- One in three of the world’s 262 unicorns is Chinese
- Many sectors in China remain inefficient and ripe for digital disruption
CHINA is already a major player in digital technologies at home and around the world, and it has enormous growth potential.
As digital forces shake the status quo and restructure value chains, an even more globally competitive Chinese economy and dynamic firms can emerge.
A new report Digital China: Powering the economy to global competitiveness finds that the next wave of digitisation is unfolding as businesses adopt these technologies more widely.
MGI finds that three digital forces — disintermediation, disaggregation, and dematerialisation — can shift (and create) value equivalent to between 10% and 45% of industry revenue pools by 2030.
This could lead to a dramatic transformation of China’s economy.
Creative destruction would sweep across China’s economy, creating efficiencies, boosting productivity, and enhancing the global competitiveness of Chinese companies.
China is already a major global force in digital technologies, and has huge upside potential
About a decade ago, China accounted for less than 1% of the value of worldwide e-commerce transactions; today that share is more than 40%.
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% in 2013 to 68% in 2016.
In 2016, the value of mobile payments related to individuals’ consumption was US$790 billion (RM3.2 trillion), 11 times that of the United States. (US$1 = RM4.06)
One in three of the world’s 262 unicorns (privately held startups valued at more than US$1 billion) is Chinese, commanding 43% of the global value of these companies.
China’s venture capital sector has grown rapidly, from just US$12 billion, or 6% of the global total, in 2011–13 to US$77 billion, or 19% of the worldwide total, in 2014–16.
The majority of venture capital investment is in digital technologies.
China is in the global top three for venture capital investment in virtual reality (VR), autonomous vehicles, 3‑D printing, robotics, drones, and artificial intelligence.
Three factors suggest huge upside for China: a large and young Chinese market enabling rapid commercialisation of digital business models; a rich digital ecosystem expanding beyond a few giants; and the government allowing space for digital companies to experiment, and being an investor in and consumer of digital technologies.
Jonathan Woetzel, a McKinsey & Company senior partner and a director of the McKinsey Global Institute (MGI) said, “Conventional measures of digitisation in China suggest that the nation is only in the middle of the pack but when you take into account China’s powerful industry dynamics and the vibrancy of its consumer markets, its potential is far larger than most observers realise.”
Chinese industries still lag behind advanced economies on digitisation, but are catching up rapidly
The new MGI Industry Digitisation Index for China reveals that a large gap vs. counterpart sectors in the United States has been closing rapidly.
In 2013, the United States was 4.9 times more digitised than China; in 2016, that figure was 3.7 times.
The pattern of digitisation in China thus far has many similarities with the pattern in other countries.
In China, the United States, and the European Union (EU), the information and communications technology, media, and finance sectors are the most digitised.
Agriculture, local services, and construction tend to be the least digitised in all three.
On average, the top three sectors are 5.8 times more digitised than the bottom three in the United States, 6.1 times in the EU, and 6.5 times in China. There is clearly ample room for further digitisation everywhere.
However, China’s digital journey also has different characteristics. Consumer-focused industries such as retail and entertainment are further ahead other sectors than they are in either the EU or the United States.
Retail ranks fifth in China but 15th and 14th, respectively, in the United States and the EU.
Entertainment ranks fourth in China but 16th and 19th in the United States and the EU, respectively.
Government-related sectors also have a larger lead over other sectors in China than in these other regions. In China, government ranks eighth out of 22 sectors, whereas in the United States it ranks 18th and in the EU 16th.
Three digital forces can potentially shift (and create) 10% to 45% of industry revenue pools across players by 2030
Many sectors in China remain inefficient and ripe for digital disruption. Three digital forces — disintermediation, disaggregation, and dematerialisation — can potentially shift, (and create) 10% to 45% of industry revenue pools by 2030. Disintermediation and disaggregation can have the largest impact.
- Consumer and retail. Disintermediation (omni-channel, data-driven business models) is a major force for meeting evolving consumer demand. Disaggregation (sharing economy) and dematerialisation (3‑D–printed goods) can serve niche demand in specific categories. These forces can impact 13% to 34% of the industry revenue pool.
- Automotive and mobility. Disintermediation (omni-channel, connected cars) enables technology suppliers and automakers to reach consumers directly, and disaggregation (shared-mobility solutions) may reduce demand for new car sales. Overall, digital forces can have an impact on 10% to 30% of the industry revenue pool.
- Healthcare. Disintermediation (Internet of Things–and artificial intelligence–enabled solutions) can help to address chronic diseases, while disaggregation (healthcare big data) can minimise overtreatment. There could be an impact equivalent to 12% to 45% of healthcare expenditure.
- Freight and logistics. Disintermediation (real-time matching platforms) can address industry fragmentation while disaggregation (crowdsourcing delivery) can enable flexible capacity. These forces could impact 23% to 33% of the revenue pool.
Jeongmin Seong, MGI senior fellow, said, “Digital technologies have the power to shake the status quo and restructure value chains. This creative destruction is happening globally as the world digitises, but it is likely to be more rapid and on a relatively larger scale in China because of inefficiencies in traditional sectors and massive potential for commercialisation. Digitisation can make China’s economy more dynamic, and enable more Chinese businesses to compete globally and even export “Made In China” digital business models.”
The imperative to digitise is arguably even stronger in China than elsewhere
Digital disruption demands an aggressive response — at scale given strong, proven winner-takes-all dynamics.
The imperative for a bold response is arguably even greater in China.
The opportunities of digital transformation are arguably larger than anywhere else because of the scale of the economy, the rapid pace of its transformation, and the prevalence of inefficiencies.
Labour productivity across sectors is only 15% to 30% of the OECD average Conversely, the risks for those who fail to respond proactively are more threatening.
Companies in China may consider six approaches: adopt bold strategies to disrupt their own business models and expand their customer pools across sectors; use the power of China’s vast ecosystem by collaborating with digital giants or creating their own ecosystem; maximise value from analytics by using China’s massive data pools; build an agile organisation by restructuring into smaller, nimble teams to speed up decision making and execution; digitise operations though a structured and comprehensive digital transformation programme; and engage with China’s policy and regulators, developing business collaborations where possible.
Kevin Wei Wang, a McKinsey senior partner in Hong Kong, said, “We are already seeing leading Chinese companies responding to the opportunity and threat of digital technologies in innovative and aggressive ways.
“Given the scale of China and the rapid pace of its transformation into a digital economy, there is an even larger opportunity to benefit from digitisation by acting boldly than in other geographies — and an even greater risk for those that do not move decisively to ride the digital wave.”