How China became a digital leader

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As CEOs gather for the Fortune Global Forum in Guangzhou, China this week, the most intense buzz is around China’s role in technological change and innovation. China is already shaping the global digital landscape, and there is much more to come.

China already leads the world in digitization of consumer-facing industries such as e-commerce. It has the largest e-commerce market in the world, accounting for over 40% of worldwide e-commerce transactions, and boasts 11 times the value of mobile payments as the United States, according to McKinsey Global Institute.

But innovation is now spreading. China is a major worldwide investor in cutting-edge technologies. It is a global top-three venture capital investor in virtual reality, autonomous vehicles, 3D printing, robotics, drones, and artificial intelligence (AI). One in three of the world’s unicorns is Chinese. “Made in China” business models such as “dockless” bicycle sharing and video social networking are spreading around the world.

A new wave of transformation is now unfolding as more businesses in China put digital technologies at the heart of their operations and strategy. Three types of digitization are propelling change: disintermediation—when digital solutions enable companies to cut out the middleman and serve consumers directly; disaggregation—when large items such as properties and cars are broken up and repackaged as services; and dematerialization—when physical objects are turned into virtual ones, as we have seen in music and publishing.

New research from the McKinsey Global Institute finds that these digital forces can potentially shift and create 10% to 45% of industry revenue in China by 2030. This is creative destruction on a grand scale that can root out inefficiency and vault China’s economy to new levels of global competitiveness.

The research examined four sectors. In consumer and retail, China is now building on its success in e-commerce with moves into “omnichannel,” or blended offline and online models, as well as data gathering. Between 13% and 34% of the industry’s revenue could shift or be newly created. In the automotive and mobility sector, up to 30% of industry revenue could be impacted by omnichannel models, connected cars, and ride-sharing. The impact of digitization on health care could be the largest of all sectors—up to 45% of health care expenditure—if the full potential of the Internet of Things, AI, and big data is tapped to offer remote diagnostics solutions for patients with chronic disease, for instance, or to reduce waste in the health care system, like fraud and over-treatment. In China’s fragmented and inefficient freight and logistics sector—consider that 95% of China’s 8 million trucking companies are one-man operations or small companies—digital platforms that can match demand and supply in real time and crowdsourcing delivery can have a huge impact of as much as one-third of the industry’s revenue.

We are optimistic that China will tap this potential. Companies can commercialize digital models rapidly and at scale because of China’s huge, relatively young, and digitally savvy home consumer market. In 2016, China had 731 million Internet users, more than the European Union and the United States combined. Nearly one in five Internet users in China relies on mobile only, compared with just 5% in the United States, according to McKinsey.

China has a dynamic and rapidly expanding digital ecosystem. In 2016, three digital giants—Alibaba, Baidu, and Tencent—provided 42% of domestic venture capital investment in China, a far more prominent role than Facebook (fb, +0.19%), Amazon (amzn, +0.67%), Netflix (nflx, +0.10%), and Google (goog, +0.66%) that together contributed only 5% of U.S. venture capital investment in that year. Large traditional companies including telecommunications equipment business Huawei and insurer Ping An are now moving decisively into digital and developing their own ecosystems.

China also has the inestimable advantage of government support for digitization. The government is an active consumer of, and investor in, digital technologies, aiming explicitly for an AI applications market of more than 100 billion renminbi ($15 billion) value by next year, investing in what is envisioned to be the world’s largest 5G mobile network in the next seven years, and backing the development of quantum technology, which could lead to the world’s safest and fastest Internet.

China has already achieved world-beating success in digital technologies that serve consumers, and is now moving into a new era of digitization in industry. All the factors are in place for China to set the digital frontier for the world in coming decades.

This article originally ran in Fortune.
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