China is fertile ground for a thriving VR and AR industry. However, China’s VR industry will develop differently compared to the rest of the world due to its unique consumer and business landscape. The key driving factors for mixed reality industry are massive internet user and PC/mobile gamer populations, openness to new technologies and growing demand for better entertainment experience. Influx of VC investments is expected to recover and participation of major tech firms play a key role of setting the industry in a growth path. This Future Watch Study outlines the current status of mixed reality industry; China’s disruptors in this industry and future opportunities for Finnish companies. Available at www.marketopportunities.fi

1. OTSIKKO
ALAOTSIKKO, KUUKAUSI VUOSI
CHINA’S DIGITAL LANDSCAPE AND RISING DISRUPTORS
MODULE 2.4
VIRTUAL REALITY (AND AUGMENTED REALITY)

2. VR/AR
SUMMARY
• China is fertile ground for a thriving VR and AR industry and the key driving factors are 1) massive
internet user and PC/mobile gamer populations; 2) openness to new technologies, 3) growing demand
for better entertainment experience, 4) influx of VC investments and 5) participation of major tech firms.
• Despite the promising growth drivers, China’s VR and AR industry is facing multiple challenges: 1) lack of
quality content, 2) poor user experience, 3) expensive headsets, 4) high requirements of hardware, 5)
low level of consumer acceptance, and 6) restricted content approval.
• VR has gone through a long history of development but is only recognized as a “disruptive medium” until
recent years. With challenges ahead that limit growth, many start-ups struggle to live up the hype.
Technology advancement and local content development will determine the future of VR in China.
• The VR industry has a broad value chain covering component suppliers, B2C and B2B device
manufacturers, content producers, distributors, and B2B and B2C customers. The B2C market in China
will still take some time to reach its next growth phase due to technology lag, while the B2B market will
present opportunities for incubating early adopters and educating the mass market.
• Chinese companies such as Alibaba Group and Shanda Group are actively investing in leading VR/AR
technologies globally and transferring them to China with local business models.
• Gaming, education, travel and retail would present the most promising opportunities for Finnish VR/AR
technology start-ups in China.
Team Finland Future Watch Report, May 20172

3. AUTHORS
Dr. Edward Tse
Founder and CEO
Team Finland Future Watch Report, May 20173
Mr. Bill Russo
Managing Director and Auto Practice Lead
Mr. Alan Chan
Senior Consultant

4. VR/AR
TOPICS
Team Finland Future Watch Report, May 20174
1. CURRENT STATUS
2. CHINA’S DISRUPTORS
3. FUTURE OPPORTUNITIES AND IMPLICATIONS FOR TEAM FINLAND

5. VR/AR
Team Finland Future Watch Report, May 20175
EVOLUTION OF HUMAN-COMPUTER INTERACTION
Source: Gao Feng analysis
Black and white Color Videos/3D images
Type Click Touch 3D interaction
Mixed Reality
iPhone 6 Live Photo
Interactive, sensible,
multi-dimensional
and dynamic

6. VR/AR
Team Finland Future Watch Report, May 20176
DEFINING VIRTUAL REALITY (VR) AND AUGMENTED REALITY (AR)
Virtual Reality (VR) Augmented Reality (AR)
Source: Fung Business Intelligence; Gao Feng analysis
Virtual Reality (VR) Augmented Reality (AR)
Definition A realistic and immersive simulation of
a three-dimensional 360-degree
environment
An enhanced perception of reality
through an overlay of augmented-
digital imagery onto the real world
How Wearing a head-mounted display (HUD)
and connect the device with output
Wearing a HUD or using smartphone’s
camera as a substitute for projection
User
experience
More on immersion More on real-time interactivity
Leaders Oculus, HTC, Samsung, Sony PlayStation Microsoft HoloLens, Magic Leap

