China became a digital leader
China became a digital leader
Author: SEEbiz
17th December 2017
BEIJING - China has become a force to be reckoned with in digital technologies at home and around the world. As a major worldwide investor in digital technologies and one of the world’s leading adopters of the technologies, it is already shaping the global digital landscape and supporting and inspiring entrepreneurship far beyond its own borders.

But there is much more to come. As China digitizes, industries will experience huge shifts in revenue and profit pools across the value chain. This creative destruction is happening globally as the world digitizes, but it is likely to happen more quickly and on a relatively larger scale in China given a combination of inefficiencies in traditional sectors and massive potential for commercialization.

In this report, the McKinsey Global Institute assesses the strengths of China’s digital system, the degree of digitization of industries, and the scope for value shift and creation. Part 1 looks at China’s position in the global digital landscape. Part 2 introduces the MGI Industry Digitization Index for China, which reveals large variations among sectors in terms of their digitization. Part 3 takes a more detailed look at how three digital forces (disintermediation, disaggregation, and dematerialization) can restructure value chains and increase the magnitude of disruption in four sectors (consumer and retail; automotive and mobility; healthcare; and freight and logistics) and discusses how much scope there is for digitization to shift (and create) value. In Part 4, we look at what policy makers can do to encourage China’s digital economy, and, finally, in Part 5, we discuss what choices companies can make to prepare for the impending wave of change and why digital strategy matters more in China.

1. China is home to dynamic digital innovators and is a leading global investor in the latest technologies

Digital China is already more advanced than many observers appreciate. In e-commerce, China accounted for less than 1 percent of the value of worldwide transactions only about a decade ago; that share is now more than 40 percent. The current value of China’s e-commerce transactions is estimated to be larger than in France, Germany, Japan, the United Kingdom, and the United States combined. Penetration of mobile payments among China’s Internet users grew from just 25 percent in 2013 to 68 percent in 2016. In 2016, the value of mobile payments related to individuals’ consumption was $790 billion, 11 times that of the United States. One in three of the world’s 262 unicorns is Chinese, commanding 43 percent of the global value of these companies (Exhibit 1).

China's digital economy is a story of commerical success and investor excitement.

China’s venture capital industry is increasingly focused on digital. Overall, China’s venture capital sector has grown rapidly, from just $12 billion, or 6 percent of the global total, in 2011–13 to $77 billion, or 19 percent of the worldwide total, in 2014–16. The majority of venture capital investment is in digital technologies such as big data, artificial intelligence (AI), and financial technology companies. China is in the top three in the world for venture capital investment in key types of digital technology including virtual reality, autonomous vehicles, 3-D printing, robotics, drones, and AI.

Three factors suggest that there is huge upside for digital in China:

The big and young Chinese market is enabling rapid commercialization of digital business models on a large scale.
Three of China’s Internet giants—Baidu, Alibaba, and Tencent, or BAT—are building a rich digital ecosystem now growing beyond them.
The government gave digital players space to experiment before enacting official regulation, and it is becoming an active supporter as an investor and consumer.

The impact of digital China on the global economy has been increasing. China ran an annual surplus in digital services of $10 billion to $15 billion over the past five years. Its outbound venture capital totaled $38 billion in 2014–16, up from $6 billion in 2011–2013.

2. Chinese industries lag behind their counterparts in advanced economies on digitization, but the gap is rapidly closing

China is already a global leader in the consumer-driven digital economy. The next wave of digital transformation in China is likely to come from broader adoption of digital technologies by businesses in different sectors that will restructure value chains and boost productivity.

Overall, digitization of industries in China still lags behind that of the United States by a considerable margin, but that gap is narrowing rapidly. In 2013, the United States was 4.9 times more digitized than China; in 2016, that figure had fallen to 3.7 times.

The new MGI Industry Digitization Index for China (using the same methodology as in MGI research on digitization in Europe and the United States) assesses where its sectors stand on digitization relative to each other and reveals that Chinese industries are at very different stages.

Digital forces can shift (and create) between 10 and 45 percent of the industry revenue pool across players by 2030.

As in other economies, the most digitized sectors in China include information and communications technologies (ICT), media, and finance. In ICT, China’s Internet companies are rapidly ramping up investment in digital infrastructure. To give an idea of the size of this investment, demand for servers from China’s tech giants is as large as the entire national demand of countries such as Brazil and South Korea.

China’s consumer-facing industries and sectors associated with government rank higher relative to other sectors compared with their counterparts in Europe and the United States. Chinese consumers are enthusiastically embracing digital technologies, and the industries that serve them have had to respond by investing in digital assets and processes. There has been massive investment in government-associated sectors, too. In utilities, China was already the world’s largest market for smart grids by investment in 2013. In 2015, about 310 million households were using smart meters, a penetration rate of more than 80 percent, compared with 56 percent in 2013.

3. Three digital forces can potentially shift (and create) 10 to 45 percent of the industry revenue pool across players by 2030

As China digitizes, industries will experience huge shifts in revenue and profit pools across the value chain, doubtlessly involving a degree of disruption that will create losers and winners—and disproportionate value for the latter.

Digital disruption is likely to be on a relatively large scale in China due to a combination of the rapid pace of economic growth and changes in the economy, the prevalence of inefficiency across sectors, and massive potential for commercialization at scale.

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