Financial Times

China gears up for leap into digitisation of industry

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From a consumer point of view, China is already a global leader but its digitisation of industries still lags behind the US. However, China is catching up rapidly and another powerful wave of digitisation in businesses is starting to sweep through the economy, promising creative destruction in inefficient sectors on a grand scale.

China is well established as a digital player in consumer-facing industries with the largest ecommerce market in the world, accounting for over 40 per cent of global ecommerce transactions. Nevertheless, huge upside potential remains. China has a huge, relatively young home consumer market — and Chinese consumers are eager and willing to embrace all things digital.

Take just one example: connected cars. A McKinsey Survey of more than 3,000 respondents in China, Germany, and the United States found that 60 per cent of Chinese respondents would switch car manufacturers to obtain connectivity features, compared with only 20 per cent in Germany.

Many sectors in China are ripe for digital disruption because they are fragmented and inefficient. In freight, for instance, about 95 per cent of China’s estimated 8m registered trucking companies are individuals or small companies. Less than 1 per cent of companies have 50 trucks or more in their fleets. A lack of transparent, real-time information on routing means that China’s average empty running ratio in road transport is about 40 per cent, compared with 10 to 15 per cent on average in Germany and the United States.

China may lead the world on ecommerce but its express delivery industry has not been up to the task. About one-quarter of intercity express delivery did not meet delivery targets. Faced with demands for more efficiency and speed from China’s ecommerce giants, the industry is embracing digital technologies. Alibaba backed a new big-data platform connected to many express-delivery companies that can process 9tn lines of information per day and mobilise 1.7m drivers. The power of such digital approaches is now evident: on China’s Singles Day shopping bonanza, the number of days it takes to deliver 100m packages has fallen from nine in 2013 to only three-and-a half in 2016.

Such huge efficiency gains can be achieved through digital means across industries. New McKinsey Global Institute (MGI) research finds that digitisation can potentially shift (and create) 10 to 45 per cent of industry revenue pools in China by 2030, and, in the process, vault China’s economy to new levels of global competitiveness.

Potentially the biggest transformation could be in health care. China has made great strides since reform of the system in 2009, but it still faces considerable challenges. There is an imbalance in provision. Urban residents have two to three times better access to health-care professionals than those living in rural areas, and 51 per cent of China’s top 100 hospitals are in just three cities: Beijing, Guangzhou, and Shanghai. In such a vast country as China, the potential for internet of things and artificial intelligence (AI)-enabled health care — delivered remotely and digitally — is enormous. The government’s Internet Plus Health Care plan published early this year discussed giving patients access to their own medical data through mobile terminals.

China’s health care system today has relatively low levels of digitisation. In 2015, 29 per cent 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 per cent in the United States. The government has recognised that the system is ripe for a big-data revolution, introducing for the first time regulations on how big data in the health-care sectors are collected, stored and used.

China’s internet giants are moving into health-care big data. Baidu is building Baidu Cloud with the government of Beijing, which will monitor data from wearables and devices. Alibaba has launched an e-health app called Future Hospital that connects about 200 hospitals in more than 20 provinces and 40 cities across the country; the app offers information on what hospitals have beds, and the means to make appointments, payments, and access medical records.

Such innovations offer just a tiny snapshot of China’s dynamic, expanding digital ecosystem whose growth has been, to a large extent, propelled by the largest internet players.

Baidu, Alibaba, and Tencent provided 42 per cent of all venture capital investment in China last year, and one in five top Chinese start-ups were founded by one of the three or their alumni (an additional 30 per cent of them receive funding from these three).

Digital players also benefit from the fact that they enjoy such close links to hardware manufacturers. A sign of changing times is the fact that Shenzhen used to be known as the world center for shanzhai, or copycat products; now the city is known as China’s open innovation center. The city is home to drone manufacturer DJI, which commands more than 70 per cent of the global consumer drone market, HAX, a hardware-focused incubator that brings entrepreneurs from around the world for rapid prototyping and commercialisation, and Shenzhen Capital Group whose portfolio of more than 600 companies is increasingly internet-focused.

The government is backing digital strongly. It is explicitly targeting an AI applications market of more than Rmb100bn ($15bn) value by next year, is mobilising resources to invest $180bn on building China’s 5G mobile network over the next seven years and is supporting the development of quantum technology.

This combination of enthusiastic consumers, a robust ecosystem and a supportive government has already guaranteed China increasing prominence on the global digital landscape. China’s outbound venture capital totalled $38bn in 2014-16, up from just $6bn in 2011-13, about three-quarters of which is pouring 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.

Strength at home is the anchor to China’s digital globalisation — and there is much more to come.

This article originally ran in Harvard Business Review.

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