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China’s Software-As-A-Service (SaaS) Market Offers Tremendous Growth Potential

A column chart showing China's cloud computing market size in billions of yuan. China's cloud computing market was valued at RMB 9.7 billion in 2015, RMB 17 billion in 2016, RMB 26 billion in 2017, RMB 41.3 billion in 2018 (forecast), RMB 60.8 billion in 2019 (forecast), RMB 84.3 billion in 2020 (forecast), and RMB 110.9 billion in 2021 (forecast).

The public cloud market is growing at a rapid clip around the world. The worldwide public cloud services market is projected to grow from US$ 182.4 billion in 2018 to US$ 331.2 billion by 2022 representing a CAGR of 16.08% according to research from Gartner. The fastest growing market segment is expected to be cloud system infrastructure services, also known as Infrastructure as a Service (IaaS) which is expected to grow from US$ 30.5 billion in 2018 to US$ 76.6 billion by 2022, representing a CAGR of 25.89%. The second fastest growing market segment is expected to be Cloud application infrastructure services, also known as Platform as a Service (PaaS), which is expected to grow from US$ 15.6 billion in 2018 to US$ 31.8 million by 2022 representing a CAGR of 19.49%. Meanwhile the market for cloud application services, also known as Software-as-a-Service (SaaS) is expected to grow from US$ 80 billion in 2018 to US$ 143.7 billion by 2022 representing a CAGR of 15.77%.

The story is the same in China where, much like the rest of the world, China’s cloud market has also been on an uptrend.

A column chart showing China's cloud computing market size in billions of yuan. China's cloud computing market was valued at RMB 9.7 billion in 2015, RMB 17 billion in 2016, RMB 26 billion in 2017, RMB 41.3 billion in 2018 (forecast), RMB 60.8 billion in 2019 (forecast), RMB 84.3 billion in 2020 (forecast), and RMB 110.9 billion in 2021 (forecast).

China’s IaaS market is the fastest growing cloud computing segment and is dominated by homegrown tech giants Alibaba (NYSE:BABA) and Tencent (HKG:0700). And although the country’s SaaS market has received relatively little attention compared to the IaaS segment, it is a significant part of China’s overall cloud computing market, being estimated to reach a market value of RMB 47.3 billion in 2020 which accounts for about 56.1% of China’s cloud market which is estimated to reach market value of RMB 84.3 billion the same year.

China’s SaaS market has been growing steadily over the past several years.

A column chart showing China software-as-a-service market size (in RMB billions). China's software-as-a-service market was valued at RMB 3.49 billion In 2013, RMB 5.98 billion in 2014, RMB 9.89 billion in 2015, RMB 12.75 billion in 2016, RMB 16.87 in 2017, RMB 23.21 billion in 2018 (forecast), RMB 33.7 billion) in 2019 (forecast), and RMB 47.34 billion in 2020 (forecast).

Yet, there is still ample potential for growth. China’s SaaS market is expected to reach approximately RMB 47 billion (US$ 6.7 billion) in 2020 according to Statista while the global SaaS market is expected to reach US$157 billion by 2020. This means China would account for just about 4% of the global SaaS market while accounting for about 16% of global GDP indicating ample potential for growth.
Furthermore, according to a 2019 report issued by Alibaba Cloud Research Center, while the number of Chinese companies is 3 times that of the United States, China’s SaaS output is just 24% of the U.S.

There are several growth drivers to support China’s SaaS market. Unlike in the west, a growing number of Chinese firms are not tied to legacy IT infrastructure and they are increasingly moving directly to the cloud, leapfrogging the traditional enterprise software generation in much the same way Chinese citizens leapfrogged the desktop/laptop phase and went straight to mobile. In the medium term, the COVID pandemic may prompt SMEs to accelerate cloud adoption to control costs, facilitate remote working, and online sales. Over the longer run, the industry is likely to enjoy tailwinds thanks to China’s made in China 2025 initiative which aims to upgrade China manufacturing base by developing high-tech Industries including electric cars, robotics, artificial intelligence, agricultural technology engineering new synthetic materials. Cloud computing is among the many technologies expected to drive this development (others include big data and IoT).

