IoT Made in China: The Race Is On

Smart Business

IoT Made in China: The Race Is On

IoT Made in China: The country is betting big on Internet of Things with huge investments in cutting edge technologies. Does this mean it will come to dominate the industry? And should the West be worried?

by Greg Langley

When a blinding dust storm rolled across Saudi Arabia and engulfed its capital Riyadh in April last year, 61,000 street lights automatically responded to the low visibility and turned on. The solution was installed by a frim based in the Chinese province of Zhejiang, Fonda Technology, a specialist in intelligent lighting. Fonda uses the Narrowband Internet of Things (NB-IoT) to control street, tunnel, and facade lighting brightness, immediately identifying system malfunctions.

Founded in 2010 in Hangzhou, a coastal city near Shanghai, Fonda lists many large Chinese cities among its clients and a growing number of international ones, including some in Cambodia, Indonesia and, of course, Saudi Arabia. Western companies can expect to increasingly butt heads with Chinese IoT firms in international competition. The “Middle Kingdom” has been investing heavily over the past decade in a bid to become a major player in IT, with a schedule that could see Chinese firms appear on the international stage in increasing numbers after 2025. IoT applications are well integrated into China’s daily life. They are found in solutions that reduce pollution, prevent bicycle theft, and monitor agricultural crops in remote regions. In cities, buses and trains are on the go with embedded IoT technology, while fleets of smart bikes whisk people through congested traffic. Face-scanning solutions are used everywhere, from retail to banks and police stations.

China has many IoT solutions due to its large manufacturing.

Rui Ma, Investor

Iot Made in China: Rui Ma - Investor

In Shenzhen, China’s answer to Silicon Valley, jaywalkers are recognized by street surveillance cameras and a fine is sent automatically to their WeChat social media / mobile payment account. The norm for paying such fines, or for purchased goods, is via smartphones using Tencent’s WeChat Wallet or the country’s other leading digital platform, Alibaba Group’s Alipay. Does the rapid rise of China’s IoT abilities mean the country will dominate the sector? Not necessarily, according to Rui Ma, an early stage investor active in China and the United States. The proliferation of consumer and commercial solutions, she says, can give the wrong impression that China is more advanced in IoT than the West.

IoT Made in China - Cubeworks

Getting Under the Skin: Companies like Michigan-based microsensor maker CubeWorks still enjoy a lead over Chinese competitors because of their decades-long academic tradition.

“In terms of simple every day consumer IoT, China is selling a lot because of its massive population. In terms of manufacturing, China has many IoT solutions based on robotics due to its large manufacturing base. But, as for cutting-edge, deep-tech IoT, it is unclear that China will ever dominate.”

The Western edge

Today, China is the largest market in the world for IoT with a 22 percent market share, according to data portal GSMA Intelligence. The Annual IoT Industry Development Report of China, published by the China Economic Information Service, says the IoT market in the country was worth more than 1.19 trillion yuan ($176 bn) in 2017. The Industrial Internet of Things (IIoT), still in its infancy compared to consumer markets, is projected to link 14 billion objects by 2025. GSMA believes that Greater China (China and Taiwan), with around four billion connections, will account for nearly a third of the total global IIoT market by then. Such numbers may draw a picture of China surging to global IoT dominance but it is misleading, says Saman Farid, a partner at Baidu Ventures. Farid has worked in China for 20 years, including founding and selling two start-ups there. He now leads the US artificial intelligence early-stage investment team for the capital arm of Chinese technology company Baidu. He argues that both China and the United States have advantages that make them the principal competitors in IIoT but feels the West has the edge through technical superiority, which is the result of close interaction with leading research universities.

Farid points to the example of CubeWorks, a Michigan-based company that develops millimeter-scale, ultralow-power, autonomous wireless systems (mmWave) capable of imaging, motion and pressure detection, and temperature sensing. The CubeWorks microsensors can be embedded into everyday objects, from smart home systems to wind farms, and links them wirelessly to form IoT networks. The sensors can even be injected into human tissue to monitor intraocular pressure in glaucoma patients and intercranial pressure in trauma victims. They could also be used to measure pressure inside tumors and thus the effectiveness of cancer treatments. In comparison, China’s leading companies have tended to excel at applications of existing technologies, rather than original research, whereas CubeWorks is a spin-off from Michigan Micro Mote (M3), an initiative of the University of Michigan. “You can do a lot of things with off-the shelf technology,” says Farid, “but such solutions as the microsensors of CubeWorks are the result of years of research that come from an academic tradition built up over decades. You can’t buy that type of knowledge.”

Shenzhen speed

This has not stopped China from throwing money at the problem. The year 2006 was important for IoT in China because it was then the government decided the country should be known for more than copycat technology. In its Medium- to Long-Term Plan for the Development of Science and Technology, Beijing outlined how China would transform from “the world’s factory” into “an innovative society” by 2020 and become a leader in science and technology by 2050. China intends to increase R&D funding to beat rivals in “strategic emerging sectors” such as advanced materials, biotechnology, and IT. Goods are no longer simply to be “Made in China” but “Designed in China.”

