Editor’s Note: China is an attractive market for foreign robotics companies, with a relatively low robot density, large-scale manufacturing, and strong investor interest. At the same time, suppliers of industrial automation and artificial intelligence should be aware of governmental policies, technological and legal hurdles, and heightened competition.
This article is part of a series by Georg Stieler, managing director of STM Stieler Asian investments, who will be speaking at RoboBusiness 2018 in Santa Clara, Calif. He will be participating in a keynote panel on global robotics. (Robotics Business Review produces RoboBusiness.)
Stieler previously provided an overview of Chinese automation, explained how the country’s technology sector is developing, and discussed growth prospects for the Chinese market. Here, he looks at pitfalls and challenges for foreign robotics companies.
In addition to the market dynamics we’ve already examined, we are seeing several challenges for foreign robotics companies.
From a Western perspective, the scale and speed of developments in China are often hard to grasp. This presents great opportunities for automation providers, but successfully seizing these opportunities requires a great amount of flexibility.
For instance, if a supplier receives an order by a large contract manufacturer of electronic products like Foxconn, it is entirely possible that the product in need has to be supplied in a multiple of regular annual sales — within just a few weeks.
However, it is not certain whether the sudden bestseller will still be in high demand in the following year. Design modifications in smartphones change the production processes and lines.
Chinese competition rising for foreign robotics companies
There is fierce competition among foreign robotics vendors and increasingly with domestic businesses. Pricing pressure for industrial automation has become incredibly high.
Even if they were able to increase sales, all domestic and foreign robot producers paid for this with lower profitability. Depending on the product, the speed with which domestic competitors are catching up is increasing.
In the meantime, European competitors often cannot compete with their lean cost structures.
Investment strategy and tactics
The increasing market share of domestic producers is also in line with the “Made in China 2025” strategy of the Chinese government. This strategy aims at making China the leading nation in high-potential tech industries such as robotics, aerospace, and advanced information technology, as well as new-energy vehicles.
Among the means to achieve these goals are deliberate acquisitions of foreign companies and forced technology transfers. In this context, we support the potential market entrance of Waymo, an American supplier for autonomous driving.
On the one side, Chinese investors lure foreign robotics firms with strong financial resources and access to their huge domestic market. On the other side, the effective protection of intellectual property (IP) under in a joint venture presents a serious challenge.
Legal environment and vulnerabilities
Foreign robotics and AI firms should also be aware of relevant regulations. For example, with regard to the Internet, information control and communications infrastructure are of paramount importance to the Chinese government.
Not only does Beijing want data generated in China to be stored on local servers, but it also wants access to that data and to limit the ability of that data to be moved beyond its borders. This requires the same level of attention as the European General Data Protection Regulation.
Encryption codes have to be made available on request of the Chinese government. Data connections to the Internet outside of China are only allowed with VPNs approved by the government. Under these circumstances, the risk of becoming a victim of cyber espionage when using intelligent, interconnected production processes is high.
The worst-case scenario would be the definite loss of knowledge in digital form to competitors. Hence, it is not surprising that even leading advocates of Industry 4.0 do the opposite of what they promote in public. They use isolated solutions for data management, instead of extensive usage of the cloud.
If a foreign robotics, AI, or telecommunications company wants to offer cloud-based software services in China, the system has to run on a Chinese server. The system must also be licensed to a majority-owned Chinese company, which also holds the contact with the end customers.
Computer game providers and Microsoft, with Office 360 and Azure Cloud, are examples how this can work.
Another challenge for foreign robotics companies is finding a matching Chinese partner. First, the partner has to bring technological skills and financial resources to purchase the respective license and later run operations.
In addition, foreign companies need to keep close attention on keeping control of their IP and making the cooperation financially successful.