Ten Observations about LED Lighting, SmartCity, the Internet of Things, and China in the Springtime

Original posting March 6, 2015 … reposted here.

Having just spent the first week after the Lunar New Year work break in mainland China, both in the Pearl River Delta and in and around Shanghai, I can tell you that the Year of the Goat (or is that Ram, or Sheep…?) and the “new normal” that seems to be the Party leaders’ mantra is still an effervescent cocktail of economic growth, fueled by a sophisticated demand for technology.
Here are ten observations that I think are worth sharing.
1. Major cities beyond the Pearl River Delta, where retrofits have more or less been completed, are the next wave of targets for LEDs. Time and again, from several sources in the market, I was told that the evolution of the domestic LED market is sweeping from the south of the country in Guangdong, where virtually all the LED retrofits are complete in towns such as Shenzhen and Dongguan, northwards. We all know, depending on how you count, that in 2000, China had 58 cities with 1M plus. In just 25 years, that number increases to 128 and it’s well on its way. This translates into very large projects for ESCOs to target.

2. China’s LED market is being impacted by the government corruption crackdown. With the latest five-year plan implementation, the Party has looked at how lighting retrofits were financed by banks and seen that as a source for potential corruption. Rooting out corruption is paramount, and so the reaction of financing institutions has been conservative, pulling back on financing sources for ESCOs who need the capital to pay for the equipment that will allow them to capture the energy savings over the life of the lighting concession period. Without capital, ESCOs are either being forced to self-finance or seek other alternative funding sources, putting a dip into the pace of the market. I have the impression this’ll get resolved quickly.

3. The US-China spat over technology is unhelpful on both sides, and is partially related to my point about the crackdown above. I won’t rehash this too much here, but let’s just say that everything from the talk of backdoors, to Snowden, to restrictions put on one another’s MNCs trying to do business in the other’s country have contributed to an atmosphere of suspicion, mistrust, and ultimately difficult business conditions on both sides of the relationship. This mistrust means that companies whose technology is proven elsewhere must adapt to local requirements: security stack differences, operating requirements, and data protection are three issues on everyone’s lips. Now let’s get back to the lighting market.

4. HID overprovisioning and subsequent LED retrofits for energy savings are not enough any more. Previously, the lighting in urban and road projects was, to put the term lightly, over-provisioned. There is a massive amount of 100W and 250W HPS illumination throughout China. Lighting authorities had illumination from dusk to dawn as a security imperative, and erred on the side of caution. This consumed a large amount of energy, and — as I will talk about shortly — energy reduction is absolutely critical in China, both in terms of mitigating demand for energy further down the line from generation, as well as for quality-of-life of the inhabitants of the country. But let’s focus on energy used, and the bill handed to municipalities for lighting these overprovisioned cities for a moment. ESCOs had a simple proposition: give me the lights to run at the same cost as you’re currently paying for lighting, and I will retrofit to LEDs and use the energy difference over the life of the concession to earn my project payback. But this market has grown more sophisticated as it has evolved, for both buyers and ESCOs, and now buyers want a reduced bill because they have realized what a large gap there is between the old and new lighting footprint. This leads ESCOs towards two things — controls to eke out additional savings and opex benefits, and differentiation to stop competing on ever-thinner margins. I won’t go into controls, since that seems obvious, but let’s zero in on how they are thinking about differentiation. Of course it’s about technology.

5. LED providers and ESCOs are actively looking for a differentiating platform, and other communication technologies have not proven out at scale. I was told on several occasions that other communications at scale wouldn’t work or haven’t proven out: cellular is too expensive, not everywhere, and is built for smartphone users whose staggering data demands push network build-out towards ever-faster data speeds; powerline carrier is expensive, as fitting actual power lines as well as lights and poles adds cost (see point above about project payback and you understand the reluctance), and is difficult in terms of an architecture to manage at scale; radio-frequency technologies continue to have a lack of standardization, and so providers whose technology is not proven or well-developed come to be seen as a scarecrow for the entire category (examples include ZigBee, sub-GHz, and others); WiFi is also seen as too expensive for lower-bitrate, lower-bandwidth, highly-reliable, massively reachable device networks. There is still very much a prove-it mentality in China, and a bias (thanks to some of the contributing trends I talked about earlier) towards local solutions — but those have precious few proof points, and none seem to have really worked at scale.