Proximity to the supply chain is vital.here you can pop into the factory every few days.

Kai-Fu Lee, AI venture capitalist and author

Iot Made in China: Kai-Fu Lee

In 2014, Premier Li Keqiang enhanced this strategy by introducing a blueprint for “mass entrepreneurship and innovation,” which included subsidies and generous government contracts. China immediately became a hotbed of millions of start-ups chasing innovations in aerospace, artificial intelligence, and robotics.

IoT Made in China: Research US Europe China

Catching Up: China still lags far behind the West in terms of overall R&D spending, but the lead is shrinking, especially in the top priority fields of IoT and IIoT. The stakes couldn’t be higher.

IoT companies have been a grateful beneficiary. The sector was earmarked as far back as 2010 for special treatment as part of a fve-year economic plan that targeted reaching a market volume of $163 bn by 2020.

That volume was actually passed in 2017 and the China Economic Information Service now thinks the Chinese IoT market will surpass $230 bn by 2020. Archer Zhu, vice president for strategy at Yunding Network Technology, downplays the importance of subsidies in developing China’s IoT. His company, he says, has managed to capture 60 percent of its market without a cent of government funding. “For some companies it may be helpful, but at the end of the day, what counts is having a good product at a reasonable price. That is what appeals to customers and if you don’t have that, no number of subsidies will help,” he explains.

Amazing speed: IoT Made in China

Founded in 2014, the Beijing-based company specializes in smart locks and cameras for homes and offices. One of the advantages Chinese companies have is being able to iterate quickly and this is evident at Yunding, which has experienced 300 percent year-on-year growth and, in 2016, shipped 200,000 products. The company has managed to produce a new product line every year. In comparison, US company August, founded two years earlier, is only on its third generation.

Even so, Zhu describes Yunding as being comparatively slow: “Other [Chinese] companies are much faster than us. The speed at which they can reiterate is amazing.”

Kai-Fu Lee, a leading AI venture capitalist, touched upon speed as a Chinese advantage in his 2018 book AI Superpowers, which described how China is rapidly moving toward becoming a global leader in AI. “A week spent working in Shenzhen,” he wrote, “is equivalent to a month in the US, as a prototype can be created overnight in Shenzhen and then repeated the next day at little cost.”

Rapid prototyping shortens the time for new product introductions. Considering that the Dyson vacuum cleaner, for example, required over 5,000 prototypes, such a manufacturing ecosystem offers significant advantage in moving from the lab to the market. Farid agrees with Lee: “Proximity to the supply chain is important. In China, you can pop into the factory every few days, which adds to the speed of iteration, plus it is easier to find skilled people there.”

Tim Cook, Apple CEO, has made the same point. In 2017, he said that “China has a wealth of skilled labor unseen elsewhere.” He added that a meeting of tooling engineers in the US would not fill the room but “in China you could fill multiple football fields.”

From this perspective, it is harder for a US company to reiterate on technology than a Chinese company, says Farid. He adds that having the cellphone supply chain in China is also a huge advantage: “Lots of the components that go into IoT devices, such as cameras and sensors, are produced in China for mobile phones, so this makes it easier to adapt components for IoT devices.”

While the technological progress made by China in a little over a decade is impressive, an incident in April 2018 made it brutally clear how vast the gap is before China can compete on technological competence. Chinese telecommunications giant ZTE, which makes smartphones, telecommunications equipment, and other mobile gadgets, was banned from accessing crucial American technology after violating sanctions on Iran. ZTE, one of China’s star tech companies, was pushed to the brink of financial collapse before the US relented.

IoT Made in China: Forcast 2019

ZTE uses Snapdragon processors from Qualcomm in San Diego for its smartphones and sources 53 percent of its chips from the US. Without them the company was crippled. Most major Chinese tech frms are in a similar position, with around 90 percent of the integrated circuits used being imported or made domestically by foreign chipmakers.

“ZTE was a shock,” says Rui. “While industry insiders knew the situation, the public was used to thinking that Chinese technology – the fast trains, the smartphones, the e-commerce giants – was world-leading. To see ZTE humbled due to a lack of local semiconductors was a wake-up call.”

The ZTE incident exposed the technological weakness underlying China’s ambitions. Much of the recent progress has been based on parts and equipment designed abroad. China’s world-leading smartphones cannot function without cutting-edge foreign microchips. The Android operating system powering them, almost exclusively, comes from Google. And the rapid strides being made in manufacturing depend on German and Japanese industrial robots. Zhang Jun, Dean of the School of Economics at Fudan University, says China is not the fierce competitor for global technological supremacy that many Western observers imagine. Writing for Project Syndicate in July 2018, he commented, “China is really nowhere near the cutting edge of IoT technology. In fact, the distance separating it from that frontier is far greater than most people recognize.” Zhang argues that digital technologies may be transforming China’s economy, but it reflects the implementation of “mobile Internet-enabled” business models rather than the development of cutting-edge technologies, and it affects consumers more than manufacturing.

