Smart energy solutions must be discussed when one tries to understand the current Chinese economic environment. In three of our publications already, we described Chinese engagements in electric cars, green buildings and renewable energies, and we showed the challenges that the Chinese authorities faced to fulfill these commitments.

In this April article, we offer you a critical synthesis of different reports by the National Reform and Development Council of China (NRDC), the World Bank, the US Trade Ministry and other global players. Indeed, we noticed that all these reports coincide in three points: China needs to develop an efficient management system for its energy distribution and consumption, AI technologies can be of some help (see VVR’s article from last month), and whatever happens in China will most probably be of global importance in the domain of energy.

China, a global leader in reducing carbon emissions?

With the Paris Agreement, China definitely took a leading role in the fight against carbon emissions. This strategic choice in terms of international relations, was also dictated by its internal situation, namely the alarming atmospheric pollution rate. China is thus becoming a laboratory of the energetic transition for developing countries: indeed, in 2016, coal was still amounting for 62.6% of China’s energy mix (US Trade Ministry). Besides, Chinese energetic challenges are typical of developing countries: a fast-speed urbanization rate and the development of rural zones, both increasing the country’s needs in energy. These latter increased by 6.6% in 2017, compared to 5% the year before (Global Energy Statistical Yearbook). Overall, China’s energy consumption could increase by 40% on the next 15 years (World Resources Institute).

An unefficient electric grid

Large Chinese investments have been announced in renewable energies, but worldwide analysts agree on the assessment that nowadays Chinese production in renewable energies is overly wasted because it is not connected to the country’s grid. This grid is a monopoly of two State-Owned enterprises, so it is hardly accessible to foreign businesses. Nonetheless, it is interesting to know that the State Grid Corporation, responsible for 80% of the national distribution system, has published large investments targets in smart meters (they plan to install 280 million of them by 2022) as well as automatization and distribution systems (investments worth USD 7billion by 2020).

Source : International Finance Corporation (World Bank)

Building, work in progress

Thus, green building is a priority of the 13^th Five-Year Plan; in theory, half of the new constructions should be “certified” green. However, higher costs and delay in getting the certifications often deter private promoters for engaging in green building. As such, the clients looking for smart grid technologies are often the local authorities: the China Daily reported that 290 cities already launched a smart city project, amounting to 95% of the provincial capitals. These projects are likely to have a global impact: Kuala Lumpur already showed some interests in the Hangzhou’s City Brain (a project launched together with Alibaba and Foxconn). Some nuance needs to be done here: most of the projects we read about are located on the East coast, and especially in Shanghai, Zhejiang, and Jiangsu, as these provinces dispose of the suitable development and urbanization state for such projects as well as financial resources.

70% of the energy in China is going to the buildings today, 60% of which (around USD 100 billion) is wasted because of outdated or broken equipment (China Economic Review). And it just happens that 70% of carbon emissions come from cities, one third of them from the electricity consumed by buildings (NRDC).

The International Finance Corporation (World Bank) identified green buildings as the sector that will receive the most investment by 2030 in China: an amount estimated at USD 12.9 trillion.

All in all, to solve the gap between electricity offer and demand in China, the central government, local authorities, and State-Owned enterprises all turn to smart grid and other smart energy solutions. Both public and private actors in China seek to attract innovative start-ups around events such as Arup’s forum on green building (Shanghai, April 2 and 3) and the Smart Energy China Fair (focusing on IoT) and the Energy Storage China Fair (both in Tianjin, on September 19, 20 and 21). The first one claim to be the locus of discussion on public policies in Shanghai while the other two invite government officials to speak at conferences.

Which place for European companies?

Able to produce equipment at low costs, China is now looking for smart energy and smart grid technologies, which often come from the West. Some American start-ups are thus already present on the market.