7. VR/AR
Iterative Stage
(1990s – 2010s)
Exponential Growth Stage
(2014 – Present)
Team Finland Future Watch Report, May 20177
WITH A LONG HISTORY OF DEVELOPMENT, VR HAS ONLY RECENTLY
BECOME A BIG HIT
Source: Wikipedia; iResearch; Gao Feng analysis
 Advancement in GPU
computing power, computer
vision, network infrastructure
and artificial intelligence
 Growing demand for quality
entertainment experience
 Influx of major tech
companies and capitals
 Early consumer VR products
– e.g. Nintendo’s Virtual Boy
in 1995 (original price: 179
USD)
 Growing popularity of
similar products such as
panorama images, 3D movie
and 3D TV
 Early concepts of VR first
appeared in science fictions
(1930s – 1970s)
 Early applications in military
training and flight simulation
programs (1970s – 1990s)
Early Development Stage
(1930s – 1990s)

8. VR/AR
Team Finland Future Watch Report, May 20178
VR HAS A WIDE RANGE OF APPLICATIONS
Source: Goldman Sachs Investment Research; Gao Feng analysis
China’s VR industry will develop differently compared to the rest of the world
due to its unique consumer and business landscape
4%
2%
12%
Livestreaming
Real estate 5%
Video entertainment 9%
7%
Engineering
13%
Military
Healthcare
15%
Education
Retail
Games
33%
Global market size share of
different VR applications
China’s Unique Potential (besides games)
Education Travel
Entertainment Retail

9. VR/AR
Team Finland Future Watch Report, May 20179
BESIDES B2C, THERE ARE ABUNDANT UNTAPPED OPPORTUNITIES IN B2B
B2B Segments Business Models
1 VR Experience Center Pay-per-game, ticket fees
2 Retail “V-Commerce”, Advertising, Experience Zones
3 Education Immersive coursework and classrooms, professional training
4 Real Estate Interactive Virtual Showrooms, Virtual Tours, Interior Design
5 Healthcare and Wellness Rehabilitation, Virtual surgery, Medical training
6 Fitness Fitness apparatus + VR fitness exercises
7 Travel Promotion videos and virtual tours
8 Video Entertainment and Movies VR movie production, VR music videos, VR variety shows
9 Live Events
Live-broadcast concerts, sports events, E-sports, social live-
streaming
10 Manufacturing and Engineering VR-enabled intelligent manufacturing
Source: Gao Feng analysis

10. VR/AR
Team Finland Future Watch Report, May 201710
YET, THERE EXISTS SOME MAJOR BARRIERS TO FUTURE GROWTH
Hardware Software
 High price points
 High requirements for hardware
 Physical and technology challenges
(weight, comfort, video frame rate,
physical space, interactive
experience, movement tracking)
 Consumer acceptance
 Lack of content
 Poor-quality content
 Lack of large-scale distribution
platforms for VR content
 Lack of content production
standards
 Content censorship in China
Source: Gao Feng analysis

11. VR/AR
Team Finland Future Watch Report, May 201711
CHINA’S VR INDUSTRY EXPERIENCED A ROLLER-COASTER RIDE IN 2016
 In 2016, over 50% of Chinese VR hardware
startups went bankrupt
 End of 2016, Storm Magic Mirror went
through a big layoff to reduce from 500
employees to 300 employees
 There are over 2,000 VR arcades throughout
China, but only less than 20% of them are
profitable
Source: iResearch; Gao Feng analysis
462
1,680
1,490
1,030
17041
2016H12015H22015H12014H2 2016H22014H1
Total size of VR investment in China
2014-2016, Unit: million RMB
 As major foreign big name hardware players
entered China’s VR market and local industry
heavyweights followed in mid 2016, investors
were mainly cautious on investing in VR
hardware makers
 New, varied and exciting content will drive the
resurgence of VR industry from the so-called
“VR capital winter”
VR start-ups struggle in China

12. VR/AR
Team Finland Future Watch Report, May 201712
IN THE LONG RUN, CHINA’S VR INDUSTRY WILL SEE EXPLOSIVE GROWTH
1,098
630
315
135
45
851
341
26
8
3
2018E
104
2017E2016E2015 2020E
1,683
2019E
Source: IDC; iResearch; Gao Feng analysis
Gaming will remain to be the key growth driver of the VR industry,
whereas mobile-powered VR headsets will dominate a significant market share
Forecast of VR consumer base in China
2015-2020E, Unit: 00,000
Mobile-based VR
PC-based and Untethered VR
China’s VR industry is forecast to increase from 1.54 Billion RMB in 2015 to 56.63 billion RMB in
2020, at an annual compound growth rate of 105% which is higher than the global average
204,207
19,67425,90025,000
0
50,000
100,000
150,000
200,000
250,000
2015Q42015Q3 2016Q32016Q2
43,646
2016Q1
VR headset shipment in China
2015Q3-2016Q3

