Expert Speak Urban Futures
Published on Aug 01, 2018
Smart Cities: Impressive finance models of Yinchuan, Chengdu and Hangzhou

Source Image: JCT600

Future Connected City

Since 2012, the urban lives of Chinese people have witnessed a massive change in the way they conduct their daily lives. This is particularly true for those citizens residing in the 200 smart cities that are witnessing a technological transformation. Right from smart transport to having a totally cashless life, these cities are reaching new heights on the urban technology space. Words like big data, digitalisation, internet of things, artificial intelligence, etc. are still quite alien to the ordinary citizens, but everything they do is now tracked and watched by this smart technology.

The world is looking at cities in China and closely observing how their urban transformations are taking place. Three cities, Yinchuan, Chengdu and Hangzhou, have particularly stood out. Their financial models, which are supported by technology and telecom giants, are being replicated across China and watched worldwide.

Although these cities have resorted to private-public partnership (PPP) models to finance the projects, each city has its own distinct features concerning operations management and profit strategy for its newly established smart city ecosystem. This is caused not only by the unique characteristics of the cities but, more importantly, by the different business emphasis of cooperating enterprises.

Yichuan – ZTE model

Yinchuan experienced enormous change since its government started the smart city construction in conjunction with Zhongxing Telecommunication Enterprise (ZTE) in 2013. Five years ago, like many inland cities, Yinchuan suffered from complex population and urban issues such as traffic congestion, unbalanced medical resource allocation and inefficient administrative operation. To tackle the problem in a ‘smart’ way, on 27 June 2014, Zhongxing (Yinchuan) Intellectual Industry Co. Ltd. was founded. Established on a public-private partnership model, 90 percent of shares were owned by the municipal government, while te ZTE owned the rest. As one of the nation’s best telecommunication companies with cutting-edge technology, ZTE offered scientific tools for Yinchuan’s smart city construction in exchange for first-hand data concerning various aspects of the city. This enabled the joint-venture to become profitable through big data management. Not only could ZTE obtain sustainable governmental investment (approximately INR 2000 million annually for 50 years) by transforming administrative departments into its main customers, but it could also sell citizens’ personal data like consumption habits to other businesses as well. By using this profitable business model in Yinchuan, the financial burden of the smart city project was transferred to the capital market. The appreciation of private assets invested has also boosted the economy. This model is a win-win for both the public and private sectors. So far, the joint venture company has developed ten sub-projects, including smart transportation, a big data center, an e-card system, and an enterprise cloud.

Chengdu - Tecent model

As the economic centre of south-west China, Chengdu is famous for its dynamic culture of entertainment and e-sports. Its unique characteristics drew the attention of Tencent, China’s number one internet media corporation, which extracts most of its profit from operating in the entertainment industry. In 2015, the Chengdu government and Tencent signed the “Strategic Co-operation Framework Agreement” in which Tencent agreed to assist Chengdu’s smart city project using its wide range of resources, including big data and a cloud computing platform. Unlike the ZTE in Yinchuan, Tencent is after more than just data. In March 2017, Tencent announced its plan to turn Chengdu into the ‘E-sport and Entertainment Centre of China’ and create a friendly business environment for game developers and entertainment companies. With the help of Tencent’s strong social media platforms viz. Wechat and QQ, the company is now able to expand its influence from Chengdu to the whole country. Considerable profit can be generated from this strategy, which motivates Tencent to keep participating in the smart city project and even copy its success in other cities.

Hangzhou -- Alipay model

As home to the nation’s magnate e-commerce enterprise Alibaba, Hangzhou benefits greatly from the company’s technology innovation. Wang Yu, a sophomore who moved to Hangzhou two years ago for education, is a witness to how Alibaba is making the city smart. He says, “Alipay now covers every aspect of my life. I no longer need to carry a card for public transportation like I did two years ago as I now have my digital card implanted in Alipay. Within the system, I can do everything from getting snacks from vendors to borrowing a public bike.” The ID card digitalised in Alipay can also be used for checking in at hotels and administrative purposes. By implanting these functions into the app, Alipay is turning more and more Hangzhou dwellers into loyal users. In the e-commerce industry, more users means more profit. With its huge base of users, Alibaba is now gradually replacing the role of traditional commercial banks and is generating huge profits from capital aggregation and reinvestment. Like Tencent in Chengdu, Alibaba is taking advantage of the smart city project to boost the growth of its industry of specialisation. Because of this model, Alibaba is encouraged to offer smart solutions because of the promise of future profit.

The key to success for these cities was creating a scientific, sustainable and profitable business model. Many variables can be influential in this pursuit. The most important is the ability of the private company to profit from the smart urbanisation process. The private company and government should together to find a mutually agreeable path for the smart city project that maximises growth of the private company as well as benefits people. Another element is the features of the city itself.  As seen in Chengdu, the city culture’s alignment with the business model can enhance profitability.

Few concerns

Smart city projects have indeed brought convenience into people’s lives. However, there remains controversy over whether some major threats posed by the processes are being dealt with properly. Among these threats, privacy protection draws the most attention. While more and more personal information is going online, and companies are selling personal data to earn their profits, the legal system seems to be reluctant to keep pace. Laws and surveillance measures concerning information disclosure still have wide gaps. With the help of available data, outlaws can easily track people with a few strikes of the keyboard. Unless these existing problems are tackled properly, the smart city project will never be able to truly benefit the citizens.

The smart city project in China is being undertaken with great enthusiasm from both the public and private sectors. So far, the financing practices and general situation in most cities are satisfactory, but it is still too soon to predict whether the positive trend will continue, especially due to potential threats to privacy. While becoming smart is easy, the biggest future challenge lies in how to become smart wisely.

Guo Xingze is a Research Intern at Observer Research Foundation, Mumbai. She is a finance student with the Beijing Institute of Technology in China.

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