Opportunities for local and international SaaS companies

China’s higher end SaaS segment is largely dominated by foreign SaaS behemoths such as Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL), and SAP (ETR:SAP) whose product offering often comes with a hefty price tag. Homegrown SaaS companies such as Kingdee (HKG:0268), Digiwin, and Yonyou (SHA:600588) on the other hand are not as powerful in terms of functionality compared their foreign counterparts, however their product offering has been improving in terms of sophistication and capabilities, and they are usually significantly cheaper which makes them a very compelling option to fulfill the needs of China’s Small and Medium Enterprises (which make up almost 99% of business establishments in China) as well as state enterprises. This has helped local SaaS providers carve out a niche for themselves in China’s nascent SaaS market while competing against foreign, well-established players.

The country’s SaaS market is highly fragmented the top 10 vendors accounting for only about 30% that the market as of 2018 according to research from PR Underground. Local rising star Kingdee dominated the market with a market share of just 5%, followed by Microsoft, SAP, Salesforce (NYSE:CRM), Oracle, Veeva Systems (NYSE:VEEV), Zoho, Beisen, Yonyou, and Newdo which collectively made up the top 10.

Pie chart showing the market share of China's SaaS vendors during the first half of 2018. Kingdee was the market leader with a 5.1% market share followed by Microsoft (5%), SAP (4.3%), Salesforce (4%), Oracle (3.8%), Veeva Systems (2.6%), Zoho (2.6%), Beisen (2.2%), Yonyou (2%), Newdo (1.8%), and others accounted for the balance 64.5%,

Many of China’s SaaS market verticals are also dominated by homegrown companies. Kingdee for instance, leads in HR, ERP, and accounting. Beijing-based Forceclouds, and Shanghai-based MacroWing lead in document and data management tools for the clinical research, pharmaceutical, and medical device industries. Beisen and DOIT provide CRM solutions in partnership with Tencent.

America boasts a number of SaaS behemoths; in one category America has born-in-the-cloud SaaS companies such as Salesforce, Workday (NASDAQY:WDAY), ServiceNow (NYSE:NOW), Splunk (NASDAQ:SPLK), and Atlassian (NASDAQ:TEAM); in another category there are established software giants with a growing cloud business such as IBM (NYSE:IBM), Oracle, Microsoft, SAP, and Adobe (NASDAQ:ADBE); and finally there are IT vendors with a growing SaaS cloud offering such as Google (NASDAQ:GOOGL) and Cisco. The world’s top three SaaS companies are American; Microsoft, Salesforce, Adobe with market shares 17%, 12%, and 10% respectively of in 2019 when the SaaS market reached US$ 101 billion according to analysis by Synergy Research.

Chinese SaaS companies on the other hand are still at a relatively early stage of growth. However, in much the same way America’s SaaS market growth spawned a number of homegrown SaaS giants, there is potential for Chinese SaaS companies to blossom along with the growth of China’s SaaS market. A notable example is Kingdee.

Kingdee

Kingdee is one of China’s largest providers of ERP software with a focus on SMEs, and is one of China’s leading SaaS players with a market share of 5%. Kingdee first started out as an ERP software company building a large user base of enterprise customers. This user base helped Kingdee’s cloud transformation, enabling it to introduce its own cloud products to its existing user bas

In FY 2019, Kingdee’s cloud services revenue grew 54.7% year-on-year accounting for 39.5% of revenue during the year up from 30.2% in 2018 according to their 2019 annual report. Cloud revenue’s share of total revenue is likely to increase going forward as traditional ERP customers migrate to the cloud. Traditional ERP systems are gradually being replaced by SaaS which is generally more cost-efficient and easier to use and manage compared to traditional ERP systems. Notable enterprises upgrading to Kingdee’s “Kingdee Cloud Cosmic” (a cloud platform for large enterprises) include one of China’s largest courier companies SF Express (SHE:002352), Chinese edtech unicorn VIPKid, and Chinese state-owned defense corporation Norinco. The company is targeting cloud revenue to contribute 60% to total revenue by 2020.