Some challenges to the entry of foreign businesses in this sector should be pointed out. Firstly, there is an overall preference for local actors. One reason for that might be the fact that energy is strategic for any country’s government. Secondly, also due to national security concerns, Chinese authorities increasingly require that the data processed in big data technologies should not leave the Chinese territories, obliging foreign businesses to develop facilities in China. Solutions exist to these challenges, one of them is to find a Chinese partner. Lastly, another obstacle might be the lack of unification in urban policy, making this environment complex for a foreign actor not acquainted with the Chinese system to understand. Besides, policies are not always implemented. For instance, the objective to reduce carbon emissions as a part of China’s GDP by 40 to 45% between 2005 and 2020 had to be lowered. In China, terms such as “green” or “environmental” are mostly political or used for communication purpose, and they rarely fit with the European definitions.

Owning innovative technologies, European and French are fit for the Chinese smart energy market. During the Smart Mobility Forum which happened in Marseilles last February, French businesses showed their dynamism and innovative spirit in the domain of smart energy (although the focus of the forum was mostly transportation). Besides, France already stepped in the Chinese market: in 2016, EDF launched a smart energy project with Changfeng Energy for the city of Sanya, to reduce the carbon emissions of this town.

By Manon Bellon

Much has already been written on China’s plan to become an Artificial Intelligence (AI)’s world leader by 2030. These two trendy words also appear almost daily in the Chinese media and political communication. Thus, based on the analysis of governmental plan and the reading of the relevant press, this article seeks to depict today’s actual picture of AI in China; leaving aside announcement effects and articles looking for a mediatic buzz on a topic that both fascinates and worries.

What exactly do these plans contain? How do they impact Chinese society and economy? And which opportunities for foreign – particularly French – companies can be identified today?

At the Barcelona World Mobile Congress this year, Huawei was showing the world the first car entirely driven by a smartphone, using AI. This smartphone, issued last fall, was qualified as the first smartphone truly using AI. Besides the world reactions to the announcement that a smartphone effectively drove a car on ten meters and avoiding all obstacles on the road, it is interesting to note that China has today become unavoidable in discussing the advancements of AI technologies in the world. As such, Huawei was the first company to appear in a news story broadcasted by a European channel about the World Mobile Congress.

Become a major worldwide leader in AI in 2030

In the last past years, China issued several plans to structure its transition from the world workshop to the world laboratory. Innovation is a central part to the three following plans: Made in China 2025 (2015), Internet + (2015), and the 13^th Five-Year Plan (2015) and is further developed in last July’s National Strategy for the development of AI.

The official target is to become a major world player in AI by 2030, with two middle-steps in 2020 and 2025. Eluding the numerous political and strategic objectives, we here explore the economic ones mentioned in the strategy. Indeed, this paper puts forward the figure of a 150M CNY (19,2M EUR) direct contribution to the Chinese economy by 2020 and of 1bn CNY (128M EUR) by 2030. The audit cabinet PwC were more optimist about these figures, forecasting a global contribution of AI to the world economy as large as 16bn USD (13bn EUR) by 2030 with half of it for the Chinese economy.

Privileged sectors for AI applications mentioned in the strategy and in the overall Chinese political communication are production, urban planning, agriculture, renewable energies, robotics, intelligent cars, medical care and national defense. However, the concrete encouraging mechanisms are still not known.

How much AI and which kind of AI is used in nowadays China? We seek here to understand where potentials for further development lie in China; knowing whether China or the US is leading the AI race is a topic for another discussion.

Governmental political and financial support

According to the global media reports and analysis, Chinese assets are: a supportive government in terms of financing and legislation (data protection is almost absent in the Chinese law as it is practiced), wide data resources thanks to a large, diverse and connected population, and scientific talents (20% of the world’s currently trained scientists in AI are Chinese). An interesting feature is that China is apparently better placed thanks to its talent in research on translation and language, due to the complexity of the Chinese language.

