Why China will leapfrog the world in Internet of Things

The U.S. led the world in the PC revolution. Europe was where cell phones took off. So where will the wellspring of innovation and customer adoption take place for the Internet of Things?

China.

With its recent IPO, Alibaba is a ramping up a strategy for the Internet of Things. Seeing the success of Nest and Dropcam in the US, all of the major Chinese web properties— SINA, Baidu, Tencent —are looking at ways to use connected devices as a way to increase market share and advertising revenue. SINA started the trend last year with Wi-Fi weather stations. We are also seeing a battle among these Chinese Internet giants trying to provide IoT services to third-party manufacturers, similar to Amazon’s Web Services, both on their own and with U.S. partners.

Here are three reasons why China is going to take over and lead the world in the Internet of Things:

1. China is firmly ensconced as the manufacturing center of the world and the services and capabilities offered by Chinese manufacturers continue to expand. Fifteen years ago, Chinese manufacturers primarily sat at the far end of the supply chain. Products were designed in the U.S. or Europe and shipped to Taiwanese companies, who in turn figured out ways to manufacture them efficiently before shipping them over to their counterparts in China for cheap, volume manufacturing.

Now, Chinese companies manage industrial design, design-for-manufacturing, and actual manufacturing. People often miss this, but U.S. companies don’t go to China just for cheap labor and engineering. Increasingly, they go for expertise.

2. Chinese manufacturers are rapidly building their own retail brands. Look at Yifang Digital Technology. No, it’s not a household name, but there is a very good chance you’ve seen their products or know someone who owns one of them. Yifang’s Nextbook is the fifth largest selling tablet in the U.S. and eighth worldwide. The company’s products can be seen on the shelves of Target, Walmart and other large retailers.

Very soon, you’ll see the company’s NexTurn home control platform on store shelves in the U.S. at prices that will challenge some of the incumbents. Google’s acquisition of Nest and Nest’s acquisition of Dropcam woke Asian manufacturers up to the possibilities of IoT.

These two factors — the increasing sophistication of the manufacturing base in China and the willingness of retailers to promote or adopt new brands from China — will have far-ranging impacts in the electronics industry. Whenever you talk to veterans of this industry, they say the same thing: It’s too late for anyone else to get into the market. The big brands already have it sealed up. But look at what happened years ago in PCs. Dell snuck in after the established brands had allegedly locked up the market.

In cell phones, Apple and Google swept aside stalwarts like Nokia and Motorola.

In TVs, Vizio, a company with only about 100 employees and no brand recognition, went from being an obscure brand available on shopping networks to the largest seller of TVs in the U.S. in a few short years.

Change is more common than you think.

But the third factor is arguably the most important.

3. China, and the other fast-growing OECD economies, need IoT. In the U.S., smart thermostats are fun, interesting gadgets. In India or China, they will be mandatory. Over 1.4 billion people still aren’t connected to the grid. And where the grid exists, it is often rickety and dirty. Approximately 35% of the power in India gets stolen, and power in many regions still comes from diesel generators.

Traffic jams in cities like Harbin and Shanghai are notorious, and more people are moving into cities every day. China builds 2.5 cities the size of Chicago every year. By 2025, the country will have 221 cities with over one million people.

Technology that can help people fine-tune appliances like air conditioners to cut emissions and energy consumption will be absolutely essential. Sensor networks in streetlights and smartphone apps that provide up-to-date traffic information will be the first line of defense against gridlock.

IoT will also be employed to increase crop yields and monitor irrigation. Many predict that by 2050 worldwide food output will have to be doubled, but we will have to double it without increasing arable land, water rights or fertilizer use. Without technology, it will be impossible.

While IoT will be adopted in Asia, Latin America, and Africa somewhat quickly, adoption in China will probably be more rapid. A domestic industry for IoT products is already evolving after all. Just as important, local officials are encouraging adoption through new building codes and other incentives.

Earlier this year, we launched an effort backed by some of China’s largest VCs and the International Finance Corporation (the venture arm of the World Bank) to build a cloud for IoT in China. Based on the experience, the IFC wants to bring some of the ideas to other markets.

The pervasiveness of mobile phones will play an instrumental role as well. Smartphones will become a universal remote control for managing everything in your life. Smart thermostats in a few years won’t be glitzy items with LCD screens; they will be small, unobtrusive chips, and the screen for controlling them will be in your pocket.

Admittedly, IoT has just begun, and, if you judged the future by the amount of marketing being generated, you could easily conclude that this market will be dominated by U.S. conglomerates with household brand names.

Just prepare to be surprised.

Dave Friedman is CEO and co-founder of Ayla Networks.