‘Only the paranoid survive.’
-- Andy Grove, former CEO of Intel

One of the crucial unintended consequences of the US/China trade war is a concerted and coordinated drive for “indigenous innovation” and breakthroughs in “core technologies”, mobilising vast amounts of financial and human capital and uniting the state, academia, commercial enterprises and investment community with a common goal.

While its parallel with the Manhattan Project is not a perfect one, what is taking place in China’s science and innovation system may even surpass the Manhattan Project in its unprecedented scale, scope, and long-term impact. In this short article, we want to draw the curtain on this historic development and discuss some key potential long-range implications for investors.

China’s scale and progress in innovation

Research and development (R&D) is the backbone of innovation and, in this regard, China was still a backwater just 10 years ago. In the most recent decade, R&D has been increasingly prioritised and China’s R&D expenditure is now second only to the US at $514.7bn (in 2019) and poised to become number one very soon.

This enormous investment has already started to pay off. According to a report from Nikkei and Elsevier, in 23 of 30 ‘hot’ fields with clear technological applications, China published more high-impact papers than the US between 2013 and 2018.

However, China’s massive R&D spending number must be seen in context. The great bulk of it goes on the ‘D’ with basic and applied research accounting for only c15% of total national effort. As a result, China still lags in new product innovations. This is about to change thanks to the US/China trade war.

Research & Development Spending by Country

Source: OECD; Polar Capital.

A concerted effort with a common goal

Different from the original Manhattan Project, which was centrally directed by the state, China’s endeavour is a distributed but concerted one, with buy-ins from not only the state and academia but also commercially minded parties like technology and industrial enterprises and the investment community.

There has long been a divide between Chinese commercial enterprises and a research system centred in universities and the Chinese Academy of Sciences. Until recently, the enterprise sector lacked a strong research orientation and sought proven technologies from abroad instead of longer-term cooperation with the domestic research system. The US/China trade war and the threat of losing technology access upended this dynamic.

Even though each party has very different motives – national security for the state; intellectual curiosity and funding for academia; access to technology for enterprises and capital returns for investors – there is a common solution: invest heavily in basic and applied science.

Seven strategic priorities

Another unique characteristic of China’s new Manhattan Project is its wide scope. In its latest five-year plan, China highlighted seven key areas related to technology it aims to boost: next-generation artificial intelligence; quantum information; brain science; semiconductors; genetic research and biotechnology; clinical medicine and health; and deep space, deep sea and polar exploration. Among these seven strategic areas, semiconductors is the one we can take a closer look at because it is predominantly driven by commercial interest, hence it comes with better transparency and data.

Beijing's not so secret plan to overturn US leadership in semiconductors

China imported semiconductors worth $350bn in 2020, more than 70% of the $450bn global industry. Sanctions on some Chinese technology companies limiting their access to US semiconductor products and technology are a wake-up call for a nascent Chinese semiconductor industry. At least $170bn of capital has flown into semiconductors. The result has been an extraordinary flourishing of chip-related companies within China.

China’s greatest weakness and America’s greatest leverage is in two ‘neck-choking' technologies: chip-making equipment and chip design tools. It is a daunting task for China to make major breakthroughs in cutting-edge equipment and design tools, but we are seeing unprecedented interest, capital and talent flow into these areas.

Every US market leader in the chip industry now has a Chinese doppelganger that is being positioned to take its place as a vendor to the Chinese chip industry. While in areas like equipment and design software it may take more than 10 years for them to succeed, the impact of China’s determined drive for technology independence in the strategically important semiconductor industry can be profound and long-lasting.

When would China’s semiconductor industry be globally competitive?

Now<5 Years5-10 Years>10 Years


Assembly and Test✔️

Design (Low end)✔️

Design (Mid end)

Design (High end)


Foundry (Cutting edge)


Source: Polar Capital estimate.

Profound and long-lasting implications for global investors

The massive scale and broad scope of China’s new Manhattan Project – a concerted endeavour in basic and applied science and technology research, and the resulting spillover effect in civil and commercial innovations and applications will have significant long-range implications for investors:

Rise of Chinese multinationals: We have already seen moderate success of the first generation of China’s global businesses – like Lenovo, Haier Electronics and Fuyao Glass in mid-end manufacturing – and we are witnessing the rise of a new generation of Chinese multinationals including Bytedance, owner of TikTok. More Chinese multinationals will emerge over the next five years as they develop, create and produce world-leading products and services.

Proliferation of innovative Chinese growth companies to invest: The Chinese equity universe is large, with more than 3,000 very liquid listed companies, but for investors like us with a strong quality bias, the real universe is much smaller. This is changing quickly. What surprised us a great deal was the number of truly innovative and well managed new assets, especially in areas like automation and robotics, medtech and software, we were able to find and own in the past few years. We believe this proliferation of high-quality assets will only accelerate in the coming years.

Increasing competition for global incumbents: With rising intellectual capital and technology sophistication, leading Chinese companies will increasingly compete directly with global incumbents in high-end manufacturing and high technology. Numerous industries will be impacted, but in certain areas within semiconductors and industrial parts and equipment, this could happen sooner than the market currently expects, leading to disappointing revenue growth and declining profitability for those incumbents that are not prepared.

Golden age of Chinese innovation

The unintended consequence of the US/China trade war is that it may usher in the golden age of Chinese innovation. We believe the Polar Capital China Stars Fund has been able to identify and invest in a fair number of inventive new assets over the past few years in automation, robotics and medtech, and many of our portfolio companies are benefiting from expanding addressable market and rising profitability because of more globally competitive products and services. This trend will continue and accelerate.