While it may seem that cloud can cannibalize Kingdee’s traditional software business, according to figures from its annual report, it is evident that this is not the case with much of Kingdee’s cloud growth being driven by new customers During FY2019, of Kingdee’s “Kingdee Cloud Galaxy” (a digital cloud service platform for medium and large enterprises, and fast-growing enterprises) customer base, 77% of clients were new to ERP, 13% were from competitors, and just 10% were existing clients.

Armed with a wide product range of cloud software spanning e-commerce, supply chain and intelligent manufacturing, a healthy balance sheet (the company’s borrowings stands at RMB 199 million while it has a cash pile of RMB 3.18 billion), a strong brand name among local SaaS companies, and an impressive user base of SMEs as well as large enterprises suggest Kingdee is well placed to capitalize on China’s growing SaaS market.

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Malaysia’s Growing Digital Economy: Opportunities And Sectors To Watch

Bar chart showing usage of ICT tools and systems among Malaysian SMEs. 86.5% of Malaysian SMEs used desktop / laptops, 90.1% used internet connections, 91.4% used smartphones, 43.8% used e-commerce, 70.5% used social media, 50.2% used Finance & Accounting systems, , 28.8% used HR systems, 18.8% used POS systems, 14.5% used inventory systems, 12.5% used Customer Relationship Management (CRM) systems, 12.3% used supply chain management systems, 11.5% used order fulfillment systems and 10.5% used Enterprise Resource Planning (ERP) systems.

Malaysia’s digital economy, as defined by its government registered an average growth of 9% annually between 2010 and 2016 in value-added terms, exceeding Malaysia’s overall GDP growth rate during the period. In 2018, Malaysia’s digital economy grew 6.9% year-on-year to reach RM 267.7 billion, contributing 18.5% to the national economy (up from 18.3% in 2017) according to the Department of Statistics. Although the 2018 growth rate of 6.9% is lower than in 2017 when it grew 9.8%, it is still higher than the country’s overall GDP growth rate of 4.7% recorded for the year according to data from Bank Negara.

This growth momentum is likely to continue thanks to a combination of government support, a youthful, tech-savvy population, and increasing digitization of SMEs among other factors.

On the consumer front, Malaysia boasts favorable demographics to support its growing digital economy. Of Malaysia’s approximately 31 million population, about 42% are aged 24 years and below according to the CIA and the median age of the country’s population is 29.2. This compares with neighboring countries such as Thailand where the median age is 39, Singapore (35.6), and Vietnam (31.9). A relatively young population as well as high incomes have helped push Malaysia’s internet penetration rate to 85.7% as of 2018, which is higher than the approximately 60% penetration rate in the region.

On the enterprise front, large enterprises currently dominate Malaysia’s digital economy as they adopt digital technologies such as e-commerce at higher rates than SMEs, partly due to larger enterprises having greater access to funding and technical expertise. For instance less than 44% of Malaysian SMEs use e-commerce for their business according to data from a 2018 report by SME Corp.

Bar chart showing usage of ICT tools and systems among Malaysian SMEs. 86.5% of Malaysian SMEs used desktop / laptops, 90.1% used internet connections, 91.4% used smartphones, 43.8% used e-commerce, 70.5% used social media, 50.2% used Finance & Accounting systems, , 28.8% used HR systems, 18.8% used POS systems, 14.5% used inventory systems, 12.5% used Customer Relationship Management (CRM) systems, 12.3% used supply chain management systems, 11.5% used order fulfillment systems and 10.5% used Enterprise Resource Planning (ERP) systems.

However, government support (such as the government’s PeDAS program which is aimed at assisting rural SMEs reach a larger consumer base through e-commerce platforms) and a growing breadth of affordable digital enterprise solutions could spur Malaysian SMEs to shift towards digital applications in the future. With SMEs accounting for nearly 99% of Malaysia business establishments, their digital transformation could contribute significantly to the growth of Malaysia’s digital economy.

To add further impetus to Malaysia’s digital economy which is already riding high on strong fundamentals, the Malaysian government has put in place several incentives to encourage greater market expansion and is aiming for the digital economy to contribute 20% to the national economy by 2020, up from 17.8% in 2015.

