Presented by ESMT Berlin
How will the global investment landscape look like moving forward? Patrick Zhong, Founding Managing Partner of M31 Capital, discusses the impact of industrial policy, the fragmentation of globalization, and how different regions are navigating innovation.
Interviewed by Klara Marie Schroeder
For me, trends are about statistical probabilities; they give us greater confidence in predicting what’s likely to happen over the next decade or beyond.
One major trend is demographics, which are set to worsen for nearly all developing countries. Another is the persistent climate crisis. The green transition will be unavoidable, requiring significant energy resources, ideally from renewable sources, to meet rising demand. We will also see the widespread adoption of robotics in diverse settings—from industrial applications to daily use in our homes. AI will play a transformative role, manifesting in countless ways and driving further innovation and change.
However, not all trends are positive. I am concerned about the fiscal challenges governments will face in the next 10 years. Many are overspending amid low demand, and mounting debt could lead to fiscal crises. Additionally, I anticipate more tariffs and trade wars, which will increase costs and strain economies. These conditions might limit market creation and economic growth.
Overall, some of these trends are exciting, while others are deeply concerning. But that’s how I see the world through the eyes of an investor.
Innovation, by its very nature, defies prediction. It emerges unexpectedly, akin to insights spilling out of a black box. A useful parallel can be drawn with advances in AI, particularly large language models: the sudden emergence of results that mimic human intelligence stems largely from the sheer volume of data fed into the system and the transformative design of its processes.
Similarly, when these systems reach a certain threshold—powered by vast datasets and immense computational capabilities—they begin to deliver outcomes that surprise and surpass expectations. Innovation operates in much the same way, often revealing its potential only when the right conditions align.
Five years ago, nobody would have predicted the recent breakthroughs in AI or the Chinese dominance of the EV market. Both examples illustrate a critical point: innovation cannot always be planned or predicted.
This unpredictability also raises important questions about industrial policy. Governments often set these policies, but their effectiveness depends on who is involved. Are they technocrats with deep technical expertise or generalist politicians? In rapidly evolving technological fields, lacking technical understanding can lead to misguided regulations that hinder innovation. Poorly informed policies may attempt to regulate imagined problems or fail to address real ones, potentially stifling progress.
Good industrial policy should create an environment that fosters innovation while stepping in to regulate only when innovations cause harm—whether to societal ideals, public well-being, or other industries. This requires a nuanced approach involving not just policymakers but also input from technologists, economists, and even historians to provide context. The process of drafting industrial policy is as much an art as it is a science, balancing the need for innovation with the responsibility to protect societal interests.
Ultimately, industrial policy itself is neither inherently good nor bad—it depends on its quality, relevance, and the expertise of those crafting it. Only then can it truly support innovation without undermining its potential benefits.
This is a critical question to address: the world is not an even playing field, great technologies are often rooted in different regions across the globe. Technologies like generative AI are heavily concentrated in specific regions, particularly the U.S., where significant investment, corporate budgets, and access to GPUs have fueled rapid progress. However, the U.S. lacks a complete supply chain, much of which resides in China. Europe, on the other hand, has not made major upgrades to its supply chain infrastructure since World War II, leaving it less competitive in this area.
To tackle the challenges of the next generation effectively, the world must leverage shared resources, talents, and capabilities. Collaboration is key, yet global divisions and lack of communication are creating inefficiencies. Instead of working together, nations are duplicating efforts, forcing everyone to build their own comprehensive "toolbox" of solutions—an approach that is both costly and unsustainable.
That’s a fascinating question - I’ll take a shot at it. What I’m about to say might not be entirely politically correct, but it feels close to reality.
America thrives on being market-driven and, frankly, greed-driven. There’s a relentless focus on scalability and maximizing profits quickly, which is why so much investment has flowed into generative AI. It’s a compelling business model, even if its ROI hasn’t yet been proven—unlike the internet during its early boom. The U.S. is uniquely positioned due to its deep pockets, large corporate budgets, and access to cutting-edge technology like GPUs.
China, as an industrial powerhouse, has driven significant innovations in supply chain management over the years. This foundation has enabled the development of highly competitive technologies in areas such as batteries, robotics, and electric vehicles. It also benefits from a substantial pool of skilled software engineers, well-equipped to deliver comprehensive, integrated solutions. In addition, government involvement plays a key role in shaping China’s innovation landscape, complementing market-driven mechanisms and influencing its unique development path. However, the economy is currently facing challenges, which may impact its ability to sustain its rapid pace of innovation.
Europe faces different hurdles. It lacks a strong risk-taking culture, with many wealthy families hesitant to invest in local innovation. This has led to a brain drain, with talent often moving to the U.S. to pursue opportunities. Additionally, Europe’s stringent regulations fragment markets, making large-scale innovation difficult. For example, highly regulated data policies reduce scalability, deterring investors from pursuing projects with limited market reach. This environment has stifled major tech advancements.
A common challenge worldwide is the rising cost of capital. With interest rates high, risk-free investments like U.S. Treasury bonds offer a 4.5% yield, making them more attractive than risky, long-term bets on innovation. This has reduced the pool of capital available for high-risk ventures, further slowing innovation globally. I believe collaboration is crucial to revive innovation and tackle next-generation challenges. Unfortunately, growing geopolitical divisions make this increasingly difficult.
