A new commentary by Fitch Solutions Macro Research suggests that smart city initiatives in China gained traction after the 12th Five-Year plan [Plan].
Fitch noted that the Plan highlighted the use of digital cities to manage increasing urbanisation as the government repurposed coastal cities to become high-end research and development centres. It also shifted the focus of coastal settlements away from low-cost manufacturing.
In January 2013, a pilot was started with an initial 90 cities, growing to 193 cities by 2015. While smart city projects are centrally-coordinated and adopt a largely top-down approach, implementation is decentralised and carried out by municipal governments. Initiatives are managed by the Ministry of Industry and Information Technology (MIIT), the Ministry of Science and Technology (MOST) and the Ministry of Housing and Urban-Rural Development (MHURD), along with some input from other ministries.
Fitch believes that China has managed to scale its smart cities programme thanks to the use of a public-private partnership (PPP) arrangement. Risk is shared between both private enterprise and the government, providing incentives for companies to take part in the construction and operation of the infrastructure.
Duties and liabilities are reportedly clarified during the agreement signing, as smart city developments normally take a long time to generate a positive return. Building a comprehensive smart city network also requires multiple stakeholders which are forced to co-operate with one another. China also benefits from an advanced technology supply chain, which boasts leading telecoms equipment makers and both tech software and hardware firms.
Smart sensors on machine-to-machine (M2M) connections are the most widely-deployed form of technology in smart cities. China's virtually nationwide mobile networks together with the widespread availability of NB-IoT networks and fibre infrastructure have allowed government-commissioned sensors to be adopted and used in a variety of ways.
Telecoms operators have been experiencing a surge in IoT connections, although we believe that a majority of these connections are of low value. China Mobile, for one, reported in H118 a growth in IoT revenues of 47.6%, despite M2M connections rising by 154% y-o-y.
The deployment of sensors to collect massive amounts of data has enabled artificial intelligence (AI) to take an increasingly important role in smart city planning. AI is being used to process and tag people and objects from closed circuit television (CCTV) streams, and used in a variety of ways, including:
- Public transportation: CCTVs are used to monitor passenger volumes at bus/train stations in order to manage the frequency of buses/trains.
- Energy management: Usage of smart grid infrastructure to manage intermittent and dispersed supply from technologies such as solar and wind.
- Disaster prevention: Water-level sensors are used to detect imminent flooding of monsoon drains and rivers.
- Fire prevention: Drones are installed with thermal cameras to detect unusual heat patterns to alert firefighting personnel.
- Traffic control: Motion sensors to detect roads with high vehicular traffic in order to adjust traffic light timings. AI detects emergency vehicles such as ambulances and change traffic lights to green to allow a smooth passage. AI is also able to detect accidents and alert human traffic controllers.
Ubiquitous connectivity has led to the widespread adoption of mobile financial services (MFS), which have now become indispensable and integral to Chinese life. M-payment services such as AliPay and WeChat Pay are used on a daily basis at retail shops and for public transport payments, allowing the government to generate substantial geo-locational data can be used for city-planning.
Small cities, large opportunities
While smart city applications in China's Tier 1 cities (Guangzhou, Shanghai, Chongqing, Beijing, Tianjin, and Shenzhen) have gained most of the attention, we believe that opportunities in Tier 3 cities will remain the biggest due to the relatively larger infrastructure investment gaps. With the implementation of smart city projects being decentralised in nature, the chance to gain regulatory approval to begin construction should be quick, as government is smaller in less populated cities.
As that the opportunity to construct residential properties in less developed cities is also large, municipal governments can take a top-down approach in the construction of smart housing, for instance. In areas with high levels of development, most technologies have to be augmented on existing infrastructure, sometimes creating barriers to implementation.
Implications and barriers
The rise of smart cities and continued collection of data has given rise to privacy and cybersecurity concerns. Chiefly, China's Internet Security Law, which came into effect in June 2017 mandates companies which store data to share it with the authorities when requested.
This allows, in theory, the government to de-anonymise MFS and mobile phone data and identify a specific individual's movement, although there will likely be disconnect as certain daily transactions are done via offline channels. For instance, Apple has had to store its iCloud data domestically, so the state can theoretically access an individual's iCloud data at any time.
Fitch says technology trials in smart cities have also provided telecoms operators and tech companies a real-time testbed for their products and services, which in-part have contributed to the pace of their research and development (R&D). Telecoms carriers are given dense cities to test run their network trials instead of limiting them to closed environments, and tech companies are allowed to test their services on limited amounts of the population. The success of smart cities will also provide a platform for China to replicate its success into other Belt and Road (B&R) cities. B&R initiatives such as the Manila Bay Project will largely adopt success cases of smart city technologies in China. We expect capital cities along the B&R route, along with Chinese companies, will be beneficiaries of the smart city success.
Fitch also concludes that the success of smart city initiatives will be largely contingent on policy continuity of provincial and municipal governments. The decentralised nature of smart city implementation, once again, means that the central government can provide strong guidance but whether initiatives are taken-up is contingent on the receptiveness of provincial governments.
Fitch cautions that unexpected budget shortfalls and provincial level austerity measures can unexpectedly threaten the progress of smart city developments, and companies involved in the initiative must be cautious of this.