13. VR/AR
Team Finland Future Watch Report, May 201713
SIGNIFICANTLY, THE CHINESE GOVERNMENT IS SUPPORTIVE TO THE VR
INDUSTRY DEVELOPMENT ON HIGH-LEVEL
Source: Fung Business Intelligence; Gao Feng analysis
 Identified as one of the potential
emerging technologies and new strategic
growth points in China’s 13th Five Year
Plan
 The Ministry of Industry and Information
Technology (MIIT) issued a white paper
on VR in April 2016 on the future
developments and policies suggestion to
support China’s VR industry

14. VR/AR
TOPICS
Team Finland Future Watch Report, May 201714
1. CURRENT STATUS
2. CHINA’S DISRUPTORS
3. FUTURE OPPORTUNITIES AND IMPLICATIONS FOR TEAM FINLAND

15. VR/AR
Team Finland Future Watch Report, May 201715
VR INDUSTRY VALUE CHAIN
Computing Chips
Sensors
Display Units
Input / Output
Components
Image processing
Storage
Communication
Recognition
Large-size VR
devices
Industrial VR
devices
Direct Sales
Dealer Sales
Customized
Content
Customized
Software
Games Movies Videos
Distribution
platform
Pre-installed
application
Online
channel
Offline
channel
Military
Medical
Engineering
Arcade Center
Games
Live streaming
Movies
Social
B2B
Use Cases
B2C
Use Cases
B2B Content
B2C Content
B2B
Devices
Mobile VR
PC-based VR
Untethered
VR
Console-
based VR
B2C
Devices
Hardware
Software
Education
Real Estate
B2B Channel
B2C Channel
Source: iResearch; Gao Feng analysis

16. VR/AR
Team Finland Future Watch Report, May 201716
KEY PLAYERS IN CHINA’S VR INDUSTRY
Source: VRguancha.net; Gao Feng analysis
VR headset manufacturers VR content producers VR platforms, software engines
 Nascent console market in China
 Local firms focus on low/mid-end
mobile-based and untethered VR devices
 Lack of local content has become a major bottleneck
 Development tools are dominated by foreign companies
 Local start-ups focus on content development and
distribution

17. VR/AR
Team Finland Future Watch Report, May 201717
FOUR MAJOR TYPES OF VR HEADSETS
PC-powered VR headsets Mobile VR headsets
Source: iResearch; VRguancha.net; Gao Feng analysis
Console-based VR headsets Untethered VR headsets
 USD399
 Require PlayStation 4
(700 USD)
 Targeting hardcore
gamers
 USD99
 Require Samsung
smartphone (150-300
USD)
 Others: Xiaomi VR; Dream
VR; Storm Magic Mirror,
Google Daydream View
Samsung Gear
PlayStation VR
 USD799
 Require high-spec
PC (900 USD)
 Others: Oculus Rift;
3Glasses; AntVR;
GameMadman;
VRgate; EMAX
HTC Vive
 USD430
 Others: Coocaa VR;
Pico; Second Reality
Deepoon M2

18. VR/AR
Team Finland Future Watch Report, May 201718
SEVERAL INNOVATIVE LOCAL VR HEADSET COMPANIES ARE EMERGING
Source: 36Kr; Gao Feng analysis
 Founded in 2015 based in Shanghai
 High end VR headset with high
resolution, OLED display and 90Hz
refresh rate, similar to Oculus Rift
 Advanced positioning system similar to
HTC Vive's Light House Positional
Tracking, which allows room-scale
tracking using laser
 Received USD 10M Series B investment
led by Qiming Ventures in March 2017
 Founded in 2014 based in Shenzhen
 Specialized in smart VR and AR devices,
SDK and VR content delivery platform
 Contributed nearly 100 patents
 Collaborate with Microsoft as Windows
Holographic Partner
 Latest signature product: 3Glasses D2 –
RMB 2200
Hypereal 3Glasses

