Is China building the metaverse?

There is a heated debate on the state of the race between the United States and China to dominate in AI. But perhaps the more strategic question is whether China is building the metaverse.

Built upon infrastructural technologies like AI, the metaverse refers to the vast array of digital experiences and ecosystems, from e-commerce and entertainment to social media and work, where we spend more and more of our lives. It’s soon going to be hard to conceive of a world in which much of our social and economic lives are not defined by the rules of the metaverse. To the builder goes the opportunity to establish rules to their own benefit.

In truth, both the U.S. and China are trying to build and lay claim to the metaverse, with other actors such as Europe trying to do so as well, but they simply don’t control enough of the core technologies that make the metaverse possible.

These core technologies include AI, 5G, end-user devices and the sector-straddling super apps that bring everything together — and related technologies such as smartwatches and eyewear. Competence and dominance across these four criteria is what may give China an insurmountable head start over the U.S. in the race to build the future of the virtualized human experience.

China’s AI advantage

The Chinese leadership understands that AI is revolutionizing virtually all aspects of social life, including consumption. AI is a top priority for government and business, and the Chinese government has called for China to achieve major new breakthroughs by 2025 and become the global leader in AI by 2030.

The strategy was initially outlined in the Chinese government’s New Generation Artificial Intelligence Development Plan in 2017. It has since spurred both new policies and billions of dollars of R&D investments from ministries, provincial governments and private companies.

As a result of China’s AI initiatives, the American advantage in the sector has been steadily eroding: In 2017 the U.S. had an 11x lead over China, but by 2019, that lead had come down to 7x. By 2020, the U.S. was left with a narrow lead of 6x. Even this lead has been uncertain, and the ex-chief software officer of the Pentagon went so far as to say that China already had an insurmountable lead in AI and machine learning.

Moreover, some question the American lead when it comes to the availability of training data. In the privacy versus public good debate, the U.S. tends to lean toward privacy, whereas China has long exercised government intervention in maintaining a civil society as a public good.

Finally, China has access to vast data sets to train AI, which presents a significant strategic advantage, especially considering the country’s population of 1.4 billion.

China builds the devices

The capacity to build and ultimately become the preeminent force in the metaverse starts with China’s long-standing and unrivaled dominance of consumer device manufacturing. From smartphones and notebooks to AR and VR headsets, Chinese manufacturers are building the largest portion and widest varieties of the devices that consumers need to access digital platforms and social experiences. The most advanced design and production competencies are likely to already reside in cities like Shenzhen.

What has separated Chinese device manufacturers from their U.S. competitors, from phones to AR/VR devices, has been the depth of their pockets. Chinese hardware innovators often have to be competitive quicker than their U.S. peers because there are fewer investments in untested products. This means that while investments may be smaller, they get spread around to more Chinese tech startups, each of which has the potential to hit it big.

Facebook recently rebranded itself as a metaverse company, but its ambition rests upon industry-leading immersive headsets that are manufactured in China. The company’s own Oculus Quest line of headsets rely extensively on Chinese production so much that the COVID restrictions put in place early in 2020 disrupted production of the headsets right when the opportunity for virtual travel and activity was in greatest demand. Now, one of its biggest rivals, China’s own ByteDance, has bought the No. 2 VR headset manufacturer in the world, Pico.

Pico and NReal are examples of cutting-edge AR and VR headsets from Chinese producers competing with the best that the U.S. has to offer. More powerful and efficient devices are needed to make the burgeoning metaverse not just accessible, but persistent and immersive. It’s hard to imagine those devices being built anywhere else but China.

Finally, HTC has entered the race with its Viveport Verse, which is expected to launch on Mozilla’s open source Hubs platform. Hubs runs on WebXR, so users can access it on any platform without needing to install an app, which put it in a strong position to help create an interoperable system.

China leads in 5G

The typical response to wearing an immersive AR or VR headset is that it’s too heavy and bulky and that it’s still not powerful enough. 5G will allow immersive devices to shrink down to comfortable and convenient sizes. The ultra-fast data speeds made possible by 5G will mean that graphics-heavy experiences will be rendered in the cloud, enabling the development of devices the size of glasses to simply display the image.

Building the internet continues to be a stated domestic priority for China to compete in the global marketplace. In its 14th “5-year plan” in 2021, China committed to rolling out 5G networks, aiming to achieve 5G penetration of 56% in the next five years. Currently, 5G penetration in the U.S. is 15% and is expected to rise to 50% by 2025. In total, Northeast Asia is expected to account for the largest share of 5G subscriptions by 2026.

