Blended Reality In China
How The Convergence Of 5G, AI And IoT Will Shape China In The Next Five Years
by Sebastian Mueller, Chief Operating Officer at MING Labs
With over 753 million users, China is home to the largest mobile internet population in the world. People are connected everywhere they go — with the internet for them largely consisting of a few access points, including Tencent’s WeChat, Alibaba’s e-commerce properties, Baidu’s search engine and popular social applications like Bytedance’s TikTok.
The smart services that come with that ubiquitous connectedness are changing consumer habits drastically. Digital payments are on the rise, reaching transaction volumes of nearly USD 16 trillion in 2017. The Chinese market is accounting for 68% of the global trips completed with on-demand bike and car sharing services.
Mobility is always available at the click of a button, without the need to own the asset.
WeChat is now processing over 45 billion messages every single day, with massive adoption across various age groups including the elderly, creating a new social fabric. Traditions are being brought into the digital realm, with 688 million people sending their hongbaos through WeChat on the Chinese New Year’s Eve of 2018. While these numbers are already incomprehensible to most, by all indications the mobile boom in China is just getting started.
The Looming 5G Revolution
The combination of wide-scale availability of affordable smartphones, rising incomes and an increasing amount of attractive digital services, had lead to an exponential growth in mobile data usage.
While the total in 2012 was below 1 exabyte (1 billion bytes), in 2017 it reached nearly 25 exabytes. The consumption growth rate is itself accelerating and has reached over 100% year-on-year growth since 2016.
This has been a strain on the country’s infrastructure. It has been a bottleneck both to consumption and also to the widespread proliferation of IoT devices and the implementation of even more data-intensive services. Live streaming, a very popular activity among the young population, is already data intensive. Yet that is fractional, compared to use cases such as 360° live streaming for virtual reality consumption.
This is all about to change, as China is accelerating the timeline on the rollout of 5G across the country. With the new technology being faster by an order of magnitude, we will see a Cambrian explosion of new services, use cases, IoT penetration and data consumption across the country.
With data collection, data streaming and data storage capacity growing at the same exponential rate, it will also be the starting point for a new wave of personalization that we have never seen before.
AI And The Audience Of One
It is by now well established that China is taking the lead in AI research and implementation. China is home to the most valuable privately held AI companies globally (SenseTime, Yitu, Face++ and more) and the government and investor scene are eager to fund the technology to even higher degrees.
While there are many potential applications for AI, in the consumer space the main use cases so far are around customization. Using data generated by the usage of services to learn about the consumer, understand the consumer and serve their needs even better the next time around.
The holy grail of this customization is to serve every individual exactly according to their needs, as an audience of one.The effectiveness and efficiency of AI mainly depends on the available computing power and the available datasets.
Without enough computing capacity, insights take too long to generate, making it inefficient. With too little or badly structured data available, the generated insights are meaningless, making it ineffective. For hyper-customization to be possible, both requirements must be met.
We are on the verge of that happening. There is no lack of computing power, increasing further and further as it keeps doubling every 12 to 18 months. At the same time, datasets are getting richer and richer, with an explosion in available user data on the horizon through the rollout of 5G services and the increasing capacity to collect, transfer and store anything and everything a company can learn about their customer.
AIoT — When The Physical World Becomes Customized
Xiaomi has recently committed at least RMB 10 billion in investments into AI and smart devices over the coming five years. It is no coincidence that these two technology fields are thrown together in the same sentence. Lei Jun himself, CEO of Xiaomi, mentioned in the same statement that Xiaomi is “all in on AIoT.”
What the convergence of these two technologies means is nothing short of the potential of a hyper-customization of the physical world. IoT devices, also termed cyber-physical systems, serve as the connector between offline and online.
They combine the capabilities to act in and onto the physical world, collect data from it and turn that data into insights and instructions, through algorithms running in the digital realm.