19. VR/AR
Team Finland Future Watch Report, May 201719
MAJOR CHINESE TECH GIANTS SUCH AS BAIDU, ALIBABA, TENCENT,
XIAOMI, LEECO AND HUAWEI ARE ALL TAPPING INTO THE VR INDUSTRY
Source: Technode; Gao Feng analysis
 Established an in-house VR/AR research lab, GnomeMagic Lab, which develops
technologies to help sellers on Alibaba platforms to build their own 3D product library
and set up VR display stores
 Launched Buy+, a VR E-commerce initiative, during the Double 11 shopping festival
 Participated in a 793 million USD C round for AR start-up Magic Leap
 Launched AR Red Envelop on Alipay
 Alibaba-backed Youku Tudou rolled out 360 degree panoramic videos
Case of Alibaba

20. VR/AR
Team Finland Future Watch Report, May 201720
LOCAL VR GAME DEVELOPERS AIMING FOR HIGH QUALITY VR CONTENT
Source: Sina news; Gao Feng analysis
 Founded in April 2015 based in Wuhan
 Specialized in local VR game development
 Received 15M angel investment in May
2017 led by Z Ventures Group, with
participation from Synergetic Innovation
Fund Management
 Set up new studio in Tokyo Japan
 Games launched: Iron Soul, Super Ninja
Hero, etc.
 Founded in 2015 based in Wuhan
 Dedicated to make premium VR content
for the international market
 Experienced team coming from Konami,
Gameloft, Ubisoft, Tencent Games, and
other famous Internet/animation/filming
companies
 Launched Black Shield, awarded The Best
Vive Product by HTC and The Best Annual
VR game by Sina Games
Wuhan Firegame V-Sensory

21. VR/AR
Team Finland Future Watch Report, May 201721
VR ARCADE CENTERS, THEME PARKS AND CAFÉS ARE ATTRACTING
EARLY VR ADOPTERS
Source: Sina news; iResearch; Gao Feng analysis
 Co-founded by film director Zhang Yimou,
SoReal is a new virtual reality theme park in
Beijing with a massive 32,000 sq. ft. footprint
VR Arcade Centers VR Theme Parks and Cafes
 Super Captain and LeKe VR are the top
leaders in VR arcade centers in China
 HTC Vive opens first official branded Vive VR
Cafe in Shenzhen

22. VR/AR
Team Finland Future Watch Report, May 201722
VR INNOVATION IS HAPPENING IN MANY OTHER AREAS
Source: Itjuzi’; 36Kr; Technode; Gao Feng analysis
 Air360 China (Letin VR) is a high-
end VR video producer and VR
live events broadcasting platform
 Focus on making VR microfilms
for B2B customers
 Founded in 2013, InVision Health
Media launched “Surgeek” in
2016 targeting VR + healthcare
 Focus on VR professional surgery
training and education for doctors
 Launched in 2015, Huajiao is a
live-streaming platform for
internet celebrities
 In mid-2016, it became the first
VR live-streaming app in China
 Tencent-backed Zanadu is a
premium online travel agency
and lifestyle content platform
 Launched a VR travel app and
offline VR concept store
 Phantom Whale is a VR
education start-up
 Developed a virtual laboratory
for science education
 Building virtual classrooms for
K12 education
 ConductorVR specializes in the
VR + real estate space
 Launched VRoom in 2015, the
first multi-user VR real estate
application in the world
Live-streaming Education
Healthcare Travel Real estate

23. VR/AR
TOPICS
Team Finland Future Watch Report, May 201723
1. CURRENT STATUS
2. CHINA’S DISRUPTORS
3. FUTURE OPPORTUNITIES AND IMPLICATIONS FOR TEAM FINLAND

