Educational technology is an often overlooked global phenomenon. In 2015, global EdTech companies took in more than $2.98 billion across 442 deals, and global EdTech funding jumped a whopping 58% in 2015 from the previous year. The global market is projected to grow at 17.0% per annum, to $252 billion by the year 2020. Asia is seeing the fastest growth in investment into the sector; China, in particular, is the largest EdTech market.

According to the Statistical Report on Internet Development in China, the number of online educational users in China reached 423 million as of March 2020, an increase of 110.2% from the end of 2018. The EdTech sector in China is estimated to reach RMB 453.8 billion in 2020, a 12.3% increase from the previous year, according to a report by iiMedia Research. As a response to the coronavirus outbreak, many EdTech start-ups have captured the opportunity to increase its presence in China and competed to gain popularity among students with attractive course offerings and discounts.

With over 400 million students, China is the world’s largest market for educational technology. While the education market in China still has much room to improve, especially in terms of formal integration of technology into classroom settings, many companies have successfully taken advantage of opportunities for digitizing education in China. EdTech landscape in China focuses on virtual tutoring, but there are a number of other EdTech start-ups that have successfully penetrated the EdTech landscape in China.

These are a few of the most innovative start-ups of the Chinese EdTech landscape –  from robotics to tutoring, to innovative educational technologies. We also explore which of these start-ups have gained a competitive edge during the coronavirus outbreak.

EdTech platforms in the Chinese education market

Yuanfudao (Yuantiku)

The platform focuses on K-12 learning and its products include AI-enabled virtual classes, live tutoring, and apps for homework support. A start-up founded in 2012, Yuanfudao has raised US$1 billion in a new round of funding in April as a response to the coronavirus outbreak led by Hillhouse Capital and its previous investor Tencent Holdings. This puts its valuation at around US$7.5 billion, making it one of the most valuable ed-tech start-ups in China.

In 2015, it launched Yuantiku, an online question bank. This app strategically takes advantage of the test-taking focus of the education system in China. Yuantiku is an online education product that provides material of previous years examinations for students and an exercise database that also provides tailored exercises to improve testing efficiency.  Some tests available include: National College Entrance Exam, post-grad entrance exams, tests for civil servants, first-level constructor exams, law counselor of enterprise exams, securities qualification exams, and more. More than 13 million Chinese junior high and high school students utilize the app, where hundreds and thousands of apps are aggregated to prepare students for the college entrance exam.

With such a huge database like this, its no surprise that two-thirds of Yuantiku’s staff is dedicated to research and development. Leading engineers and researchers are also hired for the application’s “little ape” search and “ape teaching” assistance to further develop its artificial intelligence methods in more effective learning methods. However, since its release, there have been public debates regarding its promotion of the heavy test-centric culture that has already been criticized in China. Questions of whether this kind of application is positive for the social health for Chinese educational society is still something to keep in mind with Yuantiku.

17zuoye

17zuoye, translating to “yi-qi-zuo-ye” or “homework together” widely recognized as the largest online educational platform in China. It is a three-party intelligent education platform for students, parents, and teachers. As of February 2018, 17zuoye has served over 60 million users and 120,000 schools by offering homework solutions to instructors, students, and parents. The platform aims to improve learning efficiency and efficacy and transform student homework from offline to online.  In the same year, the company also raised over $250 million, and intends to expand into the middle school and high school sectors, and continue to lead the the educational technology market in China.

Their mission, state on their website, is to “make education a more beautiful experience” by “utilizing advanced education technology, quality educational content, and continuous educational enthusiasm” in order to “provide more efficient and beautiful products and experiences for K12 stage schools, families and social education scenes, opening a new era of intelligent education.”

VIPKid

Valued at $3 Billion in 2018, VIPKid is one of the hottest applications for online English tutoring in China. The company pairs English tutors from the United States or Canada with Chinese students for one-on-one English tutoring geared for children 4 to 15. Through a live video tutoring platform, parents can book a session for their children with tutors, who can upload videos of their lessons. The English teachers are considered hourly-paid independent contractors.  Currently, VIPKid claims to have over 700,000 paying students and more than 80,000 registered teachers based in North America on the platform.  The company also raised $500 in 2018, suggesting a wave of growth in the Chinese EdTech industry, and across Asia more broadly. 

The app released followed their launch of the desktop version, and the app is a handy tool that lets students see previous feedback from teachers, upcoming schedules, and personal profile. Teachers can review their student sessions, a number of classes taught, and how minutes teaching completed. It also comes with a messaging area and notifications that can alert teachers and students of their upcoming tutoring sessions.

The platform rapidly took actions to support education in response to China’s school closures in late January due to the coronavirus outbreak. VIPKid’s first step was a launching 1.5 million free online math and English classes for children aged 4 to 12, and they prioritized students in Wuhan, the epicenter of the outbreak. They also launched free live-stream and recorded classes on eight major streaming platforms in China.

DaDaABC

DaDaABC has become one of the most successful intelligent English learning platforms for children in China. Founded in 2013, the company had earned over 15 awards and recognition in 2016. They’ve also collaborated with a number of top media companies in China, including Baidu, People’s Daily, and Tencent.

DaDaABC developed an English training system focused on one-and-one online tutoring while encouraging kids to have with their instructors during their practice. As an English tutoring platform, DaDaABC is often compared to VIPKid, but the company does not require their native English teachers to have a North American accent like VIPKid.  As a partner of the American TESOL Institute (ATI), they also offer online training courses for aspiring English instructors worldwide.

Makeblock

Makeblock is one of the most creative companies on our list. Founded just 6 years ago in 2013, the start-up uses Robotics as its primary educational tool, teaching kids coding, engineering, and other basic AI technologies. The package includes do-it-yourself robotic kits that will be manually assembled by students, who then also write simple lines of code to control their robots.

Makeblock is a global leader in STEAM education solutions (Science, Technology, Education, Arts, and Mathematics). The company provides hardware, software, content solutions, and even top-notch robotics competitions. Their products have over 8 million users worldwide, in over 140 countries, by over 1,600 channel providers. Makeblock has been the recipient of seven international awards, including the International Design and Excellence Award, the Reddot Design award, and the CES Innovation Awards in 2018.

As part of its global STEAM on Board Initiative for K-12 educators, Makeblock launched their “at-home resources” in March to adapt to online education with the pandemic. Initially designed to support local professional learning needs of STEAM and computer science teachers, the program now allows all educators and parents around the globe to teach and learn STEAM concepts with their free software, mBlock.  

CCtalk

CCtalk is the multifaceted online learning platform for Hujiang EdTech, another leading company in the Chinese education market. Hujiang was founded in 2001, as a BBS (bulletin board service) community offering online courses, but has since then expanded to offering a wide range of online educational programs, including international and domestic exam prep, foreign language instruction, professional skills training, and even more. CCtalk is a real-time interactive education platform that provides independent knowledge educators and sharers with comprehensive online education tools and platform capabilities, providing informative content and a community environment for learning.

Contrary to popular thought, not every EdTech platform in China is solely based on English tutoring. CCtalk provides a variety of educational tools and abilities both in live, recorded, and group formats. The platform allows teachers to utilize and create educational widgets, including a two-way digital whiteboard, digital hand raising, a multiplayer video that guaranteed teacher-student synchronization, desktop sharing, live PPT-like courseware, and playback functions. CCtalk university provides training for their iteachers, and the CC talk platform itself serves as a great platform in helping teachers attract more new users, and increase revenue from their courses.  The platform has been widely highlighted as a leader in educational innovation, allowing teachers to develop and utilize their own widgets and share them with others on the platform.

Changing Edu

Changing Edu is an O2O (online to offline) educational service app-maker connecting students, parents, and teachers to facilitate after-school learning services. Parents can post inquiries regarding tutoring services, and the mobile service app helps connect tutors to students. The Chinese EdTech company uses an online platform to make offline matches for one-on-one, at-home tutoring services. The company also plans to launch virtual, remote educational services, and other live streaming and expert Q&A services this year on their platform. The platform currently operates in 11 cities, including the larger cities of Shanghai, Beijing, Shenzhen, and Wuhan.

To accommodate for at-home learning during the coronavirus, Changing Edu launched a “Six-week learning contract” initiative for personalized one-on-one teaching. After the six-week learning period, students can apply for a full refund if they are dissatisfied. They also provided a free online teaching platform for self-employed teachers and smaller educational institutions in the industry. Among Chinese society, it seems that this platform has gained popularity among users after the outbreak.

Huikedu Group

Founded in 2010, the Huikedu Group includes the “Huike Education Group” and the “Huike Science Research Institute.” They are the largest partner with higher institutions in China, offering cutting-edge educational technology and products to higher education and vocational education services. The group also cooperates with national goals to develop mobile internet, cloud computing, big data, internet marketing, and other innovative information technology into educational services.

Huideku has reached a unicorn valuation of $1billion. Its focuses are in partnering with enterprises to provide customized educational products. It has developed online courses and R&D labs on tops such as AI and robotics. Additionally, the group also partners with overseas schools to provide overseas educational programs such as exchange programs, language training, and career development.

Supporting at-home learning during the coronavirus pandemic, but what happens next?

The coronavirus outbreak has hampered the supply chain of many industries such as tourism, retail and much more. It could be said that the EdTech sector has been one of the “winners,” seeking opportunities to gain popularity in China in support of local education. Yuanfudao, VIPKid, Makebloc, and Changing Edu have made noticeable initiatives in response to enhance students’ at-home learning. Yuanfudao is one of the top online education apps with a weekly active user YOY growth of 21 times from February 2019 to February 2020. The education app leading the industry is Xuuersi, with a 50 times YOY growth. Its daily active users exceeded 10 million, with many new users from second, third, and fourth tier cities.

With the future uncertain, the most popular educational functions are short commitments, such as one-month subscriptions for a couple lessons or short interactive videos. However, doubt remains as to whether surge demand for EdTech fueled by quarantine measures will last. Schools will eventually reopen, and users are not guaranteed to stay permanently. Indeed, how people value and view the online education market has been revolutionized, yet the question of the longevity of these platforms remains.

Educational technology in China: Takeaways

Educational technology in China has not only seen tremendous growth in recent years but also shows no sign of slowing down in the booming education market in China. With these 8 being amongst the hundreds of EdTech start-ups across China, global markets should realize the innovative ways in which China utilizes digital tools to enhance students’ education in China. This phenomenon also stems from cultural factors, as Chinese society has always vigorously upheld education as one of its core cultural and social values. It is important to make a note of how China has integrated this value with the realm of technology and innovation, While tutoring applications remain the bulk of EdTech companies in China, our list has noted a number of creative EdTech start-ups that utilize a variety of online tools and out-of-the-box educational services. Western markets should be highly alert to the EdTech landscape in China, especially due to the large demand for foreign language tutors. This market is sure to see extended global communication, as language teaching and cross-border education become increasingly in demand with the enhancement of EdTech.

Author: Julia Qi

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This article 8 Chinese EdTech start-ups leading the global educational technology industry is the first one to appear on Daxue Consulting - Market Research China.

Cloud computing is the storage and processing of data on remote data centers. Cloud storage reduces the burden on computers which makes possible more work flexibility. A large tech savvy population and need for data security drive the development of cloud computing in China.

China has the largest online population in the world, with over 800 million internet users. Therefore it is no surprise that China generates an enormous amount of data that must be stored securely. Cloud-based servers are more scalable, affordable, and secure than on-site servers, so they perfectly satisfy China’s huge demand for flexible data storage.

The technology is being rapidly developed in various sectors and is already generating over five billion dollars in revenue annually. Generally the three main types of business delivery models available for cloud computing are Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS). Meanwhile, data can be stored from the public cloud, private cloud and hybrid cloud.

Sizing the Chinese cloud computing market

In 2018, the Chinese cloud computing market was second in terms of overall size. It accrued approximately $13.4 billion dollars in annual revenue compared to $53.4 billion of the US. Despite this, the Chinese government is dedicated to pushing the market to approximately $64 billion by 2020, creating major business opportunities for cloud computing providers. At any rate, China’s cloud computing industry is projected to exceed 300 billion yuan ($42.3 billion dollars) by 2023, by which time an estimated 60% of domestic companies and government agencies will be using cloud computing services.

[Source(s): Statista, IDC, China’s cloud computing market size]

According to the Chinese Ministry of Industry and Information Technology (MIIT), from 2015 to 2019 officials have been working to more than double the scale of China’s cloud computing industry. Many analysts predict that public cloud usage rates could grow more than 20% annually to 2023.

Large enterprises, government agencies and financial institutions accelerate the pace of cloud application

Furthermore, according to an interpretation of the MIIT’s Action Plan, China’s cloud computing industrial structure continues to optimize. Key technologies such as large-scale concurrent processing, mass data storage and data center energy-saving have achieved great breakthroughs in standards. Also, backbone enterprises are working to develop more strategies to improve their business categories. With many large bodies like enterprises and government institutions relying on cloud computing in China, the technology is applied into an increasingly wide range of industries.

According to data from market research firm IDC, cloud computing and artificial intelligence will more than double the rates of innovation and productivity at Chinese companies and organizations by 2021. For these reasons, cloud computing is considered a crucial infrastructural force in China’s push for an industrial upgrade as it moves to embrace new technologies like artificial intelligence, internet of things, and big data.

The graph below portrays IaaS as the segment with the biggest market share in cloud computing in China. The forecasted market size of software-as-a-service (SaaS) will continue to be the largest among the three with CRM and Mail management as the most widely used application types.

[Source: Statista, Cloud Computing in China – Statistics & Facts]

Chinese Government’s Cloud Computing Industry Development Mandate

As part of a larger development strategy for advancing Chinese software and information technology services, the Chinese government plans to continue to make large investments over the next few years to drive domestic cloud computing development.

Through the ‘Internet Plus’ strategy, introduced in 2015, the Chinese government is pushing for the development of the domestic cloud computing industry to modernize manufacturing and other domestic industries. In short, this strategy promotes the integration of cloud computing with big data and IoT.

China’s cloud computing market is still at the nascent stage; however, it is likely to witness tremendous growth across all the industry verticals with public sector, manufacturing, retail, and healthcare sectors among major adopters of cloud computing services. Also, fast pace deployment of 4G LTE mobile network across China is anticipated to support further penetration of cloud computing services among end user organizations. The cloud market has particularly strong growth potential, underpinned by government initiatives and major investment by vendors in infrastructure and human capital. A new cybersecurity law will protect local cloud and hosting players from growing international competition.

Government support for the Chinese cloud computing market will see strong growth continue. Domestic firms have been set the target by China’s Ministry of Industry and Information Technology’s goal of increasing cloud revenues by at least 50% annually over the next few years, including a focus on generating revenues for cloud services from international sources and building China’s presence in the global cloud computing market. There is also an eight-point initiative that includes the creation of a national industry data recovery center and a national safety control service center for China’s data security.

Trends in the Cloud Computing Space

The future of cloud computing looks vast, connected and increasingly fast. While the concept and initial design of cloud computing began in the United States as a way to store data, networks, intelligence and more over the Internet, the refinement of cloud-based platforms and services are spreading widely in China. From individual consumer cloud services for storing photos, to multibillion-dollar corporations that need to house intelligent data, this technology has become internationally ubiquitous in the last ten years.

Globally, the cloud computing industry is dominated by American companies such as Amazon, Microsoft, and Google, which controlled a combined 57% of the overall market in 2018. According to Wikibon Research, the global cloud market hit $237 billion in 2018 and is estimated to reach $814 billion by 2027. With mega corporations like Google, IBM and Amazon mostly running cloud systems in the U.S., it’s easy to overlook China’s market for now. Data shows, however, that companies like Alibaba (which currently ranks fifth in the global cloud computing market), Tencent and Huawei have worked their way up the ranks and are growing rapidly.

[Source: Statista, Synergy Research Group, Global market share of leading cloud providers]

China’s cloud computing market will be the largest in the world

China’s cloud market is set to become the largest in the world by 2023. But right now, it remains nascent and insubstantial compared with its respective sectors in mature economies. The Chinese market is roughly one-tenth the size of the US equivalent. The market is expanding but remains fragmented, which means that much of it is up for grabs. Domestic tech heavyweights Alibaba and Tencent, along with international players like Amazon and Microsoft, all want a piece of what will eventually become a very large pie.

Despite the challenges presented by the Chinese market, several large, well-resourced U.S. cloud providers have established operations in China through joint partnerships with local companies. For example, Microsoft has partnered with 21Vianet, a Chinese data services firm, to roll out public cloud. Other U.S. companies are also operating in China. Amazon is partnering with ChinaNetCenter to offer cloud services and IBM is teaming with 21Vianet to offer its hybrid cloud platform.

