China’s all-in approach to the metaverse could spell trouble for U.S. tech supremacy

Meta then spent billions of dollars and assigned thousands of employees to fulfill the metaverse dream. But since Mark Zuckerberg announced his big bet on the metaverse, the company’s stock price has dropped more than 70%. Its metaverse struggles are characterised by skepticism, confusion and frustration, and much of the metaverse narrative, in the U.S. at least, has been colored by Meta’s ebbs and flows.

Half a world away, China is poised, and perhaps more determined than ever, to make the metaverse central to its future economy. Ironically, Meta’s vision sounds like the metaverse blueprint that China is following. In November 2022, a year after Meta’s name change, the Chinese Ministry of Industry and Information Technology (MIIT), together with four other government agencies, published a 12-page Action Plan to develop the virtual reality (VR) sector and integrate VR with industrial applications like manufacturing, health care and smart cities.

“Powerhouse of the digital economy”

While other countries have announced aspects of a digital strategy, I think it’s safe to say that China’s is the world’s first national, and most comprehensive, metaverse industrial policy. According to the 14th Five-Year Plan for National Economic and Social Development of the People's Republic of China and the Long-Range Goals for 2035, VR is one of the “key industries of the digital economy” designated by China, which will help the country become a “powerhouse in manufacturing, cyberspace, culture and the digital economy.”

The Action Plan is titled The Virtual Reality and Industry Application Integration Development Action Plan (2022-2026). In it, China wants to expand the VR industry output to 350 billion yuan (U.S. $48 billion) by 2026—six times the level of 2021—showing it aims to become a world leader in the emerging metaverse economy, far beyond VR devices and content for entertainment alone.

In line with this government promotion, Chinese companies are investing heavily in the field. Major Chinese internet companies like Tencent, Baidu and Alibaba have announced plans to begin developing metaverse technologies. The state-owned telecom firms are also directing funds into the metaverse.

For example, in March 2022, Alibaba led a $60 million investment round into Nreal, a Chinese manufacturer of augmented reality (AR) glasses. China Mobile has a subsidiary dedicated to creating digital VR and AR content. Most notably, TikTok’s parent company, ByteDance, acquired VR headset maker Pico for $1.5 billion in 2021, a move similar to Facebook’s acquisition of Oculus in 2014.

Three Differences

As China appears to be gunning for an edge in the burgeoning metaverse, three interesting—and significant—differences between the U.S. and China markets are emerging.

• Market-driven versus government-driven. Whereas the U.S. metaverse is mostly market-driven innovation by private companies, China set up a specific industry policy, under which both state-owned enterprises (such as telecom companies) and private companies (such as internet platforms) participate. China's ambition might have been spurred by the historic loss in 2017 of China’s No. 1-ranked player, the world champion in the Chinese game Go, to the AI-enabled computer programme AlphaGo, designed by Google’s DeepMind Technologies.

Perhaps it was a coincidence of timing, but soon after the AI machine’s straight 3-0 win over the best human Go player on the planet, China’s central government released A Next Generation Artificial Intelligence Development Plan in July 2017. The Chinese government announced a sweeping vision for AI excellence, calling for Chinese AI to be the world’s undisputed leader (“occupy the commanding heights”) by 2030. China believes that national industry policy and sovereign capital are important catalysts for innovation.

• Democratised versus regulated. The Chinese metaverse is focused on tech—hence “token-less,” which is very different from the blockchain, crypto-based metaverse version prevalent in the U.S. market. Unlike many other countries, China takes a bifurcated approach to blockchains. The Chinese government has actively promoted the digital technology of the blockchain and used it for its sovereign digital currency, called e-CNY, while strictly prohibiting crypto mining and trading at the same time. The technology is used widely across a range of industries in China, such as banking, financial services, public services, health care, logistics and smart manufacturing. But at the same time, no crypto transaction is legal under Chinese regulations.

For example, when the metaverse concept first appeared in China, virtual real estate was a hot commodity, driving front-page news articles and trending topics on social media. However, in 2022, China’s crypto asset regulation extended into similar digital assets, such as NFTs (nonfungible tokens) and virtual assets. Today, NFTs can only be kept as “digital collectibles,” subject to strict restrictions and regulations on trading and transactions.

In essence, “democratising" technologies like NFT and blockchain are being strictly controlled in China, which set its focus on tech innovation while restricting speculation on related financial features, illustrated by its bifurcated approach to blockchain and crypto/NFTs.

• Centralised versus decentralised. The Chinese metaverse is more centralised than the U.S. version, which is expected to be more decentralised by Web3 enthusiasts. In the U.S., “metaverse” is often used interchangeably with “Web3,” and Web3 advocates suggest the blockchain and cryptocurrencies will play a key role in the future, decentralised internet. China’s top-down approach is evidenced by the fact that the MIIT has approved the establishment of a national-level VR manufacturing and innovation center in Nanchang City to boost the development of metaverse-related industries. Altogether, the Chinese version of the metaverse will operate on centralised digital infrastructure and data regulations.

As far as “digital collectibles,” China launched a state-backed secondary trading platform for digital assets on New Year’s Day, 2023. And China’s first-of-its-kind regulation of altered images, or “deepfakes,” became effective in January 2023. The law governs “deep synthesis technologies” through the required registration of algorithms.

Threat to U.S. supremacy?

Is China’s metaverse push a serious challenge to U.S. tech supremacy? In a word, yes. Even though China’s VR content production and operating systems lag far behind its global peers, massive investment is on the way as Chinese capital is pouring into the sector. According to the MIIT, financing for the VR industry across China saw a 100% year-on-year increase in 2021. But it will take time. China's largest VR company, Pico, holds a mere 4.5% of the global market share, a fraction of Meta‘s 90%, according to a 2022 report by IDC.

However, an immersive user-interface experience is one of the key pieces to the metaverse from a technology perspective, for which hardware is the driving force. Therefore, the sophisticated “made in China” manufacturing system is a distinct competitive advantage over the U.S. and other innovation hubs worldwide.

Surely, the metaverse competition between the U.S. and China will intensify in the coming years, but China has several key advantages that could tip the scales in its favor. These include its national, top-down, government-led approach, which includes a laser focus on being the global leader in emerging technologies, specifically in VR and AI, by the decade’s end, and its “token-less” metaverse ecosystem with unique Chinese characteristics, which will have profound implications for how the global metaverse shapes up—or how many metaverses the world will have.

The race is on. Although slowed by COVID, many still think China will overtake the U.S. as the planet’s largest economy over the next decade. If it does, China will have a budding digital economy—and the metaverse—to thank.

For more insights on the Future of Metaverse, please visit https://vision.protiviti.com/