Some of the incentives include:

  • A RM 210 million allocation under Budget 2020 for the purposes of accelerating the development of digital infrastructure such as industrial parks, and in public buildings such as schools.
  • RM 21.6 billion allocated under Budget 2020 for the five-year National Fiberization and Connectivity Plan (NFCP) which will ensure high-speed connectivity throughout the country along with an additional RM 250 million to increase broadband connectivity in rural and remote areas such as Sabah and Sarawak with technologies such as satellite technology.
  • Under the Malaysia National Industry 4.0 framework, the Industry4WRD Readiness Assessment Intervention Program or in short known as ‘Industry4WRD Intervention Fund’ was launched by the government in Budget 2019. It is a financial support facility for Malaysian SMEs in the manufacturing and related services sectors to adopt Industry 4.0 applications and technologies such as the Internet of Things (IoT), sensor technology, artificial intelligence, robotics, 3D printing and others.

With many tailwinds to support market expansion, the International Data Corporation (IDC) predicts that by 2022, 21% of Malaysia’s GDP will be digitized, up from about 18% currently.

Sectors and industries to watch within this burgeoning market include:

E-Commerce

E-commerce is one of the few verticals in Malaysia that is relatively ahead of the digitization race with the e-commerce sector alone contributing 8% to Malaysia’s GDP in 2018. Already one of the fastest growing e-commerce markets in Southeast Asia, there is still ample growth ahead with the sector expected to expand to nearly US$ 6 billion by 2024.

Column chart showing Malaysia’s e-commerce revenue, 2017-2024. Malaysia’s e-commerce revenue was 2,651 million in 2017, 3,030 million in 2018, 3,680 million in 2019, 4,337 million in 2020, 4,974 million in 2021 (estimated), 5,433 million in 2022 (estimated), 5,750 million in 2023 (estimated), and 5,995 million in 2024 (estimated.

B2C e-commerce has garnered the most attention contributing to the top-lines of online retails such as Lazada (owned by Alibaba (NYSE:BABA)), Shopee (owned by SEA Group (NYSE: SE), and Zalora (owned by Global Fashion Group (ETR:GFG)).

However B2B e-commerce is poised to catch up as SMEs jump into the e-commerce bandwagon. Alibaba looks set to capitalize on this growth opportunity having emerged as one of the most aggressive players in encouraging and facilitating Malaysian SMEs to adopt e-commerce to reach a global customer base. Under its eWTP (e World Trade Platform), Alibaba collaborated with the Malaysian government to launch the world’s first Digital Free Trade Zone (DFTZ) at Kuala Lumpur International Airport (KLIA) Aeropolis in 2017 to assist local businesses sell their products in overseas markets through online e-commerce, and position Malaysia as a regional e-commerce hub. And in April this year, Alibaba’s logistics arm Cainiao Smart Logistics Network celebrated the inaugural flight of a new dedicated cargo route between Hangzhou and Kuala Lumpur.

Electrical and electronics

Malaysia is a global electrical & electronics (E&E) hub, with major players such as Intel, Hewlett Packard, Osram, Broadcom, Western Digital, and Samsung having manufacturing and distribution operations in the country notably Penang. Malaysia’s E&E industry (which can be categorized into 4 sub-sectors namely electronic components, consumer electronics, industrial electronics, and electrical products) is the biggest segment in the country’s manufacturing sector. Malaysia is the world’s 7th largest E&E exporter and the E&E sector accounts for 38% of Malaysia’s exports.

As Malaysia’s digital economy grows, spurring greater demand for mobile devices, semiconductors, storage devices, and other hardware, Malaysia strong E&E industry is well-placed to satisfy demand and profit. Only 62% of businesses in Malaysia are connected to the internet, 46% have fixed broadband, and about 28% have a web presence of some kind according to the World Bank. This is lower than the EU average where 96% businesses are connected to the internet, 95% have fixed broadband, and 75% have a website.

In an effort to incentivize Malaysian SMEs to adopt digitalisation measures for their business operations including electronic point of sale systems (e-POS), Enterprise Resource Planning (ERP), and electronic payroll systems, the Malaysian government will provide a 50% matching grant of up to RM 5000 per company for subscription to such digital services under Budget 2020. The government will also allocate RM 550 million to provide smart automation matching grants to 1,000 manufacturing and 1,000 services companies automate their business processes.