Proactive big players

In terms of data, China disposes of its own produced data (thanks to Baidu, Alibaba and Tencent, also called BAT). These data are sufficiently numerous and available thanks to a non-fragmented environment. Indeed, the pervasive application Wechat now counts more than 800 millions of accounts and is used by Chinese people to chat, but also to pay, localize themselves, rent taxis, bikes, order foods… Half of the Chinese smartphones are also equipped with online payment (see VVR article on this topic) and many observers comment on the general Chinese affection for connected objects. All in all, owning these data is a decisive asset nowadays as AI is merely a sophisticated calculating tool which improves through the processing of huge number of data. In other words, data are AI’s food. However, some scientists say they are today able to develop AI systems using simulated data. This would thus reduce in the long-run the advantage of American and Chinese groups who dispose of large sets of data.

China also owns strong calculus systems

Baidu’s image recognition is now more reliable than Google’s (by 0.3%) and Huawei’s last smartphone is equipped with microchips made in China. Yet, Chinese vocal recognition is still not as efficient as the American one; large investments are spent on it.

Investments

Capital is indeed the last trump in that game, and Chinese hand is full of it. BAT all recently made public their development roadmaps for AI. Baidu is investing 3bn EUR in image recognition, augmented reality, and deep learning while Alibaba announced the opening of 8 research centers for AI and quantum computing, an investment worth 15 bn USD (12,7 bn EUR). Baidu is also engaging in the development of self-driving car and made public in that context their will to put their data in opensource, contrary to American uses.

On the governmental side, Beijing made public their intention to invest in universities, incubators, and start-ups for an amount up to 150bn CNY (19,15bn EUR) with the objective of developping Chinese AI systems. More specifically, they announced beginning of this year the creation of a professional park dedicated to AI (focusing on big data, biometric identification and deep-learning) located in Beijing and gathering some 400 companies, an investment worth 13,8bn CNY (1,8bn EUR).

What about foreign companies in China?

Reading these facts, it appears that China is increasingly competitive in AI and intelligent technologies. Nevertheless, opportunities for foreign and French businesses also arise from this evolution: available investments, possibility to come to China, soon available trained manpower, efficient Chinese AI technologies and large data sets if these data are indeed put in opensource. Foreign and French businesses could also play an intermediary role between Chinese products and European business in that sector as The Economist describes the difficulty for Chinese AI to export itself. The coming China International Import Export Exhibition might thus be an interesting opportunity as an entire hall will be dedicated to high-end technology and intelligent equipment. It will take place in November 2018.

To sum up:

The various governmental publications lead us to expect a rise in the already abundant public and private investments for AI. The target of these investments are the development of AI technology and its applications in the following sectors: production, urban planning, agriculture, renewable energies, robotics, intelligent cars, medical care, and national defense. France made known its will to cooperate with China specifically in AI and according to the rhetoric used in governmental publications, China doesn’t wish to restrain this domain to its national businesses. Today, we can mostly assess Beijing favorable policies for the coming of foreign talents. Besides, research centers announced by private and public actors are not operating yet. Therefore, immediate opportunities for foreign and French businesses mainly lie in the needs that Chinese companies might have in terms of AI, or on the contrary, in the technologies that these companies might have developed.

By Manon Bellon

Restoring the Silk Road. On May 14th and 15th, China held its first international forum devoted to the One Belt, One Road (OBOR) project, bringing together some 100 country representatives in Beijing. Launched by Chinese President Xi Jingping in late 2013, the initiative aims to revive the ancient Silk Road, a huge network of land and sea trade channels used by China to connect with Europe, the Middle East and Africa via Central and Southeast Asia. China, the second – biggest world economic power, wants to further develop commercial activities and relations between Eurasia and Africa through the construction or modernization of energy and transport infrastructure.

A Far-Reaching Project

The initiative is titanic, including within its scope more than 68 countries with 4.4 billion inhabitants and around 40% of the world’s GDP. Nearly USD 1 trillion of investment has already been pledged by development banks such as the Asian Infrastructure Investment Bank (AIIB), to finance roads, rail, energy and port projects, including a railway linking London to East China, and a string of sea ports connecting Southeast Asia to North Africa. China, for its part, made available USD 40 billion of initial capital through its “Silk Road Fund”, to which should be added a supplement of about USD 15 billion, as announced by President Xi at the Summit.