Through face and voice recognition, every individual can be clearly identified without the need for passwords, fingerprints or ID. Every device knows exactly with whom it is interacting, can access what is known about that individual, and customize its services and surroundings in accordance with that information. A personal version of reality, in which bikes pre-adjust their seat and resistance, cars adjust the softness of the seat and the temperature, and restaurants prepare dishes exactly to taste and nutrition needs are all possible.
Smart home device penetration in China is still in its infancy. Only an estimated 5% of Chinese households did make use of smart home applications in 2018, equaling a market size of just around USD 7 billion. This is estimated to grow fivefold by 2025 to USD 35 billion. And that is a conservative estimation, taking into account the paradigm shifts that are just getting ready to launch and scale.
Qui Bono? Alliances Are Forming To Benefit
As this emerging field is on the intersection of multiple industries, alliances are already forming and looking to take advantage of this opportunity. Most are a combination of a traditional household goods player and a technology company, looking to combine the brand strengths and retail channels of the manufacturer with the technical chops of the digital player to bring new propositions to market.
Such combinations include the announced alliance between IKEA and XiaoMi to team up in smart devices for the Chinese market. Other tie-ups that have already formed include Alibaba and Midea, as well as Philips Lighting and voice-controlled home assistant manufacturer LingLong (itself a joint venture between JD and iFlytek). While initial use cases around remote- or voice-controlled lights, at-home environmental quality and smart fridges seem benign, they are just the starting point for what these companies have in store.
Chinese companies have been great at figuring out business models, where others saw prohibitive entry points. Such as XiaoMi pricing their devices at bare break-even to drive penetration and monetizing through services and advertising. Or WeChat making digital transfers and payments free for users and only charging merchants. Where traditional business models fail, because the immediate cost-benefit logic does not work for the customer, Chinese technology companies understood the importance of first achieving scale with an entry point and monetizing through ancillaries later.
The smart devices themselves are and will be priced very aggressively, to appeal to as many consumers as possible.
Reach is the name of the game. What comes after that is a level of unprecedented data gathering and insights on a scale nobody can yet imagine.
The Transparent Customer
Technology companies like Alibaba, Facebook, Google or Tencent know a lot about their customers. But all their knowledge is mostly limited to their customers’ online activity. Google knows what people search for, click on and which websites they visit, but it does not know how many people are in their house at any time or where they stop by on the way to work. They know a lot by what is revealed online, yet the actual physical world and activity have been barred from their view. Until now.
By introducing smart home devices into customers’ homes, the usage data not only allows them to make the device smarter but also to know a lot more about the consumer. Voice control means they can listen in and analyze how many different voices (i.e. people) are at home at any time. They know when people are at home. They know when people are on the road and where they stop by. And they can correlate all of those insights into the physical world with their existing data to generate a whole new level of insight.
The ultimate selling point of technology companies has always been about convenience.
Making it easy to connect with friends and family. Making it easy to pay. And now making it easy to control every aspect of your home. Not to mention being able to get everything delivered at any time, not having to carry around cash, and mobility at your fingertips wherever you are.
The trade-off has always been the same: You pay the economically equivalent price — either in cash or in data. While high convenience is nice to have, the business model behind it needs to be considered. Paying the full price for value in cash, by dealing with companies who are not looking to monetize data to an extreme, might be a good balance to strike. The proliferation of technology is unavoidable, yet how we view it and deal with it is fully in our control.
China is the frontier market for this development, as it has been innovating and adopting in the relevant spaces at an unprecedented pace, and the technological waves of 5G, AI and IoT will crest together here over the next few years in the first nation globally. It will be interesting to see what scenario will unfold and how that will impact the lives of consumers across the country.
Sebastian Mueller is Chief Operating Officer at MING Labs.
MING Labs is a leading digital business builder located in Berlin, Munich, New York City, Shanghai and Singapore. We guide clients in designing their businesses for the future, ensuring they are leaders in the field of innovation.
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