Tense domestic competition drives growth

Furthermore, in the decade since e-commerce giant Alibaba became one of the first domestic players to tap into the market in 2009, China’s internet giants have been pouring resources into building up their cloud infrastructure services. Companies like Huawei, Tencent, and Baidu are now working feverishly to deploy their own cloud computing-based services. Among Chinese tech players, the excitement surrounding cloud computing’s potential as a growth driver is real.

Thus, local competition is another significant factor to take into consideration. Several Chinese companies are well-positioned in their domestic market. E-commerce giant Alibaba’s Aliyun is already a notable competitor, servicing 1.4 million customers directly and indirectly. China Mobile, China Unicom, China Telecom, Baidu, Tencent and ZTE among others, are also well-positioned in the market.

The Chinese cloud computing market is dominated by local players

China’s cloud market is dominated by local players, with IDC figures showing Alibaba Cloud as holding 42% of the public cloud marketplace in 2018, followed by Tencent Cloud at 12%, China Telecom with 9%, and Amazon Web Services (AWS) close behind with 6%. The total market for cloud infrastructure and software in the world’s second-largest economy reached $5.4 billion in the first half of 2019.

As you can see below, they are leading in each of the four key market segments: data center hardware/software, cloud computing services, colocation and CDN.

[Source: Synergy Research Group, This graph shows the market size (greater to the right) and annualized growth rate (high growth will place at the top of the chart) for the Chinese Cloud and Data Center Market]

Where is the growth and opportunities in the Chinese cloud computing market?

China has been a frontrunner in many different tech industry verticals, from AI and the Internet of Things (IoT), to smart cars and virtual reality (VR) services. As a direct result, the Chinese government and businesses have worked to also strengthen cloud computing technologies to support the data infrastructure of many of these emerging technologies.

According to Zhang Feng, chief engineer with China’s Ministry of Industry and Information Technology, China’s overall cloud industry reached a scale of $48 billion, and the IoT industry surpassed $174 billion in 2018. In other words, there are many businesses in many industries looking to implement cutting edge cloud computing technologies. Thus, increased development by Chinese companies on their cloud services offerings will continue to support the domestic market’s growth.

Along with this, the SME market in particular continues to offer strong growth potential and will be an important driver of demand for cloud computing in China. With security being a key hurdle, Chinese SMEs will likely continue to favor Chinese cloud providers for their IT services expansion. The SME cloud market was a key area of growth over the previous years and the fastest growth rates were for hosted communication and collaboration services, but in terms of total demand, it is Infrastructure-as-a-service (IaaS) and business applications that dominated.

Chinese companies are sensitive about their data

In the past, concerns over cost, security and logistics meant many Chinese businesses were reluctant to migrate to the cloud. Chinese companies are extremely sensitive when it comes to their data, with the vast majority still preferring it to be stored in-country.

However, encouraged by decreasing costs and Chinese government policy, a growing number of Chinese firms, unhampered by decades of outdated IT infrastructure, are now adopting cloud-based alternatives to on-site enterprise hardware and software. This is especially the case with China’s burgeoning number of SMEs, which typically have smaller budgets and therefore prefer the lean business models supported by SaaS. Customer relationship management software (CRM), office automation software (OA), intelligent manufacturing software (IM) and office collaboration software top their shopping lists.

Alibaba Cloud Leads China’s Cloud Computing Market

It opened up to third-party customers in 2009 and offers a comprehensive suite of cloud services, including web hosting, elastic computing, data migration, database, storage and content delivery networks, large-scale computing, security, and management and application serves.

Alibaba Cloud is China’s largest public cloud service provider with the most advanced cloud network, including 11 data centers and more than 2,300 CDN nodes in mainland China. Although being the world’s fifth biggest player in having just 5% of the global cloud market, it holds a 40% share of China’s domestic market and provides international companies with seamless access to China through Alibaba Cloud’s

China Gateway solution. Alibaba Cloud’s ongoing focus on innovation and internationalization has allowed it to outperform major Cloud vendors in the Asia Pacific market.

[Source: Deloitte, Overview of Alibaba’s Cloud Products and Solutions]

Alibaba Cloud’s Recent Performance

In its December 2019 4Q earnings, Alibaba maintained its leadership position in the Chinese cloud computing market by developing technology and business solutions that enable the digital transformation of businesses across industries in both the public and private sectors. During the quarter Alibaba Cloud reached two important financial and technological milestones.

62% YOY growth

First, their cloud computing business generated, for the first time, over 10 billion RMB in revenue, growing 62% year-over-year. This was driven by increased revenue in its public cloud and hybrid cloud businesses.

Applying public cloud infrastructure

Second, ahead of last year’s 11.11 Shopping Festival, Alibaba Cloud enabled the migration of the core systems of their e-commerce businesses onto their public cloud. During the festival, Alibaba Cloud provided a highly scalable, reliable and secure public cloud infrastructure that handled a single day GMV of RMB 268.4 billion (US$38.4 billion). Its public cloud infrastructure and technologies enabled Alibaba to process over 544,000 orders per second at peak and 970 petabytes of data without disruption for the full 24 hour period during the festival.

The company believes that the migration of the core systems of Alibaba’s e-commerce businesses onto the public cloud is a major milestone that not only will generate greater operating efficiencies for Alibaba but also will encourage more customers to adopt their public cloud infrastructure.

Cloud computing now represents more than 7% of all of the company’s revenues as Alibaba continues to cement its cloud position in China and in the Asia Pacific region.

A Promising Future for the Chinese Cloud Computing Industry

China still has a complex regulatory environment with intense local competition. However, the market opportunity is attractive to a point where foreign firms are willing to invest heavily in the cloud sector and take necessary measures to be compliant. Massive investments from both public and private actors also support this trend as it enables higher speed connections in remote areas and better wireless connectivity in the whole country.

Huge private sector investment, strong government backing and young talent are together rallying behind the growth of China’s cloud computing industry. The thirst for big data and information on consumer trends from corporate marketing departments will likewise drive demand for cloud-based database technology.

The other primary driving force will be market demand. Given the growing appetite for on-demand video, short-videos and live-streaming, mobile gaming and online content in China, content providers will need to invest in elastic computing services, auto-scaling, content delivery networks and server load balancers in order to provide uninterrupted service and fast download speeds. Demand for cloud products will also increase as companies invest in new technologies such as O2O services, IoT integration and online payments, or expand into overseas markets.

Mobile security will be another priority for the industry. As the world’s largest smartphone market, China is regarded as a mobile-centric market, and different to PC-centric markets found in the West. China’s tech savvy population is leading the way in adopting mobile payments, O2O services, mobile gaming and designing their lives around their smartphone. While Android is the leader in powering mobile applications for the China market, its operating system also remains highly susceptible to external attacks. To address data security and the concerns of Chinese mobile users, foreign companies will need to invest in mobile security, while still offering fast load speed and high availability to users.

Public vs. Private Cloud

[Source: Technode, Mckinsey, Spending on public and private cloud computing in China]

Although Chinese businesses are beginning to ramp up investment in cloud computing, they use cloud computing services at a lower rate than companies in the United States and other developed markets. While Chinese companies generally prefer the private cloud (i.e., data is stored on a company’s intranet), rather than the public cloud (i.e., data is stored by the provider), China’s public cloud market is set to grow over 20% by 2020 as more Chinese companies adopt public cloud services.

For foreign cloud firms, the local ecosystem features several peculiarities that have so far restricted them from securing significant market share on a global level. In addition to standard regulations that prohibit foreign cloud providers, they also face a market unready for widespread public cloud adoption. Unlike more mature cloud markets, firms still prefer private cloud solutions, which allow them to maintain full ownership and control of physical resources. However, the public cloud model is slowly waking up in China and in the future hybrid cloud models will likely become mainstream as more businesses choose both solutions for different ends.

What are the opportunities and concerns for foreign businesses?

Given the growing importance of data in business operations, cloud computing is a must for MNCs operating in China. However, setting up cloud computing solutions in China presents unique challenges including legislative and technical aspects of MNC cloud options. Despite the uncertainties and challenges, global cloud providers cannot afford to ignore China’s large and growing market. Increasingly competitive domestic players are finding their niche, but multinationals still have an opportunity to shape the market. As a market player it is time to identify target segments and invest in solutions for this customer base, as China’s IT buyers decide how they will take advantage of what the cloud has to offer.

Current regulations stipulate that foreign cloud providers must partner with local Chinese companies to serve customers in China, and the cloud computing industry is still regulated. The main challenges facing cloud computing within, from or to China stem from the information security aspect. This involves issues such as data cross-border transfer, personal information protection, data processing and mining among others.

While its tech market is growing, China still needs to enhance its core cloud technologies and encourage its adoption across markets. According to a recent report by Alibaba, areas that Chinese businesses require the most cloud assistance include IoT integration, mobile security and expansion into overseas markets. However, the convergence of emerging cloud technology trends and China’s increasing demands for the use of cloud services will open cross-border business opportunities. The tech sector will benefit tremendously from collaboration and partnership initiatives between firms in China and the rest of the world.

Mastering the Cloud Economy

How to navigate your approach?

Two characteristics of China’s cloud market may help enterprise vendors navigate their approach.

• Technology providers selling cloud software, services and hardware can strengthen their value proposition by developing a better understanding of cloud economics, customer preferences, and the impact of the cloud’s ascendance in legacy and disruptive technologies.

• State-owned enterprises account for a large share of total IT spending and are highly concentrated in government, banking and financial services. In these sectors, most IT spending focuses on large, complex, highly integrated legacy systems that cannot easily move to the cloud. A large and dynamic start-up scene has emerged in China, and is spending on the cloud. However, that still represents only a small fraction of total IT spending. In the U.S., cloud providers are addressing mainstream companies across industries, but that’s more difficult to do in an economy dominated by state-owned enterprises.

Choosing a Provider

When entering the Chinese cloud market, Alibaba maintains that website load speed is crucial anywhere, but particularly important in the mobile-centric market like China. Thus, the best option to minimize latency, improve SEO visibility, and provide high availability is to host in Mainland China.

The clear local market leader, Alibaba has earned the title of trusted partner for Chinese firms expanding into European availability zones. And with the growth of China’s cloud industry and now with China Gateway, it’s looking to do the same for companies moving in the other direction. Selina Yuan, president of international business of Alibaba Cloud Intelligence says that the “primary challenges foreign organizations face are “security, connectivity and demanding cross-border digital infrastructure setup issues.”

Therefore, for any multinational vendors or business it is important to assess how your business can fit into the proper Chinese ecosystem from both a technology and business perspective.

Author: Jeffrey Craig

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Economic recovery is uneven across regions

There is not a direct correlation with the number of cumulative cases and pace of economic recovery. Rather, it could be explained by the main industries of provinces. Inner Mongolia and Qinghai, where mining is an important part of the economy, seemed recover a bit slower due to decreased energy demand. Tibet, visited by over 30 million tourists a year, is second slowest to recover, despite only having one reported case. However, with the exception of Tibet and Hubei, all provinces are only a few percentage points, or fractions of percentage points away from regular output.

[Data sources: Trivium China, National and provincial health commissions, daxue consulting analysis]

Industries most hit by Coronavirus

As of April 10th, 95% of large companies have resumed operations. However, most companies are not yet at full production. Large corporations have been around the 80% mark since the last week of March, and may linger for a while until demand returns to normal. The service industry and SMEs are bearing the brunt of the impact, especially those in the tourism, catering, and transportation. SME’s, have been trailing behind large corporations in their recovery.

Manufacturing: may see some irreversible changes

Motor vehicle manufacturing was the most impacted according to China’s national statistics. General Motors, Nissan, Renault, and PSA (the owner of Peugeot) all have factories in Hubei province. After factories re-opening, China’s auto manufacturers may still face a decreased demand. According to China’s Association of Automobile Manufacturers estimations, car sales will be down 10% in the first half of 2020, and down 5% during the whole year. This is assuming the outbreak remains under control.

Many computer and electronic manufacturing is also concentrated near Hubei, the epicenter of the outbreak. 290 out of 800 plants named in Apple’s global supplier list were located in regions in China that had major delays in returning to work.

[Daxue Consulting CEO, Matthieu David-Experton, interview with FranceTVInfo.com on China’s economic recovery after COVID-19]

The delayed impact of supply chain

Supply chain delays may be felt up to five weeks after manufacturing plants re-opened. Shipment between Asia and Europe or the US can take around a month, meaning that we are not yet finished with the delays despite plants in Hubei opening up again. Additionally, many factory workers are migrant workers, and were not able to return to their jobs for an extended period, even if operations had resumed.

Many countries interpreted the COVID-19 supply chain impact as a sign that they had put all their eggs in one basket. The Japanese government announced that it would provide $2 billion in loans for companies shifting production back to Japan.

Back in 2019, an AmCham survey results showed 39.7% of companies were either considering or actively moving their supply chains out of China. In the midst of the trade war, the pandemic may be a nudge for companies to move manufacturing.

None the less, Chinese factories are resuming operations. According to a Bloomberg report, Apple’s iPhone 12 will be released on time, contrary to early rumors. The phone was not scheduled to start being manufactured in China until May. Assuming there is no second rise in the pandemic, China’s factories will in the clear by then.

Logistics: continued positive trend for container volumes

The logistics industry is reflective of China’s recovery from the Coronavirus. In the first week of March, Chinese ports had a 9.1% jump in container volumes. Among them, the growth rate of Dalian, Tianjin, Qingdao and Guangzhou ports was 10%. However, the ports in Hubei are recovering slowly and face a lack of staff and workers. Apart from ports in Hubei, the epicenter of the virus outbreak, other ports along Yangtze river have returned to normal operation. The cargo throughput of three major ports at Yangtze river, Nanjing, Wuhan (in Hubei) and Chongqing increased 7.7%, while the container throughput increased 16.1%.

Shipping rates have increased 20-fold

Freight shipping rates for dry bulk and crude oil have begun to show early signs of recovery as Chinese industries recover from Coronavirus. The Baltic Dry Index, which is a proxy for dry bulk shipping stocks and the general shipping market, has risen by 50 percent to 617 on March 6, while on February 10 it was 411. Charter rates for very large crude carriers have also regained some footing in recent weeks. It forecasts daily rates for Capesize ships, or large dry-cargo ships, to rise from about US $2,000 a day in 2020 first quarter, to US $10,000 in the second quarter, and to more than US $16,000 by the fourth quarter.

[Data Source: sofreight.com, China’s recovery from Coronavirus Report by Daxue Consulting, growing BDI in March 2020]

Daily charter rates for the VLCC tankers from the Persian Gulf to China have risen to US$28,816 per day on March 5th from US$12,500 the previous month. A March 2nd report by IHS Markit noted that as Chinese industries recovering from Coronavirus, the final week of February saw a resumption of industrial production in China. Container cargo lines may have to wait longer for resumption, as it takes time for manufactured goods to roll out of factories for export. It is expected that the recovery time will be in the second or third quarter.

[Data Source: China Ports Association, China’s recovery from Coronavirus Report by Daxue Consulting]

While Chinese industries recover from Coronavirus, highway logistics also getting on track to recover.  From March 16 to March 20, 2020, the China Highway Logistics Freight Index, was 984.41 points, up from last week; the LTL light cargo index was 967.94 points, an increase of 0.01% from last week. From March 23, the demand for highway logistics is stable and the highway freight index rebounded slightly. From the perspective of later trends, the demand for highway logistics is expected to rise steadily, and the freight index may fluctuate and rise.

[Data Source: China Federation of Logistics and Purchasing, China’s recovery from Coronavirus by Daxue Consulting, growing China’s highway logistics freight index]

Retail and restaurants: customers return to shops

The Coronavirus impacted Chinese consumption in the long-run, and many of those impacts are still unfolding. However, during the pandemic, we are saw retail sales in China shrink by a fifth in the first two months of 2020, compared to a year earlier. In terms of China’s recovery from the Coronavirus, offline retail has a large uphill climb ahead of them. However, restaurants and supermarkets are indicators of the positive trend ahead.

[Data source: qianzhan, China’s recovery from Coronavirus by Daxue Consulting]

Offline restaurants and shops reopening

The Chinese offline retail industry is recovering from Coronavirus, on March 13^th all 42 official Apple retail stores opened for hundreds of shoppers. IKEA, which opened three of its Beijing stores on March 8, also saw high visitor numbers and queues. Earlier, on February 27 Starbucks opened 85% of its stores.

[Source: daxue consulting, Starbucks coffee shop in Shanghai, China enforcing social distancing by blocking off chairs]

Some restaurants narrowly avoided disaster

Had the pandemic shutdowns lasted two months longer in China, many more restaurants would have been in serious trouble. Over half of restaurants in China reportedly do not have enough cash to cover operating costs for more than six months. Normally, the restaurant industry makes 15% of their annual revenue during the lunar new year holiday. But this year, the China cuisine association reported that the restaurant industry lost 78% of revenue during the 2020 lunar New Year season.