Europe’s 5G penetration, by contrast, is off to a slower start and has continued to fall behind China, the U.S., Korea, Japan and the Gulf Cooperation Council (GCC) markets, according to an Ericsson Mobility report.

If the metaverse does become the successor to the internet, who builds it, and how, will be extremely important to the future of the economy and society as a whole.

WeChat, the precursor to the Metaverse

With a huge customer base, rich commercial ecosystem and interoperability already established, is all that’s missing just the headset?

What sets Chinese digital conglomerates like Tencent apart is social mass combined with the interoperability of their different services — especially payment services, which enable a rich circular interapp economy. In fact, a significant portion of the Chinese internet industry now belongs to the Tencent ecosystem.

The New York Times calls Tencent “a mega entertainment platform” that publishes some of the world’s most popular video games, digital content and interactive entertainment experiences for people around the world. According to a recent report by the company itself, Tencent has invested in more than 800 companies. Importantly, it also owns WeChat.

WeChat is the only app in China to have over one billion active users and is one of only five apps in the world that have surpassed that milestone. Considered by some to be “the Swiss army knife of all the Chinese mobile apps,” it is the most frequently used mobile social media platform in China. WeChat — and its domestic counterpart, Weixin — currently have about 1.24 billion monthly active users. Almost 40% of WeChat users are between 25 and 35 years old, and over 35% of WeChat’s active users are under 24 years old.

However, much of the world doesn’t understand the possibilities of the social network.

With four main sections — Chat, WeChat Moments, WeChat Wallet and WeChat Channels — the app allows for seamless social and commercial activities, from instant messaging and photo sharing, to e-commerce, entertainment and gaming. On WeChat, you can book a doctor, trips, make an investment, pay a friend, order dinner, look for a date, buy oranges from a street vendor or even file for divorce.

The amount of data generated and transmitted by users is staggering. That’s just the tip of the iceberg once persistent and immersive digital experiences, the very definition of the metaverse, emerge. Super apps like WeChat, which remain uncommon in markets like the U.S. and Europe, are the natural analogs of the metaverse, because they seamlessly integrate an incredibly wide range of personal experiences along with the ability to pay for them.

While WeChat is a major revenue driver from its ads market, its parent Tencent owns stakes in many game publishers, including Fortnite publisher Epic Games, Activision Blizzard and Ubisoft. It’s also Nintendo’s partner and distributor in China. Combining a comprehensive portfolio of digital entertainment with one of the world’s largest social media and payment apps means customers need never take their eyes off their screens.

Effectively, what Tencent, and WeChat, represents is a proto-metaverse. The missing elements to turn it into a full-fledged metaverse are increasingly smart AI-powered services, more powerful and affordable immersive devices, and the high-speed infrastructure of 5G connecting it all. China, rather than the U.S., is the market where these elements are coming together fastest.

What’s at stake

Global accounting consulting firm PricewaterhouseCoopers (PwC) predicted that the metaverse-related VR and AR market will grow 34 times from $45.5 billion in 2019 to $1.54 trillion in 2030.

XR is a critical component of the next-generation ecosystem of data and communications technologies and will play an important role in driving the transformation and evolution of smart devices, network transmission, cloud computing devices, telecommunications services, core components and software.

The development of XR is consequentially bound to other future-focused services related to rendering, processing, spatial computing, perception and interaction, and network transmission. Core positioning across these industries today is a claim to domination in growth industries that will be critical to the functionality and economic viability of online worlds tomorrow.

While it’s likely that the U.S. will ultimately overcome its current siloed, individualistic corporate approach to the development of an interoperable virtual internet, it seems clear that conditions in China favor companies poised to commit to the metaverse.

Rather than seeing China come to dominate the metaverse, two separate systems may develop, one for the U.S. and one for China, with the rest of the world left to develop assets and establish markets on each. But even in that situation, it’s not hard to imagine — at least in the near term — that China’s version of the metaverse may be the richer experience for consumers and for those who sell to them.

The key takeaway for businesses wishing to pursue business within the Chinese virtual ecosystem is that they must be prepared to engage in what is potentially a very different environment with different standards, protocols, crypto currencies, UX, UI and monetization methodologies. In short, businesses may have to develop capabilities to serve both forms of the metaverse, U.S. or Chinese, or choose between them.