Partner & Managing Director
In recent years, China’s internet has achieved a series of stunning milestones. To name a few: Online retail as a percentage of total retail surpassed that of the US. Alibaba became the world’s largest retail platform, and its online sales volume surpassed that of Amazon and eBay combined. Mobile payments reached $8.5 trillion, 70 times those in the US. MIT Tech Review’s list of 2017’s breakthrough technologies included three developed by Baidu, including autonomous driving. These achievements attracted global attention—and intense interest in the characteristics of China’s internet market.
The Boston Consulting Group joined forces with two of China’s online giants, Alibaba and Baidu, to explore how the internet developed so rapidly and what the future holds. We sought to discover the unique characteristics of the Chinese internet, unveil their root causes, and identify the implications for struggling foreign players in China, future market trends, and the global expansion of Chinese internet giants. (Highlights from our research can be found on SlideShare.)
China’s online landscape is growing rapidly but is also fast-changing and volatile. As of 2016, the country had 710 million internet users—one-fifth of the world’s total, equivalent to all Indian and US users combined. Over the past 15 years, the number of users has grown at 25% per year. Total online spending has reached $967 billion, second only to the US and increasing by 32% per year over the last five years. Despite this rapid growth, only 52.2% of China’s population uses the internet, so significant potential remains.
Internet-related activities account for 6.9% of China’s GDP, second only to South Korea. The market’s two largest sectors are e-commerce and online finance—with a 44% share and a 12% share, respectively—and both surpass their US counterparts in revenue size and relative share.
Chinese internet users are younger, less educated, and more mobile than their US counterparts. The average age of online users in China is 28, compared with 42 in the US—largely because internet penetration among those over 60 is much lower in China (12% compared with 66% in the US). Users are also less educated in China (only 49% have more than a high school education, compared with 91% in the US) and more likely to live in rural areas (25% compared with 17% in the US).
Although China lagged the US in terms of total connectivity in 2016, more Chinese connect using mobile phones (90% compared with 78% in the US). A quarter of users have never used any device other than a mobile phone to connect to the internet. These “mobile natives” tend to be younger, less educated, poorer, and more rural.
Chinese mobile internet users are more willing than users in the US to try new apps, but they also tend to drop them sooner. In China, the average mobile user has 38 apps, but 43% of them are used only once, compared with 25% in the US. Only 15% of apps in China are used more than ten times, compared with 37% in the US.
Chinese users shop online far more often than their US counterparts. Of desktop users, 64% shop online at least once a week (compared with 34% in the US), and as many as 70% of mobile users buy online every week (versus 43% in the US). In the past, games were the only digital content that Chinese online shoppers were willing to pay for. But in 2016, live streaming and videos accounted for 10% and 5% of spending on digital content, respectively (although games still accounted for 76%).
Internet competition is fierce in China, 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. Meanwhile, overnight success is more likely in China. On average, it takes four years for a Chinese startup to become a “unicorn” (valued at over $1 billion), compared with seven years for a US startup.
Many Chinese internet sectors are dominated by giants such as Baidu, Alibaba, and Tencent, which are further strengthening their positions by forming “ecosystems” of related companies, apps, technologies, payment systems, content, and markets. Examples include Alibaba’s investment in Sina Weibo and Youku Tudou, Baidu’s founding of iQiyi (online video) and investment in Ctrip (online travel), Tencent’s teaming up with JD.com, and Alibaba’s and Tencent’s investments in DiDi (ride sharing).
However, emerging technologies such as artificial intelligence can disrupt the playing field at any time. Internet giants and hundreds of specialized AI companies are competing fiercely in this rising market and a winner has not yet emerged.
Three primary forces have propelled China’s internet boom: the economic environment, a high degree of transparency, and the leapfrog growth of undeveloped sectors that the internet enabled. The economic environment includes factors such as a young population, a low-cost talent pool of highly skilled scientists and engineers, a large supply of available capital, and a rapidly expanding infrastructure that continues to increase internet connection speeds.
Transparency within the internet industry drives growth as well. Internet-based products, services, and business models are typically available online, so information and advances are rapidly shared. Open-source software also promotes learning.
The third and most important force is the leapfrog growth within certain industries (such as retail and financial services) that were previously lagging more developed countries. Internet-based solutions that address efficiency gaps and other pain points have quickly gained traction and become mainstream.
Innovation lies behind the rapid change and volatility of China’s internet landscape. Unlike in the US, where innovation is more technology focused, Chinese internet companies tend to innovate in applications, including business models and content. These innovations are driven by the unique demands and characteristics of China’s internet landscape. Players often aim to fill the gaps in underdeveloped industries or to quickly reach new customers.
This focus on applications lowers the competitive threshold and leads to intense competition in the hottest areas. The result is the development of multiple microchanges that are able to meet evolving market demand—as well as higher innovation frequency, more quick wins, and greater volatility.
Why have so many global giants failed to crack China’s internet market? We’ve identified four success factors that point to why some companies thrive and others fade:
Besides acquiring these key capabilities, companies must monitor and prepare for future market trends in order to capture the next waves of growth.
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, a large, 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. Although monetary policies are tightening and the population is aging, we don’t expect these factors to offset the generally strong tailwinds.
In addition, China’s major players are pioneering new internet development models, which should also drive growth. For instance, Alibaba’s “new retail” approach aims to use big data to digitize consumers and their online behaviors, fully integrate online and offline channels, and help merchants optimize supply chain efficiency.
We expect that China’s internet landscape will shift from application-driven to technology-driven innovations, which will likely stabilize the market. The country’s large number of scientists and engineers are a valuable resource, and technology innovators like Baidu are leading the way.
As China’s internet giants go more global, we expect their targets to be overseas Chinese and outbound tourists. What’s more, they’ll tend to aim for markets similar to China—those with large scale, strong local demand, and traditional industries with pain points that can be addressed. With their application-focused mindset, Chinese players will likely work with local partners to achieve quick wins and short-term results. In this way, Chinese expansion offers opportunities for collaboration rather than being a competitive threat.
Explore the report’s findings on SlideShare.