Smart cities – an overseas opportunity for German businesses?

26 June, 2017

“Smart cities” – a concept, which is currently used for a wide range of measures and projects at municipal level. The term is generally used to denote efforts to extend the use of new technologies to innovative arrangements between the private and public sectors in order to meet the challenges faced by a growing metropolis or indeed by shrinking municipalities and to offer the best prospects for citizens, municipal authorities and businesses. It covers a wide range of activities: for example, it might touch on urban quarter developments, agile public administration, energy supply, networking, innovative transport and housing concepts as well as waste disposal.

In a “smart city”, networked smart technology supports all aspects of our everyday lives. It helps organise everything efficiently, making living in a “smart city” easier and more comfortable. Genuine digital access does away with the need for inconvenient appointments with the authorities. In the transport sector, car share schemes reduce people’s dependency on their own vehicles and, when combined with smart local transport networks (on-demand local transport), are more environmentally friendly. In light of the turnaround in energy policy, smart power grids lead to an increase in decentralised power generation and a capacity-based demand management. Streetlights can be fully automated, switching on only when a road user is present. In a “smart city” the waste disposal systems are controlled efficiently based on real-time data. There is also urban gardening which suits the local climate – and many more initiatives and measures that could be named.

But the benefits are not just limited to the environmental or social policy; “smart cities” also reduce costs. Slimming down administrative processes reduces public expenditure over the long term. The same applies to the energy efficiency increases mentioned above. Initial studies also show that (large) cities with higher levels of digitisation are far more attractive as locations for businesses and highly-qualified workers. Thus, “smart cities” can be seen as providing a location advantage, or part of the local business promotion strategy.

All this brings with it opportunities for the German industry both domestically and, in particular, overseas. Developing smart cities provide significant opportunities, not just for providers of IT and digital solutions but also for conventional entrepreneurs, for example in transport or waste disposal.

Multinational companies have been quick to realise this and open up markets. But it is also becoming increasingly important for SMEs too.

Studies have identified municipal budget restrictions and data protection regulations as the biggest obstacles to implementing such projects in Germany. Only few municipalities have the structures required in place; many have no clear digitisation strategy, individual projects do not form part of an overarching concept and there is no integrated approach. There are only a handful of municipal administrations with a designated digitisation officer to take central responsibility for these efforts. Therefore, foreign markets are gaining in importance.

In the international markets, the emerging Asian economies such as India or China have stolen a march on many Western industrial economies in developing smart cities. In China, for example, every metropolitan area has its own digitisation strategy. The country’s key issues, alongside air quality and more sustainable traffic management are increasing citizen participation and maintaining strong economic development. The continuing rapid growth in urbanisation in China also means an increasing need to invest in new technologies in order to increase energy efficiency and reduce emissions from infrastructure, particularly in electromobility. The high priority attached to this is shown by the Chinese government’s budget allocation under its 13th Five-Year Plan for 2016 to 2020 of 500bn Renminbi (equivalent to just under 70bn Euro) to the further development of smart cities. Beijing is also very willing to work jointly with international partners on addressing these challenges. A “Smart Cities Development and Investment Hub” was set up at the end of 2016 under a cooperation agreement with the United Kingdom. And the EU is in permanent talks with China on smart infrastructure solutions. There are already some EU co-financed agreements in place on joint research and development projects. These bring with them opportunities for German companies to participate in public-private cooperation on joint projects.

But the increase in urbanisation – and policies to address it – also play a major role in India. The Indian government approved its “100 Smart Cities Mission” in mid-2015. A total of 15 bn US-Dollar was approved for the smart design of 100 new, and re-design of 500 existing metropolises in the country. Infrastructure measures will be primarily aimed at optimising municipal water supplies, sanitation systems, waste management as well as public transport and affordable housing. Germany and India are maintaining a close economic and political dialogue on this initiative and thus there is potential for German companies too. These present themselves in India as in China mainly in the form of public private partnership (PPP) initiatives, i. e. direct cooperation with public agencies. There is also the possibility of creating joint ventures with Indian or Chinese companies or implementing joint projects locally in consortia. Doing business in these areas will in many cases involve investing locally. Although China and India have so far shown the greatest potential here, in the medium term the other BRIC-and emerging economies should also follow this trend.

However, engaging in international markets, particularly in emerging and developing economies, also carries risks. These are often political when companies are in direct cooperation with public clients. In most cases the government agencies act as purchasers under long-term contracts with foreign investors and impose extensive licensing requirements along with options for state intervention. This means that governments are closely involved in most “smart city” ventures. Changes in government or government policy, domestic political unrest or international events such as sanctions or embargoes may therefore have a negative impact on PPP projects and may jeopardise their long-term future. In recognition of this, the German Federal Government issues investment guarantees for eligible investment projects abroad to provide effective protection against political risks. Since political risks are virtually impossible to influence or calculate, especially in the case of long-term projects, investment guarantees also help to open up high-risk markets. With the investment guarantees, the Federal Government acts as a strong partner supporting German companies entering foreign markets for the first time.

Talking to Bernd Papenstein, Partner at PwC and expert on business development

Why might foreign direct investment be worthwhile for German companies?

Bernd Papenstein: If the relevant studies are to be believed, the digitisation process faces significant obstacles in Germany in the form of restrictive data protection regulations and a lack of funding. Both factors mean that Germany is still quite limited as a sales market. Thus, marketing German technologies and applications internationally seems a perfectly reasonable option. This may take place in the form of cross-country cooperation models, but can also include foreign direct investments. For example, German car suppliers are already investing in the expansion of their own electric vehicle development and production sites in China. And this is a particularly important part of the Chinese smart cities concept. China is already well ahead of the game on smart urban mobility concepts. Since German technologies continue to enjoy an excellent reputation in China, there is potential for sales and investment here. Establishing themselves as providers in these markets from the outset could be highly profitable for German companies in the mid- to long-term. However, the sectors most affected by smart citiyconcepts, particularly in developing and emerging economies, are dominated by the government, bringing political risks. Tools to incentivise foreign business such as governmental investment guarantees protect companies against political risks. The German government has been shown to provide excellent crisis management for projects protected by investment guarantees, with many projects receiving support at various diplomatic levels in the past.

How can German SMEs benefit from these interventions over the long-term?

Papenstein: The German SMEs sector is highly innovative. Some of these companies are already highly specialised in digitisation issues, including solutions for so-called smart cities. The bandwidth of the business models extends from automatic pedestrian crossing lighting and smart solar panels to integrated sensor and software-based solutions used, for example, in recycling and waste disposal systems of entire municipalities. Clearly, digitisation is a continuous process, not a passing trend. German SMEs would be well advised not only to export goods but to complement them with a permanent service offering and seek permanent partnerships in growing overseas markets.

Contact us

Bernd Papenstein
Partner
Tel: +49 211 981-2639
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Michael Huber-Saffer
Partner
Tel: +49 40 6378-2083
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