Although China has a sophisticated meal delivery ecosystem, which has measures to ensure sanitary and contactless delivery, delivery alone was not enough to save the F&B industry. 65.8% of restaurants reported to the World Federation of the Chinese Catering Industry that their revenue reduced dramatically compared to the lunar New Year period of 2019. However, 15.1% of restaurants actually experienced a revenue increase.

[Data source: World Federation of the Chinese Catering Industry, daxue consulting’s Coronavirus economic impact in China report]

As of March 24^th, Yum China reported 95% of its stores were either partially or fully open. Around 10-20% of stores either with restricted hours or serving delivery only. Also as of March 24^th, Starbucks had also opened 95% of its stores in China, after being closed for 40-60 days.

Super market chains

As of February 20th, the average opening rate of large-scale supermarket chains nationwide exceeded 95%, and the average opening rate of convenience stores has also been around 80%. However, large-scale shopping malls such as department stores and shopping malls currently have a relatively low opening rate of about 50%.  

Baidu search statistics show that after a month-long lockdown, China’s consumer demand is increasing. At the beginning of March, information on “resumption” on the Chinese search engine increased by 678%.

China’s recovery from Coronavirus in the travel industry: surge in domestic tourism

The tourism industry felt the most immediate impact of the epidemic. According to our Coronavirus economic impact in China report, the damage to the Chinese tourism industry was equivalent to a loss of 1 trillion yuan GDP.

Despite only having one reported COVID-19 case, Tibet Autonomous Region has the second lowest economic resumption rate after Hubei. Tibet’s economy, growing a double digit speed for twelve years straight, is largely dependent on tourism. According to China Daily reports, in 2018 Tibet’s tourism revenue was nearly 50 billion yuan, constituting around 30% of the province’s GDP.

Plane tickets are selling again

From March 1^st to March 8^th, more than 300 Chinese scenic areas reopened. In Hainan, tourism contributed to around 20% of the local GDP in 2018. Since the Hainan tourist sites’ reopening, they have received over 74 thousand tourists and 23 thousand tourism workers have returned to work.

As more and more places have no new reported cases, the domestic tourism market is accelerating the pace of recovery. Qunar and Ctrip, two of China’s biggest online travel service providers, have resumed bookings for travel packages and attraction tickets after a two-month hiatus.

Ctrip started selling travel packages and attraction tickets on its app last week as the country accelerated the pace of reopening parks and tourist spots. As of March 17, tickets to 1,449 well-known tourist spots across the country could be bought online while 40 percent of China’s top national tourist spots have reopened, according to Ctrip. Results from a recent Ctrip online survey of nearly 15,000 netizens showed that 78 percent expressed willingness to travel in the near future.

[Data Source: China Institute of Travel Studies, Ctrip, China’s recovery from Coronavirus Report by Daxue Consulting, Chinese people are willing to start traveling in late spring and summer]

Where Chinese tourists are itching to travel after the Coronavirus outbreak

According to Ctrip Global Play Platform statistics, as of March 11, the number of scenic spots reopened and resumed on the Ctrip platform has exceeded 1,000, and the resumption rate is more than 25%. There are more than 100 scenic spots open nationwide.

[Data Source: China Institute of Travel Studies, Ctrip, China’s recovery from Coronavirus Report by Daxue Consulting, growing demand for domestic tourism in China]

Additionally, Chinese customers can now book presale travel packages for April and May on Qunar’s app and website. Qunar is now offering 1,000 domestic travel packages for regions including Shanghai, Xinjiang and Sichuan, based on the respective local government guidelines for the resumption of tourism. According to Qunar’s data, as of the end of February, more than 90% of hotels in China (excluding Hong Kong, Macao and Taiwan) have resumed operations.

Qunar claimed that online searches for China’s upcoming May 1st holiday soared 76 percent at the beginning of March compared to the previous week. The words “scenic area”, “museum”, “tourism” and “landscape” have become the key words of the national tourism industry network information in February.

For the full year of 2020, Analysys is forecasting that the proportion of domestic tourism in the country’s travel market will increase from 47% last year to 60%. However, that number depends on how long international travel restrictions remain in place.

Industries that may explode post Coronavirus outbreak

Online retail: outbreak encouraged the rapid movement from offline stores to digital

Since the outbreak of the Coronavirus epidemic, most people in China spend more time at home. Even consumers living in third to fifth tier cities are becoming keen to shop online. Surveys show that this group made twice as many online purchases for the first time during the epidemic than consumers living in first-tier cities. According to the GfK China Consumer Confidence Study of February 2020, more than 40% of consumers use online shopping more frequently, resulting in a surge in demand for online shopping and home delivery. More and more consumers are also shopping for the first time through platforms such as third-party apps, official brand websites, and WeChat communities.

[Data Source: qianzhan, China’s recovery from Coronavirus Report by Daxue Consulting, more people choose online shopping during the epidemics]

Carrefour reported vegetable deliveries growing 600 percent year-over-year during the Lunar New Year period and JD.com saw an increase of 215 per cent in online shopping grocery sales to 15,000 tons in just the first 10 days of February 2020. According to the Mob data center, from January 22 to February 6, 2020, the number of new users in Hema Fresh, Daily Fresh, and Ding Dong’s continued to grow.

[Data Source: qianzhan, China’s recovery from Coronavirus Report by Daxue Consulting]

As for online shopping in the future, half of consumers look forward to home delivery, and 40% of the respondents (mainly younger and wealthier consumers) want environmentally friendly packaging for their products.

Great potential of online catering industry

The food delivery market in China experienced high growth from the end of February to the end of April. More and more customers choose to order food home instead of eating out.

The survey shows that among the merchants that were in business in early February 2020, more than 70% of orders from their restaurants and shops accounted for online food delivery. In the short term, online food delivery has become an important driver for catering businesses to survive the crisis. Whereas in the long run, the epidemic has accelerated the digitalization of the catering industry.

In January 2020 Meituan Waimai announced in-app feature for contactless delivery, allowing the courier to leave an order in a convenient spot for the customer to pick up without interaction. So far Meituan Waimai claimed that contactless delivery has been launched in 184 cities across the country and is expected to cover the whole country.

As some food enterprises gradually recover their food delivery services, hoping to compensate some financial losses, contactless food delivery in China growth will last for a period of time

The demand for epidemic prevention drives the demand of the cloud video industry

During the new Coronavirus epidemic, many companies and schools adopted remote office work and online teaching. It is expected that telecommuting at this stage will help to increase the recognition of video conferencing.

[Data Source: qianzhan, China’s recovery from Coronavirus by Daxue Consulting]

At present, the domestic software market represented by cloud video conferences is  US $173 million, but the growth rate is considerable, with a CAGR of 25% in the next five years. It is estimated that the size of the domestic software video conference market in 2023 will reach 537 million US dollars, which is three times more than current one.

[Data Source: qianzhan, China’s recovery from Coronavirus Report by Daxue Consulting]

The demand for epidemic prevention and control is expected to drive the demand for the cloud video industry, and the industry penetration rate is expected to gradually increase. At present, the penetration rate of video conferences for about 35 million small and medium-sized enterprises in China is less than 5%. China’s video conferencing market is not the only technology to receive a boost from the virus, some AI technologies were advanced during COVID-19 as well.

Sport industry: in the long run, the epidemic will not change its’ development

One of the Chinese industries recovering from Coronavirus is sport industry. In 2018, the total scale of China’s sports industry (total output) reached 265.9 billion yuan, and the added value of the sports industry reached 107.8 billion yuan. In 2018, the added value of the sports service industry was 653 billion yuan, and its share in the sports industry increased from 57% in 2017 to 64.8%. According to the data of the State Sports General Administration, the added value of China’s sports goods and related products manufacturing in 2018 was 339.9 billion yuan, accounting for 33.7% of the total added value of the sports industry.

In the short term, the new coronavirus epidemic will have a more significant impact on the development of the sports service industry and it will be prominent in offline clusters such as sports competition performances, stadium operations, sports equipment and related product manufacturing. It has less influence on the online sports.

[Data Source: qianzhan, China’s recovery from Coronavirus Report by Daxue Consulting]

In the long run, the epidemic will not change the vigorous development of China’s sports industry. On the contrary, people will pay more attention to their physical health and increase their enthusiasm for participating in physical exercise.

China goes back to work: Signs of recovery from Coronavirus

Manufacturing: top manufacturing companies resumed production

From February 18th to 20^th 2020 China Enterprise Confederation set up a research group to conduct a targeted survey on the resumption of production. It showed that China’s top 500 manufacturing companies resumed work and resumed production at 97%. Among the enterprises that have resumed work and resumed production, the average employee turnover rate was 66%. The average capacity utilization rate was 59%.

Chinese SME’s recovery from Coronavirus

As the largest employer, China’s recovery from the Coronavirus is not complete until SME’s are back on track. SME’s are the hardest hit from the Coronavirus outbreak in China. According to a survey by Beijing and Tsinghua universities, 85% of SME’s say they would only last three months without a regular income. However, as of April 10th, SMEs are over 80% recovered.

China’s state owned enterprises recovery from the Coronavirus

In general, the indicators of state-owned enterprises are significantly better than those of private enterprises, and there are more difficulties and problems in resuming production and production in private enterprises.

In terms of different industries, technology-intensive industries, and capital-intensive industries have a higher resumption rate, while labor-intensive industries have a lower recovery rate.

From the perspective of regional distribution, Guangxi, Anhui, Jiangxi, Hunan, Sichuan, Henan, Shandong, Hebei, Shanxi have higher rates of resumption.

[Source: Xinhua, China’s recovery from the Coronavirus by Daxue Consulting]

The capacity utilization rate in labor shortage regions such as Jiangsu and Zhejiang and the Yangtze River Delta and Pearl River Delta regions is lower.

Tech supply chain is gradually recovering

As Chinese industries recovering from Coronavirus, there is a hope for the resumption of the global supply chain. For example, Foxconn Technology claimed that the company’s factories in China would be running at their normal pace by the end of March. Compal Electronics and Wistron expect that by the end of March computer components production capacity will return to the usual low-season levels. Philips, whose supply chain was disrupted by Coronavirus, is also recovering now. At present, the factory capacity has been restored to 80%.

China auto sales fell significantly. However, Volkswagen, Toyota Motor and Honda Motor resumed production on February 17. On February 17 BMW also officially resumed work at Shenyang’s world’s largest production-based subway West Plant, and nearly 20,000 employees returned to work. Tesla’s Chinese factory claimed that it has exceeded the pre-outbreak level and since March 6 more than 91% workers returned to work.

[Source: Reuters, an employee wears a face mask to work on a car seat assembly line in Shanghai]

As Apple prohibited its engineers to travel to Asian countries, the launch of Apple’s new phone may be postponed from September to October. However, Apple’s CEO Tim Cook called this “temporary condition” and suggested iPhone makers  wouldn’t make quick moves out of China.

During China’s recovery from the Coronavirus, the upstream and downstream of the industrial chain gradually link up again. Foreign firms are more and more confident in their businesses in China.

Assistant Author: Valeriia Mikhailova

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This article China’s recovery from the Coronavirus outbreak is the first one to appear on Daxue Consulting - Market Research China.

When it comes to virtual reality (VR), all eyes are on China. Indeed, its market is developing far faster than anywhere else. An infographic made by Daxue Consulting shows that within four years, the world VR market will grow by 1000 %. In 2020, the virtual reality market in China is around 8 billion USD in size.

As proof, stores proposing an experience of virtual reality blossomed in all Chinese malls. It is a great opportunity for those who cannot afford a VR headset. Costing around 50 RMB, they can take place sitting comfortably in an egg shaped chair. The success of those stores is such that the Taiwanese smartphone maker HTC, which owns its range of VR set, said it would open 10,000 of such experience sites in China before December 2016.

Enthusiasm for virtual reality market in China

This decision of HTC is not surprising when one knows the potential of the virtual reality market in China. The ones who are likely to get the broadest share of the cake may be the Chinese producers: compared to their US competitors, they can produce quality devices in large quantity for a very competitive price. Hence, a hundred of devices are already available on the Chinese market with products by Baofeng Magic Mirror (Baofeng Mojing) and Dëe Poon as best sellers.

Those optimistic estimations may be explained by the curiosity of Chinese consumers for virtual reality. According to iResearch, they were 1.4 million to use VR devices in 2016, a figure that could be multiplied by five before 2018 to reach 7.3 million users. Main fields of application of virtual reality quoted by fans today are video and game, but they also expect applications in the sectors of social networks and education, reports a poll from iResearch.

China’s plan to lead in global VR market

In 2018 the Chinese government released a document that states how it wants to commit to the VR development in China. This document entitled “Guiding Opinions of the Ministry of Industry and Information Technology on Accelerating the Development of Virtual Reality Industry” and has been released by the Chinese Ministry of Industry and Information Technology.

In 2020, China expects to have a working VR ecosystem and a growing infrastructure to create VR products and services. In 2025, China plans to become the worldwide leader of the virtual reality industry. It includes having a flourishing ecosystem, with Chinese companies that will be highly competitive in the whole world. The government wants to see growth not only in manufacturing headsets but also in innovative technologies such as chips, screens, UX, 3D modeling, motion capture, data processing, positional tracking.

Growth projected in the Chinese VR market

The VR market in China is forecast to expand to 55.63 billion yuan (US$7.9 billion) by 2020. The compound annual growth rate of the VR market will likely reach 91.2 per cent.

With the rapid development of the economy, VR market in China has a huge potential user group, providing a broad market demand. The rapid expansion of the user base will directly promote the development of the virtual reality market in China.

With the development of technologies, the prices of VR products will be refined, which will further promote the popularity of VR products. According to IDC China data, the consumption of China’s AR / VR industry in 2018 was 3 billion yuan. Experts predict a rapid growth trend from 2019-2023. The average annual compound growth rate will reach 77.8%. By 2023, the consumption will be over 65 billion yuan.

According to the forecast of iResearch, in 2021 VR games and VR film and television will become the two mainstream content segments, accounting for 34% and 32% respectively.

BAT has their eyes on the virtual reality market in China

Baidu, Alibaba and Tencent (or by their nickname “BAT”), the three giants of the Chinese Internet, are important players of the virtual reality scene. In fact, they are working to broaden the use of this technology far beyond users’ expectations. For instance, China’s first e-commerce group, Alibaba, would like to use virtual reality to improve the e-shopping experience. For web users, shopping on the streets of New-York would be possible without moving from one’s computer. Sellers would promote their products in three dimensions.

Tencent, which owns two of the largest Chinese social networks, would be thinking of a chat where participants would directly discuss in a virtual world. Finally, Baidu, China’s first search engine, is working on the production of content adapted to VR technology, which remains one of the main hurdles to the expansion of this technology today. To make those plans real, each of the three groups is heavily investing in specialized VR start-ups.

Streaming giant iQiyi: plans to enter millions of houses

In May 2018, Baidu stated that it wants to build the world’s largest Chinese virtual reality service through iQiyi. IQiyi has worked with more than 300 partners, including Chinese virtual reality maker Beijing Storm Technology. It also recently released an application that makes movies and games on iQiyi platforms compatible with head-mounted virtual reality devices. IQiyi is also launching live streaming concerts and making virtual reality movies.

Virtual reality video is a big part of the VR development in China.  About 504 million Chinese consumers already use media streaming sites frequently, which may help VR live broadcasts quickly gain popularity.  A survey by Niko Partners in 2016 found that half of Chinese consumers are interested in virtual reality, and 30% of consumers are willing to spend $200 on a VR device.

IQiyi ’s VR strategy focuses on film and television. IQiyi ’s founder, Gong Yu, said that virtual reality soon can enter millions of houses. He also announced the launch of the VR incentive plan that will cover more than 10 million Chinese VR users. Users can use the device to watch movies and shows from iQiyi’s app in a virtual cinema, complete with a high-resolution projection screen and theater seats. The headset also supports Steam and other platforms for gaming in China.

Alibaba: plans for virtual reality applications

Chinese e-commerce giant Alibaba has created 3D renderings for hundreds of products and will enable merchants to create their own virtual shopping experiences. In 2018, Alibaba launched a virtual reality shopping mall called Buy +. Alibaba claims that 30,000 users have registered on the platform within an hour after the release of Buy +. In addition, Alibaba has also launched a payment service that allows shoppers to use virtual reality technology to pay for virtual reality items by nodding. VR Pay technology uses biometric identification technology, such as identifying the unique voice of each consumer before authorizing payment for goods.

