/Digitizing the Chinese Economy

Digitizing the Chinese Economy

In the digital sphere, China is both world-leading (primarily as a result of its enormous market) and catching up with others. Businesses and chinese government bodies are eager to ramp up digitization in china due to the ongoing prevalence of inefficiencies across industries. China accounts for more than 40% of global e-commerce transactions.<a href=”#_ftn1″ name=”_ftnref1″>[1]</a> China conducts 11 times more mobile payment transactions annually than the United States.<a href=”#_ftn2″ name=”_ftnref2″>[2]</a> Technologies such as mobile internet, cloud computing, big data, the Internet of Things, and artificial intelligence can bring valuable efficiencies to business across a wide variety of industries and drive world-leading innovation in the coming decades.

 

Despite persisting inefficiencies in the economy, the Chinese government and business community has been successful in rapidly digitizing the economy. At this point, the most digitized industries are information and communications technologies (ICT), media, and finance. Chinese technology giants alone generate as much demand for servers as all of Brazil and South Korea, according to a 2017 McKinsey Report. The success of the next leg of digitization will likely depend on the government’s ability to manage the disruption of digitization.

<h2>Major Industries</h2>

<h3>E-commerce<em> and Retail</em></h3>

<img class=”alignright size-medium wp-image-18674″ src=”https://ins-globalconsulting.com/wp-content/uploads/2018/06/e-commerce-300×199.jpg” alt=”” width=”300″ height=”199″ />E-commerce is in the process of disrupting industries that suffer from a lack of information between transacting parties. For example, Alibaba has cut out the traditional offline middlemen between suppliers and businesses across almost every industry, giving buyers a marketplace with far greater information transparency. Disintermediation has transformed the retail economy by redistributing revenues from offline retailers to e-commerce players. E-commerce has allowed retail to penetrate far deeper into the rural economy than ever before. Rural areas may lack world-class shopping malls, but E-commerce retail giants like JD and Taobao have found loyal customers in most of the country’s villages.

<h3>Mobility</h3>

The <a href=”https://ins-globalconsulting.com/china-to-open-car-market/”>automotive industry</a> has been rapidly transformed by the adoption of digital technologies. The use of ride-sharing services like DiDi Chuxing is a prime example. Ride-sharing services greatly increase the ROI from car ownership for individuals that opt into the sharing economy. In this way, the force of digitization is transforming the automotive sector from an ownership-based one to an increasingly services-driven one.<em> </em>

<h3>Logistics</h3>

Logistics costs remain high in China relative to developed countries. Digitization can help address the inefficiencies that give rise to these costs. China also has the opportunity to use the Belt-And-Road initiative to experiment with the use of high-technology in the logistics space at scale.<em> </em>

<h2>Looking to the Future</h2>

The Chinese innovation ecosystem is poised to continue driving the growth of the digital economy. China has a vibrant population of investors with deep pockets, a government bureaucracy that is incentivized to promote digitization of the economy, and an enormous and rapidly growing consumer market.

 

<img class=”alignright size-medium wp-image-18673″ src=”https://ins-globalconsulting.com/wp-content/uploads/2018/06/digitization-1599552_960_720-300×254.jpg” alt=”” width=”300″ height=”254″ />In promoting digitization, China will face the challenges of major economic disruption that go along with it. Digitization in China creates new groups of winners and losers. The winners are typically the technology innovators (such as Alibaba) that are on the cutting edge of disruption, as well as market incumbents that are quick to adopt new methods and are sometimes willing to cannibalize their sales. The losers are the market incumbents that stay wedded to inefficient and outdated methods and technologies. These businesses can be large and cash-rich but fatally shortsighted. They can also be smaller businesses that are unable to afford the capital costs of adopting digital technologies.

 

One of the biggest risks to continued digital transformation is that the potential losers will form a coalition of vested interests and influence the bureaucracy to prevent continued digitization in China. Vested interests may be able to play into the fears of the bureaucracy by arguing that continued disruption would lead to political instability as a result of labor and social unrest. A telling case study in this issue is the ability of cab drivers around the world to lobby local governments to ban or limit the use of ride-sharing services. The disruption from these technologies is relatively small by comparison to the coming disruption from self-driving vehicles. Legions of out-of-work and disgruntled truck drivers, delivery workers, and taxi-drivers pose a very real but potentially manageable threat to political stability in China and elsewhere.

 

Additionally, the redistributive aspect of digitization in China means that it will be inherently characterized by a growth in income inequality. Economic inequality across a variety of dimensions (rural to urban, east to west, rich to poor, etc.) is already a major concern for social stability in China. Digitization may create more billionaire owners of technology giants (and add some upper-middle-class jobs) but it may leave large segments of the working class without work.

 

For these reasons, the next wave of digitization in China will be tempered by the ability of regulators to come to terms with the disruptive powers of these technologies. What further complicates this is that effective regulation in these areas may bring regulators to their limits on the <a href=”https://ins-globalconsulting.com/china-economic-reforms-in-2018/”>reform frontier</a>. Effective regulation will likely require the Chinese government to clearly delineate the role of the state and government in the economy. Advanced economies have largely solved this problem by allowing the state to play the role of the regulator and the market to play the roles of financier, entrepreneur, planner, and decision-maker. The Chinese government was moving in this direction for several decades, but has reversed its trajectory, and continues to have a heavy hand in the economy, acting as financier, entrepreneur (i.e. State-Owned Enterprises), decision-maker, and planner. The coming decade will reveal how China reconciles the disruption of digitization with the role of the government in the economy.

 

<a href=”#_ftnref1″ name=”_ftn1″>[1]</a> See https://www.mckinsey.com/featured-insights/china/digital-china-powering-the-economy-to-global-competitiveness

 

<a href=”#_ftnref2″ name=”_ftn2″>[2]</a> See https://www.weforum.org/agenda/2018/01/these-are-the-challenges-facing-chinas-digital-economy

2018-07-11T15:25:16+00:00 July 11th, 2018|

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