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Like most things in China, its digital economy is big, VERY BIG. And it’s growing fast.Here’s a quick snapshot:At $5.5 trillion, its mobile payment market is 50 times that of the U.S. ?While China’s output accounts for 15% of world’s GDP, HALF the world’s online sales take place in China. ?There are two Chinese technology firms among the world’s 10 most valuable companies today. Just last year, there were NONE.
So how did that happen?The answer, in one word, is ecosystem. Chinese companies have been highly successful in creating a web of services around a core offering, all targeted at improving the user experience. Consider this example. Say Li is planning a holiday. Using a single messenger application on his smartphone, he could research, book and pay for the entire trip, including flights, taxis, hotels, restaurants and local entertainment options. He could then use that same app to also do everything from playing online games to renting a bike and then use any small change left over to invest in a variety of investment products! What’s more, the popularity of the digital platforms has reached critical mass. Not being plugged in isn’t just uncool. In China’s big cities, it could make simple everyday transactions more challenging and time-consuming.?
There are factors, unique to China, which have enabled this digital revolution:Demographics: The country has 730 million mobile internet users, many of them highly adaptive to new technologies. For tech companies, this large test market of early adopters is a HUGE incentive to innovate constantly. ?Geography: China is a large and diverse country. Development levels and requirements differ vastly between urban and rural areas. As most internet users live in the bigger cities, growth outside them can happen only by offering a more customized suite of services. And Chinese companies are responding with solutions, such as offline payments and biometric identification features.Infrastructure: Unlike many developed countries, credit card penetration is still low in China. That has created a ready-made market for digital payment services. ?Regulation: Finally, there are fewer limitations and restrictions on how Chinese tech companies operate than in the West. This allows local tech companies to explore innovative business models and access new opportunities relatively easily.
The net effect Technological advancements have helped REINVENT the way companies and consumers operate, even in old-economy industries.Technological improvements touched nearly 70% of the activities that made up China’s total output in 2016.And why not? China has nearly 7% expansion in its GDP, and its digital economy grew 19% last year.Chinese tech companies now make up more than 11% of the MSCI Emerging Markets Index. Only five years ago, that was just a little over 1%.
So, what’s next?Nearly 600 million Chinese are still not connected to the internet, so the market is far from being saturated. Moreover, even a large part of the population that DOES have access to internet hasn’t jumped onto the online retail bandwagon yet.Unlike their Western rivals, Chinese tech players earn a smaller portion of their revenue from advertising. Instead, they rely more on subscriber fees, merchant commissions and in-app purchases to drive top-line growth. So there is a tremendous scope for growth in advertising revenues yet, as the market evolves and matures.Chinese companies aren’t just happy dominating in their own country. They’re now attempting to acquire know-how and diversify revenue streams. That means cross-border acquisitions and strategic partnerships.The industry enjoys the government’s backing. Policies such as Internet Plus, Made in China 2025 and the National IT Development Strategy are examples.All of this points to new investment opportunities in areas ranging from fintech, where China already leads the world, to relatively unexplored frontiers such as artificial intelligence. And this will likely keep China’s technology-driven growth story in the spotlight for many more years to come.?
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