24. VR/AR
Team Finland Future Watch Report, May 201724
SHANDA GROUP IS ONE OF THE MOST ACTIVE CHINESE INVESTORS IN
BUILDING A COMPLETE VR/AR ECOSYSTEM
Source: Crunchbase; Sina news; Gao Feng analysis
 Founded in 2014 based in
Iceland
 AAA quality VR games
 Killer app: Everest VR, a VR
travel adventure app
 2.1M USD investment from
Shanda Group, Tianqiao Chen
(founder of Shanda)’s private
investment group, Iceland´s NSA
Ventures, and Finnish VC
Inventure and Reaktor Ventures  Founded in 2015 based in San Francisco
 The world’s first platform for creating
cinematic, live, virtual space tourism
 1.25M USD seed funding led by Shanda Group
with participation from Skywood Capital
 Founded in 2014 based in San
Francisco
 Best known for its VR/AR events,
digital publication portal
uploadvr.com, and the Upload
Collective, a VR focused co-
working space in San Francisco
 1.25M USD seed funding led by
Shanda Group and Tianqiao Chen
(founder of Shanda)’s private
investment group
 VR theme park in partnership with The
Void LLC from the U.S.
 350M USD investment

25. VR/AR
Team Finland Future Watch Report, May 201725
DIDI CHUXING HAS WORKED WITH FINNISH LAPLAND TOURISM
BUREAU TO SPREAD CHRISTMAS SPIRIT IN CHINA THROUGH VR
Source: Gbtimes; CNtour2; Gao Feng analysis
 VR tourism in Santa Claus Village
 Filmed by Insta360, a Chinese panoramic
filming company
 Virtual wishes to Saint Nick on the Didi app
 Targeting Didi users in Chongqing
 Exclusive Didi post office

26. VR/AR
 To create the desired style and interior
decoration for their homes, customers can
choose from apartments of several
different styles, change the colors of the
walls, choose different painting effects and
furniture
 With the help of the VR system, customers
can preview their decorated apartment –
purchase decisions are made easy
Team Finland Future Watch Report, May 201726
TIKKURILA HAS PIONEERED A VR-BASED INTERIOR DECORATION
SYSTEM FOR CHINA
Source: Tikkurila; Gao Feng analysis
 Tikkurila is a leading leading paints and
coatings company based in Finland
 Tikkurila China has piloted a VR Color Surfing
System for consumers to experience and
decorate apartments in a creative way
 The first store demonstrating the VR devices
is Tikkurila Exclusive Store in Shanghai Xi Ying
Men International Building Material Center

27. VR/AR
Team Finland Future Watch Report, May 201727
POTENTIAL AREAS FOR SINO-FINNISH COLLABORATION
Source: Gao Feng analysis
 What is the next big VR game for the
Chinese market?
 Are Finnish companies capable in
developing world-class VR games?
 VR is the next battlefield for game industry
 Finland has strong heritage in the global game industry
 China has the largest gamer population
 Chinese game exports will grow gradually
 Can Finnish education experience be
delivered to Chinese students via
VR?
 What do Chinese students want from
VR education?
 Education quality in Finland ranks the top in the world
and it is widely recognized in China too
 Chinese emphasize on education and Chinese middle
class who are investing heavily in their kids’ education
 Can Finnish travel experience be
delivered to Chinese tourists via VR?
 What do Chinese tourists want from
VR tourism?
 Finland's tourism and Nordic culture are increasingly
popular among Chinese
 Chinese middle class are upgrading for more
aspirational lifestyles and outbound tourism is now a
major trend
Gaming
Education
Tourism
 Can China’s retail experience be
enhanced through Finnish VR
technologies?
 Chinese consumers are trading up as they are now
more quality-driven and experienced-driven
 The traditional retail experience will no longer be
sufficient to meet their rising demand
Retail
Rationale Strategic QuestionsSegments

28. VR/AR
Team Finland Future Watch Report, May 201728
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
Intelligent Transportation
2. Industries/Technology Deep Dive
Rising Opportunities and Future Evolution
China Digital Landscape Overview
1. China Digital Landscape Overview
Big Data and Cloud Computing
Progress Reviews (done by teleconference)
Fintech
Conclusion and recommendation for Finnish companies
New Retail
VR and AR
New Social Media
Industry 4.0
3. Conclusion and Recommendation
Drones
IoT
Activity
AI
We’re here
PROGRESS UPDATE (MARCH)