In 2018 Valentino has teamed up with Alibaba for a new virtual reality retail experience. The joint effort takes the form of a virtual store, which is a representation of a real Valentino pop-up shop that customers can explore in virtual reality. Valentino created the virtual experience to promote its new line of Garavani Candystud bags. The virtual reality store allows customers to explore the interior of a Valentino pop-up shop, letting them examine the pieces on display and purchase them.  

Valentino is one of the major brands to be a part of Alibaba’s Luxury Pavillion. As China is one of the major markets for luxury brands from around the world, Alibaba is hoping to act as a conduit between Chinese customers and Western brands. Valentino’s new pop-up is one of its first major efforts to enter the VR market in China. Alibaba’s Luxury Pavilion is helping brands deliver experiences and services to top customers through the launch of a loyalty program.

Tencent: expansion to VR market

Another Chinese tech giant Tencent is also investing in virtual reality content for video and games. Company is hosting live virtual reality concerts for music artists, and buying rights to 300 Japanese anime series.  The next step is to expand to VR games industry. According to data from the China Internet Data Center, China will reach nearly 500 million online game players in 2020, and online game revenue increased from 143 billion yuan in 2017 to 251 billion yuan in 2018. They are potential users of the VR online games technologies.

Tencent has also invested in Original Force, which creates computer-generated virtual reality content and develops virtual reality movies. Original Force also works with Pulse Evolution, which created a hologram of pop stars for concerts. These investments are strategic to Tencent. The tech giant needs attractive content to keep 1.3 billion active users on its WeChat and QQ instant messaging services for longer.

Future trends for virtual reality market in China

COVID-19: pandemic gives a boost to virtual reality

Spreading of coronavirus pandemic across the globe could be a push for the VR market in China. Covid-19 in China has pushed many people to use VR in ways they hadn’t before. Some people also started using VR devices again after leaving them idle for a long period of time. People can watch exercise videos on a TV or meet people in a conferencing app like Zoom. In China, where the coronavirus outbreak first appeared, some people have found more creative uses for VR tech. Some Chinese hospitals let doctors put on VR headsets to virtually visit potential Covid-19 patients in isolation wards.

VR development in China let people virtually visit popular tourist attractions. Chinese online tourism is gaining more and more customers during the pandemic. Property developers have also been relying on VR. Some have created apps to view homes virtually, helping to buttress sales as cities were locked down. During two weeks in February 2020, Chinese consumers took more than 3 million VR house tours, according to a report by online real estate company Beike. The numbers were more than nine times higher than in January.

As schools across the country cancelled courses due to COVID-19, officials developed plans to cope with longer-term closures. One such solution is launching VR conference platforms. 

In February 2020, Lanvin, one of the oldest French fashion houses, revamped itself at Paris Fashion Week with emerging technology. The brand’s Fall/Winter 2020 runway show was broadcast using virtual reality technology to Chinese audiences with the help of the video platform iQiyi. In addition, the show was also livestreamed on the luxury e-commerce platform Secco, and hosted by a Paris-based Chinese influencer who provided live commentary.

New 5G era of VR development

5G commercialization is opening up new spaces for a wider range of VR applications, benefiting more industrial practices that need real-time interaction. The transmission rate of 5G network can reach 10Gbps, which is 100 times more that of 4G. The delay in transmission can reach the level of 1ms. Сurrent 4G networks cannot meet the above performance requirements. 5G will greatly improve network performance. It is specifically reflected in transmission rates, delays, connection density and mobile speed.

Zhang Lijun, vice president of Tencent, believes that under 5G, VR may become the third screen other than smartphones and TVs. Compared with mobile phones and TVs, VR has a wider field of vision and a more realistic experience. With the acceleration of 5G commercialization and the continuous advancement of chips, display technology and algorithms, the VR industry will usher in a new round of explosion.

China’s VR industry has a huge potential

China is one of the most active countries in terms of innovations in VR industry.  VR development in China presents several characteristics. R&D and manufacturing system has already formed. China has produced more than 70% of high-end head-mounted VR displays in the world. The content resources are also constantly enriched. VR live broadcasts are becoming popular during major events such as the Spring Festival Gala and National Day celebrations. Experiential quality content is beginning to take shape. Especially when China officially entered the first year of 5G commercialization, it opened up a broad market space. Estimations say China will deliver the largest AR/VR spending in 2020 with $5.8 billion US.

Entering the Chinese market

On a dynamic market which BAT has a hold of, foreign competitors may have difficulties promoting their own products. For instance, between June 2014 and January 2016, Google sold 5 million of its VR Cardboard while in six months only, Baofeng’s sales prediction for its own set are about twice this amount. In this context, some foreign companies are trying to create partnerships with their Chinese counterparts in to facilitate their entry into this market. This is the case of Magic Leap which was able to persuade Alibaba to join the team as an investor. Nokia did the same when choosing the supplier of online videos LeEco for the launch of its virtual camera Ozo.

Those partnerships should enable foreign actors to understand the unique characteristics of the Chinese VR market. For instance, Chinese consumers would rather get themselves an experience of virtual reality in amusement parks or dedicated spaces (cybercafés etc.) rather than buying themselves a headset, which is often too expensive for a majority of consumers.

Author: Valeriia Mikhailova

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In this episode of Daxue Talks, Steve Hopkins, a China’s fintech specialist, discusses the Coronavirus crisis’ repercussions on fintech in China.

Hi everyone, my name is Steve Hopkins. I’ve been operating within the Chinese fintech industry for the past several years, working at Chinese hedge funds, robo advisors, cryptocurrency investment banks and wealth-tech start-ups across Mainland and Hong Kong. I’ve been studying Chinese language and culture for the past 10+ years and I’m the co-founder of The China Guys. TCG is a firm full of professional Chinese watchers that track regulatory, economic and policy optics within China’s business landscape and present them indigestible bite-sized pieces through newsletters and research articles. For clients with more specialized needs we also provide tailored consultative services within the Chinese market. We’re newly started but I would love it if anyone listening to this would check us out at TheChinaGuys.com. I’m excited to be presenting this talk for Daxue Consulting and let’s get started.

Full transcript below:

How has the coronavirus outbreak impacted China’s fintech ecosystem?

So firstly before answering this question, I think it’s right to say first of all that it’s terrible to see the crippling effect that the coronavirus has had on China and now that it’s beginning to spread to a few other countries around the globe, our hearts really go out to everyone affected and I’m personally encouraged to see the sort of international support that’s beginning to bring people together across borders and cultures.

But, now getting back to the question of how the coronavirus has influenced fintech in China – in terms of Chinese fintech it’s really had a pretty lasting impact, but it’s fairly immeasurable until everything is settled down. so, Because of the comprehensive economic depression that this virus has brought, private funding has all but dried up. Which means that SME’s are cut off from external liquidity with their own reserves either being spent or quickly bottoming out and this I guess in turn had led to the central government mandating that banks across the country relax lending requirements for SME’s during this time, but – well that will buy time for these SME’s that are kind of getting to the point of a cash crunch, at the end of the day, several months or quarters down the road, it’s also going to add additional pressure to the overall Chinese economy at large, particularly the financial industry – to this banking system that’s already been overburdened by bad debt and high default rates just by adding more bad debt and high default rates on to that. And so, I’m not quite sure that there’s been much fintech innovation directly driven by this outbreak. There might be a new appreciation for digital payments and the e-commerce industry in general as people are trying to minimize exposure and human interaction to try to contain the spread of the virus, but I can definitely see the general fintech environment rallying after the entire society begins to normalize, people start getting back into their old routines, etc. and so – it’s pretty simple to see why the central government has their own economic benchmarks that they’re trying to hit, for growth and they’re going to basically do whatever they can to try to hit those targets. And so, they’re going to flood the industry I project with capital to show their support for fintech – it’s a priority industry, so it’s that simple.

When you have the capital, when you have the governmental support within the Chinese market, you’re going to have kind of a re-blossoming of the old innovation that was taking place before the industry got hammered by the virus.

Any questions? We will find an expert to answer them. Drop your questions in the comments or send us an email – dx@daxueconsulting.com.

This article Daxue Talks transcript #54: The Coronavirus crisis’ repercussions on fintech in China is the first one to appear on Daxue Consulting - Market Research China.

Find here Daxue Talks episode 50. Steve Hopkins shares his knowledge and helps you better understand China’s fintech ecosystem.

Full transcript below:

Hi everyone, my name is Steve Hopkins. I’ve been operating within the Chinese fintech industry for the past several years, working at Chinese hedge funds, robo-advisors, cryptocurrency investment banks and wealth-tech start-ups across Mainland and Hong Kong. I’ve been studying Chinese language and culture for the past 10+ years and I’m the co-founder of The China Guys. TCG is a firm full of professional Chinese watchers that track regulatory, economic and policy optics within China’s business landscape and present them indigestible bite-sized pieces through newsletters and research articles. For clients with more specialized needs, we also provide tailored consultative services within the Chinese market. We’re newly started but I would love it if anyone listening to this would check us out at TheChinaGuys.com. I’m excited to be presenting this talk for Daxue Consulting and let’s get started.

What problems do fintech solutions attempt to solve in modern banking?

So, I think before you ask about what fintech and what problems fintech solutions are trying to alleviate in modern society, you kind of need to get a base of reference. So, fintech as a class sort of has its roots in the early 1900s where they’re very – what people think is the very first instance of fintech technology – not as we know it, but as the world saw it was as a transfer of orders for the purchase of stock or telegraph. And that happened in early 1900’s I think it was something like 1906 – 1908, and so you can kind of think about the 1900s early on, maybe even 1970’s – 1980’s as that first stage of fintech where you were more just trying to develop the concept of how to use technology to further everyday business operations.

Phase II is probably from the 1970s–1980s to the mid-2000s and so in 1972 you had the NASDAQ who was pretty innovative in bringing electronic quotations over to brokerages, the investment banks, etc. you had e-trade come on as the first online brokerage, so I think you can probably classify the stage II as sort of the internetization of fintech.

And then Phase III which is the mid-2000’s to current is really what we consider fintech. The digitalization of these products, of these services, which is really just focusing on getting more widespread adoption through working out the kinks in the system. And so, this has been characterized by Robo advisors, mobile payments, digital banks, that sort of thing. Things that are kind of common industry buzz words now, for everyone who is following the China’s fintech ecosystem. So just like that, I think that fintech as an industry, people try to oversimplify it by saying fintech does this – fintech does that and you know the realities that fintech does have at face value some simply used cases so yes – robin hood, a classic example in the States, they’re beginning to offer some digital banking services, they got their name as an online brokerage that focused on millennial clients, but – those sorts of concepts that we’re very familiar with. There’s also used cases of fintech solutions that are pretty convoluted that we’ll talk about a little bit more in this discussion and so – a classic example over in China is supply chain finance where you can use basically a blockchain-based platform to work out some of the kinks in supply chain finance and in a very much simplified term allow SME’s deep within big corporation supply chains, get them access to much-needed funding and capital liquidity. And so, this is all to say that fintech is just a very broad phrase for saying its finance + technology. Using technology to work out some of the kinks within the financial system as we know it.

What is special about the local fintech market?

So, I think that China is very unique in the broader sense that the Chinese market is pretty isolated. There’s a lot of cultural, language barriers – that means that it’s just a little bit more complex to break into for foreign entrants and because of that there are a few more complexities that you need to think about when you’re trying to operate within China, whether you’re a national Chinese firm or a foreign player trying to operate within the Chinese market. But within that there’s also along with these complexities there’s a lot of benefits within the operations of the Chinese market. So, if you’re already within the market, you have fewer barriers of entry into the financial industry; as opposed to a few comparable Western counterparts. There’s a lot of central support through regulations, through easy access, through capital and liquidity – as long as your fintech solution is aligned with the central government’s key areas of focus and the countries overall development.

And I think probably the last most notable one is that the Chinese domestic market is huge. Just think about the population of China – 1.5 billion people and yeah you can kind of segment that – how to say – well the vast majority of the fintech players aren’t going to be trying to access this entire market as a whole, but think about this – as of 2018, over 800 million Chinese consumers had internet access and 98 of that was through mobile devices. Which means this is a massive market of potential users that really brings an opportunity for firms that find the right channels to get their message out. Have a product that can actually provide some value to people’s lives. It brings them a huge opportunity for explosive work. The type of stuff that – the unicorn stories that you hear about are made of.

What have the US and other countries learned from China’s fintech scene?

It’s a good question. There is definitely an attitude of healthy competition between what I would call Eastern and Western fintech circles. But at the end of the day, I think that fintech, the whole purpose of fintech is that it’s a little bit broader than arbitrary borders and so everyone across the globe, whether you’re in the West or in the East, is handsomely studying each other, learning what they can from used cases and other companies successes and failures. So, on a broader level, I think the more interesting question is probably – what is the one or two main takeaways that have really unified players within the fintech market and so remember the players are not necessarily only start-ups or companies that are providing these fintech solutions, but also educational facilities, governments, etc.

I think probably one lesson really rings louder than most – on a very broad level, I  think a lot of countries across the globe are beginning to recognize that while regulation is certainly needed for consumer protections, particularly within the financial industry, it can directly impede innovation and so kind of the solution that regulators have come to try to walk that line is to establish regulatory sandboxes, which are just basically frameworks that are meant to spur innovation by lowering regulatory hurdles for innovators. And so, what this really means is that – the specific areas – the regulators within the specific areas will allow these companies to come, register with them, gain access to controlled environments where they can get relaxed exposure to legal limitations and restrictions. They can test their products and their services with a confined user base and they can basically have an easier operating environment for a said amount of time. And so, this kind of advancement of regulatory sandboxes are pretty important developments for not only the global fintech scene, but I would say probably the broader technology industry. In that, it just gives a little bit more breathing room to these firms that are already playing against the odds. It just gives them a little bit more freedom in operations and a little bit more autonomy to really try to bring innovation to the industry.

Where are China’s fintech hubs?

Yeah so China – every city really has its own pocket of fintech players, of a fintech culture, but I think if you’re just talking broadly there are a few main ones. Beijing which has … Guangzhou which has the big players obviously, Shenzhen, Chengdu which is an emerging start-up haven for fintech players and China – where at least the central government is putting a lot of time, effort and resources into developing what they hope is going to become the next central fintech hub, which is … it’s the city that’s a little bit South of Beijing. And so, all of these cities obviously have slightly different undertones. For example … because of its proximity to the government within Beijing is going to be better for some of the fintech firms that are dealing with a little bit more sensitive sort of products that need that sort of bureaucratic relationships, etc. and Shenzhen obviously is right across the harbor from Hong Kong and so they have a little bit international of a perspective, of market opportunities, however, you want to call it. But ultimately all of these places are really pretty well blossoming with fintech innovation.

Any questions? We will find an expert to answer them. Drop your questions in the comments or send us an email – dx@daxueconsulting.com.

This article Daxue Talks transcript #50: Understanding China’s fintech ecosystem is the first one to appear on Daxue Consulting - Market Research China.

Full transcript below:

Hi everyone, my name is Steve Hopkins. I’ve been operating within the Chinese fintech industry for the past several years, working at Chinese hedge funds, robo advisors, cryptocurrency investment banks and wealth-tech start-ups across Mainland and Hong Kong. I’ve been studying Chinese language and culture for the past 10+ years and I’m the co-founder of The China Guys. TCG is a firm full of professional Chinese watchers that track regulatory, economic and policy optics within China’s business landscape and present them indigestible bite-sized pieces through newsletters and research articles. For clients with more specialized needs, we also provide tailored consultative services within the Chinese market. We’re newly started but I would love it if anyone listening to this would check us out at TheChinaGuys.com. I’m excited to be presenting this talk for Daxue Consulting and let’s get started.

Who is driving fintech in China? Large institutions, SME’s or start-ups?

So, it’s a difficult question to answer, because China is very special and the government dictates where it’s going to direct a lot of its capital investment towards. There is a lot of innovation happening all across the spectrum from top to bottom. So, we can just break it down by section. Large institutions have governmental connections, the resources and the operational scope to build and scale innovative products really quickly. Not only do they drive innovation in-house through organic product development, but they also play pretty important roles in injecting liquidity within the start-up environment, through typical investment positions and merger and acquisitions. Particularly here in Hong Kong where I’m based out of, a lot of the chatter lately has been about the first 8-digital banking license being awarded to some of the banks and fintech players over from Mainland that is trying to break into the Hong Kong banking market. So of these first-ever 8 licenses issued, 7 are at least majority-owned, if not fully owned by Chinese institutions like Ant Financial, Xiaomi, Tencent, Jingdong all of those, and so what’s very interesting about this are that a lot of these firms are not only coming from traditional financial institution backgrounds, but they’re also just playing fintech start-ups, they’re e-commerce companies, basically, the companies that have a lot of governmental connections, a lot of resources and a lot of capital just sitting around that they can allocate or keep more capital reserves, etc. so, besides that – remember the staggering figure that I came across was Ant Financial which is the fintech investment spinoff of Alibaba, it accounts for 35% of total global capital investment in fintech firms in 2018, which shows that A) there is a crazy amount of focus going on right now within China for fintech investment and B) that some of these bigger players have an insane amount of resources to leverage in whatever direction that they want to.

