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Why U.S. Innovation Needs China to Achieve the Next Technology Mega-Trend Building the Internet of Things will require a much deeper collaboration of the US tech industry and Chinese manufacturers than simply outsourcing.

By Masanari Arai Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

Sean Pavone /

Since long before the arrival of the Apple Watch, businesses and consumers have kept close tabs on the Internet of Things (IoT) market, which is projected to hit $7.1 trillion in 2020 with 28 billion connected devices. IoT luminaries leading the charge are thinking well beyond the realm of smart watches, fitness bands and thermostats like Nest.

A recent report from Goldman Sachs Equity Research identified five areas primed for IoT success: Connected Wearable Devices, Connected Cars, Connected Homes, Connected Cities and the Industrial Internet, which includes the transportation, petroleum and healthcare verticals. Fully automated homes, smart vehicles, agricultural equipment and even entire smart cities are on the horizon, all run by billions of tiny robots and interconnected sensors. It's enough to make you think the Terminator movies weren't far off the mark.

It's often easily missed when concentrating on the inevitability of IoT and any dystopian concerns. However, it is imperative that in order to embrace today's rise of the machines, there requires a partnership between Silicon Valley innovation and China manufacturing.

Related: Mobile + Sharing Economy + Internet of Things = the Coming Economic Boom

IoT: Built on software, hardware and cloud services

From enterprise resource planning (ERP) systems to apps to social media, software drove most of the last decade's disruptive innovations. California's famed Silicon Valley proliferated the majority of new billion dollar companies, creating a rich ecosystem of developers, venture-funded startups and entrepreneurs. Most have ideation, design, development and marketing firmly rooted in the United States.

What's different about the new IoT multi-industry tectonic shift is that it relies on a combination of software, hardware and cloud services. It heavily leverages sensors, beacons and microprocessors, with storage and other services provided in the cloud, while also measuring the environment and connecting with big data analytics systems.

In order to build the best IoT possible over the next decade, hardware, software and cloud services need to be working together in perfect harmony. While the United States holds the upper hand in software and cloud services, this does not mean that U.S. companies can simply design the software on their own and outsource the hardware manufacturing to China. Instead, a true, collaborative partnership needs to be formed where both sides contribute from the beginning.

This future system of open collaboration between the two sides differs greatly from the current system, where US companies rely on China simply to manufacture at scale.

Working capital leaves little room for missteps

Startups driving IoT innovation and growth are constantly fighting to compete and introduce their products first. Both fueled and limited by working capital, it's a world where the small guys need to rapidly bring products to market to prove their worth, win more funding and achieve profitability.

One of the biggest challenges for IoT startups is that the suppliers and customers who are driving IoT demand span several continents. At the same time, competition is hot on their heels There's pressure to deliver on price, without sacrificing quality. Challenges lie throughout the supply chain, from placing the right orders based on demand, to delivering design to fulfillment, shipping and managing payments -- all with an international lens.

Related: 8 Ways the 'Internet of Things' Will Impact Your Everyday Life

The high stakes require startups to burn through their budget with a very small margin of error, making manufacturing at scale even harder. These challenges can be overcome with greater collaboration between developers and manufacturers during the beginning of the process, minimizing these chances for errors and missteps.

Scaling from Day One

For the IoT, the true value of China's labor force stems from its massive force of engineers. Having these engineers available to collaborate from the beginning, with the US software developers and cloud services providers, streamlines the development process for IoT devices. This allows for a holistic approach to be taken from day one, leading to better devices being created in less time, with fewer issues and glitches.

While the US may bring software innovation to the table, it is unable to conjure up anywhere near the type of trained workforce needed to produce IoT devices at scale. This is where the rest of China's massive workforce comes into play. However, because the China-based manufacturers have been in on the process since the beginning, there is no disconnect between the developers and manufacturers, allowing for quick and cost-efficient scaling. This is one of the primary benefits of the two powers coming together.

Bottom line: From divisive to complementary

For IoT initiatives of any size, companies must be aware of all the opportunities available to them in China and the United States, and then understand how things differ when dealing with corporate regulation and politics in each country. Collaboration is encouraged, but that doesn't mean common interests and rules are aligned.

It is not always easy, at first, when two big but very different powerhouses come together for a particular cause. Both sides are usually set in their own ways, with differences of opinion and egos often getting in the way. As they work together in the trenches, however, those differences become less divisive and more complementary, with each side bringing their own skill sets and strengths to the table. Because the IoT is expected to become such a huge change within the global economy, this partnership between the companies -- large enterprises and startups-- in United States and China will go a long way towards bringing the two very different DNA's working towards a common goal, and as partners.

Related: Why the Investment Potential of the 'Internet of Things' May Be Overblown

Masanari Arai

Co-Founder & CEO, Kii

Based in Tokyo, Masanari Arai is founder and CEO of Kii, a global, end-to-end IoT platform with a presence in China, Silicon Valley and Japan that is a member of the Allseen Alliance open source IoT consortium. He joined Intellisync in 1995 as one of its original members, where he served in various positions, including VP Product Marketing, VP Business Development, GM for Asia and President of Intellisync Japan.

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