Furthermore, the imminent launch of 5G technology in the country (expected by the third quarter of 2020) should add a further boost to the E7E sector thanks to the offering of 5G-compatible smartphones, tablets and other devices. Satisfying this growing demand for electrical and electronic components suggests revenue growth opportunity for local E&E players such as Inari Amertron Bhd (KLSE:INARI).

Although the country’s E&E sector has been hit by production shocks as a result of Covid-19, these blips are likely to be temporary and should recover in the long term as market fundamentals remain supportive.

Cloud services    

IDC projects Malaysia’s overall IT spending to be approximately US$ 11 billion in 2020, with much of that shifting to managed and cloud services.

Research firm GlobalData foresees Malaysia’s digital spending to reach US$ 25.2 billion by 2023 from US$ 16.5 billion in 2018 (representing a CAGR of 8.9% during the period). Much of that spending will be on client computing and cloud solutions.

Bar chart showing Malaysia's ICT market growth rate (CAGR) a leading 5 IT solution areas, 2018 2023. Mobility is expected to grow at a CAGR of 20.9%, cloud computing 19.1%, data and analytics 17.6%, storage 14.3%, outsourcing 10.1% during the forecast period.

By vertical, the manufacturing sector is expected to account for the lion’s share of ICT spend in 2023.

By vertical, the manufacturing sector is expected to account for the lion’s share of ICT spend in 2023.

Cloud adoption is largely concentrated among Malaysia’s larger enterprises while adoption among SMEs, (which accounting for 98.5% of Malaysian business establishments make up the backbone of Malaysia’s economy) is relatively low. However this is poised to change with the Malaysian government encouraging SMEs to adopt digital technologies such as cloud computing, thanks to favorable provisions in Budget 2020.

Yet again, Alibaba has made its moves in Malaysia with its cloud computing arm Alibaba Cloud partnering with local domain registrar WebNIC to tap into this relatively underserved market.

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China’s $150 Billion AI Ambition Opens New Growth Opportunities

Line and bar chart showing facial technology investment value and deal volume (including grants) in China 2013-2017. Disclosed funding in facial recognition in China grew from US$ 2 million in 2013 to US$ 41 million in 2017 while the number of deals increased from 3 in 2013 to 41 in 2017.

China is aiming be the world’s leading player in artificial intelligence (人工智能) by 2030 and by some measures, the country appears to be on track.

According to a report by CB Insights, Chinese companies seem to be overtaking their US counterparts in AI-related patent applications; the number of patents published in China containing the words “artificial intelligence” and “deep learning” have grown rapidly over the past few years, and the middle Kingdom finished 2017 with six times more patent publications containing those words than the United States in 2017.

Line graph showing the number of AI related patent publications published in China and the United States, 2013-2017.

While the United States continues to lead in terms of the number of AI startups and equity deal volume, it has seen its share of global AI equity deal volume shrink from 77% in 2013 to 50% in 2017. By comparison, China accounts for a mere 9% share of the world’s AI equity deal volume.

Bar chart showing global AI equity deal share (US vs Non-US deal share), 2013-2017.

However, in terms of global AI funding value, China is the dominant player accounting for 48% of global equity funding in 2017 representing a major increase from the 10% share China held in 2016 and surpassing the United States for the first time. By comparison, the United States accounted for 38% while the rest of the world accounted for the balance 13% of global AI funding value in 2017.

The numbers are likely to be just the beginning for China’s AI industry expansion which, driven by government funding, an encouraging regulatory environment, and the natural advantage of having the world’s largest population yielding unrivaled quantities of data (AI systems need to be “trained” with real-world data and the more data fed into a system, the more accurate it is) positions China as a hotbed of AI opportunities for investors and entrepreneurs.

The Chinese government has set forth a plan for the Development of a New Generation of Artificial Intelligence Industry, which runs in three stages during which the country’s AI capabilities will be steadily developed through 2020 and 2025 and conclude in 2030 when the government aims China will be the leading player in artificial intelligence.

