"Internet +" reshapes smart home

1. Report Summary:

Smart home is one of the "Internet +" fields that Internet giants are most interested in. Recently, domestic and foreign giants have been accelerating the layout of related catalysts for smart home. Google launched the Android system for smart home product development at the I/O conference last week. Apple is also expected to launch a new IOS9 system at the WWDC conference next week, one of the highlights of which is the HomeKit smart home module. Smart home is a field with huge imagination space, but the industry development stage is still in its early stages. At present, the market expects that it is getting closer and closer to the critical point of the launch of killer application products, and it has good subject matter.

This report is the opening report in GF Smart Home Series. There will be a series of reports from industry perspective in the future. Investors are welcome to pay attention.

2. The prospects, current situation and bottlenecks of smart home

The smart home industry has huge potential, and the market size of my country's smart home industry is expected to reach 100 billion yuan in 2018. The domestic smart home industry is still in its early stages of development, and the realization of single product intelligence is in a rapid development stage. The current user scale is small and the products have not yet been linked. With the accelerated popularization of the concept of smart home, more and more consumers are beginning to be interested in it, but "poor practicality" and "too expensive" are the core factors that hinder consumers from purchasing. The complementary cooperation between Internet giants and hardware manufacturers is the only choice to effectively break through the current bottleneck of the industry.

3. "Internet +": Breaking through the core bottleneck of smart home

my country has become the world's largest smart terminal market, with an Internet scale twice that of the United States. Coupled with a relatively weak industrial foundation, the Internet will be more disruptive in my country. The core of smart home lies in "intelligence", and Internet companies have a natural advantage in this field. In the smart home industry, which is still in the introduction stage, the shortcomings of hardware manufacturers are in "realization of intelligence", and the shortcomings of Internet technology giants are in "professional hardware production". The complementarity between the two will help break through the core bottleneck of industry development. At present, Internet companies such as Google, Apple, Alibaba, Tencent, Baidu, JD.com, and Xiaomi have accelerated their layout and cooperation in this field.

4. Investment Logic

In the early stage of the development of the smart home industry, which is still "single product intelligence", we believe that we should first focus on lightweight hardware manufacturers that "cooperate with Internet giants" and "have a wide range of applications" based on the two core contradictions of "poor practicality" and "too expensive" products. Key companies include: Beijing Junzheng, Yingtang Intelligent Control, iFlytek, etc. Secondly, we should focus on manufacturers that are accelerating their layout in the field of smart homes and establishing cooperative relationships with Internet giants. Relevant companies include: TCL Group, Meiling Electric, Del Home Furnishing, Qingdao Haier, etc.

1. Let’s start with the “home of the future”

Bill Gates is the initiator of smart home. As the world's richest man who made his fortune through the Internet, he began to attach importance to the "intelligence" of houses in the early 1990s. "Future House" is the name given by Bill Gates to his smart house. The house was built in 1990 with an initial investment of more than 50 million US dollars. It took several years to lay 52 miles of cables for the house and build a standard home network with a combination of raw wood and sophisticated chips.

In the "home of the future", guests need to wear a pin with a built-in chip when entering the house. The built-in computer in the pin can display the location of the guests at any time and record their detailed information. With the help of the smart housekeeper, the music, lighting, temperature and humidity, and paintings in the room can be adjusted according to the customer's preferences, so as to realize smart music, smart lighting, and smart temperature control. The "home of the future" can also realize intelligent security protection. On the one hand, the micro camera at the door of the residence can notify the owner before others enter the house and follow the owner's instructions. On the other hand, when an accident occurs at home, the emergency system can automatically detect and generate the best solution. Bill Gates' "home of the future" has opened up the imagination space of smart home scenes for us. With the continuous advancement of technology, the "home of the future" is getting closer and closer to ordinary consumers.

2. The Prospects, Current Situation and Bottlenecks of Smart Home

1. The smart home industry has huge potential

More than 20 years ago, the objective conditions of science and technology determined that Gates's future home could only be enjoyed by him. Now, with the rapid development of science and technology, the original restrictions are being overcome. For example, the 48-kilometer-long cable in the "future home" can now be easily replaced by a WIFI module. The era of smart home for ordinary consumers is gradually coming. The smart home industry has huge potential. According to the "2012-2020 China Smart Home Market Development Trend and Investment Opportunity Analysis Report" released by Qianjia.com, my country's smart home sales reached 11 billion yuan in 2011, 15 billion yuan in 2012, and the scale of my country's smart home market will reach 139.6 billion yuan in 2018. According to Juniper Research's forecast, the global smart home market will reach 710 in 2018.