By contrast –moving on to the next stage, we’ll jump over to start-ups. China is pretty unique wherein most start-ups and smaller companies have a lot of operational and regulatory breathing room when it comes to product development and product testing. And of course, this helps by reducing the barriers to entry, encourages either rightly or wrongly experimental business models, products and services. It’s a pretty risky approach by the central government to allow this sort of operational grey area, operational breathing room – whatever you want to call it, but ultimately its resulted in a pretty flourishing fintech start-up community. An example of this would be the cryptocurrency industry. Depending which study you look at, Chinese investors account for anywhere between 60 – 80% of total crypto investment and even after the Chinese central governments ban on crypto investing, crypto trading, we’ll be one of the largest crypto exchanges that operate primarily within the mainland, for mainland investors – however you want to put it. They even experienced a period where they were opening accounts for 200 thousand plus customers in an hour, which is an absolutely staggering figure. And, besides this, many of the largest cryptocurrency mining companies, public chain companies are either Chinese companies themselves or they have their roots over in China and then once they got to scale, they moved offshore, but still continue to service Chinese clients.

What role do SME’s play in China’s fintech scene?

So, I guess that leaves the last of the three groups. SME’s and SME’s within China are where it gets a little bit more complex. They probably get the short end of the stick so to say. A lot of SME’s in China are pretty much like walking on a tight rope, and so a common saying over in China within their fintech circle is – when you’re small and unnoticed, you can do what you like – once you’re big enough to get noticed, you can still do what you like. And so, the logic behind there is that you have that sort of experimental and a trial period where you can test out your products, see if there’s a fit and then once you – if you’re one of those lucky few that scale-up, get really big, and you have the resources, you have the influence, etc. – to be able to keep on living. But SME’s kind of operate in that middle awkward teenage stage and that’s where in China you have the most risk and you can take a very common example – a very well-known example that a lot of people all across the world have heard of, and the Peer to Peer lender. They started off as a small Chinese P2P lending firm but quickly exploded. So, at their peak, they reached over 5000 employees were providing 500 million dollars USD in loans every month for 4 million buyers. But unfortunately, the company quickly found itself within – I guess you could put it as the crosshairs of Chinese officials and they had a conflict of interest there, between the central government and their own vested business interest, and so the result of that is almost overnight the government enacted a few policies, made it very operationally difficult for DM loan to continue operating and almost overnight the company had to lay off 2000+ employees and to date, it still has its – very existent threat. So these are some of the – I don’t know if you can necessarily say that one section of this between large institutions, SME’s or small more innovative fintech’s firms are driving innovation in China, I think it’s more like it’s an eco-system that all sorts of plays of each other, you know – the large institutions provide much-needed capital and liquidity to the fintech start-ups who are testing out these experimental products who go through this awkward growing stage and eventually turn into those very large institutions that provide the opportunities to begin.

Is there room for foreign companies in China’s fintech ecosystem?

It’s a good question and I’ll be pretty direct with this. At lower levels of operation, before you’ve really reached a high level of exposure, of influence, there’s definitely room for foreign players. It is a difficult operating environment particularly like we discussed because you’ve got cultural barriers, you’ve got language barriers, etc., and so the issue is that once a foreign fintech start-up reaches a certain point of scale, that’s when it kind of becomes tricky to navigate China’s more politically charged financial industry and so – China has made huge strides in opening up their financial industry to foreign players within the past couple of years particularly but they’ve still got a long way to go. And so the typical solution that a lot of these foreign fintech players take as their approach once they reach that certain threshold is to collaborate with a partner Chinese firm, separate operations between China domestic operations and international operations and obviously while this can be a daunting task, any firm that reaches that stage and sees the potential can – would realistically have the resources and the connections to do something.

But I would say for 99% of the players, within the international fintech community – A) the majority of them realize that China’s market while it offers a lot of opportunities, is pretty daunting unless you have a trusted partner that can help bring you over to the Chinese market, and B) even the ones that do, I think that they probably – the vast majority of them don’t reach the level of success where they would really reach the existential threat to them by again this politically driven financial industry.

Any questions? We will find an expert to answer them. Drop your questions in the comments or send us an email – dx@daxueconsulting.com.

This article Daxue Talks transcript #49: China’s fintech players: Large institutions, SME’s, startups or foreign companies is the first one to appear on Daxue Consulting - Market Research China.

Boost for Chinese big data and AI in mass surveillance

The most visible use of new technologies during the Coronavirus in China are thermal scanners at Chinese stations and airports. With thousands of coming and going each day, these detection gates can accurately identify the body temperature of dozens of passengers simultaneously.

Facial recognition and infrared scanners

The Chinese AI company specialized in Facial Recognition Megvii, announced on February 7th that it had built a solution that “integrates body detection, face detection, and dual-sensing via infrared cameras and visible light.” This new temperature detection system has been supported by the Chinese Ministry of Science and Technology and was first deployed at a subway station in Haidan District on February 4th. The system is capable of simultaneously check the body temperatures of 15 people every second, even when masks or hats cover people’s faces.

[Source: Megvii – New software equipped with facial recognition and temperature checking cameras]

Megvii is known to have been blacklisted by the US administration in October 2019 for its alleged human rights abuses. Facial recognition is indeed a subject of controversy, even in China. The widespread use of this tool to better control populations during the epidemic could, however, bury the privacy concerns of Chinese citizens. Megvii facial recognition devices are now being installed in more and more subway, train, and airport stations. The use of facial recognition by the authorities could, therefore, be enforced in the long term.

Big data powered QR codes

The Alipay’s Health code is another example of the use of big data to implement epidemic control, a newly automated form of social control that could persist long after the epidemic subsides.

[Source: New York Times – Color codes, one of the AI solutions to the Coronavirus in China]

Launched at the end of February by Alibaba’s part-owned Ant Financial, the QR code is available in more than 200 cities across China on the popular wallet app Alipay. The color code, green, yellow, or red, indicates people’s health status. A green QR code allows free access to public places such as subways, malls, or even supermarkets. The yellow QR code forces you to a seven-day quarantine, while the red one requires a fourteen-day quarantine.

Government tracking of APPs feeds AI development during the Coronavirus

While QR code checkpoints are becoming standard  across China, neither the company nor officials have explained how the system decides whether someone is green or not. However, it seems that the QR code bases its arbitrations on the history of the user’s location coupled to information data on the Coronavirus. A yellow or red code may be therefore given to someone who has visited cluster areas or had contacts with an infected person.  

There is still no consensus regarding how to marry the right for privacy and the responsibility of the government to stop a deadly epidemic. A huge amount of data has been made available by the authorities’ consistent tracking of so many apps, which feeds Artificial Intelligence in China during the Coronavirus.

New healthcare technologies to fight against the Coronavirus  

In the first weeks of the outbreak, much has been written in scientific journals across the globe after Baidu has developed an algorithm that only takes 27 seconds to solve the RNA secondary structure of the Covid-19 which is 120 times faster than the top classic algorithms. On January 30, the tech giant that operates the country’s largest search engine opened up its prediction algorithm, ‘LinearFold‘ to global genetic agencies and scientific research institutes, for free. This scientific feat took place in the early stages of the outbreak in China, followed later by other AI solution to the Coronavirus in China. These advances in healthcare technology could set a new precedent for pandemic prevention in the future.

AI in China to diagnose Coronavirus

Deep learning, the same technology that makes possible facial recognition or autonomous driving, is also making it possible to diagnose Coronavirus faster than doctors. We have seen giant Chinese tech companies relying on machine learning to develop diagnosis chatbots on their platforms. Based on thousands of real diagnoses, as well as questions asked to the user through the chatbot, Baidu or Tencent algorithms can identify if the user’s symptoms match those of the Coronavirus.

Smart CT Scans

New technologies from the Coronavirus in China also include capabilities to read computed tomography (CT) scans. CT scans of the chest are indeed a critical method in diagnosing the Coronavirus. Alibaba and health insurance company Ping’An has developed smart image reading systems that can deliver results in about 15 seconds with an accuracy rate above 90%. Such tech advancements from the Coronavirus in China significantly speed up the process, as radiologists can spend up to 15 minutes reading the CT images of a patient suspected of contracting COVID-19. 

[Source: Infervision –  Tech advancements from the Coronavirus in China to help reading CT scans]

Infervision is another Chinese Artificial Intelligence startup that has developed CT Pneumonia reading software to detect lesions from possible pneumonia caused by the Coronavirus. Before the outbreak, the company was specialized in detecting lung cancers through CT chest scan reading. Bringing its AI solutions to the Coronavirus in China, the whole diagnosis analysis process can take as little as 10 seconds. As of March 5, the Infervision’s system has been deployed in 34 hospitals across China and reviewed over 32,000 cases.

Deployment of disinfection robots

In hospitals often overwhelmed by new cases, addressing hospital-acquired infections remains a considerable challenge for medical workers. Given the contagiousness of the Coronavirus and the density of patients in Chinese hospitals during the outbreak, the deployment of unmanned disinfection systems is a necessity.

UVD robots is a Danish company which supplies Chinese hospitals with disinfection robots during the Coronavirus. The robots consist of a base equipped with sensors, surmounted by powerful UV lamps. This kind of disinfection technology using UV lamps has been around for a while – used in the disinfection of drinking water, for example – before being deployed in hospitals. This technology consists of pointing a high-intensity UV light – which can be harmful to human skin or eyes – on contaminated areas during a few minutes.

The robot scans its environment using its lidars, creating a digital map that medical workers can annotate, indicating the areas to be disinfected. The robot can then navigate on its own, relying on simultaneous localization and mapping (SLM), without any human interaction. The disinfection of a room can takes up to ten minutes. For safety, the robot shuts UV lights off when detecting a person through its sensors.

[Source: Spectrum – Danish UVD robots to push AI innovation in China during the Coronavirus epidemic ]

During the epidemic, the Danish company shipped robots to China by plane every week to cope with the demand. On February 19, UVD Robots announced that it would equip all the Chinese provinces, deploying its robots in more than 2,000 hospitals. Given the globalization of the epidemic, UVD robots will be deployed at other medical facilities in the United States. In the near future, this kind of technology could also extend to schools, cruise ships, or other usually crowded spaces that offer like-hospital structured places. 

Spreading information faster than the Coronavirus

In times of pandemic, giving accurate and precise information to the public is the first step to ensure broad awareness and implement prevention to strengthen epidemic control. But with people getting scared, it is easier for fake news and hoaxes to spread better than a valuable accurate piece of information. Moreover, with a situation evolving really fast, something that was still true a few hours ago may now be out of date. To ensure proper transmission of information to populations, AI and Big Data in China during the Coronavirus intensified their effort towards new ways of informing Chinese people.

Online information centers rely on Chinese AI and big data during the Coronavirus

As previously noted, AI solutions to the Coronavirus in China include the recourse to machine learning processing bots. On February 4, in the early weeks of the epidemic, JD launched a ‘smart epidemic assistant’ integrated into the WeChat account of Wuhan’s Mayor to accurately answer Wuhan’s dwellers’ inquiries. Its functions are further detailed in this article. More generally, the giant Chinese companies such as Baidu, Tencent, Alibaba, JD, Meituan all released a big data-powered information center on their platforms. These powerful tools inform people about the latest news on the Coronavirus, displaying statistics, transmission rates, and other virus-related queries. It also provides information about the nearest hospitals, self-testing features, and online medical services. 

[Source: Baidu app – Information center about COVID-2019]

These tech advancements from the Coronavirus in China quickly became widespread, with 34% of the Chinese said they tried online medical consultancy for the very first time thanks to the epidemic. As of March 17, the most consulted online health center, which is Baidu’s, has been seen close to 5 billion times.

Big data-powered maps

Among AI solutions to the Coronavirus in China, Baidu, the tech giant that operates China’s largest search engine, launched several maps to help people find their way through the epidemic. An ‘epidemic map’ displayed the number of contaminated and suspected cases in a certain area, while a ‘migration trend map’ was helping people check the migration status of Mainland cities during the Spring festival. The two apps were making it easier for people to manage their travel plans to go back home at the end of the holidays, as well as avoid risky places.

Last to date is the ‘resumption work map’, which shows all the shops open around. Since the quarantine that forced millions of stores to close, it’s indeed hard to tell what’s open from what’s not. This new feature is available in more than 300 cities and allows the user to select the type of spot they want to search for, from supermarkets to parks and hotels. Those identified as open appear on the user’s screen.

The adoption of AI and big data in china during the Coronavirus at all levels of society

From disinfection robots to color codes, China is perhaps the best example of how technology has moved from being nice-to-have to essential to address the disease. The examples listed above are some of many highlighting the widespread use of AI and Big Data in China during the Coronavirus. Tech advancements from the Coronavirus in China are now everywhere for everyone, boosting innovation in China. 

Big data platforms to help the Chinese government with decision making

During the epidemic, more than 20 province’s government worked with technology companies to build AI solutions to the Coronavirus in China to report epidemic related data and feedback, providing invaluable advice for public crisis management of priority populations. Deeper cooperation between the two parts to fight the Coronavirus supported tech advancements from the Coronavirus in China.

From March 2020, two months after the initial economic impact of the outbreak, Chinese authorities are now focusing their efforts to find a balance between epidemic prevention and control, social development and sustainable economic recovery after COVID19. Proof that AI and big data during the Coronavirus in China has been of invaluable help at the highest political levels in managing the crisis, Chinese President Xi Jinping said on March 5 that unprecedented expenditure on “new infrastructures such as 5G networks and data centers” will top the Chinese response to the economic impact of the Coronavirus. The comment confirmed that investments would be made to support new technologies and innovation in China. Stocks related to AI, big data storage center, and 5G, surged in response.

The real power of technology

Ordinarily, only a few people try new tech products and help to push the boundaries of technologies further. These people are called early adopters, geeks, or innovators. The Coronavirus situation forced the majority, the later adopters, to catch up fast. As it created an unprecedented launchpad for AI, big data, and robotics developments in China, consumers, producers, marketers, and decision-makers will come better to understand their potential in all walks of life. 

If no one knows when the pandemic will end, it looks certain that new technologies from the Coronavirus in China will last. These AI solutions to the Coronavirus in China, but not only, were born out of a necessity to cope with an unprecedented situation. With the virus expanding worldwide, tech advancements from the Coronavirus in China will be of great help to other countries globally. By its essence, technology has no borders or nationality. It can easily scale up to solve threats elsewhere.

Author: Maxime Bennehard

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This article AI and the Coronavirus in China: China’s cutting edge technologies to defeat the Coronavirus is the first one to appear on Daxue Consulting - Market Research China.

Full transcript below:

Matthieu David: Hello everyone. I’m Matthieu David, the founder of Daxue consulting and its podcast China Paradigm and today I am with Laurent Le Pen. You are the founder of Omate, a Wearable as a service solution from China. You have been in China for 12 years now and 12 years is a cycle in China. You arrived at one type of animal sign and you are back to this sign again; 12 years and you started your business with something I am very, very interested in and I think a lot of people will be interested in, the Kickstarter. 

In 2013 in something which is a difficult thing to do as an entrepreneur; hardware, products and something which is very sexy but few people deliver, wearable as a service. We are more used software, right, and you are offering a wearable as a service solution from China. This is a watch. Omate is a watch. You went from fashion to actually a working element and you switched from something which is designed for fashion to something which is designed for kids and lone workers, it’s a people’s safety device from China. I had to Google what is a lone worker to understand what a lone worker is and I believe you are going to tell us more about it. On Kickstarter you did a $1 000 000 fundraising in China in 2013, if I’m correct; at least that is what is on your presentation which is very, very impressive. So, I believe you have a lot to say and you are calling from Shenzhen and you have been in Shenzhen for 10 years or 10-12 years. You have spent your life in Shenzhen. Thank you very much for being with us and what’s Omate today; size, revenue that you can share, number of people working in the company and what do you do?

Laurent Le Pen: Thanks for having me, Matthieu. So yeah, we are obviously in Shenzhen. We have a small audit or meeting room. So yeah, Omate; we have been around since 2013. Previously actually I come from the mobile phone design industry. I was working for Philips mobile in France and I worked from Paris and in late 2007 the company asked me to move to Shenzhen, but whereas I was an altar for our industry like consumer electronics and telecom or mobile phone design and back in… 7 years after like in 2013 I started indeed with the Kickstarter and it was pretty new and today… so we pivoted a few times as a start-up in that wearable world, but today we focus on a wearable as a service solution from China, as you mentioned. 