Towards this end, the Ministry of Industry and Information Technology (MIIT) unveiled the first stage of the plan in December 2017, a detailed Three-Year Action Plan (2018-2020) which supports the local AI sector as a strategic area by developing AI-related technologies, bolstering AI talent and investing in AI research through various initiatives, incentives, grants, and funding commitments. The plan focuses on the development of some key AI areas namely,

  1. Intelligent Networked Vehicles (智能网联汽车)
  2. Intelligent Service Robots (智能服务机器人)
  3. Intelligent Drones (智能无人机)
  4. Medical Imaging Diagnostic Systems (医疗影像辅助诊断系统)
  5. Video Image Recognition (视频图像识别)
  6. Intelligent Voice Systems (智能语音)
  7. Intelligent Translation Systems (智能翻译)

 

This creates tremendous business opportunities. By 2030, the Chinese government expects China’s AI sector to blossom into a CNY 1 trillion (US$ 150 billion) industry which could stimulate as much as CNY 10 trillion in related businesses.

The opportunity has attracted local and foreign tech giants eager to profit from China’s burgeoning AI industry. Google (NASDAQ:GOOGL) for instance has opened an AI research facility, Google AI China Center, in Beijing to hire China’s top talent in artificial intelligence while homegrown tech giants such as Alibaba (NYSE:BABA), Baidu (NASDAQ:BIDU), Tencent (HKG:0700), Xiaomi, Huawei and JD.com (NASDAQ:JD) are making hefty investments in AI technologies.

 

Artificial Intelligence chips

AI systems depend on powerful AI chips to run and while numerous Chinese tech giants such as Alibaba, Baidu and Tencent are actively deploying AI technologies to improve their core offerings, much of the AI chips that power their systems are made by foreign suppliers such as Nvidia (NASDAQ:NVDA) and Intel (NASDAQ:INTC).

Although China is the world’s largest semiconductor market, accounting for about 45% of the world’s demand for chips (also known as integrated circuits), much of the country’s demand for chips is met through imports which account for about 90% of China’s total consumption of integrated circuits.

AI chips make up the basic infrastructure of AI systems and having a greater presence in the supply of such strategic components could potentially facilitate the Chinese government to achieve its goal of becoming an AI powerhouse.

Furthermore, as the global AI industry expands at a rapid clip, the global AI chips market is expected to witness extraordinary growth as well. According to research from ResearchAndMarkets, the AI chipset market is poised to expand from US$ 7.06 billion in 2018 to US$ 59.26 billion by 2025, representing a CAGR of 35.5% during 2018-2025.

Globally, chip startups have raised more than US$ 1.5 billion from in venture capital funding last year, nearly double the amount the year before according to CB Insights.

The Chinese government appears intent on capturing some of that profit potential too; in its Three Year Action Plan (2018-2020), the Chinese government aims to mass-produce neural network processing chips by 2020. China’s previous attempts to build the local semiconductor sector (from as way back as the 1990s) had mixed results partly due to the fact that government incentives and funds were concentrated on research and academia than on business.

This time however, Chinese AI chip businesses seeing greater government support, putting them in good position to participate in the growing global AI chip market.

Within 18 months of its founding by scientists at the Chinese Academy of Sciences (CAS), Chinese AI chip developer Cambricon Technologies raised US$ 100 million in Series A funding making it China’s first AI unicorn. Led by SDIC Chuangye Investment Management which is a subsidiary of China’s State Development and Investment Corporation, the funding round attracted prominent investors including e-commerce giant Alibaba Group, computer manufacturer Lenovo (HKG:0992), robotics company Zhongke Tuling Century Beijing Technology and the investment arm of the Chinese Academy of Sciences (CAS).

Scientists and engineers from Beijing’s Tsinghua University (which is known as China’s ‘MIT’) have developed “Thinker” a multi-purpose AI chip that can support any neural network and is extremely energy efficient. Beijing-based chip manufacturer Tsinghua Unigroup, a subsidiary of Tsinghua Holdings which is owned by Tsinghua University received up to US$ 22 billion in state financing in early 2017.

Chinese e-commerce goliath Alibaba is also reportedly developing its own chips, joining global tech giants such as Google, Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB) which are already working building their own AI chips. Called the Ali-NPU, Alibaba’s AI chips will be made available for anyone to use through its Alibaba Cloud service.

