Hardware is all the rage this year. Internet giants are vying to keep ahead in the sector by acquiring hardware startups, rolling out home-grown products or supporting programs. Google closed a massive US$3.2 billion purchase of connected device company Nest Labs while Facebook acquired virtual reality pioneer Oculus VR for US$2 billion, to name only two.
The craze is also taking China by storm, with domestic giants like Alibaba, Tencent, Baidu, Xiaomi all investing heavily in the sector. Venture capitalists formerly turned off by hardware’s high startup costs and lengthy start times are also jumping on board.
However, huge capital injections into a market with uncertain prospects may raise the concern of whether it’s worthwhile to invest in. Will the hardware industry continue its booming development or it is just a faddish investment bubble? TechNode founder Lu Gang took to the stage at the annual gala of crowdfunding reality TV show The Makers with six veteran investors to consider this problem.
Hans Tung, managing partner at GGV Capital, pointed out that most hardware products on the U.S. market target the high-end market with 80-90% of them priced at over US$100. But he think this trend is not going to continue. As an early-backer of Chinese smartphone maker Xiaomi, which released low-budget smart wareable and other smart gadgets this year, Tung believes Xiaomi’s model of offering affordable smart devices and monetizing through cloud-based value-added services is a feasible direction for hardware developers.
He added that selling feature-rich smart gadgets at lower prices might help Chinese hardware makers to stand out from the crowd. Global netizens are expected to increase by 1 billion in the next decade and China should capitalize on this opportunity, Tung said.
It seems that Xiaomi is not the only Chinese company eyeing back-end services. Baidu, Tencent, Alibaba, Meizu and JD all launched smart hardware platforms. Third-party smart home or internet-of-things solution providers are also emerging in China.
Harry Hui, founder of ClearVue Partners, thinks although early-stage investors of hardware companies have to take bigger risks, the overall prospect of this industry is promising. “Leading edge is the bleeding edge. The first or second generation of hardware products may fail, just like the first generation iPhone did not provide the compelling features that its latter versions did. It is quite normal to take three or four generations of hardware to improve the hardware functions and user experiences.”
Michael Zhu, partner of Gobi Partners, said he saw much less hardware projects than for mobile internet, let alone hardware projects with good teams. Zhu’s advice for hardware makers is to target the consumer market and to find a clear product position by answering the questions of “who, what, where, when, why and why not”, because it is important for a startup with limited resources to stay laser-focused on their users and to promote the product through the right channels. They should make sure there are branding experts on their team, cause it is a crucial link to a successful product, he added.
Dai Zhikang, board chairman of Zendai Group, said too much money has created a bubble in China’s tech industry in general. Most so-called smart hardware devices should not be named as such and he thought real smart devices should solve the strict demands of users.
It is interesting to see that Huang Yubin, founding partner of Yunqi Capital which just raised US$100 million to invest in smart hardware-related services, saw a bubble in the hardware industry. However, Huang thinks bubbles does not prevent them from investing in the sector. “We are just at the beginning of this hardware trend, which will be more widely accepted by users in the future decade.” Chinese cities Shenzhen, Zhuhai and Dongguan will be at the center of the hardware industry chain and domestic companies should seize this opportunity to go global.
Zhang Suyang, partner with IDG Capital Partners, thinks that a bubble is not necessarily a bad thing. He said a bubble and its bursting are two different things.
Click here to watch the video in Chinese.