2. The smart home industry is still in its early stages of development

After more than 10 years of development, my country's smart home industry has gone through the concept stage, the pioneering stage, and the hesitant stage, and there has been no major breakthrough. After the Internet giants accelerated their involvement, the industry officially entered the early stage of development. From the perspective of product form, the development of smart home can be divided into three stages: single product intelligence, linkage between different products, and systematic realization of intelligence. As a huge ecosystem, the development of the smart home industry is a gradual process, that is, single products are first realized intelligently, and then different intelligent single products are constantly linked and gradually evolved and transformed. Finally, each product can be seamlessly connected, and home products are systematically realized intelligently. At present, my country's smart home industry is still in its early stages of development, and the realization of single product intelligence is accelerating.

3. Bottlenecks in the smart home industry: poor product practicality and too expensive

With the accelerated involvement of Internet giants, the concept of smart home has been rapidly popularized among consumers, but the core contradiction of the industry is that the effective needs of users cannot be met. According to the "2014 Domestic Smart Home Market Development Report" released by Tencent, more than 95% of the 50,000 surveyed users are interested in smart home. However, in terms of satisfaction, nearly 90% of consumers believe that current smart home products are below expectations, and even 40% of consumers believe that they are completely unrelated to expectations.

Among the issues that consumers are most worried about, "too expensive" and "poor practicality" account for 70%, which further shows that the smart home industry is still in its early stages of development and the bottleneck of single product intelligence has not yet been broken. In terms of price, there are a large number of supporters in different ranges, and the proportion of more than 30,000 accounts for 25%, which shows that consumers are more accepting of the price of smart homes. However, from the perspective of the price level that most consumers can accept, "lightweight smart homes" are still the mainstream. In addition, poor practicality is the second core factor that hinders consumers from purchasing smart home products, which shows that the products provided by smart home manufacturers cannot effectively match consumer needs.

Therefore, if the smart home industry wants to achieve rapid development, it must break through the two core bottlenecks of "poor practicality" and "too expensive". However, in terms of feasibility and priority, solving the problem of product practicality is more feasible at the current stage, because in the smart home industry where the target consumer group is not very sensitive to price, the sharp drop in prices of most products will be based on a significant expansion of the consumer scale. Therefore, increasing the penetration rate of smart home products is the most core contradiction at this stage.

2. "Internet +": Breaking through the core bottleneck of smart home

1. Large Internet companies have natural advantages in the smart home wave

The core of smart home lies in "intelligence". For traditional home products, this is a revolution rather than a simple improvement. This can be reflected in Tencent's consumer survey of home appliances. More than 50% of consumers believe that large Internet companies are more likely to win, and when choosing smart home brands, consumers are most concerned about "creativity" and "humanistic care", which are more in line with the culture of Internet companies. From this perspective, traditional manufacturers do not have an advantage because of their product production experience. Internet elements such as creativity and culture are the core competitiveness of enterprises.

2. The source of power of “Internet+”

From the perspective of the disruptive nature of "Internet +", it is reasonable that more than 50% of consumers are more optimistic about large Internet companies. "Internet +" has become a new engine for my country's economic growth. After more than ten years of development of the Internet industry, the number of Internet users in my country has reached 650 million. In 2003, the number of Internet users in my country was only 79 million, and the Internet user penetration rate was 4.6%. By 2014, the number of Internet users in China was 650 million, and the number of smartphone users was 500 million, with an Internet user penetration rate of 48%. In 11 years, the number of Internet users in my country has increased eightfold. Large-scale network connections and the power of change have opened up a new era - the "Internet +" era. China has now become the world's largest smart terminal market, with an Internet scale twice that of the United States. Compared with other countries, the wider installation of information equipment, a larger number of online people and a weak industrial economic foundation make the Internet more disruptive in China.

The power of the Internet to subvert traditional industries mainly comes from three aspects: cloud, network, data resources and large-scale social collaboration. With the strong breakthrough of cloud computing and big data infrastructure, the rapid penetration of Internet and Internet of Things infrastructure, and the emergence of smart terminals and APP applications, cloud, network and end have become new infrastructure superimposed on the original infrastructure. As a new production factor in the "Internet +" era, big data is moving from the IT era with control as the starting point to the DT data era with the purpose of activating productivity. Large-scale, socialized collaboration including sharing economy, network collaboration and crowdsourcing cooperation is also constantly impacting traditional corporate boundaries, production organization systems and labor employment relations.

