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Decoding the Chinese Internet 3.0: Speed of Change and Journey to Digital Acceleration

For over a year, China’s Internet giants have been moving forward with greater clarity and speed, and companies are scaling up their digital business. At the same time, government continues to be a major player in China’s Internet ecosystem. The government is leveraging digital methods to level up its governance—particularly in the context of COVID-19, China has been leading the way with its speedy response. The Chinese Internet has always been a global focal point due to its unique makeup and development potential. Understanding the drivers behind it will be the key to success in the future.

Shanghai—China’s Internet is fast catching up with the world, according to a new joint report by BCG Henderson Institute China and AliResearch. The paper, Decoding the Chinese Internet 3.0: Speed of Change and Journey to Digital Acceleration offers a systematic overview of the role of government and industry players in development of China’s Internet over the past year, especially in the context of COVID-19. The report illustrates how China is accelerating on the path towards a smart, innovative, and inclusive digital economy, and how the country’s industrial Internet is beginning to lead in certain areas on the business side and leapfrog in certain areas on the government side.

“Due to COVID-19, the increasing demand for digital has led the Chinese government to accelerate its digital program and make government more effective,” said David He, BCG Managing Director & Partner, co-leader of BCG Henderson Institute China, co-author of the paper. “Taking the example of the ‘Health Code’ pass system implemented by the Hangzhou government, the city authorities quickly leveraged the Zhejiang provincial government’s cloud to enact digital measures, and within 20 days, Zhejiang had launched a health code system across the province, making it the first province in China to be fully covered by a health code. And a nationwide ‘health code’ system was established within two months.”

“In areas where the consumer Internet is highly developed, China’s industrial Internet leads the world,” said Fang Ruan, BCG Managing Director & Partner, co-leader of BCG Henderson Institute China, co-author of the paper. “By redefining the key factors of individuals, goods and use cases, global beauty giant L'Oréal continued its swift rise in China market even in the middle of the pandemic. Its revenue in China market increased 17.5% in 2020 H1, far outstripping L'Oréal group’s global performance.”

China built its Internet from the ground up, quickly moving from a “follower” to a “forerunner” in many fields. And its future prospects are bright. China still has huge potential to take the global lead in many segments. Developing speed in four areas—technology, data, applications and agile working practices—has been the driver behind this trend, which has enabled China to move ahead faster than other regions.

Hongbing Gao, VP of Alibaba Group & Director of AliResearch, said, “Companies have built up a trove of consumer insights, technology, etc., from the well-developed consumer Internet side, which will accelerate the future development of the Internet. For example, the data middle-office solution offered by Alibaba will help companies manage their data assets in private domain, build ‘data banks’ to integrate their data with Alibaba’s big data platform for convenient analysis & operations, and rapidly grow their businesses. In 2018, Joyoung formed a partnership with Tmall and Cainiao to create a high-frequency closed loop for its products, based on the supply chain. Goods retail projections and real-time data indicate that during the 6·18 shopping festival in 2019, Joyoung cut its inventory turnaround time from 40 days to 26 days and boosted its sell-through rate by 11%.”

The outbreak of the COVID-19 pandemic in China has underscored the urgency and potential of digitalization for all players, prompting a drive for not just “digitalization”, but also “smart development”. Companies are now seeing the Internet not as a “connector” but as an “enabler”; while the government sees it as not merely a “tool” but as a “new form of infrastructure”, which can drive digital readiness across society and improve productivity.

This shift in awareness has taken China’s Internet development into a new stage, characterized by new smart digital business models, the rise of the industrial Internet and the modernization of governance. The competitive landscapes for both the consumer and Industrial Internet are taking shape, while the government also has a clearer roadmap for how to improve governance. Defining distinct roles for each party and making sure everybody benefits will be the key to sustaining this trend.

  • Government: As the pandemic spread, the government became aware of the huge potential benefit of building digital infrastructure and increasing investment in this area to bridge accessibility and adoption gaps, as well as stimulating the development of the digital economy. At the same time, it realized that by mobilizing the capabilities of individuals and businesses, it could accelerate its own e-government transformation.
  • Industry: Businesses have recognized the huge opportunities that can be created through integration. By clarifying their positioning, drawing on their traditional advantages as “industry natives” and finding ways to add value to the industry chain rather than merely going after trends, they can guarantee themselves a strong foothold in the industrial Internet era. In the next phase, the development of digital commerce and the industrial Internet will move in tandem, creating new possibilities.

China’s Internet deserves global attention for its unique development path and the speed of its growth. China is well-placed to take the lead in more areas and to provide its own insights from “China experience”, informing development of the Internet around the globe.

To arrange an interview with one of the authors, please contact Vincent Wang (call +86 13818219004 or email wang.vincent@bcg.com).

About BCG Henderson Institute

BCG Henderson Institute is Boston Consulting Group’s strategy think tank, dedicated to exploring and developing valuable new insights from business, technology, and science by embracing the powerful technology of ideas. The Institute engages leaders in provocative discussion and experimentation to expand the boundaries of business theory and practice and to translate innovative ideas from within and beyond business.

About AliResearch

Established in April 2007, AliResearch is deeply rooted in Alibaba's commercial ecosystem, the world’s largest such ecosystem involving e-commerce, new retail, logistics, cloud computing, and entertainment. Adhering to the value of building an open and sharing Internet, AliResearch works with researchers and think tanks specializing in exploring new forms of business and areas of the economy and governance, sharing ideas, technologies and business cases. AliResearch explores everything from consumer insights, to corporate digital transformation and business model innovation, to new forms of the Internet and Internet governance.

About Boston Consulting Group

Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we work closely with clients to embrace a transformational approach aimed at benefiting all stakeholders—empowering organizations to grow, build sustainable competitive advantage, and drive positive societal impact.
 
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