 

Facial recognition

 Over the past few years, China’s facial recognition market has seen a rapid growth in investment in terms of deal value and volume.

Line and bar chart showing facial technology investment value and deal volume (including grants) in China 2013-2017. Disclosed funding in facial recognition in China grew from US$ 2 million in 2013 to US$ 41 million in 2017 while the number of deals increased from 3 in 2013 to 41 in 2017.

According to CB Insights, of all countries in the world, China appears to be making the greatest use of facial recognition software with the technology being widely used throughout the country from supermarkets, airports, streets, office buildings, apartments, hotels, bank counters and ATMs.

The business opportunity has given birth to a number of Chinese facial recognition startups such as Alibaba-backed AI unicorn SenseTime (the most valuable AI startup in the world as if April 2018), Megvii (which develops Face++, one of China’s most common facial recognition platforms used for applications such as to manage entry in places such as Beijing’s train stations and Alibaba’s office building, and to enable Alipay customers to authenticate payment), CloudWalk Technology (a facial recognition software developer whose clients include the Zimbabwean government and Bank of China), DeepGlint, Zoloz and Yitu Technology (which counts the Malaysian Police as a client).

Chinese police are already using facial recognition sunglasses to track its citizens and the Chinese government is reportedly aiming to build a national database that will recognize any of the 1.3 billion citizens in China (the world’s most populous country) in three seconds. Already, more than 4,000 people have been arrested by Chinese authorities, helped by facial recognition technology.

Alipay, China’s most popular mobile payment app owned Alibaba affiliate Ant Financial has rolled out the world’s first payment system that uses facial recognition to enable customers to authenticate payments using just their face and a second authentication using their mobile phones.

In spite of China seeing rapid advancements in facial recognition, there is still considerable potential for the industry to grow driven by the growth of intelligent vehicles in China.

 

Intelligent vehicles

While autonomous cars are gathering momentum worldwide, China, the world’s largest car market is speeding towards intelligent vehicles with the country’s top economic planning agency, the National Development and Reform Commission naming intelligent vehicles as a national priority in a three year action plan unveiled in December 2017.

Autonomous cars refer to vehicles that are equipped with sensors and GPS while intelligent vehicles (the so called “smartphones on wheels”) refer to cars with technologies such as road safety monitoring, interactive entertainment, facial recognition, voice interaction systems and in-vehicle payment systems.

By 2020, the Chinese government expects the market share of smart vehicles to reach 50% of total new vehicles sold in China. Towards that end, the Chinese authorities have taken steps to boost the country’s intelligent and connected vehicle industry such as through talent training and research, encouraging investment, and encouraging cross-border mergers and acquisitions.

Strong regulatory support coupled with Chinese car buyers’ seemingly high enthusiasm for connected vehicles which presents a potentially sizeable market for smart cars suggests the government’s target could be within reach. According to a survey conducted by McKinsey in 2017, 64% of Chinese consumers would switch brands for better in-car connectivity. By comparison, 37% of Americans would switch brands for better in-car connectivity and just 19% of Germans would do the same.

Bar chart showing desire for in-car connectivity from consumers in China, United States and Germany. 64% of Chinese consumers surveyed were willing to switch brands for better in-car connectivity compared with just 37% of American consumers and 19% of German consumers. For 33% of Chinese consumers, having in-car connectivity is critical while 20% of American consumers and 18% of German consumers felt the same. 62% of Chinese consumers were willing to pay a subscription for in-car connectivity while just 29% of American consumers and 13% of German consumers were willing to do the same.

The opportunity has turned China’s intelligent connected vehicle market into a hot sector attracting a raft of companies, from established tech giants to smaller startups, keen to participate.

Alibaba has signed agreements with auto companies such as Ford (NYSE:F), Dongfeng Peugeot Citroen and SAIC Motor (SHA:600104) to develop connected vehicles which use its AliOS automotive operating system which was unveiled in 2016.

Chinese social media behemoth Tencent has teamed up with Changan Automobile, while Chinese internet giant Baidu has partnered with Great Wall Motors towards develop intelligent connected vehicles.