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China Set to Burst on Global Scene as Digital Giant

China's "digital generations," who are rapidly increasing mobile-phone and Internet use, will shape global growth and innovation, according to a report by The Boston Consulting Group.

BEIJING, July 9, 2008—Chinese consumers have emerged as leading users of mobile communications, instant messaging (IM), and Web 2.0 services, pushing the boundaries of digital activity in ways unimaginable just a few years ago, according to a new report by The Boston Consulting Group (BCG).

The report, China's Digital Generations: The 570-Million-Hour Opportunity analyzes the rapid surge in the use of digital services in China, predicts the speed and direction of future growth, and shows what companies have to do in order to successfully connect to China's online consumers.  In the course of this, it sets straight a number of myths that surround the Chinese internet.

"Many people in the West think that China is still early in its digital development. In fact, however, in many activities such as IM and blogging, China is more advanced than the United States and other Western economies," says Christoph Nettesheim, one of the report's coauthors and a senior partner and managing director in BCG's Beijing office. 

Today, China's internet users do not only outnumber internet users in the United States, with 2.7 hours daily—or, collectively, just under 570 million hours per day—they also spend more time online. And they are quicker in adopting the most advanced kind of services such as watching videos and movies, playing games and sharing music. Where most Americans netizens still rely on email to communicate with each other, their Chinese counterparts use IM and web 2.0 applications.   

The magnitude and speed of these developments, according to the report, have outpaced the common understanding about digital life in China. In 2007 alone, more than 80 million Chinese acquired their first mobile phone, and nearly 40 million became new Internet users. With this influx of new digital consumers, China now has more than one-half billion mobile-phone subscribers and 210 million Internet users. Also contrary to common belief, this trend is not restricted to young people in large cities. It already extends far into other segments and into lower city tiers. Even in many smaller cities, more than half of the population already has access to a computer, a mobile phone, or both. On the other hand, lower overall penetration—especially in rural areas—will ensure continued growth for the years to come. BCG estimates that the proportion of Chinese consumers with digital access could increase to 87 percent by 2015.

China's Digital Generations is a product of an extensive research project that involved interviewing 3,700 people from 12 cities and conducting eight focus groups. This research shed light on why Chinese netizens are behaving differently from their Western counterparts. The quick adoption of fairly advanced services, for example, is in part driven by the relatively slower development and less variety of more traditional media. Massively multiplayer online role-playing games (MMORPGs) did not have to replace game consoles, but brought the whole genre to China. Conversely, Chinese consumers are slower in embracing online shopping and electronic banking, because trust issues and concerns about security are more entrenched.

In the course of this research, three generations of digital users in China emerged.

• Little Emperors. People aged 14 through 25 are often Internet addicts, yet they are critical about the quality of much Internet content.
• Reform Beneficiaries. People between 26 and 35 have easily adapted to the opportunities of the Internet and highly value the diversity it provides.
• Frugal Middle-Agers. People between 36 and 50 are less comfortable with digital services, and they often stick to using simple voice-only services, text messages, and news search services.

In 2007, digital goods and services generated an estimated RMB 580 billion in revenues. By 2015, revenues are expected to exceed RMB 1.8 trillion. Although the share of content and advertisement revenues is still low, BCG expects it to grow significantly in the future. And while foreign internet giants, such as Google and Yahoo!, have long struggled to gain market share in China, local players have adopted creative solutions to produce profits and stimulate share price growth. China's digital market has produced several leading local players, such as Tencent and Sina, that have been able to beat their global competitors by investing aggressively, customizing their services to suit Chinese tastes, and figuring out which promising business models to pursue.

But according to the authors of China's Digital Generations, the implications go far beyond internet companies. Eventually, every consumer company in China will have to find new ways to reconnect to consumers which spend their time and form their opinions online.

What are the challenges companies need to master  in order to fully exploit the opportunities presented by China's new digital generations ? BCG identified eight activities and principles which are of particular importance.

• Be visible in the places where your customers spend time
• Actively use the new influencers that surround your customers
• Use the internet to advertise your brand and build trust
• Build the online sales channel as part of a multi-channel model
• Reach out to consumers in lower-tier cities
• Leverage the collective power of the network of digital consumers
• Customize products and services for China's online consumers, communities, and channels
• Build organizational capabilities to address the digital space

Clearly, success is not guaranteed. "Each company needs to define its own objectives and road map, depending on its industry and starting point", said David Michael, Chairman of BCG Greater China practice, "Companies should spend time segmenting their customers, defining priorities, and establishing a systematic approach."

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