China's online market has joined that of the US as one of the two engines driving the global internet economy, research shows.
The number of Chinese internet users has grown at 25% per year over the past 15 years, to reach 710 million in 2016—20% of the world total.
Online spending in the country has increased by 32% per year in the last five years, reaching $967 billion in 2016. Still, only 52% of China’s population uses the internet, leaving significant room for growth.
A new report by The Boston Consulting Group (BCG), AliResearch and the Baidu Development Research Center takes a detailed look at what is driving this rapid growth. The report, Decoding the Chinese Internet, offers a window into China’s online landscape, its unique characteristics and competitive dynamics, and what the future holds.
Rapid growth, power players, fast-cycle innovation, and mobile connectivity are shaping this growth market. Over the last three years, Alibaba has become the world’s largest retailer, and mobile payments in China have reached $8.5 trillion - 70 times more than in the US.
In April 2017, Ant Financial’s Yu’ebao became the world’s biggest money market fund, with $165.6 billion in assets under management. And three technologies developed by Baidu, including autonomous driving, were selected by MIT Tech Review among “the 10 Breakthrough Technologies in 2017.”
Although China lags the US in terms of total connectivity, more Chinese go online using mobile phones (90% versus 78%). Mobile internet users in China love to try new apps, but lose interest quickly: the typical user has 38 apps, 43% of which are used only once.
Overnight success is more likely in China than in the US. On average, it takes only four years for a Chinese startup to become a unicorn (valued at over $1 billion), compared with seven years for a new company in the US.
Shu Li, a BCG partner and coauthor of the report, said that “both the economic environment and a high degree of transparency within the internet industry have propelled China’s internet boom, but the most important force is the leapfrog growth of undeveloped sectors that the internet enabled.”
In certain industries such as retail and financial services, internet-based solutions that address efficiency gaps and other pain points have quickly gained traction and become mainstream.
François Candelon, a BCG senior partner and coauthor of the report, notes that “China’s internet landscape is fast changing and volatile. Ongoing innovation in business models, applications, and content leads to intense competition.”
The hottest areas see many microchanges that can better meet evolving market demand, as well as higher innovation frequency, more quick wins, and greater volatility.
Online competition is fierce, with many companies vying for a piece of the pie. This is especially the case when a fad is peaking, after which many companies are unlikely to survive. For instance, the number of group-buying websites soared to 5,000 at the height of their popularity in 2011, then plummeted to only 200 sites three years later.
Can China maintain its online growth and momentum? All signs point to yes. The country has a massive supply of available capital, 850 million people under the age of 40 – internet users skew young in the nation - a low-cost talent pool of science and engineering grads, and ongoing investments by the Chinese government in infrastructure—in areas such as broadband, mobile internet, and cloud computing—with the goal of providing ubiquitous internet access.
In addition, China’s major players are pioneering new internet development models, which should also drive growth. Hongbing Gao, vice president of Alibaba Group and dean of AliResearch, said, “The new development models will create new opportunities for the Chinese internet market.”
Cheng Zhao, Baidu's editor-in-chief and general manager of public affairs, commented that “we expect that China’s internet landscape will shift from application-driven to technology-driven innovations, which will likely stabilize the market.”
First published in CFO Innovation