Key takeaways

• Constraints placed on Asian companies, particularly in China, limit their access to the most advanced technologies, but such restrictions actually spur innovation rather than hamper it.
• China enjoys a number of structural advantages that further facilitate innovation relative to the West.
• These advantages are typically overlooked by the market, leaving many Asian companies undervalued.

“We should think of tariffs as a positive thing for innovation,” says technology analyst Jonathan Tseng, in the latest episode of The Investor’s Guide to Asia. 

He points to DeepSeek, the Chinese AI start-up that has left US companies scrambling to catch up. Tariffs forced the company to improve the efficiency of its models, he says, “to make do with less. DeepSeek succeeded because of restrictions, not in spite of them.” 

“The more the US squeezes China, the more China has to push back and innovate.”

• Listen to the Investor’s Guide to Asia podcast here, or below. Scroll down for the video.

The mother of innovation

Despite news of US tariffs on China and chip export bans, co-host Stuart Rumble says that Chinese company management teams seem relatively sanguine about such changes. 

Tina Tian, a portfolio manager, points out that the US has been applying pressure to Chinese producers for years, which has given companies the time to prepare for this new round of tariffs. 

Chinese companies have prepared in two ways. First, by diversifying their markets, with a particular focus on increasing exposure to emerging markets. Second, they’ve been forced to develop their own technologies, in lieu of US co-operation. And this is where necessity, as Tian comments, has become the “mother of innovation”. 

Market matters

All of this is good news. From a fundamental perspective, Tian likes to see innovation in her companies: “I believe that innovation drives better growth, and stronger stock returns.” 

Companies’ innovation breakthroughs are good news from a stock picker’s perspective. “Markets tend to be focused on the short term. People sometimes forget there are structural advantages an economy or a country has [that help them] continue to deliver secular innovation and growth.”

“I think these kinds of structural opportunities are usually underappreciated.” 

Fortunately for Tian and Tseng, Chinese companies are abundant in structural advantages. 

Private and public

Tseng believes “the government can give Chinese innovation an advantage versus the West”.

That’s because Beijing recognises the role the private sector plays in supporting employment and growth in China, and also in driving innovation. China’s dominance in the electrical vehicles (EV) space is a case in point – in 2024, China produced 60 per cent of the world’s EVs. 

But the private sector needs government too. “To build the infrastructure, the semiconductors, the data sets – you need capital, and the government supplies that,” explains Tseng. Hence the country has seen continuous spending on research and development, as well as skilled labour. There is an abundant talent pool from which Chinese companies can draw, which is “relatively low cost but very hard working,” says Tian. 

China also allows for far more regulatory flexibility than western governments, which can ease the burden on companies at the forefront of technological change. 

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Where do the next innovations lie?

The opportunities in AI seem boundless. Rumble explains that while models like DeepSeek or Chat GPT are hard to build, once they exist it’s easy to develop applications on top. 

Tseng is particularly excited about AI that moves beyond the screen and into the real world. 

“Screens are great, but screens are only [one] part of your life. If you can get AI out into everything else – driving around, walking around in the home cleaning – the benefits of digitisation, which so far we only consume via our screens, can be consumed and spread out in everything we do.”

The obvious upside to this lies in productivity. “As an analyst my time is the most important resource I have,” says Tseng. 

“I’d like to spend as much time as possible thinking about investment ideas, thinking about winners and losers. But there are many other things we need to do with our time. Things like deep research agents, which can automate a lot of my bread-and-butter work, can free me up to be even more productive. If I can find three or four more hours a day, I can be 30 or 40 per cent more productive, and produce 30 or 40 per cent more ideas.”

The breakthroughs that are lurking

Before we get there, someone has got to do the innovating. For structural reasons, and because of the exogenous pressures they’re feeling now, it’s to China’s undervalued producers that Tian and Tseng will be looking.

As co-host Taosha Wang concludes: “The innovation process often has a spontaneous nature to it; you can never exactly predict where and when the next breakthrough is going to come from – but it’s lurking in a corner waiting for you. From an investment perspective it speaks to the importance of looking beyond just a handful of mega cap companies.”

Learn more in the latest Investor’s Guide to Asia. Watch or listen.