Geopolitical and Economic Risks

In addition to outlines yet to be defined and benefits yet to be determined, the initiative also presents risks. According to a report published on April, 10th 2017 by the Chinese Academy of Social Sciences (CASS) and the rating agency “China Bond Rating”, the development of OBOR could be notably influenced by geopolitical events. Indeed, disturbances linked to terrorism, corruption and independence movements along the trade corridors constitute risks for OBOR. Furthermore, the implementation of the initiative depends on the application of good governance practices in the countries where OBOR infrastructure is being constructed. CASS experts are also concerned that protectionist trends in the United States and Europe will affect other parts of the world and weaken the whole project.

In its report of January 2017, the rating agency Fitch warned of risks in the financing of OBOR projects for Chinese banks. In addition, while acknowledging that these investments will improve and modernize infrastructure in the various Asian countries involved in OBOR through China’s technical funding and expertise, Fitch had doubts about the ability of Chinese enterprises to adapt and operate in the countries concerned. To reduce these risks, Fitch advocated greater EU involvement in the initiative to reassure the international community of the business logic of OBOR projects.

Jean-Pierre Raffarin, former Prime Minister and representative of France at the OBOR Forum in Beijing, along with several other notable experts, will discuss these issues regarding the Belt and Road initiative on June 12th, 2017, from 8:30 am to 10:30 am, at the MEDEF premises (Main employers’ organization in France) in Paris.

China is the world’s largest green building market. With more than 1 billion square feet of certified green, sustainable building space, China has now surpassed the United States. It only took China half the time – about 10 years, compared to the US. China aims for a 50 percent commercial green building rate by 2020, as part of its pledges under the Paris Climate Agreement. If it reaches that goal, about half of green building space in the world will be in the Middle Kingdom.

For green building certification, China uses one domestic and two major Western standards : the China Three Star Standard, the Leadership in Energy and Environmental Design (LEED) standard from the US, and the Building Research Establishment Environmental Assessment Method (BREEAM) standard from the United Kingdom.

The Value of Sustainability

Those three competing standards have their limits. With increasing urbanization – 300 million more Chinese people are expected to live in cities in the next 15 years – more green buildings will be needed. What is crucial now is thinking of green buildings in terms of sustainability.

Construction decisions made in China are often based on short-term costs instead of long-term savings from energy efficiency. Despite initiatives to improve energy efficiency, such as the Chinese Ministry of Housing and Urban-Rural Development’s building energy efficiency label, these programs are still voluntary for the majority of buildings and will unlikely reduce energy consumption in China on a large scale.

Furthermore, the standards should develop new indicators on responding to climate change, such as total CO2 emission reduction or the carbon footprint of one building. The standards should take into account China’s vast territory and differentiated climatic zones. It is difficult to apply standards without considering the local situation.

The cost of green building techniques can represent between 10 – 30% in extra building costs. This remains a significant barrier for further adoption. Even if the Chinese government intends to subsidise around 40 – 50% of the additional building costs through a series of regulations and policies, most of the time, subsidies go straight to public buildings and (Chinese national) buyers of residential units. It is often faster for public buildings to get certification than for private construction. As a result, more than 70% of green buildings in 2013 were public buildings.

The Need for Western Technology

Besides the adoption of green building techniques, China has also seen a surge in ‘eco-city’ development in recent years. One of the best known is an area near the port city of Tianjin. Built in partnership with Singapore’s sovereign wealth fund, the project plans to transform a former uninhabitable swamp into a residential area for more than a million people, as a satellite ‘eco-city’ of the municipality.

More than 100 such eco-projects are scattered throughout China, mainly aimed at establishing new cities of 250,000 to 500,000 people. These cities do create potential showcases and opportunities for Western technologies in a country hungry for foreign know-how. Yet, since green buildings are closely defined by standards, only materials and solutions that contribute to the certification score will have the chance to enter the Chinese green building market.