We kind of created it to explain what we do and basically, we use our Smartwatches, so the hardware and telecom Smartwatches connected to the telecom network over 4G and we focus on people who need protection, it is a people’s safety device from China. So, that allows us to basically cover several segments that going from the kids; you know like this kid watch from 5-10 years old which are likely used to locate or to communicate over a video call with their kids and then I would say the opposite of the live spectrum; like the 70 years old and above whereby using the same adware we designed a new software and we connect it to some services, especially with the insurance companies and telecom companies. So, in that way we can basically when people press the emergency button, we will extract the GPS location and we will trigger a video call with the professional call center. So, that’s a real professional service, right for the kids and it’s more like; you know as a free service through apps that the parents can locate their kids and in between we have this segment called the lone workers where basically people working in an art environment or any environment where they can be at risk because they are alone so it can go from security to people working in construction, transport, utilities, etc. 

So that’s the three segments today that we cover, but before that, we have been shown different processes and actually, our very first model was you know as a sports watch and after we moved to fashion and finally to kids and then with the seniors today which represent about 70% of our revenue. So, that has been a lot of change and to answer briefly your question; so, today we have 12 people full time here in the R&D side in Shenzhen and we have a support team in Hong Kong and in Europe and in the US where we can like ship out our customers and locate them because most of our business lives in the US and Europe especially for the seniors and lone workers and for the kids it would be more in Asia.  

Matthieu David: I see. So, I saw a smile when I was saying fashion; fashion device, initially. So, can you tell us more about the story? You began your idea when it was a Kickstarter and what was it exactly for Omate and for the smartwatch?

Laurent Le Pen: So, our first product was really a coincidence of business; like we were designing smartphones and we are still today like Android experts and that’s where we come from so that is our DNA. Then we started working on a project called ODOmate which was kind of sport watch that you can wear where you cannot bring your expensive or smartphone so in 2013 that was the very beginning of the people having these tablets and you know like big smartphones that we all have today; like over 5 inch and even at that time I-Phone was still a relatively small phone. It was a 3.5 inch. So, something like that; like I-Phone 4 and then it was also the beginning of the smartwatches. So, we decided to create this ODOmate project to, you know like trying to sell it to the B2B customers and no one really saw the value of it and said, “It’s too complex” or, “It’s not yet ready” or so on. So, I said, “Okay let’s do it.” 

From ODOmate we created Omate, a wearable service solution from China, and because we had to give a name to that. That was our company name and it was a digital device which was a watch; a smartwatch or 3G watch at that time. We decided to call it a True Smart because compared to other smartwatches it did not need to be paired over Bluetooth. It could be smart by itself by connecting it to the network which was quicker. So, that was really unique. It was a first Android smartwatch and we had Google looking at us like, “What are you doing? You are not allowed to do this and that.” Anyway, we launched it on Kickstarter and very quickly we did a $1 000 000 fundraising in China so that was like… the million dollars wasn’t important. What was the most important was the 5000 users and we were used to dealing with you know like our B2B partners. 

We had to deal with 10 customers or 12 customers or something like that and if they are a large company or small, medium enterprise, but we are at 5000 and we were becoming a consumer brand. It was a totally new game for us and we did pretty well because we did it on all… not everything on time, but honestly quite well and we did all of them and it was a good experience to become like suddenly having the spotlight from the press or from you know like the consumer side and very quickly we weren’t very legitimate on the sports segment. You know you have like the Polar, you have the Garmin and you have these very great companies and very good sports watches. We also understood that what we were doing is very geeky and exactly what we were presenting, actually. 

We also… at the same time the other companies who had just started, maybe 6 months a year after, you have like the Apple watch, you have Google coming with their version of Android-ware so it was a time for us to differentiate and that’s what we were thinking like, “Technology is what you carry, but fashion is what you wear.” It is true. All these early devices were really designed by like engineers with no taste of fashion. I mean there was no fashion designer behind that while the watch industry is much more like into style and into diversity about your look and what you wear. So, we did this little adjustment or pivot to move to fashion and it was too easy because they also… everyone did the same maybe 6 months later; Apple, Google. They all came with their own fashion partnership and much bigger than what we could do. So, that’s where it led us to move to a wearable as a service solution from China that we do today and I am very happy about it because it allowed us to survive in that world.

Matthieu David: As a Kickstarter what did you emphasize on for people to spend at least $200 because if I count right, you did a $1 000 000 fundraising in China and you had 5000 people and so it’s about $200 and it isn’t a small amount. They had to trust you. You don’t have the product. What did you sell for them to buy? I understand it was a sim card. You insert a sim card in the watch which is not connected to Bluetooth and you can go out only with your watch and not with your phone. With the other watch you still have to connect both of them, if I understand well, but what else did you provide? I see that you can provide emergency calls; maybe it was not an initial feature. You can see the clock, of course, the time, but what was the initial value proposition?

Laurent Le Pen: See, it is more about we have to think back into the context wherein 2013; so, 6 years ago there was no real smartphone at that time. There were only a few brands like the guys were doing Pebbles. They were doing like E Ink and black and white, Bluetooth watch and it was very good. They were like doing this kind of you know like shin-band which were also very basic giving you like steps and the time and steps and notification. What we were bringing to the table with the true smart was already revolutionary. We were putting almost like a smartphone on your wrist, so you could run almost any kind of app you wanted. It was not the intention, but it was more like a developer addition. 

So, that’s why we got and we could capture at that time the developer community you know like Android developer community and many people like us actually and many people like Omate engineers where we were like an engineer, Android software-based people and so, people that could check about IS; that’s all. It worked for us. They could see that we were really involved in the industry; in the mobile phone design industry so I was not coming from another industry. So, I was not like from the oil and gas industry and suddenly decided to do like a wearable as a service solution from China with Android. We were people who were already pretty involved in that environment. We had the credibility and I think that helped to gather some backers to sift out our product of Kickstarter at that time.

Matthieu David: You say the people who buy on Kickstarter are that geeky, basically? They will look at your profile, they will listen to where you come from, they will trust you because of who you are and more than the product you described? 

Laurent Le Pen: It is definitely the product, but I think it is a lot bigger than the product. You look at the team, you look at how we communicate; we are really B2B guys. We are not B2C people. We are not a consumer brand. We are like a small start-up. We are worth $1 000 000 when we were just a 6-month old company. So, we just had a prototype and we invested our own money. So, we could see that we had a working prototype and then the press; it is thanks to the press. We had no PR, we had no influence. We didn’t know anything about that. I guess it didn’t really exist at that time, but it’s like a snowball effect. 

After I think the first day, we did a $100 000 fundraising in China and we reached our goal after that and after 30 days of our company we got $1 000 000, but that’s a long time ago and we had also a very small budget on marketing. We had zero. We just had a video. This is not possible today. Now we do or when we launch our new product; a limited edition we do it differently, but we spend totally different. It is much more professional when you launch a Kickstarter or Indiegogo nowadays; much more. 

Matthieu David: How much did you have to invest to get the prototype back into the team from your own money?

Laurent Le Pen: We invested about… me and my partner at that time; Jack and I spent 50 000 each so it was already an investment of $100 000, but that project was in the pipe for us to sell to the company so it’s just because we could not find anyone to invest or to launch the product in production, but the prototype was half-done. We had like some wires and I’m still into that. 6 years after, I am still into that. So, we have like this kind of prototype phase and it was like what we call in a pallet run number 2 when we announced and then we did a pilot run and after we did a mass production. So, the backers of 5000 helped us to move to production, but I was not feeling it was that big at that time. Today I mean it is great, but the most important was not like the amount of money. It was really like the fact that suddenly we had a community and people looking at our product.  

Matthieu David: How easy was it to find the factories for the product that you work with? How many did you meet? How many did you work with? Could you describe a bit more about the challenges and on the opposite; maybe it is easier than what people expect. 

Laurent Le Pen: So, from our side, it is very special. I was already there in 2013. For 6 years I was in Shenzhen and I had multiple like factories I was working with for phones and so it was very easy for us and that is probably the part where giving the most credibility to our audience is because they could check that I was already delivering products in the past that before you know working with Phillips, working with some carriers/operators worldwide so we had this expertise for a long time so for me, that was an advantage. We had the factory; we had all our supply days along with the components we were using. They were all qualified by us so it was very different from people who are designing for probably in the US or in Europe a device and then it’s like a nightmare because they arrive in Shenzhen and they want to sample the product and it’s… so that’s valid for them, but that was a big advantage for Omate is that we have already that in place. 

Matthieu David: You have been interacting with them? Did you speak in English or could you describe a bit more on that; how it is working when you were working with them for your own product which is a bit different from when you work for a big company, I believe? 

Laurent Le Pen: Yeah, so now we deal with Chinese manufacturers, international people or contractors in English so this is a very stand-out process.

Matthieu David: Okay, but would you move from a big company; I think that is interesting for people who are listening to us. You have moved from a big company which is well-known among factories and so on and you moved to be an entrepreneur to have one prototype. How do factories react to that? Are they willing to help? Are some of them dropped actually with you? Did you have some difficulties?

Laurent Le Pen: No, again we add that it’s just about the network. So, after some years; that makes 12 years so obviously everyone has their own business, their own expertise and some always have credibility in the market and after it is just about… especially when you come with a $1 000 000 order, I mean not a $1 000 000, but at last with 5000 units to manufacture is not to have the people to get interested or to… because after they can. People are smart and people see it like, “This 5000 is just the beginning. Maybe this will move to a million units and maybe that will become the next GoPro”, but it did not, but I have a friend who signed GoPro at the very beginning. He signed just to make the touring and the same; it was like some American guy doing like this little funny camera and he just manufactured it and it became a crazy story.no, it is dropping down. 

We all know that the GoPro is not the GoPro that was like 5 years ago, but I can tell you for 5 years that they did like crazy things. They moved to a million units in almost a month. People say that Chinese people are very business-oriented so they are happy to… and especially in the press at that time wearable tech was very hot in 2014, I would say; 2015 many people especially as soon as Apple came in the game and Google and the Samsung and all the brands it didn’t move as well as expected, but it was a new category. So, people were excited to deal with one of the early birds of that segment. 

Matthieu David: A step earlier with the prototype and at the prototype stage how did the factories react to your request? Did you do everything by yourself and you didn’t need a lot of factories as only you sell a prototype or you had to deal with the factory already?

Laurent Le Pen: No, for prototyping we had our own workshop and were proposed by manufacturers who would like to provide some early engineering samples of them and we could ask about it and then we have like what we call the SMT’s or some of the technology where you can basically build your boards and the same we got some good support from our partners so no, prototyping is not… it is more like debagging the software. This takes a long time otherwise we are very advanced. 

Matthieu David: I see. So, you have three segments; kids, lone workers, and seniors. Could you tell us what do they look for with your product specifically? I see there is a button; a red button to ask for help, I believe it is a people’s safety device from China, but what is the value of your product compared to I-Watch? I have an I-Watch here right now. What value of your product compared to the I-Watch?   

Laurent Le Pen: Well, the Apple watch is different like in a way that it’s really focused on every day, everyone and it’s mainly connected to your smartphone so it’s kind of a more complex ecosystem. What we do is very, very focused on the specific segments. So, there are different niche segments like the kids, as you mentioned or it is really like with a very cute user interface and very focused on some, for example, video call and you can end like some voice audio messaging and your location in case of an emergency. This will only communicate with an app so what we do is that actually when we integrate a sim card, you don’t want your kids to receive SMS or people to be able to call your kids directly so we download all these pictures and we only connect to the data. We are integrating new technology to get rid of the sim card, a virtual SIM Card technology, but only to communicate with data over the cheap sites. 

So, this is very, very revolutionary for what we are doing on that segment and on the three segments it actually would be applied, but we focus on really making these devices as an IOT product in China and all over the world and it is pure IOT device and for the senior; when you press the button then it’s a very similar service, but it’s a pro version; like the professional version because it will connect – and the same goes for the lone worker – it will connect to our call center and that call center based on an emergency, for example, the grandmother or grandfather who has this watch on his wrist and if anything happens at any time or anywhere he can press the button and then we will extract the GPS location, we will call back with a video call and according to what the wearer is speaking or not we can also check the vital signs, etc. and based on that we can really trigger an action so that can be calling an ambulance, bring; like we have a white list of people which are safe to contact and that can be as a neighbor, it can be someone in the surroundings, etc. It is a people’s safety device from China. 

So it is really a customized service for the seniors whereas for the kids it will be more like a generic communication device, but once again these are very different from the Apple watch and also when Apple watches; I think Apple watches is coming on the… the wearable segment as a senior so they are going after this segment with kind of a premium service that the price of an Apple watch is still like and it’s still linked to an I-phone so a complete package plus the service becomes very pricey. We try to make it much more affordable and I think that’s why they are partnering up with us. We are now selecting an Apple watch in their package, but usually, people will select our watch because it’s way more affordable and our complete service is less pricey.

Matthieu David: When you talk about senior people do you sell to those nursing homes or hospitals or do you sell directly to children and senior people while buying for those senior people and then can be in touch with them in case of issues. Is it a B2B business or B2C business?

Laurent Le Pen: Yeah that’s a good question. For the senior and the lone worker, it is purely B2B so we will team up with people who already have like these kinds of ecosystems and are working with that so insurance companies are very good. They are very smart people and they have already this kind of data relative to the age of people and people who could be interested in that. The B2C side of it is that there are some people that would be interested I guess to buy a senior smartwatch, but that would be very similar to the kid watch where it would become like a free application. It is very odd. 

I mean I am based in Shenzhen and it would be very hard to sell a watch in the US, for example, and to have someone phoning after which call center and then call it back in Shenzhen and then I have 20 people here to listen to what it is and that won’t work. It is really like for this kind of service it needs to be local or national; as local as possible. I would say the state or the US or a country in France, it worked very well that way in an insurance company in Germany or the UK. They are doing safe motions which are doing a great job as well and this kind of call center service. Medical guardian is in the US as well; one of the leaders actually in that field. They offer a watch with a service because it can operate the call center behind the end of the process. 

Matthieu David: The insurance companies work with nursing homes, with hospitals and they would provide you with a watch? They would make the hospitals, nursing homes, buy a people’s safety device from China and then provide the service behind it; the support service. How does it work? There are different parties involved here.

Laurent Le Pen: Yeah so when we did find it feasible with an insurance company and after we can resell the watch to other insurers or brokers or nursing homes etc. the way that we will integrate our adware and software and customize it according to which partners it would sell and after the service will be customized as well on their side. So, it’s a B2B business model. I would say up to B2B, to B2C. It can be like a long way before it goes to the end-user, but that doesn’t matter. In the end, what we want is for them to have some professional and the best service possible. 

Matthieu David: So how far do you go into the service? As I understand for the hardware you build the hardware fully and entirely the watch, but what about the software? You are building your software or your watch on Android and I believe you can already use some apps delivered by other companies and developers on Android, but what do you provide with your team of software developers on top of that for the insurance companies which are certainly asking for customized software because I don’t believe they would want to go to another company, develop with other people at the same with you like the hardware. How does it work for the soft part of it?

Laurent Le Pen: So yeah it is a combination of balance. So, everyone is their own co-business. Basically, you can… we are open to many kinds of businesses in our business case. So, if in some cases people have a very good or very strong robust software or it is already integrated into their platform so we will nudge that and so we will integrate it to our baseline software development software and then otherwise we can open a source code and then they can build directly on the root of the device and it has happened in other cases so it really depends as well; very open. On the kids’ side, we have a full solution where we are even integrating the connectivity. So again, in this world and what we are doing and, in our industry, you must be flexible to be able to gain some market shares and to launch a product because that’s how it is. We work with balance and every one has its core business and everyone can bring its own part to the table. 

Matthieu David: I go back to the comparison with the I-Watch. The I-Watch is pretty complicated. You have small icons with a lot of software’s and we have to download them… sometimes you don’t even know you have downloaded it and you find it on your I-Watch and I believe indeed for senior people it is a nightmare. It is difficult to watch and it is difficult to see and you don’t understand too many things; too many items. So, how do you structure the watch to be basically easy to be used by those populations which are kids, seniors or people who are at work who don’t want to look for the app for 1 minute before finding it? They need immediately to get the right app. 

