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Smart cities: flash-forward to tomorrow’s world

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Today, more than half of the world’s population lives in cities. By 2050, this number is expected to increase to 68%. This unprecedented level of urbanization is creating several social and environmental challenges, driving the need for sustainable urban living. How are major cities across the world responding to this? By becoming “smart.” 
Smart cities have been a buzzword for at least a decade, but in a post-pandemic world, digital inclusion and the need for sustainable and pandemic-ready cities have become crucial, strengthening the case for smart cities. In this introductory article to smart cities, we take a closer look at the concept, components, and current landscape of smart cities, and analyze the business opportunities they offer.

What is a smart city?

A smart city is a broad framework that varies by country (or city) and doesn’t have a universal definition. Loosely defined though, it is an urban area that uses the internet of things (IoT) at various levels to address modern challenges, delivering economic benefits and improvements to its citizens. These initiatives are typically led by city governments in partnership with the private sector.
McKinsey identifies three elements that need to come together for a city to be considered “smart.” 
1. Technology base: This comprises smartphones, sensors, measuring devices (meters), cameras, open data portals, and communication networks (e.g., sensors gathering data on traffic flow). 
2. Applications: These are tools that help transform raw data (collected by technologies) into insights. App developers create applications across various sectors such as security, mobility, health, energy and water, housing, and community engagement (e.g., data on traffic flow can be used to build smart parking apps that can direct people to available spots). 
3. Public usage: Applications need to reach a large portion of people to be successful, and more importantly, they need to result in behavioral change among the users.

Elements in making a city smart

Smart cities - 01 - image
Source: McKinsey & Company

What are the key focus areas?

Currently, smart cities across the world are developing applications across eight domains, and this will stay relevant till 2025.
It may not be practical for city planners to focus on all these areas. So, they prioritize a few domains deemed critical to their respective cities. To find out which areas are generally prioritized, we analyzed 13 randomly selected smart cities across Asia, Europe, and the US. 
Our key observations:
  • The leading domains are sustainability (energy, water, and waste management) and mobility—10/13 cities focus on these two areas. 
  • Engagement and community is the second most focused area—9/13 cities focus on this. 
  • Two components that US cities commonly focus on, but European cities generally don’t, are:
  1. Infrastructure (e.g., sensors): This is a common focus area for most US cities including some well-developed cities like New York. 
  2. Security: While some European cities focus on this, US cities seem to place a higher emphasis on it. 
  • The focus on healthcare at the city government level in the US is relatively low, as opposed to its European and Asian counterparts.

What’s the state of play for global smart cities?

The Institute for Management Development (IMD), in collaboration with the Singapore University for Technology and Design (SUTD), has been publishing the Smart City Index report since 2019. The index ranks global cities by surveying residents’ perceptions of how technology is being used to address urban challenges across five areas: health and safety, mobility, activities, opportunities, and governance. 
We analyzed the IMD’s 2021 Smart City Index, which ranks 118 global cities, to understand the current landscape.
The key highlights: 
  • Singapore tops the list with a rating of AAA; it is the only country to get this rating. Zurich (Switzerland) and Oslo (Norway) took second and third place, respectively, with an AA rating. 
  • The majority of smart cities identified by IMD are from Europe (43%). Asia and Oceania follow with 34%, while North America accounted for only 13%.
  • Europe had 12 out of the top 20 smart cities. New York City is the only North American city to be featured in the top 30. 
  • None of the North American cities had ratings above A, whereas six European cities got ratings above A. 
  • Out of the 36 Asian cities featured in the index, 12 are from China. In contrast, 11 US cities are included in the list.

What’s the business opportunity?

Cities across the world spent around USD 100 billion (2019) on smart technologies, with this expected to grow to USD 327 billion by 2025 at a CAGR of 23%. US and European cities have invested significantly in open-data initiatives during the COVID-19 pandemic and aim to increase focus on technologies like 5G as well as autonomous and robotic technologies. China, through its new infrastructure initiative (2018), will continue to invest heavily in 5G, smart grids, AI, and data centers. 
These investments could translate into business opportunities for companies involved in the smart city ecosystem (telecom companies, software and hardware developers, utilities, financial institutions, and transportation companies). The total value of opportunities is estimated to be ~USD 2.5 trillion by 2025, up from around USD 1 trillion in 2020.

What revenue streams are available for vendors?

The smart city ecosystem is crowded with several high-profile companies such as Cisco, IBM, Huawei, Siemens, and Hitachi. These companies typically offer a wide range of smart city solutions. There are also thousands of IoT providers, startups, and large firms competing in the market, generally specializing in specific types of solutions (e.g., hardware equipment, analytics solutions, or healthcare-focused smart city solutions).
These vendors can earn revenue in various ways depending on their contracts with city planners. Usage fees (pay-as-you-go) and subscription fees are the most commonly used revenue streams for smart city projects, compared to direct monetization from project sponsors.

The road ahead

For all its great potential, smart city projects face widespread criticism for their use of personal data. For a concept that relies entirely on the collection and sharing of data, this is not surprising, but this could significantly impact its progress and adoption. 
The case of Sidewalk Labs could help us understand the severity of such concerns. In 2017, the Alphabet-owned urban innovation company won the bid to convert Toronto’s Quayside area into a smart city. The project involved deploying sensors to manage traffic, trash, and other services as well as autonomous cars, public Wi-Fi, etc., and promised high levels of data privacy regulation. It was met with heavy community resistance from the get-go, suffering negative press coverage and lawsuits. The project was scaled down in October 2019 from 190 acres to 12 acres, only to be shut down half a year later. The company mainly attributed this decision to post-Covid-19 financial uncertainties, but the continued public pushback must have also played an important role. 
Some argue that the pandemic has made people more open to sharing personal information when it is used for public health management or to deliver essential services. In a recent survey by New York law firm White & Case, 42% of respondents said they are willing to trade reduced privacy for better services, while 33% declined. This could be considered as some progress, but there is still a long way to go for universal acceptance. 
Governments need to enact laws to better regulate data collection and sharing. The EU's General Data Protection Regulation (GDPR), implemented in 2016, is seen as a move in the right direction. A few states in the US have similar data regulations, such as the California Consumer Privacy Act (CCPA), but data privacy regulations in the US have generally not yet been fully evolved. 
5G technologies are considered a highly promising development for smart cities, as they can significantly increase speed, bandwidth, and data throughput. However, their rollout is also slow-going because of infrastructure and financial challenges as well as a lack of understanding. Perhaps these challenges, along with privacy concerns and the lack of regulatory landscape at present, could slow down the progress of certain smart city projects. Nevertheless, there is no denying that future cities in the developed world will certainly be smart.

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