3. Cooperation between hardware vendors and Internet giants: Breaking through the core bottleneck of smart homes

In an era of emerging new technologies, the core bottleneck of the smart home industry is not technology, but the market. How to quickly adapt supply and demand is the most critical issue. In the smart home industry, which is still in the introduction stage, the shortcomings of hardware manufacturers are in "smart realization", and the shortcomings of Internet technology giants are in "professional hardware production". The complementarity between the two will help break through the core bottleneck of industry development.

From the perspective of hardware manufacturers, the help that Internet giants can provide by using "cloud, network and terminal" and "big data" assets is reflected in "better exploration of consumer demand" on the one hand, and in "product linkage realization" in the future on the other hand. In addition, the traffic assets of Internet companies can also improve the efficiency of smart home product sales. According to data from the National Bureau of Statistics, the amount of online shopping ranked second in the total retail sales of various provinces in 2014, second only to Guangdong Province, and the scale is huge. In the comparison between physical retail and online retail, the transaction efficiency of online retail is much higher than that of physical retail. The data and traffic assets of e-commerce platforms such as Alibaba, Tencent Weidian and JD.com can help lock in potential consumer groups for smart homes, speed up promotion and increase sales.

From the perspective of Internet giants such as Google, Apple, Alibaba, Tencent, Baidu, and JD.com, cooperation with smart hardware and smart system manufacturers can make up for the deficiencies in professional links such as smart home hardware and systems, and thus help to quickly seize the smart home platform market. Therefore, a mature and win-win smart home industry chain should include three core elements: smart hardware, smart systems, and smart platforms. Each company has its own scope of capabilities, and only when Internet giants and hardware manufacturers cooperate with each other can they move faster and more steadily in the smart home field, which is still in the introduction stage.

4. Case: Google’s smart home ecosystem

Currently, Google is at the forefront in building a smart home ecosystem. Looking back at Google's experience in the smart home field, we can find that Google's attempts before acquiring Nest were basically wiped out, and it was not until the acquisition of Nest that it established a leading position in the smart home field. As a software company, Google has operational advantages, but its weakness is the hardware field. Before acquiring Nest, Google's Powermeter, GoogleTV, NexusQ and Android@Home products basically all failed. The core reason is that due to its limited capabilities, Google cannot make attractive and easy-to-use smart hardware products.

NestLabs was founded by Tony Fadell and was acquired by Google for $3.2 billion in early 2014. Nest's initial core products were data monitoring devices such as thermostats and smoke alarms. After being acquired by Google, Nest announced in June of the same year that it would acquire Dropcam, a leading company in the field of smart cameras, for $555 million. In October of the same year, Nest announced again that it would acquire Revolv, a company that produces smart home hardware hub control devices. Currently, the devices that can be supported by Nest include Nest smoke detectors, Dropcam cameras, BigAss fans, Lifx smart bulbs, Logitech Harmony remote controls, Jawbone Up24 sports bracelets, etc. From Nest's perspective, the founder of Nest once said in an interview that 80% of the work behind the company's products is to build and operate the infrastructure that its products rely on, and this is exactly where Google excels. Google has not only accumulated a massive database but also has the skills and experience to use this data. Therefore, summarizing Google's exploration of the smart home field, it is not difficult to find that cooperation between hardware, system and platform companies is a golden rule.

5. Cooperation layout of other IT giants in the field of smart home

(1) Apple

Apple's approach to smart home is opposite to Google's, but the ultimate goal is the same - to achieve the combination of software and hardware. Although Apple started late in the smart home field, it is very competitive based on its advantages in the field of Internet of Things. Combined with Apple's platform advantages in the field of Internet of Things, its strategy is to use software to drive hardware. In June 2014, Apple launched its smart home platform Homekit at the Worldwide Developers Conference (WWDC). Homekit integrates Siri voice function, allowing users to control home appliances such as door locks, curtains, lighting, thermostats, etc. through devices such as iPhone and iPad. At the same time, the platform carries out Made for iPhone (MFI) certification for third-party smart home hardware products, thereby improving the convenience of device interconnection and making users' smart home operations simpler. Homekit does not produce hardware itself, but it opens the application programming interface (API) to third parties. Third-party hardware products can be connected as long as they meet the MFI certification. At present, manufacturers such as Midea, Haier, Philips and Honeywell have established cooperative relations with Apple, and the first batch of smart home devices supporting the HomeKit platform will be available in June 2015.

