China's digital leap poised to dominate global competitiveness: McKinsey

30 December 2017

China, already a major player in digital technologies at home and around the world, has enormous growth potential. As digital forces shake the status quo and restructure value chains, an even more globally competitive Chinese economy and dynamic firms can emerge, says a new report , Digital China: Powering the Economy to Global Competitiveness from the McKinsey Global Institute (MGI).

As a major worldwide investor in digital technologies and one of the world's leading adopters of technologies, it is already shaping the global digital landscape and supporting and inspiring entrepreneurship far beyond its own borders.

The report notes as China digitises, industries will experience huge shifts in revenue and profit pools across the value chain. This creative destruction is happening globally as the world digitises, but it is likely to happen more quickly and be on a relatively larger scale in China given a combination of inefficiencies in traditional sectors and massive potential for commercialization.

In e-commerce, China accounted for less than 1 per cent of the value of worldwide transactions only about a decade ago; that share is now more than 40 per cent. The current value of China's e-commerce transactions is estimated to be larger than in France, Germany, Japan, the United Kingdom, and the United States combined.

Penetration of mobile payments among China's internet users grew from just 25 per cent in 2013 to 68 per cent in 2016. In 2016, the value of mobile payments related to individuals' consumption was $790 billion, 11 times that of the United States. One in three of the world's 262 unicorns (start-ups) is Chinese, commanding 43 per cent of the global value of these companies.

The country currently has 42 per cent of global e-commerce, processes 11 times more mobile payments than the United States, and is home to one-third of the world's start-ups.

Three factors suggest huge upside for China - a large and young Chinese market enabling rapid commercialisation of digital business models; a rich digital ecosystem expanding beyond a few giants; and the government allowing space for digital companies to experiment, and being an investor in and consumer of digital technologies.

The new Mckenzie Global Institute's Industry Digitization Index for China reveals that a large gap vs counterpart sectors in the United States has been closing rapidly. In 2013, the United States was 4.9 times more digitized than China; in 2016, that figure was 3.7 times.

Three digital forces-disintermediation, disaggregation, and dematerialisation - can potentially shift (and create) 10 to 45 per cent of industry revenue pools by 2030 in which disintermediation and disaggregation can have the largest impact.

- Consumer and retail. Disintermediation (omnichannel, data-driven business models) is a major force for meeting evolving consumer demand. Disaggregation (sharing economy) and dematerialisation (3-D–printed goods) can serve niche demand in specific categories. These forces can impact 13 to 34 per cent of the industry revenue pool.

- Automotive and mobility. Disintermediation (omnichannel, connected cars) enables technology suppliers and automakers to reach consumers directly, and disaggregation (shared-mobility solutions) may reduce demand for new car sales.

Overall, digital forces can have an impact on 10 to 30 per cent of the industry revenue pool.

- Health care. Disintermediation (Internet of Things- and artificial intelligence-enabled solutions) can help to address chronic diseases, while disaggregation (health-care big data) can minimise overtreatment. There could be an impact equivalent to 12 to 45 per cent of health-care expenditure.

- Freight and logistics. Disintermediation (real-time matching platforms) can address industry fragmentation while disaggregation (crowdsourcing delivery) can enable flexible capacity. These forces could impact 23 to 33 per cent of the revenue pool.

China's government can enable digitisation by continuing to be a major investor in, and consumer of, digital technologies, promoting healthy competition, managing labour markets as the economy transitions to digital, and contributing to the effort to reach consensus in the global debate on issues such as technology standards and digital sovereignty.

McKinsey concludes companies in China need to embrace digital even more than elsewhere because China's rapidly growing and changing economy will magnify gains for winners and risks for losers. The country may consider six approaches - adopt bold strategies; use the power of China's vast ecosystem; maximise value from analytics by using China's massive datapools; build an agile organisation; digitise operations; and engage with China's policy and regulation.

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