Webinar: Internet of Things: Past, Present, and Future in the Chinese context - 15 March 2022

The Flanders-China Chamber of Commerce – with the support of Flanders Investment and Trade – organized a webinar, 'Internet of Things: Past, Present, and Future in the Chinese context' on March 15, 2022.

Ms Gwenn Sonck, Executive Director, Flanders-China Chamber of Commerce, welcomed the participants and introduced Dr Karel Eloot, Senior Partner at McKinsey Greater China where he leads the McKinsey IoT hub. He is also Co-founder of the Tsinghua University Digital Capability Center and Chairman of the Benelux Chamber of Commerce East-China in Shanghai. He has been living in China for more than 16 years. The fact that we can't go to China is the number one problem for companies doing business in China. Hopefully we will be able to go back to China by the end of the year, but we don't know, Ms Sonck said. But the biggest risk of doing business in China is actually not to be in China. On today's topic of IoT, China has already become a leader in innovation in several areas such as the internet industry and artificial intelligence (AI). The importance of further strengthening the digital economy is a strategic choice and according to the Chinese government digital technology should play a bigger role in promoting industrial upgrading. According to Premier Li Keqiang's 2022 government report presented at the session of the National People's Congress (NPC), China will continue to advance the digitalization of industries and accelerate the development of the industrial internet this year. Premier Li also announced a GDP growth target of 5.5%. China's market offers long-time business opportunities and many if not most of our companies are in China for China. According to a survey of European companies in China, they remain firmly committed to the Chinese market and indicate they plan to further expand their activities in China.

Dr Karel Eloot, Senior Partner at McKinsey Greater China, started his presentation by asking “What do we mean by the Internet of Things?” One of the big words is connectivity. Three mega trends drive the IoT revolution. The first one is connectivity: connecting devices and devices to people. There are already 8.4 billion connected devices on 700 IoT platforms worldwide. Connectivity also allows digitization of processes. The second is intelligence, machine learning and big data. About 90% of humankind's data was created in the last three years and the error rate for image and speech recognition has decreased from 27% in 2010 to less than 5% in 2017. The third group of IoT concerns flexible automation, which means humans can work together with robots.

McKinsey did a study in 2015 predicting the potential economic impact of IoT by 2025 to be USD3.9 trillion to USD11.1 trillion. What has changed six years later? Adoption levels are slower than what we expected, especially for the scale up of technologies. But there is a sustained benefit when implementing IoT solutions. The context has changed as Covid has put us much more online than we would have expected years ago. We now predict that for 2025 the impact may be 25% less than the previous high-end prediction but the lower end of the prediction is still about the same. Where does this downside come from? There is not one answer. Smart cities have increased in overall potential compared to what we predicted five years ago. In 2015 we were very much focussed on the B2B industries, but the evolution there is actually much slower than predicted. In some cases adoption, impact or context are off.

What are the reasons behind the changes in adoption? The tailwind – what is positive – is there. The perceived and actual value is further pushing the development of IoT. Headwinds include a higher than expected cost; connectivity performance is not as expected; the difficulty of installation; interoperability of different systems; and privacy and confidentiality. People are still a very big bottleneck for these transformations, including change management and the capability of talent. People are often trained in a very different environment. The three technologies that get a lot of tailwind are artificial intelligence (AI), machine learning (ML) and 5G.

What is happening in China? There is actually a Chinese wall between the companies in and outside China. There are no two IoT worlds, but there is also not one IoT world. There is one and a half IoT world, meaning that people operating in or with China need to take this into account. China's IoT landscape is shaped by three main drivers: customer preferences and needs; regulation; and local product innovation. The customer is not the same as in other parts of the world. China has very strong B2C applications. Regulations and product innovation are different in China. China is using its scale to accelerate development.

Chinese consumers adopt digital technology more broadly and are more willing to share personal data for benefits. Mobile payment penetration and the willingness to share personal data are the highest in China. China is more advanced in consumer and government use cases of AI, whereas the U.S. focusses on serving businesses. The top focus areas in the U.S. are cyber security and healthcare, while in China they are service robots, facial recognition and natural language processing (NLP). In China the government as a customer is a clear driver of IoT development. Chinese operators are more open to job-related digital services automation and asset management. That is because in China there is still more manual labor and therefore use cases in a manual labor environment. The enthusiasm of Chinese companies is higher than that of western companies as they see it as a way to close the gap with the West. To comply with Chinese regulations, cloud providers and MNCs are partnering with local companies. For example, in China, Siemens is not working together with AWS but with Alibaba Cloud. In innovation, Chinese companies are competing well and can beat MNCs, so the share of local suppliers is expected to increase. Local players are better at incorporating advanced AI features; tailoring products to China-specific needs; faster at product iteration; and better positioned on cost control.

What does this mean for IoT suppliers? You should build what you can sell, and focus on demand, not technology push. Learn to scale fast. Cyber security is a must. Make your solutions affordable and easy to install. For IoT customers this means that value proposition matters, not tech. There is no silver bullet, deploy many use cases. Technical talent drives value. Change the operating model, not just tech. For policy makers it means deciding your position on data regulation; pushing for interoperability; not constraining the future and building a technical army to shape the future.

Q&A: Is there Chinese competition for Mindsphere in Europe? Dr Eloot: Most automation players have their own platform solutions, so there certainly is competition. Mindsphere is also used in China for example in the automotive sector.

What opportunities do you see for European SMEs in the Chinese IoT market? Dr Eloot: There are opportunities for those who have a clear view of value that can be created from the bottom to the top of the stack, not just a sliver of it. You need to think ecosystem and be at the right side of the Chinese wall.

How do you see the IoT and mobile private network ecosystems coexisting in China? Dr Eloot: People are increasingly looking at how to get interoperability. The technology behind it is an enabler for value creation. Ecosystem play means you find a way to have a superior set up to catch a value. People need to think about the technology architecture that can evolve with the ecosystem.

How will policymakers in EU and China react in a borderless technology future in a time of unprecedented economic sanctions? Dr Eloot: The borderless technology future would be one IoT world and there won't be one, but there will be an evolution in that direction. Sanctions are not helpful to achieve more of a one IoT world.

What are the main success factors and challenges for European businesses in China? Dr Eloot: They need to have something to bring to China. This is the main opportunity and the main challenge at the same time. For businesses coming to China there is a tendency to overestimate the sophistication of the Chinese market. We come with specifications that are higher than those the market is willing to pay for.

What would be the contribution of hardware for the data highway in your 2025 forecast? Dr Eloot: The bigger growth is in the software, solutions and services. Hardware is necessary, but software has more tailwind.

Will the development of standards make it easier or more difficult for European companies in the Chinese market? Dr Eloot: If you are willing to work in the Chinese ecosystem, it is probably easier, but you will need a sufficient number of customers to plug for example into Alibaba Cloud. If you don't get the scale, the answer to the question is more difficult.

Who will set the technical standards? Dr Eloot: The overall framework is coming from regulations and policies. There are two different ecosystems developing.