(2) Alibaba

Alibaba's development strategy in the field of smart home is also based on platform advantages, actively seeking cooperation with hardware manufacturers, and then building a complete ecosystem. Specifically, Alibaba has launched four major business segments in the field of smart home, namely Taobao Crowdfunding, Smart Cloud, Baichuan Plan and Tmall Electric City, relying on its core advantages such as sales channels, big data, and cloud computing. Among them, Taobao Crowdfunding mainly provides funds for start-ups focusing on smart hardware manufacturing, Smart Cloud provides technical support, Baichuan Plan provides platform support for enterprise mobile application development, and Tmall Electric City provides sales channel support with its traffic advantage. Alibaba's layout in the field of smart home basically covers the production, research and sales links such as incubation, capital, technology, production, and sales, and has achieved full coverage of large, medium and small hardware companies. At present, more than 100 companies such as Hisense, Kelon, Galanz, Airmate, Haier, Ecovacs, and Changdi have joined Alibaba's smart home ecosystem.

(3) Tencent

Similar to Alibaba, Tencent's layout in the field of smart home is also based on the platform, seeking hardware manufacturing partners. Tencent's biggest advantage lies in its 800 million active QQ users, 400 million WeChat users and 100 million App Store users. Based on the platform advantage built by large-scale users, Tencent launched the QQ IoT platform, and the platform functions are positioned as software connecting hardware, hardware connecting hardware, and hardware connecting services. Similar to Alibaba's strategy of building an ecosystem, Tencent hopes to build QQ IoT into a hardware entrepreneurship support base, thereby establishing a smart home ecosystem including funding, design, R&D, sales, and communication. At present, the first batch of Tencent QQ IoT partners include Konka, Intel, NXP, Broadcom, Fontang IoT, Kangkang Blood Pressure and many other well-known domestic and foreign hardware manufacturers, and their product categories span smart home, wearable devices, smart cars, health equipment and other fields.

(4) JD.com

JD.com's core advantage in the smart home field is the large-scale 3C user base accumulated through its platform sales channels. In the first half of 2014, JD.com's market share in home appliance online shopping reached 58%. With the big data assets accumulated by the platform, JD.com's user positioning in smart hardware is more accurate. JD.com's strategy is to build a smart hardware ecological platform through cooperation or investment based on the platform advantage. In the field of smart home, JD.com's cooperation with hardware manufacturers not only provides data on user needs, but also includes sales and financing assistance. On the one hand, it supports the sales of hardware products by giving hardware manufacturers traffic subsidies, and on the other hand, JD Finance provides a financing platform for smart home hardware manufacturers. Specifically, JD.com has launched the JD+ project, JD Super APP, JD Crowdfunding, and Smart Life Museum in the field of smart home, covering smart hardware manufacturers in the fields of technology, finance, sales, and software. At present, JD.com has established cooperative relationships with Midea, iFlytek, and Broadlink, and has invested in nearly 10 hardware startups.

JD.com also launched a smart home platform, JD.com Weilian. On the one hand, users can remotely control smart products of various brands through the Weilian App to achieve linkage between different products. On the other hand, JD.com Weilian can collect information on personal health, exercise, sleep, etc., and then provide personalized services. At the Asian Consumer Electronics Show in May 2015, JD.com exhibited its Dingdong smart speaker in cooperation with iFlytek, and the "Liuyun" mobile power bank in cooperation with Changhong.

3. Investment Logic

The accelerated layout of Internet giants in the field of smart home has accelerated the popularization of the concept of smart home on the one hand, and on the other hand, it has indeed made up for the shortcomings of traditional home furnishing manufacturers in the field of "smart manufacturing". Recently, Apple said that the first batch of smart home devices supporting its HomeKit platform will be available in June, and the upcoming iOS9 system will also add the Home application to allow users to better manage smart homes. Smart home is developing from the past "concept" to the "landing" and transitioning to the "gradual penetration" stage, and hot-selling single products are expected to be born quickly in the increasingly fierce market competition. In the early stage of the industry development of "single product intelligence" of smart home, starting from the two core bottlenecks of "poor practicality" and "too expensive" products, we believe that we should focus on lightweight hardware manufacturers that "cooperate with Internet giants" and have "a wide range of applications".

1. First, focus on smart hardware vendors that cooperate with Internet giants

The core of smart home lies in "intelligence". A complete and efficient smart home industry chain includes three core factors: smart hardware, smart system and smart platform. In this wave of smart home transformation, large Internet companies have natural advantages in the field of "smart manufacturing" of home furnishings due to their own Internet genes, but smart hardware is their shortcoming. For the vast majority of hardware manufacturers who have not yet accumulated experience in the field of smart home, they are at a disadvantage in this wave of transformation. If hardware manufacturers want to seize the development opportunities of smart home, establishing cooperation with Internet giants is a better choice or even the only choice. Therefore, in the current stage of single product intelligence, we are optimistic about hardware manufacturers cooperating with Internet giants.

