The Evolution Of Smart Cities In China

Paul Schulte is the founder and editor of Schulte Research, a company that researches banks, financial technology, bank algorithms, and credit algorithms. He has had a career in equity research which spans 27 years on both the buy and sell sides covering the Asian and emerging markets.

He also has five years of government policy experience in emerging markets. He has been frequently ranked in top-five positions in Euromoney, Asiamoney, and Institutional Investor. In Institutional Investor’s 2010 poll, he received top rankings in All-Asia Banks Team, Asia Equity Strategy Team, and Asia Economics, Team.

Mr. Schulte was most recently at China Construction Bank Intl as Global Head of Financial Strategy and Asia Banks Research and based in Hong Kong. Before that, he was Managing Director and Head of Multi-Strategy and Asia-Pacific Banks Research for Nomura International. Before that, he was Chief Equity Strategist, Asia ex-Japan, for Lehman Brothers.

He served from 2001 to 2006 as Portfolio Manager and Head of Research for GEMS equities at Big Sky Capital, a US$350 million global macro fund (Tiger Cub) of the Wynn Family funds in Los Angeles, California. At the same time, he was also a lecturer at the Hilton School of Business at Loyola Marymount University.

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The Evolution Of Smart Cities In China

Another interesting phenomenon is that this arrogance doesn't extend to corporations. Maybe some of it comes at a government level and trickles down as a society. In the US, it's a lot more common to see Chinese-born Americans here who are integrated into the culture. It's much rarer to see folks like yourself who originally hail from the Western World and are deeply rooted in China and are making a conscious effort. An entire decade's worth of progress was probably undone with Trump and the rhetoric around China and this tit-for-tat trade war that was looming. It seems to be imbalanced. There's a lot more humility coming from the Chinese camp. Do you agree with this or do you think I'm off the mark?

I don't disagree at all. What I see is China has been restrained, number one. Number two, a lot of people I know who are seasoned Asians are astounded at the level of hubris, arrogance, and out of toughness with how far China has come and also, how sharp its teeth are when it comes to its military and technological responses. The fact that it has probably a far more effective spy network than America at this point, I would say that's true.

Its technological capabilities in cryptography and eavesdropping are probably as good or better. The currency rollout is years ahead of the Fed. The BSN, blockchain network, America doesn't even have one. The build-out of the 5G network is almost probably 90% done. The super apps allow these 5G networks and edge computing to all combine together to pretty much instantly turn on the switch for the blockchain service network. Alibaba and Tencent are in 55 to 60 countries.

China really has the high ground, the Silk Road, which is Beijing, Chengdu, Singapore, Afghanistan, Pakistan, over to the Middle East, the Horn of Africa, Jerusalem, Rome, and London. There's your Silk Road. In terms of a lot of that, China has a lot of it already sewn up. America has been asleep at the switch. Also, AT&T and Verizon were asleep at the switch when it came to 5G. Nobody was on the ball there.

America's 5G rollout is still primitive. It's consumer-based. It's not industrial-based. 5G requires an industrial application. Most importantly, the fact that China has 200 smart cities and these super apps and the finance to digitize building installation that you can get through the super apps, it's pretty much already there.

Alibaba has DingTalk and SMEs, smart cities, smart buildings, logistics, and ports. Tencent has WeChat Pay and ByteDance has Lark. All of that is an SME-funding rollout, which goes into the digitized nature of buildings, ports, logistics, and transportation of goods and services. China's pretty much ready to turn on the switch and it's turning on the switch now.

What is a smart city? Tell us a bit about why China is the model of the future for how PropTech could be. When we talk about visions of PropTech on this show, some of these things seem quite outlandish when you're reading it from a Western perspective. Most people wouldn't even believe what's going on in China. Could you set the context for what smart cities are and what that means in the context of PropTech in China?

We've heard about, “Smart cities are where traffic lights are smart and traffic goes smoothly.” That's crap. That's like twenty years ago. Stop it. Don't talk about that. We are talking about the capability of melding financial services, working capital, and all of the activities that are involved. We forget that 80% to 85% of all economic activity is SMEs. The large corporations only account for about 10% or maybe 13% of all economic activity. Life is about the SMEs with 20, 75, and 100 employees. These guys are chronically short of working capital and loans.

We have a blockchain-based system that is glued into the physicality of the world, from the person's office, to the warehouse, to the logistical supply chain transportation, to the port, to the ship. All of that in a city can be glued together. Working capital can be released when it's required as each company completes its assigned product, assigned tasks, or assigned part of the cycle, whatever particular type of cycle you have whether it's building motorcycles, cars, computer sets, or anything.

One of the companies listed in Hong Kong that is a Tencent-funded company is called Linklogis. It’s one of the new entities that are capable of doing this. What blockchain technology does is it’s a superstructure over the banks, gives a bird's eye view of what is happening in the physical world, and ties that to finance. That is a critical part of what smart cities are.

This applies to insurance. It applies to people's activity, people's health, construction, construction accidents, and eliminating construction accidents. It's extremely important for the Green Movement. If not the 1st priority, the 2nd priority of China is the environment. There has to be a profound rethink of how much energy is used in a building. It's absurd. People are in that building eight hours a day and the building runs 24/7. This is crazy. There has to be a way to radically reduce not just the amount of energy a building uses but how the energy is used in the building.

It's creating kinetic energy with footfall and also learning from the kinetic energy of footfall. Who's walking? Where are they walking? Who's walking through your lobby every day? What are they looking at? This ties into advertising and marketing. How do you build cities? My important point here is if you think you're going to be in the business of selling square footage as a property company, you're in big trouble. You need to actively and aggressively get involved in helping your tenant operate their business. That's another critical part of what PropTech is all about.

