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China’s industries and services are going digital

Digitization can shift—or newly create—as much as 45 percent of industry revenue across China.
Jonathan Woetzel

Leads research on China, Asia, and global economic and business trends, helps cities and regions create sustainable growth, and supports the transformation of Chinese companies into global leaders

China’s journey toward becoming a dynamic digital nation is well underway, but few observers appreciate the pace of change or the sheer enormity of the upside. New research from the McKinsey Global Institute (MGI) finds that digitization can shift—or newly create—as much as 45 percent of industry revenue across China.

That is creative destruction on a large scale, which would root out widespread inefficiency in many Chinese industries—economy-wide, China’s labor productivity is only about 15 to 30 percent that of OECD economies—and enable many more Chinese companies to compete globally.

The transformative opportunity of digitization in China is arguably larger than anywhere else because of a combination of inefficiency, huge scale, and the ability to commercialize rapidly in a market hungry for digital solutions.

The power of digital technologies has already amply been demonstrated by the rise of e-commerce that has entirely disrupted China’s fragmented, old-fashioned, and inefficient offline retail. Only a decade ago, China accounted for less than 1 percent of the value of worldwide e-commerce transactions; today that share is more than 40 percent. China’s under-developed financial sector and limited personal credit led to the rapid development of mobile payments whose volume is now 11 times larger than that of the United States.

The stage is now set for a new wave of digitization. China is investing heavily in digital technologies at home and overseas. Its outbound venture capital totalled $38 billion in 2014-16, up from just $6 billion in 2011-13, and about three-quarters of current investment is going into digital-related sectors. China is already in the global top three for venture-capital investment in virtual reality, autonomous vehicles, 3-D printing, robotics, drones, and AI.

Disintermediation, disaggregation, and dematerialization will transform diverse sectors. We chose four sectors to assess: health care, which is relatively early in its digitization; freight and logistics because the sector today is so inefficient; consumer and retail because these sectors are already relatively advanced in their adoption of digital technologies; and automotive and mobility because of the fast-moving nature of this key manufacturing sector.

Taking all four together, the range of impact is between 10 percent and 45 percent of industry revenue pools, or, in the case of health care, spending. If a range of digital technologies including the Internet of Things, AI, and big data— were to penetrate deeply into health care, the impact could be the largest of the four sectors at 12 to 45 percent of health-care spending.

Healthcare

Today, Chinese health care is relatively less digitized. In 2015, 29 percent of hospitals in China had still not installed electronic medical records systems. In 2014, more than half of Chinese hospitals had not established systems for the exchange of clinical data, compared with only 6 percent in the United States. Yet digital tools can help to overcome one of the key challenges in China’s health-care provision, namely its concentration in large cities. Consider that urban residents have two to three times better access to health care than their rural counterparts, and the fact that just over half of China’s top 100 hospitals are in only three cities: Beijing, Guangzhou, and Shanghai. One solution is delivering health care digitally and remotely, and empowering citizens to keep track of their own health, enhancing prevention. The government’s Internet Plus Health Care plan published early this year discussed giving patients access to their own medical data through mobile terminals.

Freight and logistics

The impact of digitization in freight and logistics could range between 23 and 33 percent of industry revenue. This is a sector ripe for disruption. Today, about 95 percent of China’s estimated eight million registered trucking companies are single operators or small companies, and China’s average empty running ratio in road transport is high at around 40 percent, compared with 10 to 15 percent in Germany and the United States. Real-time matching platforms can significantly reduce that ratio as delivery drivers can be crowdsourced. China’s e-commerce giants, faced with intense demand from their customers for speedy delivery, are already propelling change. Alibaba has backed a big-data platform connected to many of China’s express-delivery companies capable of mobilizing 1.7 million drivers a day.

Retail and consumer goods

E-commerce may have experienced a stellar rise in China, but there is much more to come. We think that a further 13 to 34 percent of revenue in consumer and retail sectors could be shifted (or created) through a broad shift into omnichannel retail and into data-driven business models, both of which are forms of disintermediation. The 2017 McKinsey China iConsumer survey found that 85 percent of Chinese shoppers are already omnichannel consumers, but there is huge further scope to expand the services they use. Up to 70 percent of respondents said they were excited to use omnichannel services such as QR code-scan payments and virtual reality experiences in offline stores, but only 10 to 25 percent said that they had actually tried these out.

Automotive

Chinese consumers are relatively willing to share their data, survey evidence from the automotive industry shows, and this opens the door to much greater monetization of data gathered whether in that sector or in retail. The promise of data mining in China—gathered from 731 million internet users, five billion online search queries a day on Baidu, an average of 66 minutes of WeChat usage per day, and 175 million Alipay transactions—is huge.

Overall, China’s digitization still lags considerably behind that of the United States. In 2013, the United States was 4.9 times more digitized—perhaps not surprising given China’s still vast disparities. But the gap is already closing rapidly—to 3.7 times in 2016. As China pours investment into digital technologies, and businesses innovate, we should expect the gap to continue narrowing—and rapidly.