Laurent Le Pen: Yeah so, we try to bring simplicity to complexity and that is a challenge so what we do is we offer and especially for seniors we do it in a way that it is a very powerful device. It’s a 4G Android-based device, it is almost as powerful as a smartphone and what we do in terms of the user interface is we give them very low… in terms of user experience, it is super easy. First, you have the watch phase so you can press the black button and you will see like a watch display to give you the time and especially the seniors; most of them have been wearing their watch all their lives so it is very convenient for them. Most of the people who are using our watch in the senior community; they don’t even have a smartphone. So, for them the watch is like it is a watch; a timepiece and after, the red button is an emergency one, it’s a people safety device from China. So, all the software would be running in the background. They will not interact with any other things. 

There are some of our partners who want to provide more things especially for some type of users; probably the younger generation like in the ’60s or 70’s when they were still very active and still up to date and they want to have like, for example like the weather or this kind of information, but we try to have like the rate or we can provide all this information or reminders to take the medicine, but for my favorite one; my favorite software as a wearable as a service solution from China that we offer are really the ones that are following “the less is more” philosophy in a way that it’s straight to the point and it’s super easy to use and there is no extra. You just focus on the mission. So, it depends. 

We follow what our customers want, but it is definitely not as geeky as the true smart was 6 years back or you know like which was like really crazy; 10 times crazier than an Apple watch today. I think an Apple Watch does a great job in terms of user experience, but the true smart was just like craziness. You could load any APK from under it, so basically there were some people putting games on it. You could put YouTube or you could put Facebook on it as well. So, it was really, really crazy. For the seniors, we try to make it as simple as possible. So, less is more is part of our philosophy. 

Matthieu David: So, what you are providing for seniors is the watch that always works to see the time and you are adding basically phone and you are adding an emergency call and you are adding a camera if I am correct? So, it is a people’s safety device from China?

Laurent Le Pen: Yeah. So, the main features would be like GPS, 4G, video call, but all combined together with one mission. So, you have a watch, of course, a timepiece, you press a button to turn it on and to save battery life you can see you can display like the time and some basic information; the date and then when you press the red button it will turn on the 4G module and will extract your GPS location and it will trigger video call with the call center. So, these three features altogether will triangulate like your location and we can see where you are if you are able to speak if you can explain the situation and even if you press by mistake it is fine. It is part of the service; the service you pay on a monthly basis. So, the call center will just say, “You just pressed the button. What is the matter?” Then the lone speaker and then people will watch the device and they would just say, “Oh I made a mistake.” “Okay, no problem. Have a good day. Goodbye.” So, it is really like service for any emergency, a people’s safety device from China. It is like your freedom on your wrist.

Matthieu David: Does it take also some data; like pressure or whatever it could do to send it through to the insurance company and say, “Hey, maybe there will be a problem soon.” 

Laurent Le Pen: That’s really what everyone is investing it. The grail is really to get like all this kind of information and instead of becoming an emergency device you become like a preventive emergency one, a people’s safety device from China, but you know you want to avoid things. It’s a really complex work, but definitely, this is where we are investing in the next few years in terms of R&D to integrate some which can be combined with some of our adware. It can be like the ad rate monitor. That can provide you with a lot of information. Then you need to combine them with some algorithms and then to analyze its data and finally to extract when this data gives a diagnostic which is accurate and this is not yet the people we are targeting. It’s a niche. It’s a very valuable niche in the niche businesswise because we are very happy if we save lives that way. 

Today we do it more like the people especially the seniors; the main issue is that when you reach a certain age you have a high chance to fall and when you are alone and you fall and you are still conscious this is like almost 90% of the time and every day we have like a total of over 50 000 units worldwide in news and these people… you know every day we have people pressing that button. So, every day we have people triggering this emergency and that’s what is pushing us like to innovate and could we predict that? It is not that easy. So, then the chronic disease; this is kind of a different business but very interesting. It is probably a younger audience as well with people who are at risk especially after they had a disease. The patients as well which are coming out of operation, for example, or out of the hospital where you could give… you could offer that watch for several weeks as a preventive device, but again it is kind of a different… there are many people working on that and we are part of them as well. 

Matthieu David: I see. You talk about it in the document you sent to us about Omate. You talk about design to position time of 6 months. Is it the usual time it takes to initiate a new product or a new version of the watch? 

Laurent Le Pen: Ideally from design to engineering; that is all the typical process. All our design actually we only make our own designs internally so we don’t really do it for others. It happens from time to time that people ask for adjustments etc. it is kind of complicated, but we do it because it becomes complex when you have more parties involved and different kinds of what we use to say here in the greater barrier. We say like exotic components; like components which are not too new or not easy to source locally and here we are in the best place to source any consumer electronic components or mobile phone design, IOT products in China and all over the world so in the adware; silicon valley so it is super easy, but when you add some different components that can also increase the time of design from 6 months to 9 months to one year which is not common to I would say in the west and we design a product, the design phase would take like from design to engineering and to production, would take more from 1-18 months; 12 months to 18 months. In Shenzhen, we can go very, very fast so that is the point probably about that side.

Matthieu David: I’d like to go back to the new product you are going to launch soon. If I understand correctly you told me that this device will not need anymore a sim card and it will still be connected to telecom and to the internet. Could you tell us more about that?

Laurent Le Pen: Yeah so this is something we will announce later, but it’s okay I can share with you. It is fine. You probably heard about it. So, you know that the sim card has been shrinking down to… we had these big sim cards ten years ago and then we went to these mini sim cards and then we got this micro sim card and in your Apple world and in your I-phone; the new I-phones there is something called the E-sim which is still an electronic component. It is 1mm x 1mm and it is very good in terms of integration, but it is still a component and is a component that is relaying to operators and like any sim card is linked to a network and is linked to an operator. Probably when you buy your sim card you have the name of the operator on it and it makes it very difficult for IoT products in China and all over the world to run with sim cards. It is very hard to mass-produce and to try to make it a global product very easily…

Matthieu David: One more thing; it is adding a cost to the customer because they need to buy a new sim card and they need to buy a new plan, right? 

Laurent Le Pen: Exactly and that’s why IOT people are not very good yet to sell IoT products from China and all over the world because this product with the service, but in between the enabler of the service you need to have a sim card and if you don’t provide the sim card that really destroys your whole business model. So, for many years we have been trying to figure out all we can you know as a bill with a sim card and to have like a sim card which is like very you know like originally friendly, worldwide friendly. So, with several experiments and finally, there is a new technology called virtual SIM card technology; one of the leaders is actually the Mi-Fi leader. You know this portable Wi-Fi module that you can use as a hot spot for when you are traveling. 

So, one of the media is called Skyward. It is a great company based in the US and in Shenzhen and we are teaming up with them. We are going to launch something where we integrate the virtual sim card into a wearable as a service solution from China and we believe that will be a game-changer because it will offer this virtual SIM card technology service so the device will work outside of the box, immediately and more importantly it will be a kind of a global warming. So, it will use as a local network wherever it is in the world. So, we will start first in the US, but step by step we will be able to explore other countries, other regions, other continents by offering the same device which can connect directly out of the box thanks to this virtual SIM Card technology. So, people will remove one step of the people to definitely use our device. 

Matthieu David: So, a virtual SIM card technology reminds me of a service that Stripe is offering which is a video IBAN. So basically, you have your IBAN from your bank and then you want an apartment and you want to know this money comes from someone; that person who is wanting your apartment and you are going to give them a virtual IBAN which is actually to be linked to this person. Is it similar that the virtual SIM card technology is like you have your own sim card, but you can multiply actually the location of the sim card with the virtual SIM card technology or is it the hardware which has actually a centralized sim card and you have on each item of the hardware the virtual sim card? Could you tell us a bit more about technology?

Laurent Le Pen: I am not sure about Stripe or on the banking system, but what we are doing with this virtual SIM card technology is really that it will just provide kind of a local number, but it will change automatically because we are only using data. Data has no number. It is no phone number and again you cannot erase it; SMS, MMS, phone call and everything will go from an application just like we do with a WhatsApp call or with WeChat in China. So, it will communicate with the phone, the smartphone for the kids and the watch; the watch will have this virtual sim card where it will be able to connect to any network, but the beauty of it is that it can detect a GPS location and the tower location. 

It will connect to the strongest network and this is a game-changer because especially for emergency and people’s safety devices from China or what we call like the PRS; like a personal emergency response service like this kind of device is very important to have very strong connectivity; anytime, anywhere. So, using this virtual SIM card technology it will just connect to the closest tower. So, you would always have and it suddenly can connect to one operator and then in the afternoon and in the morning, you can connect to another one depending on where you are and without affecting the cost because all this cost will pre-integrate into the device. Our goal will be to offer an unlimited data connection to our end user. 

Matthieu David: There will be a monthly cost. 

Laurent Le Pen: We want to avoid the monthly revenue and so it looks beautiful like that, right? You have revenue, but for IoT products, in China and all over the world it doesn’t really work this way. Again you don’t want the people to have like the trouble to think like, “Okay I bought this device like for $100 and it is a great device and I like it” and after every month I would have $10 per month, but at the end of the year this I $120. It is actually more than the cost of your device. So, what we want to integrate is by negotiating with more units we can provide a better price and we can integrate into that price. So, if I tell you, “Instead of $100 I offer you $129, but it is like unlimited.” I think this is a game-changer. 

Matthieu David: But how do you do it? How can you support the service for ten years?

Laurent Le Pen: Of course there would be like any unlimited thing like I am trying to say there is a need which we still have to have like a fair usage of the service so I believe we will start with a one-year service where we say we provide like a one-year unlimited service. Use it as much as you like. After one year you can contact us back. You can say like, “I want to pop up to get another one year” or, “No I am not using it enough. Maybe I will just buy a sim card on the side.” It will still keep a sim card slot for people who still want to use their own service and also for B2B some people have some benefits with their local operators. So, again we are very open people. This is probably like a good summary of what we are and what we do. We are very open in our business model, very business-oriented. So, we must bring flexibility to probe that. We do it every day. 

Matthieu David: About financing Omate; you talked about Kickstarter. We started the conversation with that and fully understand how it works, but you also raised money from 500 startups and at that time it was still the macro. How did you raise money from them and what was the need for the money because you already raised money from the Kickstarter?

Laurent Le Pen: That was 4 years ago so yeah; Dave was still on board. Basically, we got like a lady and I got connected to Wilma and she was at that time in a kind of some investment at 500 and she left the company a few years later, but we came to… in 2015 and said, “Yeah I would like to know more about Omate. I know like people invested in Pebble. So, 500. We are also looking for a wearable tech company.” I said, “Okay. Why not.” It was really like an opportunity and for us, it was also at the time where we were exploring the US market during that fashion time; 2015. So, we were just like 18 month-old company and yes, that was an experience. We stayed with the team and part of the team stayed for 6 months in Mountain View. It’s a 500 start-up office. Again, it was great to see as a difference from different perspectives; the market, the US market, many smart people around that were really into software and internet and less into hardware. So, yeah, a great experience just like an opportunity like many others. 

Matthieu David: I see your client base; I was Googling and I was looking for it on the client base and I see you did like a 217.8K USD fundraising in China. I don’t know if the number is right? That’s what we can see on your client base and usually for the start-ups they give like $50 000 for the prototype, but you already had the prototype, you already had a Kickstarter worth $1 000 000 in the bank account so where was it used to be with the 500 starts up?

Laurent Le Pen: 500 made an offer actually. So usually they invest in the 7% for the start-ups and then they send a little bit less to us and then at the same time it was like maybe 2 or 3 months later after we went out of the batch 13 and we did like new funding. We did like the only – I think no one did that after that – but we did an Indiegogo; a two-day campaign and that two-day campaign we did I think a $250 000 fundraising in China. It was a limited edition of a new model and we put 1000 watches in our new model and in two days we sold them out. We would do a two-day campaign and because we were moving our business model from B2C to become really B2B and we said, “Okay now you see we sold this 1000 units and this is a limited edition; 250 USD per unit so we got like $250 000 several days later.” That was the turning point to say Omate would become an expert in designing products and teaming up with other people. So, we always do that. We always launch our product and we do a limited edition because we still want to give like our early kind of community of people who want to buy a product at the very beginning and they want to be the first and they want to be like kind of part of the pilot and we will always offer like 100 limited edition and because it is not our business to do B2C we give them great deals. We really make them VIP and after we move our business to B2B so that means the distributor will contact us and say, “Okay I will take another 3000 units. I will take 5000 units.”    

Matthieu David: I see. So that is your process. You rather campaign first?

Laurent Le Pen: Yes. 

Matthieu David: On the kind of Indiegogo Kickstarter and maybe JD maybe sometime in the future and then after, you have the product and businesses can see you. They can even come to you to buy your product and then you have certain kinds of agreement pricing and customization because you say customization in your presentation for the businesses who buy your product. 

Laurent Le Pen: Yeah exactly. It is kind of B2C to B, right? So, you launch a product and you announce it as a consumer company and you say, “We announce. We make a proper press release.” We launch the product and we say, “There is a very limited edition. “After the people are very frustrated, they come back to us several weeks after and say, “I want to buy it” and we say, “Sorry. It is sold out.” They say, “But your website is always sold out” and I say, “Because we only launch like maybe one or two products a year so we have very limited units for end-users.” Again, we really try to make these people VIP because for us it is important that they have a great experience. 

If anything, for example, went back through quality control and there is one unit you know people receive and it doesn’t work we just tell them, “Okay don’t worry. We will send you immediately a new one. It’s free.” We really try to bring this amazing experience and we will not let them down. We can only do that on… I will not say that we will lose money, but we try to be just good with that. We just try to make these people happy, but we can only do that in a limited edition. Afterward, we can also demonstrate to our B2B customers that look, there are already some users that can bring back some ideas and we can customize and do it better and we can say, “Look, these people look pretty happy with the product.” It is easy also to demonstrate that the product is doing well so that they can start in their own market to get exclusivity in their market. Then we can ship out them locally.    

Matthieu David: I see; very, very interesting and very efficient strategy because you don’t have to spend that much in marketing and your marketing actually making you a little bit of money, even you say you are breaking even on those limited editions. Thank you very much for your time. Actually, it was interesting that we didn’t go through the usual ten questions at the end of the interview because we had enough to talk about with all your entrepreneurship stories. Thank you very much, again. I hope you enjoyed it and I hope everyone listening to us has enjoyed it as well to talk. Bye-bye, everyone.

China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.

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This article Podcast transcript #83: Building a Wearable as a Service solution from China in the smartwatch industry is the first one to appear on Daxue Consulting - Market Research China.

At the beginning of the 21st century the Chinese government began to make systematic use of new mediating technologies to measure the trustworthiness and financial creditworthiness of individuals and businesses. Establishing an online financial credit system was seen as key to better integrating China into the global market economy. The first credit-scoring companies were established in the 1990s, and following this the People’s Bank of China (PBC) established an enterprise and personal credit database. While initially focused on financial aspects like loans, the system was extended to the measurement of personal and corporate trustworthiness in relation to contract fulfillment and legal commitments. Discontent with widespread corruption in private and public institutions and with fraudulent company practices officially encouraged the Chinese government to launch a plan in 2014 for a full-blown national social credit system (SCS).

The “Planning Outline for the Construction of a Social Credit System (2014–2020)” focuses on restoring trust and improving ‘sincerity’ in government, commercial and societal affairs. Furthermore, it aims on raising judicial credibility and the ‘honest mentality and credit levels of the entire society’, with international competitiveness and a ‘harmonious Socialist society’ as the ultimate goals. Hence, the system isn’t only directed at citizens, it also targets businesses, and the Chinese government itself.

Does China’s social credit system seek to address the issues within the market?

The current legal system of regulatory checks and balances guiding the Chinese market is weak. There is widespread rule-breaking in areas such as IP violations, contracts, environment, labor violations, tax, and scams and fraud. As a result, this has fostered a low-trust market environment.

To address these issues, China’s social credit system seeks to set up a regulatory architecture to gather data on people and companies to define and determine trustworthiness. This serves as an info-intermediary to inform the government and regulators, and to grade all players within the greater business ecosystem such as companies and the public so they can take action. And lastly, to turn these data gathered insights into actionable and legitimate determinations that either restrict market access to those who don’t follow the rules, and to improve market access for those who do.

How does the social credit system help execute the government’s plan?

For China’s social credit system to work effectively there needs to be data interoperability between businesses, the local government, and Beijing. At present no single government agency has enough data or power to carry out the tasks detailed by the SCS alone. Therefore, the social credit system was created to bring all of China’s state agencies together to share data and cooperate in restricting market access to rule-breakers. It is made up up three interconnected components: a master database, the blacklisting system, a punishment and rewards mechanism. Beijing seeks to use these three primary components in conjunction to guide China through the next phases of development.

Connecting data across all state agencies: How it’s collected and where it’s stored?