You touched on advertising. I come from the advertising industry. It feels like the holy grail of advertising is tying online to offline and that's called O2O. This is a theme when I was running my advertising technology startup. I was amazed at the innovations happening years ago when I started first visiting China. O2O, McKinsey predicts, is a trillion-dollar-plus opportunity. It feels like the advent of smart cities is bringing together the ability to have sensors everywhere and to tie action to intent and to things like footfall usage.

Could you discuss more on O2O specifically here? As a consumer, could you also relate to us a day in the life of the consumer living in a smart city? What does that mean? How does that improve your life? How do you interact with technology? Is it QR codes? Is it chips in your brain? Help our readers appreciate how a smart city is real and tangible.

China has 200 smart cities, these super apps, and the kind of finance to digitize building installation that you can get through these super apps, it's pretty much already there.

By the way, Tencent is now building a smart city. Creating a smart city for Tencent is creating an ideal place for people who can work, live, have families, and have a lifestyle. They can arrive at work rested and ready for work and not frazzled, stressed, and wrecked like most of us do when we get to work because we're in traffic for an hour and a half. We’re body to body in a metro system that is hideously inhuman. That's the big picture.

We get down into the nitty-gritty. How do you use footfall technology not just to angle marketing, advertising, and pop-ups to reduce pedestrian traffic? That's one of them. What can you do to prevent snarls in pedestrian traffic as people get to work? What can you do as a small business owner when you get up in the morning to manage every single part of your business out of your phone, including automatic prepayment or working capital from the bank?

What you sold to the guy down that the supply chain has arrived through a blockchain system. He's authorized that it's arrived. The blockchain agrees. The money is released to you. You don't have to wait six months for the money. You can get on to your next batch. China has a fanatical view of getting that credit to SMEs in the easiest possible way.

DingTalk in Alibaba is exactly what I'm talking about here, WeChat Pay for Tencent, and this thing called Lark. It connects 300 million people and about 25 million SMEs. There's an automatic blockchain-based distribution of capital, which still involves the banks. You have all of this stuff where people can go into a store, they can do a QR code on their phone, there's something of an honor system, and they can walk out of the store without even going to a cash register. Everything is just completely automated in your store experience.

We're getting that way in Singapore. I was buying masks. I bought 3 instead of 2 because they were together. I wanted two. By the way, I wasn't taking any. I paid for it. I walked out the door. The alarm goes off and they said, “Let me see your bag.” I said, “I'm sorry. This is terrible.” I didn't get arrested. That took twenty seconds to get my masks out of the store in Plaza Singapore.

It's on and on, the possibilities of smart homes. You and I are both aware that China's getting there. It's because of the super apps. America doesn't have that super app. That is what America's missing right now. America's going on a multi-channel effort. Multi-channel and super app are not the same. The Alibaba and Tencent experience is everything. It is on your phone immediately there. It's all QR codes. Nobody uses cash anymore. Everything is automatic. It doesn't have any friction to it. PayPal is going to try to become a super app.

We'll touch on super apps in another segment in a moment. I want to dive into smart cities further. Help me appreciate the significance of the five-year plan that China has. Can you set some historic context for our readers on what the five-year plan is and how smart cities have come to be as a result of that? It seems like a massive organizational effort. China has a lot of priorities.

The first couple of chapters of the book talk about that. The first five-year plan I looked at was in 1992 when I was working at Credit Suisse. I was in charge of deciphering the 1991 five-year plan. What you have is a complete move away from targets, GDP goals, and output goals. The goals of the five-year plan were promulgated.

The last one, from 2015 to 2020, was all fundamentally based on technological achievement, technological capability, and education. Education in the university system will also help the public and pretty much run-away duopoly with Alibaba and Tencent to let them have as much freedom as possible. They both became multi-$100 billion companies in that period of time.

The five-year plan is very much hundreds of thousands of extremely bright people who run the top of the government going all the way down to the street level and getting consensus on hundreds of issues and then going all the way back up to the top. This thing is a complicated cake. Once the cake is baked, Xi Jinping himself can't change it. This is a societal agreement. These are the priorities that we're going to hold you to as a governor of a province or mayor of a city including smart cities. This is how you're going to be judged.

By the way, private sector, you better read this because this is not going to change for five years. It's a pretty good idea for you to base your business around this. By the way, we talked to you and you said this would be important where we need to go as a country. We would like this. This would be an interesting idea. All along, China is trying to reduce the size of the state-owned enterprises and increase the size of the private sector. That's the nuts and bolts of the five-year plan.

2015 to 2020 was blockchain coming out of their ears. You lived through it. We had years and years of, “When is the blockchain coming? Any minute now.” It's here. It's born. The BSN is an extremely important element of this. I don't have any affiliation with BSN or any of these companies. BSNBase.com is an important website. If you want to do business in China, you're going to have to go through that.

What you will not have to go through if you do business in China through BSN is SWIFT. This makes America nervous. This means that countries doing business with China do not have to have that SWIFT code that you need for any bank transfer. What are we doing? Why does an Indonesian rupiah guy who's doing a Philippine peso transaction get to have a SWIFT code for his Philippine bank? A lot of people are asking these questions. This makes America nervous because funding these gigantic deficits requires dollars. The dollar circulation is vital.

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About Zain Jaffer

Zain Jaffer is an accomplished executive, investor, and entrepreneur. He started his first company at 14 and later moved to the US as an immigrant to found Vungle after securing $25M from tech giants including Google & AOL in 2011. Vungle recently sold for $780m.

His achievements have garnered international recognition and acclaim; he is the recipient of prestigious awards such as “Forbes 30 Under 30”, “Inc. Magazine’s 35 Under 35” and the “SF Business Times Tech & Innovation Award”. He is regularly featured in major business & tech publications such as The Wall Street Journal, VentureBeat, and TechCrunch.