The main growth drivers of Asia’s science and technology industries are changing to become more domestically driven and service-oriented. These changes are happening as rising disposable income enables more Asian consumers to embrace new technologies.

Asia’s Internet-related industries have lately been seeing strong entrepreneurship activity. As the region already is home to the world’s most Internet users (collectively) and rising penetration growth, it may be no surprise that there have also been several recent initial public offerings for Chinese IT-related companies in the U.S. The proliferation of smartphones and tablets is adding more users in emerging markets, especially in Southeast Asia, where traditional high-speed Internet access has been too expensive. Compared to more developed parts in Asia, India and Southeast Asia still have seen relatively low overall Internet penetration rates. But they are expected to lead the next phase of Internet user growth for the region.

Rising Internet adoption is also enabling Asian consumers to leapfrog to the next level. For example, many emerging countries are skipping landline-based broadband and going directly to mobile-based broadband.

E-commerce in China is gaining fast popularity over traditional brick-and-mortar modern retailing in second- and third-tier cities. In fact, it seems, almost as if overnight, China has become one of the world’s biggest e-commerce markets. It now holds the distinction of being the second largest e-commerce market behind the U.S. in terms of transaction value. E-commerce’s share of total retail sales is actually bigger in China than in the U.S. In just a few years, China could become the world’s largest e-commerce market.

Let’s now consider China’s productivity rates. Not long ago, a manager I spoke with in China told me that it was far cheaper to hire additional workers to increase production volume since the payback period of installing a robot to replace labor was more than 10 years. But now, with strong wage inflation over the last few years, the payback period has lessened to about five years, meaning that it may make more economic sense to start replacing humans with computers and robots.

Over the past 10 years, physical labor and capital inputs have been major sources of GDP growth in Asia. But over the next decade, we believe productivity growth could play a bigger role in its development.

Currently, the level of automation in China is comparable to Japan in the 1980s. This trend of rising factory automation could continue to drive growth for Asia’s technology sector for many years to come.

Rising demand for technology products in Asia has been driven by rising Asian incomes. As incomes have risen in Asia, so has demand for high definition televisions, smartphones and tablets. The specification of smartphones that are selling well in China is nearly identical to those in the U.S. Asian consumers are also demanding better health care, better hospitals, better services and better products to treat illnesses—all of which could spur demand for more advanced medical and life sciences products. Most Asian countries still spend only a fraction of what the U.S. spends on health care per capita. We believe the health care sector could be one of the biggest beneficiaries of rising income as demand for such products and services rises.

But these positive trends are not without challenges. For example, Asia’s intellectual property protection has been weak, often deterring innovative companies from realize profits. To try to counter some of these issues, entrepreneurs in Asia focused on innovating different ways to monetize products. For example, online game makers offer games for basically free and they make money by selling virtual items.

Smartphone makers in China sometimes offer phones at cost and make profits by selling apps. As a result, there are some Internet-related business models that are unique to Asia. As Asia’s science and technology industries continue to evolve, we remain excited about the sector’s future and its potential to further Asia’s growth.

Opinion column by Michael Oh, CFA. Portfolio Manager, Matthews Asia

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