To solve the issue of data interoperability, the National Development and Reform Commission (NDRC) created the National Credit Information Sharing Platform (NCISP) (全国信用信息共享平台). The NCISP is controlled by the central government and is the primary clearinghouse for social credit files on individuals and corporations. Government documents lay out in great detail exactly which records the central database will contain, which government agency will contribute which datasets, as well as which records will be open to the public and which won’t.

The NCISP is divided into 3 groups, with the top at the national level, the middle at the provincial level, and the municipal at the lowest level. In looking at the diagram below created by Trivium China, each center node is surrounded by a wide range of societal institutions, government bodies, and business organizations, with each having its own database, ratings standards, and blacklists. Data flows from the outside nodes to the center, and then from the center node up to the higher levels of government. Therefore, it is no wonder why pulling together this data, both structured and unstructured would lead to issues of interoperability. And as a consequence, may lead to legal errors, system inefficiencies and bureaucratic irresponsibility.

[Source: Trivium China, National Credit Information Sharing Platform]

Relevant authorities for implementation and enforcement

The National Development and Reform Commission and the Central Governmental Agencies designed the national discredited blacklist and credited redlist system, constructed the cyberinfrastructure to publicize information, and built the multi-agency joint sanction cooperation to punish discredited people. Yet it is mostly the local governmental agencies that implement these policies by collecting and uploading data, classifying and punishing people. Interestingly, many local governments also construct their own municipal SCSs and reconfigure the meaning of “trustworthiness” and “credit” in their local practice. Unlike the severe fragmentation among different agencies in the central government, local governmental authorities can better coordinate (or force) different departments to work together at the local level.

While there is still no cross ministry SCS agency at the central governmental level, municipal governments will commonly establish a new municipal governmental agency, for example, often with the name “XX SCS center/office,” to design and implement municipal SCSs. Although some cities’ municipal SCS for businesses are divided according to the different social fields under different governmental jurisdiction, the municipal SCS for individual persons is always united into one system on the local level. (See figure below for further details on the SCS for individual persons).   

Thus, the system is very intricate, with a multitude of players seeking to govern a field while simultaneously designing, implementing, supervising, cooperating, and inputting data into various systems and labelled blacklists. When different actors in different industries and professions bring their own formulas to solve the problem and contribute to the system there results in a lot of position overstepping and mismanagement.

[Relationships among social credit systems for natural persons in China]

China’s social credit system is a merging of technologies

China’s social credit system is run by the state. But its development and functioning relies heavily on close cooperation with big Chinese internet companies like Alibaba, Baidu, Tencent and SenseTime. These provide technical infrastructures, and mine and process huge amounts of data harvested from countless sources and data-points, including geo-location and online payments. Simultaneously, the government is constructing several national data platforms for collecting, storing, sharing and mining population data with a focus on ‘integrating these separated platforms into centralized data infrastructures.

For example, one of the more famous and widely used apps Alipay has a form of credit collection, namely the Sesame Credit score. In practical use, Alibaba has begun to leverage the app’s popularity to try to solve a conundrum such as the lack of trust between buyers and sellers online. In 2016, Alibaba signed another data-sharing MOU with the central government, promising to expand its involvement in meting out penalties and perks. Agreements like these between China’s digital ecosystem strong players are only the beginning of a slow integration between the SCS and the world of e-commerce and digital payment.                                   

Although some commercial companies, such as Ant Financial and Liulian Technology (Shenyang), helped different governmental agencies to build their own SCS models or cyberinfrastructures, there is no evidence that commercial SCS data is included in any municipal governmental SCS calculation to date.

[Source: Alipay Screenshot, Ant Financial’s credit system]

How do businesses search for information on companies and punishment measures?

Businesses can find all related information regarding the SCS on the NCISP. Below are translated examples of what the menu looks like when performing a “search” for registered companies using their social credit numbers on the platform. A searcher can begin by choosing a city or by company SCN. Furthermore, by scrolling alongside the left side menu, you can see the respective ‘punishments’ the SCS is responsible for to companies who break the rules. As you go down the list the punishments become more severe. They go from listing an entity as merely partaking in an abnormal operation to labeling it a “dishonest entity.” Then from exposing companies to random checks to handing out administrative punishments, freezing assets, and on to sending out cancellation notices for business closure. And lastly, to being blacklisted. Thus, the repercussions for all businesses in China are not to be underestimated.

[Source: National Enterprise Credit Information Publicity System website, China’s corporate social credit system website explained]

To provide a case example of how the SCS works, recently there was an announcement from the Shandong Provincial People’s Government. It reported that to “reduce corporate credit risk” (降低企业信用风险) during the current Coronavirus (nCoV) crisis, enterprises with delayed deliveries, deferred payments, overdue contracts, and other dishonest behaviors will not be put on the dishonest entities black list. Below is a translation of the text, which is declared on the 12th measure.

  [Source: Shandong Provincial People’s Government]

What companies need to know about the blacklists and redlists

The “blacklist & redlist” mechanism is widely used across different sectors to build the social credit system. A blacklist is a public record of companies (and individuals) found in serious violation of existing regulations. A redlist is the opposite – a public record of companies (and individuals) that have been consistently compliant. Blacklists are for entities with adverse credit information and redlists are for entities with good credit information. Important to note is that insofar blacklists are not yet centralized, but rather the state, provincial, municipal and local agencies manage their own blacklists. The primary focus of most of these blacklists is on the regulation of malpractice in the business environment.

How Blacklisting Works?

• Step 1: State agency determines the company is non-compliant
• Step 2: State agency puts the company on a blacklist
• Step 3: The blacklist is sent to the NCISP and included in the company’s social credit file in the master database
• Step 4: Other state agencies get access to the blacklist
• Step 5: The public can see blacklist data as well

The system for blacklisting is very complex and organized by different agencies and by different levels of government. Below is a table chart which outlines some of the categories, leading agencies, and purpose and subject of their blacklisting mandate.

[Leading agencies involved in China’s social credit system blacklisting system]

Here are a few ways in which companies can be put on the blacklists

• Not honoring legal obligations
• Failing to pay employees
• Fraudulent financial activity
• Tax evasion
• Import-export offenses
• Endangering public health and safety

However, this list is set to get much longer as regulators in the fields of medicine, travel, education, sports, agriculture, e-commerce, energy, and others start to create and hone their own lists to discourage behavior like:

• Excess energy consumption
• Polluting the environment or endangering ecology
• Operating without the right licenses
• Safety violations and accidents
• Counterfeiting, fraud, and IP violations
• Poor production quality

Redlists are structured along similar likes as blacklists: there are a few big major redlists at the national level, and then a whole series of local redlists at the city and provincial levels

What is in China’s Corporate social credit system?

• Basic company registration data
• Braches/Subsidiaries
• Executive-level personnel
• Annual Reports
• Social insurance payment history
• Provident fund deposit history
• Administrative licenses
• Administrative penalties received
• Inspection records
• Awards and honors
• Utility payment history
• Red and blacklist records
• Equity structure (shareholders, legal representative, stock info)
• Tax information (taxes paid and owed, tax rate, tax period, etc)

Important to note is that most of the data from above do not come from high tech sources, but rather are derived mostly from the records generated in the course of your business operations such as customs, tax, and utilities. Furthermore, regarding the data above, some of it is self-submitted, like the annual reports and details of personnel. So in essence, there currently still remains a small level of control.

Social Credit Score components for companies

There are five ancillary aspects of the SCS that only apply to companies and organizations.

1. The National Credit Information Publicity System
2. Unified social credit numbers
3. Company grading systems
4. The new random inspection system
5. Credit commitment letters

The National Credit Information Publicity System

Corporate social credit records are available to the public via the National Enterprise Credit Information Publicity System (NECIPS) 国家企业信用信息公示系统, a website which contains compliance data on any company with a license to operate in China, including local subsidiaries of foreign companies. NECIPS’s public records include information on key shareholders and personnel, operational licenses and permits, inspection results, notices of company dissolutions, notices of frozen assets, operational irregularities, and any past violations.

NECIPS is set to become ground zero for corporate due diligence, and will be a key resource for companies to monitor the state of their own credit records. But the site is more than just a clearinghouse for data discovery; it’s also a data management portal. Company representatives can sign up for an account and upload basic company data and annual reports.

[Source: China’s enterprise social credit publicity system screenshot]

Unified Social Credit Numbers

In 2015, as a preliminary stepping stone to implementing the enterprise social credit system, the central government began assigning a new code – the Unified Social Credit Number (统一社会信用代码) – to each domestic company and organization. The USCN has now replaced traditional business license numbers on business registration certificates as the primary code by which an enterprise is identified. A USCN can be used to search for information on any China-registered company the National Enterprise Credit Information Publicity System.

[The Unified Social Credit Number is circled in red]

Corporate grading systems

As we’ve seen in previous sections, under China’s social credit system, market regulators will treat companies differently depending on their social credit record. Companies with good social credit will enjoy simpler bureaucratic processes, decreased inspection rates, and other perks. Companies with poor social credit may have higher taxes, be subject to more frequent inspections, be barred from participating in government procurement, and other repercussions.

The determination of who has good credit and who has bad credit will largely be based on four different types of grades that companies will receive: Comprehensive Public Credit Rating, Operational grades, Industry association grades, and Financial credit scores.

The new random inspection system

In 2015, Chinese regulators took a step towards cracking down on corruption by implementing a new safety and production inspection system called “Double Random, One Open” （双随机，一公开), wherein both the company to be inspected and the inspector are randomly selected (hence “double random”), and the inspection results are openly published (“one open”).

[Double Random, One Open inspection system notification]

The government’s goal here was to standardize the timing of inspections so that inspectors can’t excessively target one company while ignoring another, and to standardize the inspection process so that inspectors don’t have as much discretionary decision-making power. While random inspections aren’t a core component of the SCS per se, the results of these inspections are publicized on the National Enterprise Credit Information Publicity System website, and are included in a company’s social credit file.

Credit commitment letters

One of the most recent additions to the SCS is something called the “credit commitment system”, which was introduced in a national policy released in July 2019. The system encourages companies to sign standardized letters promising to operate in good faith and to honor social credit regulations.

Signed credit commitment letters are openly published on the National Enterprise Credit Information Publicity System website and are included in the company’s social credit file. Companies with good credit who have signed credit commitment letters may have various bureaucratic applications pre-approved on the strength of their promise.

Myths & weaknesses of China’s corporate social credit system

The SCS is not a fully integrated and unified system, which is often the way it is portrayed in the West. In practice, the system is highly fragmented and technically complex, consisting of a variety of social credit initiatives and projects at the local and regional levels that will unlikely be fully integrated at the national level. The data is not high tech and new. Regarding the definition of trust. The idea that the social credit system will artificially increase levels of “intentional trust” may not materialize. Therefore, SCS may not address the actual underlying social issues. Lastly, there is high potential for abuse. If the system is built in such a way that it is open to abuse, allowing fraudulent companies to come away with good credit records, it will call into question the entire system’s validity.

Uneven implementation across industries

While it is clear that the SCS will eventually have ramifications for every company doing business in China, policymakers have placed a special focus on implementation in industries they feel are most in need of regulation. This has been particularly evident in the roll-out of Comprehensive Public Credit Grades, the central government’s new four-tier rating system for enterprises. 

In September 2019, the NDRC announced the completion of credit evaluations on 33 million Chinese market entities. To put that into perspective, there were 34.7 million total companies registered in China in 2018, so the evaluation covers most registered companies in the market. But only a tiny portion of those results have been made public. Furthermore, these ratings have not been incorporated into any of the searchable, centralized platforms, but published in Excel spreadsheets. Also, there has been no word on whether or not these grades will eventually be added to, and viewable via, the main public portals.

Data dispersion

Two main platforms were created to serve credit data to the general public: the Credit China website and the National Enterprise Credit Information Publicity System (NECIPS).  But data sharing between the two is patchy at best, with records that appear on one often being unsearchable on the other. Making matters worse, several state agencies host their own credit data platforms with equally poor interconnectivity, haphazardly transferring data from and sharing data with NECIPS, Credit China, and each other. 

Boundaries of the system aren’t clearly defined

Social credit policy at the national level has encouraged provincial and city governments to extend the system by developing blacklists, rewards, and punishment schemes for their own jurisdictions. But policymakers are very much aware of the social credit’s potential to exceed its own mandate. Deputy Director Meng Wei stressed that social credit must have a clearly defined legal basis, and outlined the “Three Prevents”:

1. Preventing credit record data collection from expanding beyond reasonable and appropriate boundaries.
2. Preventing the unauthorized creation of blacklists and related punishments.
3. Preventing the unauthorized or illegal applications of the credit system.

What we know

• China’s corporate social credit system will be used more broadly to regulate the commerce sector. In June 2019, the State Council released a guidance document that calls for establishing three components — a credit commitment system, a credit report mechanism, and a classified credit regulation — as the basis for inspecting businesses.

• China has already built credit profiles for 33 million enterprises and organizations, including foreign companies. By some estimates, over two-thirds of China’s regional governments have released or are in the process of releasing local social credit initiatives. 

• Companies will be evaluated based on compliance with their specific industry regulations.

• There is no set of blanket standards guiding how companies will be evaluated. Instead, China’s central and local governments have published a total of 1,500 documents defining over 300 rating requirements for companies in different industries, but several have yet to be released. Understanding exactly which types of criteria companies will be evaluated on will be crucial to maintaining a healthy score.

• Companies can land themselves on both a blacklist and a “red list.” So far, China has compiled a total of 51 blacklists for non-compliance with laws and regulations.

• The blacklist for the commercial sector has been divided in two parts: the joint credit punishment list for dishonest entities, which restricts a company’s direct sales and commodity quotas, and the special attention list, about which not much is known other than companies that find themselves on the list will face “stricter regulations.

What we don’t know

• What the rating system will look like? Recent policy documents have made mention of a “Comprehensive Public Credit Rating” (公共信用综合评价) which is a national corporate credit evaluation that will determine how companies will be treated depending on their social credit scores. But exactly what the rating will look like, and how much it will matter, has been unclear.

• It is unclear how the national-level rating system will synchronize with the various rating systems developed by local governments and industry regulators, whose ratings will also be taken into account in the comprehensive evaluation of a company.  But, it has been reported that while the national-level rating will serve as a foundational metric, city and provincial-level ratings will take priority.

• Can (and how fast will companies be able to) get off of a blacklist?

In summary, there are many questions to be answered. Like, will there be a meta-score based on all the available ratings for every company? A standardized system for the types of treatment companies will receive based on the results of their evaluations? How the algorithms will calculate the score? Will it be immune to biases against foreign companies? Strategic industries? However, the draft PRC Social Credit Law might answer some of these questions, but for now, the timeline for this legislation is unclear. 

What does the enterprise social credit system mean for companies operating in China?

Carrying out the above steps will bring a company up to date and position it well to effectively manage the effects of the Corporate SCS. However, as the System continues to adjust, expand and improve, companies need to stay on top of further developments. An effective monitoring system that provides companies with the ability to react quickly needs to cover two dimensions. First, the close observation of government-side changes to ratings and rating requirements. Second, the internal monitoring of business operations with regard to the sustained fulfillment of, sometimes changing, requirements. This will necessitate regularly checking a company’s rating scores across all ratings and the monitoring of entries about the company in the different databases.

How to prepare for China’s enterprise social credit system

Every company in China, regardless of size or ownership structure, needs to expect that all its operations in the Chinese market are in one way or another, either via scale ratings or compliance records, tracked and recorded by the mechanisms of the Corporate SCS. However, the implementation status of the Corporate SCS, and with it the intensity of data transfers, tracking and recording, still varies between different industries and locations. Most of the key industries that are front-runner industries with regards to the System, meaning the coverage of the ratings is already far advanced, includes the automotive and chemical industries, as well as the entire logistics industry. Foreign business invested in these sectors will need to prepare.

Early and thorough preparation is the key for companies to tackle the challenges of the Corporate SCS. With enough preparation, companies will avoid being surprised by the accelerating implementation of the ratings, or suddenly being faced with a rating downgrade, or even a classification as a distrusted enterprise, followed by all the potentially severe consequences.

The corporate social credit score system is likely to have a huge impact on China’s business environment. Any company whose operations extend into the Chinese market must invest in understanding the SCS and its potential to impact their operations, as well as how to engage with it to minimize risk.

For those already active in the market, taking a stand still and “wait to see how the system develops” is the wrong move. Companies need to be proactive and begin creating an internal mechanism for tracking the system’s growth and impact.

What to keep in mind

• Understand exactly what the system requires from your company
• Assess where your company stands regarding the requirements
• Design and implement effective adjustments
• Continuous monitoring
• Exchange with government authorities

Author: Jeffrey Craig

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This article China’s Social Credit System: What businesses should know is the first one to appear on Daxue Consulting - Market Research China.