China and the U.S. are the principal competitors in IIoT but the West still has the edge.

Saman Farid, Baidu Ventures

Saman Farid - Baidu Ventures

This transformation is not unique to China and there is little evidence that the changes have anything to do with the government’s industrial policies. “On the contrary, the growth of China’s Internet economy has been driven largely by the entrepreneurship of privately owned companies like Alibaba and Tencent,” Zhang says. The ZTE incident and the ongoing trade war with the United States have underlined to Beijing the importance of reducing dependence on foreign companies for core technologies. China’s leaders now see chip dependency as a national security threat, especially in a time of heightened tensions with America.

IoT Made in China

Given the strategic importance of the semiconductor industry, they may be right to worry. “You need semiconductors for everything,” Roger Sheng, an industry analyst for Gartner, told CKGSB Knowledge magazine last year. “On every digital, connected device, all information is transmitted on ICbased infrastructure.”

Weaning the country off foreign technology is a central aim of the Made in China 2025 strategy, the latest take on its plan to become a leading player in virtually all high-tech sectors. Besides tax breaks, the strategy calls on public institutions to pursue IoT projects as a path to becoming a global player. However, the government reportedly scrapped the contentious economic plan last December, after it drew the ire of US President Donald Trump and other officials and became a central focus of the ongoing trade war. The strategy was controversial abroad be cause it set specific goals for raising the market share of domestic companies in many industries. Zhang argued in his Project Syndicate article that the industries targeted by Made in China 2025 are precisely the ones in which China lags furthest behind the West. “There is a big difference between applying digital technologies to consumer-oriented business models and becoming a world leader in developing and producing hard technology.”

His conclusion was: “China probably remains 15–20 years away from matching the R&D input of, say, Japan or South Korea, and when it comes to output – the more important factor – it is much further behind.”

Rui is not so sure as the Chinese have shown themselves to be quick studies. Since China began opening to the West, its manufacturers have proved adept at seizing opportunities to emulate and adapt technology. “ZTE is a catalyst for China to develop its own chip industry,” she says. “But developing R&D capacity is not like copying, especially for products like semiconductors. Still, they are determined and if there is one lesson the West should have learned it is not to underestimate the Chinese.”

In May, while ZTE’s future still hung in the balance, President Xi Jinping called for self-reliance in IC. “The initiatives of innovation and development must be securely kept in our own hands,” he said. Officials and CEOs scrambled to answer his call and more than 11 local governments aim to set up IC production facilities and major companies, including Alibaba, Baidu, Gree Electric, and Tencent, have pledged to invest more in chip research and development. Yet, for all this energy, China will be forced to take the slow road as the country does not have manufacturers of chipmaking equipment and the US has begun to crack down on the export of this vital technology.

At the end of last year, Chinese DRAM maker JHICC (Fujian Jinhua Integrated Circuit Company) was indicted on charges of economic espionage for stealing manufacturing secrets. Before that, Washington had slapped the company with an export ban preventing it from obtaining US-made equipment, a move seen as impeding its efforts to enter mass production.

These obstacles will not deter China from its technological ambitions. Spurring innovation is a central policy focus for Beijing as the drivers that propelled the economic miracle – cheap labor and surging fixed-asset investment – gradually lose steam. In a 2015 report, McKinsey found that China would need to generate at least two percentage points of growth through innovation to maintain its fast gross domestic product (GDP) growth rate. The industry needs to generate economic innovation to propel itself to the next stage of development. To avoid the middle-income trap, which has claimed places such as Brazil and Mexico, a country needs to shift from imported to indigenous innovation.

China is really nowhere near the cutting edge of IoT technology.

Zhang Jun, Fudan University

Zhang Jun -Fudan University

This is the complex political and social background against which China’s IoT is seeking to compete with the West. Zhu’s company plans to enter international markets this year, starting with Southeast Asia and the United States, but he scoffs at the notion that China will ever dominate IoT.

“How can any one country ever dominate IoT? You may have products manufactured in China, but they are designed in the United States and built on German machines. However, if you ask about Chinese brands dominating, that is different. I believe Chinese companies will be able to compete on the world stage in terms of quality and value,” he says.

Farid also rejects the notion that China will dominate. “We are really only at the beginning of IoT. Previously it was about getting sensor networks deployed, now it is about getting AI to understand the data coming out of the sensors,” he explains. “In this area, both China and the United States have their own advantages, I don’t think one country will dominate”.

One Comment

  1. great article Greg..thanks

Leave a Reply

Your email address will not be published. Required fields are marked *

*