State of the IoT: Is China the Place to Watch?

July 6, 2016

In Deloitte’s 2016 Global Manufacturing Competitive Index, a survey of CEOs indicates that while the US and China agree that predictive analytics is the most important advanced manufacturing technique, the US ranks IoT-connected products as No. 2, while Chinese CEOs rank those products down at No. 7. Chinese CEOs instead regard IoT-enabled smart factories as No. 2, showing that their focus on manufacturing remains strong.

The IoT, in the guise of the “Internet Plus” part of last year’s “Made in China 2025” plan, is a big deal in an economy whose rate of growth may have dropped, but still has vast potential.

While high-profile plan roll-outs with high-ranking party officials and businessmen giving speeches and shaking hands for the cameras get a disproportionate amount of attention, the real business will have to go on at ground level, among developers and users. We’ve gotten used to Chinese success in technological development. And the Internet Plus road map includes significant deregulation and increases in competition, not to mention adding $4.4 billion to China’s already significant R&D investment.

But innovation is much harder to mandate than productivity. What are the prospects for China’s IoT efforts?

Government Support

The Chinese government generally announces grand five-year plans, and various provinces such as Guangdong like to get into the act with their own development plans. Wuxi, a city west of Shanghai, has been chosen as the location of the “IoT Demonstration Zone”, where hundreds of companies and over a hundred thousand employees work on IoT projects.

Ecosystems, almost by definition, are not mandated from above, but grow through interactions from below. It is difficult for a government to provide a lot of money and then be hands-off on how it is spent.

And a government that has instituted the Great Firewall is likely to take a specific view of privacy and security. Smart streetlights designed to track vehicles to fight gridlock can trace them for other purposes, and omnipresent networked cameras will inevitably be used for political surveillance. IoT development is unlikely to escape political pressure.

Leading the World in M2M

China is a global leader in machine-to-machine (M2M) technology, which allows devices to wirelessly exchange information and execute tasks. According to GSMA, China already had 74 million connections in 2013, comprising nearly one-third of the global M2M market. While consumer uses in homes, cars, and stores will get the most attention, the biggest and most significant IoT growth will come on the industrial side – in factories, transportation of goods, and supply of power. This is particularly true in China, which is facing a transition from a low-skill, low-cost workforce to a more highly trained and costly workforce.

M2M connections can communicate in various ways, including Wi-Fi, Bluetooth, and cellular. Cellular seems to be the current dominant method, not because of some deliberate choice, but simply because China has smartphone uptake. There are a number of other connection technologies useful for M2M – most prominently new low-power networks such as ZigBee and Thread – but China may well choose to leverage its existing cellular connectivity for M2M, at least in the short term, despite some drawbacks, such as relatively high power use and more-expensive chipsets.

The Major Players

China’s three large mobile operators seem to have focused on different areas of the IoT market. China Mobile was first into M2M, having deployed over 3 million M2M terminals. China Telecom has a focus on connected vehicles, and China Unicom is investing strongly in the smart home sector. And it has three large internet companies: Baidu, Alibaba, and Tencent, often collectively called BAT. Tencent is the parent company of WeChat (Weixin in China), one of the world’s fastest-growing social apps.

Fragmentation vs. Unity

Despite an outside view in which China seems monolithic and unified, it actually devolves a great deal of authority to its regions and provinces. As a result, local authorities often collect data, and then keep it, since data is a source of power. Local authorities can be quite independent, and, as foreign companies trying to operate in China have long ago learned, can block or delay activities of which they disapprove—or from which they feel they do not derive enough benefit. Encouragingly, according the Ministry of Industry and Information Technology (MIIT) Vice Minister Xi Guohua, over 90 percent of provinces and municipalities list IoT as a “pillar industry” in their development plans.

As if that weren’t enough, China has provincial and city-level IP offices, which can issue injunctions to prevent what they have defined as infringement.

And even centrally, any unification effort has to negotiate with a startlingly large number of central ministries, commissions, and administrations with overlapping authority, who struggle for dominance and seldom cooperate with each other.

The Power of a Large Customer

One area where the central government might have a huge effect is in determining and mandating specific standards at various levels of the IoT, where currently a number of standards compete. If China picks a standard for industrial automation, for example, its large market may well ensure global dominance for that standard.

Read more in the State of the IoT series