When investors search for new opportunities, most of the time, the starting point is the entrepreneur themselves. The focus is on companies with the potential to profoundly transform their industries or even redefine the world. To succeed, entrepreneurs must exude energy, conviction, and confidence in their vision.
Success is never assured, but a strong drive to see their ideas through is essential. At the same time, a bold, well-crafted business plan is critical—without it, securing attention and support becomes an uphill battle.
Risk-taking behavior varies significantly, not because of culture alone but due to structural factors: the availability of capital, talent, supportive markets, and whether regulations encourage or stifle innovation. These structural challenges are often overlooked in favor of assumptions about individual or cultural tendencies.
Europe faces a unique challenge: a lack of modern role models. Over the past 10–20 years, few globally impactful companies have emerged from Europe, leaving young people without examples of contemporary leadership and success. While legacy giants like LVMH dominate their sectors, they represent achievements of the past rather than the present. To inspire the next generation of innovators, Europe must support emerging companies that show potential for global impact. Seeing leaders from their own region succeed can give young people the confidence to take risks and aim high.
The world has grown increasingly complex, with new layers of uncertainty emerging. We didn’t foresee events like COVID-19, the rapid acceleration of AI development, or the extent of today’s geopolitical tensions. As investors, this means constantly adapting to an ever-changing landscape. The future is not something anyone can predict with certainty; rather, it’s a range of possible scenarios, each with varying probabilities. Nobody has a crystal ball. My approach is to identify the key factors driving change, assess their impact, and adjust strategies accordingly.
For a long time, we operated in a relatively synchronized and stable environment, with steady growth and predictable trends. Now, we’re navigating uncharted waters, particularly with persistently high interest rates. When the risk-free rate hovers at 4–5%, and you add a risk premium on top, the cost of capital becomes significantly higher. This is a new challenge for our generation but not unprecedented in history. Previous generations have faced volatility, downturn, and uncertainty. By studying historical patterns, we can uncover valuable insights to navigate today’s challenges.
I once spoke with Ray Dalio, the founder of Bridgewater, and he emphasized that entrepreneurs, in particular, should be open-minded and flexible when facing challenges.
In Chinese, we have a saying: "A smart rabbit digs three holes." For businesses, this means the importance of being global and diversifying across at least three major markets to create a stable foundation for growth and resilience.
If you’re an innovator leading a portfolio company, it’s essential not to be provincial. You need to engage with the biggest players—whether they’re your suppliers or customers—in regions like Europe, the Middle East, and America.
We’ve been actively facilitating this kind of exposure by bringing many of them along on trips. As you know, we led a China CEO delegation to attend this year’s Berlin Global Dialogue, and the experience was invaluable for everyone involved. Platforms like yours, which foster global dialogue, are incredibly important. They help entrepreneurs find and build common ground while engaging in constructive conversations with some of the brightest minds.
Additionally, we emphasize that while innovators may excel in their products or technologies, the world is complex. Understanding geopolitical trends, trade policies, capital market dynamics, and investor expectations is critical. Mistakes often arise from blind spots—areas outside their expertise. As investors, we play a vital role in helping them navigate this complexity and broadening their horizons.
When analyzing technology, we observe its growth curves. Many assume technological progress is linear, but disruptive technologies often follow steeper curves, advancing much faster than their predecessors. As investors, we focus on identifying these disruptive curves. In China, when you’re working with truly disruptive technologies, you encounter steep learning curves and intense competition. The system itself is filled with highly capable players who constantly challenge and push each other to excel.
Historically, manufacturing relied on labor, capital, and resource intensity. Today, it's driven by cutting-edge technologies. For instance, China ranks third globally in robot penetration, surpassing larger economies like Germany. China is not succeeding due to its population size, but due to the rapid integration of next-generation systems.
China is excelling because it adopts next-generation technologies more quickly and fosters fierce competition. No single company dominates the market; instead, players continuously challenge each other.
In many Western countries, younger generations tend to avoid factory work, preferring careers in fields like chemical engineering, finance, art, or social media. This trend is mirrored in Vietnam, where it's becoming harder to hire young factory workers as they pursue more aspirational jobs.
In contrast, China has a long tradition in manufacturing and supply chains, supported by a robust pipeline of talent. Chinese universities offer 50 specialized programs in batteries annually, producing a steady stream of engineers, while comparable programs in the U.S. are virtually nonexistent. This talent gap highlights why some regions excel in areas like battery technology while others fall behind.
Politicians without technical expertise often oversimplify these challenges, relying on narratives that ignore critical realities. This lack of understanding leads to misinformation, overshadowing the need for grounded, informed strategies. Creating platforms for dialogue and collaboration is essential to addressing global challenges constructively.
Patrick Zhong is the Founding Managing Partner of M31 Capital. He has over 20 years of experience in venture capital, private equity, buyout and public equity.
Before establishing M31Capital, Patrick was the Co-CEO of Giant Networks, Chief Investment Officer at Wanda Group, and Global Partner at Fosun Group. His transformative vision at Fosun Group was instrumental in elevating Fosun to a global investment powerhouse.
Prior to joining Fosun Group, Patrick was an investor at Wellington, where he is notable for spearheading early investments in companies like Tencent, Baidu, Alibaba.com, Ctrip, and Netease, and a number of leading American companies.