6. Streetlights and poles are trending towards the “Streetlight Fantastic” and the aerial real estate is becoming more and more valuable as devices appear on the market. In addition to the bread-and-butter road lighting retrofit, ESCOs are pushing hard to put streetlight poles and fixtures in place to accommodate a wide range of devices on the pole. Demands for everything from banners, to pedestrian-level secondary lighting; from informational kiosks to EV charging (whose prominence I expect to skyrocket — see point 8 below); from the ability to motion-dim to interact with cameras managing pedestrian and vehicle capacity, the list is seemingly endless. This wide range of devices accommodated on a low-cost, highly reliable network over the other options I talked about in point 5 is at the heart of how China sees its lighting stock in urban centers, and with 128 1M+ cities in 10 years’ time, that’s a lot of demand.

7. Other devices to control traffic or detect naturally-created issues such as manhole covers floating away after storms are important. It’s not just the “flashy” functionality of human-to-device interaction at the pole in urban centers, it’s also the ability to do some of the more meaty work of helping the authorities manage issues that are not lighting per se but can leverage a robust streetlighting canopy to provide connectivity and control to other devices in the vicinity. One example in the Pearl River Delta, with its frequent floods, is manhole covers floating away after large storms, and whose open hole presents a safety hazard that goes undetected without visual inspection. A streetlighting network with a device to detect presence of a cover would resolve this problem and ease a significant operational burden, not of the streetlight maintenance team, but of the city authority. These sorts of applications are interesting. So are traffic control applications, not least of which is detecting if a red-yellow-green signal is energized or not. Without energy to the device, and no way to detect it with anything other than a visual inspection unless it’s connected up to a network, this hazard snarls China’s already-burgeoning traffic problem in cities, where jams and pollution seriously erode quality of life.

8. Under the Dome, the Internet of Things is also impacting China — but in a different way. With several hundred million views, the two-hour film depicting the impact of carbon pollution on Chinese life has taken the country by storm (and has subsequently been put on the other side of the Great Firewall). There wasn’t anyone I met who hadn’t seen it and wanted to know how what Silver Spring’s technology does could help. You can be sure the Party apparatus is keenly aware that the populace is going to demand action. Copenhagen-style CO2 reduction on an aggressive scale, tending towards a zero-carbon footprint, is a trend that will take this country by storm. Lighting retrofits will take on an environmental character; demand-side management in the style of Smart Grid that we have seen elsewhere will start to become important in the extreme, and with it the demand for networks that support it; gas-burning cars will soon give way to electric vehicles in a way that will make the transition of a state like California seem snail-like; and the idea that more demand means more coal-burning plants will be jettisoned. Siloed applications can support it at a massive cost; a true network platform that accommodates a wide range of applications so that each can be stood up at a fraction of the cost will certainly be rising in prominence as authorities consider how to achieve these changes.

9. Experience of large-scale communications networks beyond cellular platforms to accommodate multiple applications is scarce. As I highlighted above, China doesn’t really have a home-grown platform that can do what the country requires; external conditions limit how it can bring in technology that has been proven elsewhere, internal conditions on financing access and technology access limit how ESCOs can propose lighting projects that can lead to Smart Cities; a dearth of proven stymies rapid adoption. China’s demand is voracious, and so to those who can take down these barriers, the rewards are great.

10. Winners will follow the same standards-based, scalable path to victory as in other markets. I think that standardizing on an IPv6-to-the-endpoint network from the cellular platforms on down to the devices themselves will go a long way to allowing the Internet of Things to blossom in China. I also think identity management, in the form of authentication, authorization, and data privacy, will be paramount to implanting these projects. But most importantly, the massive scale of device quantities in China means that a reliable, scalable technology platform will be the key to unlock the promise of this market.

May the Year of the Ram be a prosperous one for us all!