By Jonathan Woetzel, Jeongmin Seong, Kevin Wei Wang, James Manyika, Michael Chui, and Wendy Wong
China is already more digitized than many observers appreciate and has the potential to set the world’s digital frontier in coming decades. China has one of the most active digital-investment and start-up ecosystems in the world, according to a new discussion paper from the McKinsey Global Institute (MGI), China’s digital economy: A leading global force. 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 artificial intelligence (AI). China is the world’s largest e-commerce market, accounting for more than 40 percent of the value of worldwide e-commerce transactions, up from less than 1 percent about a decade ago. China has also become a major global force in mobile payments with 11 times the transaction value of the United States. One in three of the world’s 262 unicorns (start-ups valued at over $1 billion) is Chinese, commanding 43 percent of the global value of these companies.
Three—often unappreciated—factors are propelling the expansion of digital China and suggest that there is far larger upside potential for digital in China than many observers appreciate:
The bigger, younger China market is enabling rapid commercialization of digital business models on a large scale. The sheer scale of China’s Internet user-base encourages continuous experimentation and enables digital players to achieve economies of scale quickly. In 2016, China had 731 million Internet users, more than the European Union and the United States combined. Beyond scale, it is the enthusiasm for digital tools among China’s consumers that will support growth, facilitate rapid adoption of innovation, and make Chinese digital players and their business models competitive. Nearly one in five Internet users in China relies on mobile only, compared with just 5 percent in the United States. The share of Internet users in China making mobile digital payments is around 68 percent, compared with only around 15 percent in the United States.
China’s three Internet giants are building a rich digital ecosystem that is now spreading beyond them. Baidu, Alibaba, and Tencent, collectively known as BAT, have been building dominant positions in the digital world by taking out inefficient, fragmented, and low-quality offline markets while driving technical performance such as computing efficiency to set new world-class standards. The BAT companies have been developing a multifaceted and multi-industry digital ecosystem that touches almost every aspect of consumers’ lives. The functionality offered by their “super apps” has increased about seven times since 2011. In 2016, BAT provided 42 percent of all venture-capital investment in China, a far more prominent role than Amazon, Facebook, Google, and Netflix that together contributed only 5 percent of US venture-capital investment in that year. Beyond China’s big three, other digital innovators such as Xiaomi and NetEase and traditional players such as Ping An are building their own ecosystems. China’s digital players enjoy the notable advantage of close links to hardware manufacturers. The Pearl River Delta industrial hub is likely to continue to be a major producer of connected devices because of its strength in manufacturing hardware.
The government gave digital players space to experiment before enacting official regulation and is now becoming an active supporter. The Chinese government moved to regulate the digital sector only after a delay, which gave innovators plenty of space to experiment. As the market has matured, both the government and the private sector have gradually become more proactive about shaping healthier digital development through regulation and enforcement. Today, the government is playing an active role in building world-class infrastructure to support digitization as an investor, developer, and consumer.
In combination, these three factors mean that China has an increasingly visible presence on the global stage and rising impact on the global economy. China runs a trade deficit in services but a trade surplus in digital services. China’s outbound venture capital totaled $38 billion between 2014 and 2016, reaching 14 percent of global venture-capital investment outside China. Over the past two years, China’s top 3 Internet companies made 35 overseas deals, compared with 20 by the top three US Internet companies. Chinese digital companies are also expanding business models outside the country’s borders, and sharing their technology with foreign partners, enabling their expansion. China’s digital globalization is only just getting started but is gathering momentum.
This discussion paper is a preview of a major MGI report on digital in China that will explore how digital disruption will enable companies to boost their efficiency, boost revenue, and optimize cost, and how three types of digital disruption—de-materialization, dis-intermediation and disaggregation—can help to restructure value chains, and increase the speed of the disruption.