 58% of electric vehicles sold worldwide.[4] With global market share of 23%, BYD was well ahead of Tesla (11%) in 2024 – from January to September – and three of the world’s top five electric vehicle manufacturers are Chinese.[5] On top of public subsidies encouraging the adoption of electric vehicles, China has deployed a concerted strategy aimed at controlling the entire value chain, from critical minerals to batteries and software. In batteries in particular, China has market share of nearly 80%,[6] with CATL (37%) and BYD (17%) ranking as the world’s two leading manufacturers.[7]
China is looking to replicate this success in the semiconductor sector. With numerous US sanctions blocking its access to semiconductors and semiconductor manufacturing equipment, China is aiming for self-sufficiency. Beijing has set up a 344-billion-yuan ($47.5 billion) investment fund to invest in the sector. These efforts have notably enabled Huawei to return to the forefront with a powerful smartphone. China is even making progress in the semiconductor equipment sector, which is dominated by American, European, Japanese and Korean companies. Shanghai Micro Electronics Equipment (SMEE) has just filed the first Chinese patent in EUV lithography,[8] until now the exclusive domain of ASML.
The workshop of the world is becoming the global innovation powerhouse, a revolution that will undoubtedly have an impact on investment in Chinese equities.