2. Secondly, focus on lightweight hardware manufacturers with a wide range of applications

As discussed in the previous article, my country's smart home industry is still in its early stages of development, and in terms of product form, it is still in the stage of single product intelligence. With the rapid development of the industry in the future, single products will be the first to explode. However, even in the field of smart home products, the industry structure is far from certain. On the one hand, it is not clear which type of home products can become the mainstream entrance to smart homes, and on the other hand, it is not certain which brand will win. Based on this, we are optimistic about hardware manufacturers with a wide range of applications. Expensive prices are also a core contradiction in the development of the industry. In the smart home industry, where the target consumer group is not very sensitive to prices, most companies will not choose to significantly reduce prices before the products are widely popularized. In other words, before smart homes reach a certain scale of popularity, high prices will always be a problem. Therefore, we are more optimistic about lightweight hardware manufacturers with lower prices. In general, at this stage, we are more optimistic about wide application range and low prices.

4. Theme combination

Under the two main lines of "cooperation with Internet giants" and "lightweight hardware manufacturers with a wide range of applications", we can focus on: Yingtang Intelligent Control, Beijing Junzheng, and iFlytek. In addition, we recommend paying attention to hardware companies that are accelerating their layout in the smart home field and establishing cooperative relationships with Internet giants: TCL Group, Meiling Electric, Del Home Furnishing, Qingdao Haier, and Midea Group.

1. Yingtang Intelligent Control

Yingtang Intelligent Control is a leading company in the field of intelligent controllers for small household appliances in China. It mainly produces and sells intelligent control products for digital entertainment household appliances in China, and also produces and directly exports intelligent control products for home furnishing, kitchen and bathroom, and personal care household appliances. The company is committed to the intelligent services of small household appliances and actively deploys in the field of smart home.

In October 2014, the subsidiary Fengtang IoT established a long-term strategic partnership with Tencent. The two parties will actively cooperate in IoT products and services. Fengtang IoT was jointly established in 2011 by Yingtang Zhikong and Aeon Labs LLC, which was earlier engaged in smart home IoT in the United States. The company integrates design, research and development, production and sales, focusing on the field of IoT and wireless smart home. Its products include smart control, smart sensor, smart switch, smart infrared converter, etc. After Fengtang IoT established cooperation with Tencent, on the one hand, it can use Tencent's smart home platform to attract more partners and expand the use scenarios of products, and on the other hand, it can use Tencent's traffic advantage to open up the market.

2. Beijing Ingenic

Beijing Junzheng is a company dedicated to developing independent innovative CPU technology and products in China. Its embedded CPU chip technology is leading at home and abroad. The company's products are mainly used in the field of mobile portable devices, such as portable consumer electronics, portable educational electronics, mobile Internet terminal equipment and other markets. The company has entered the wearable market and the Internet of Things market with its advantages in integrated circuits, and has successively released smart watches, smart glasses, wearable platforms, and Internet of Things platforms. In the field of smart home, at the "Core IoT Intelligence Unlimited" press conference in May 2015, Beijing Junzheng launched the X series chips that can be widely used in smart home terminal products. The characteristics of the X series chips include low power consumption, high performance and simple hardware development, and the enhanced functions include intelligent voice, high-quality audio and data security. In addition, based on the X chip, the company launched the Harley platform, which is mainly positioned as a home gateway and can be widely used in smart home products such as smart home appliances, smart audio, and smart toys. At present, the company has reached cooperation with Tencent and Alibaba, and cooperation with Baidu is also under discussion.

3. iFLYTEK

The company is a national key software enterprise specializing in intelligent voice and language technology, artificial intelligence technology research, software and chip product development, voice information services and e-government system integration. The company's intelligent voice core technology currently represents the highest level in the world. iFLYTEK actively deploys in the field of smart home with its advantages in the field of voice recognition. In March 2015, the company established a cooperative relationship with JD.com. The two parties established a joint venture to carry out comprehensive cooperation in the fields of smart home and voice technology. The company mainly provides voice technology and services for JD.com's smart hardware manufacturers, and its products are widely applicable. At the Asian Consumer Electronics Show in May, the two parties have jointly launched the first product of the cooperation, Dingdong Smart Speaker. As an interactive entrance to smart home, this product allows users to access JD.com's smart products through voice control.

Source: iInvest