While technology is transforming economies around the world via a digital revolution, nowhere is this brought into sharper perspective than in populous China .
- Now the world’s largest e-commerce market
- Data volumes and rapid adaptation spur tech development
- Government policy is a further incentive
As the country of almost 1.4 billion moves from export-led to consumption-driven growth, it has evolved into the world’s largest e-commerce market, is home to online superstars and is becoming a leading global force in the digital economy.
Technology should provide a much-needed boost to its economy by raising consumption, and help address imbalances. The availability of vast amounts of data, the rapid adoption of new technologies and government support are key ingredients that should help transform China into a leader in technology empowering consumption. We believe that Chinese companies that are well-positioned to benefit from these structural trends could be among the next superstar firms.
Technology supports the needs of a large consumer market
Booming urbanisation and an ageing population are making innovation an imperative. About 70% of the population looks set to live in urban areas in 2027, with more urbanisation occurring in inland provinces.
Furthermore, China faces an ageing population and a static labour force. By 2027, it is estimated, 100 million Chinese will join the ranks of those over 60, taking the number of senior citizens to 22% of the total population.1 This ‘greying of China’ should create new demand.
Advances in technology should help generate useful predictions or support action to tackle these momentous changes, including maximising efficiency gains and further improving the quality of life for citizens. Artificial intelligence can also play an essential role in boosting productivity.
AI is gaining in importance
Already, digitalisation is reshaping consumption. Over 900 million Chinese are smartphone users. That is four times the number in the US or India. The Chinese are also eager adopters of technologies. Both traits result in a large data pool for industries to work with, giving them a competitive advantage, including in AI development and greater efficiency.
For instance, Ping An Insurance uses technology to accelerate sales agent productivity and better manage business risk. It provides online wealth management and credit financing marketplaces, as well as online health insurance and medical services. Facial recognition, voiceprint recognition and disease forecasting biometrics help it to quickly process claims and weed out potential fraud. As a result, it has become the world’s leading technology-powered financial services group.
A booming middle class and technology are reshaping consumption and education
Consumption is expected to grow by an average 6% annually, fuelled by a growing middle class that looks set to represent an estimated 65% of households1 and that is seeking personalised products and services. Among them millennials, already totalling 40% of the urban population, are expected to gain in significance as their number rises to 46%, as early as 2021.2
Unlike their parents, they are spending more generously, favour premium goods and services, have an appetite for experience-related consumption, and tend to be the heaviest users of social media. To find out what such – online – end-users really want, merchants are turning to AI, which is redefining the shopping experience of millions of Chinese.
Rising household income is making education another sweet spot among the top-spenders as a large user base and underdeveloped technologies create considerable potential for the online learning market. After-school tutoring operators TAL Education and New Oriental Education are examples of companies using facial recognition technologies to improve online tutoring.
Technology better serves the underpenetrated areas
Untapped potential can also be found in rural China, where the population represents 43% of the total, but accounts for only 22% of household consumption. Underpenetrated areas are increasingly being digitised. Pinduoduo, a USD 1.06 billion social e-commerce platform3, has been a first mover targeting lower-tier cities that offer online shopping growth. It differentiates itself from other platforms by focusing on such cities and integrating social components into online shopping. Users can share product information on social networks and invite contacts to form a shopping team to get a lower price. This motivates users to have a more interactive shopping experience.
Most importantly, the development of AI is expected to alleviate imbalances in rural areas. For example, TAL Education Group is developing technology to give rural students greater access to education via online learning platforms, addressing a teacher shortage in remote and impoverished areas. Live streaming class/double teacher class is becoming the model of online learning: one teacher gives instruction through an online video broadcast and a teaching assistant tutors students in person.
A stepping-stone to superstar status?
Rising wealth, demographic change and an appetite to consume and learn have already created – and will again create – substantial opportunities for Chinese companies. The size of the country by itself means that companies gaining a foothold in these growth areas have the potential to become local champions.
They can expected to be spurred on by supportive government policies such as the Made in China 2025 tech initiative and the energy and drive of existing businesses and new entrepreneurs to innovate and adopt budding technologies. Their local experience and determination could well act as a stepping-stone towards a role as a global superstar.
 Source: World Economic Forum, as of January 2018
2 Source: FBIC Group, Boston Consulting Group, as of June 2017
3 Q2 to 30 June 2019, source: Pinduoduo.com
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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.
The companies in this article are mentioned for illustrative purpose only; this is not intended as solicitation of the purchase of such securities. It does not constitute any investment advice or recommendation.