SOURCE: The Boston Consulting Group

The Boston Consulting Group

May 06, 2010 00:01 ET

Explosive Growth in Internet Use Is Fundamentally Changing China's Economy and Society, Says New Report by The Boston Consulting Group

Firm Projects E-Commerce Activity Will Grow to More Than $100 Billion in Three Years

BOSTON, MA--(Marketwire - May 6, 2010) -  Internet users in China spend about 1 billion hours online each day, more than double the daily total in the United States -- and that number will grow to well over 2 billion hours a day by 2015, according to a new report by The Boston Consulting Group (BCG). This report, titled China's Digital Generations 2.0: Digital Media and Commerce Go Mainstream, offers a comprehensive study of online behavior in China based on quantitative data as well as interviews with nearly 2,000 people from 12 cities in 11 of China's 22 provinces. It also illustrates these trends through in-depth profiles of individual consumers, allowing them to tell the story of China's dynamic and complex market.

The report also reveals the explosive growth taking place in China's e-commerce arena. In 2009, business-to-consumer and consumer-to-consumer transactions in China clocked in at a total of $37 billion, and BCG forecasts that they will surpass $100 billion in just three years. Many of the new industry giants of China's online marketplace -- Alibaba.com, Tencent, and Ctrip.com, among others -- are homegrown players that have fended off tough competition from established multinationals.

Of course, China is an enormous country -- but the explosive growth of the digital market isn't due so much to demographics as to a behavioral shift: digital media and commerce have moved into the mainstream of Chinese Internet users' lives. Specifically, these digital consumers are spending more time online to meet a more complex set of needs than ever before. For example, far more Chinese people use the Internet to communicate and seek entertainment than in other emerging markets. More than 80 percent of Chinese digital consumers use instant messaging, read news online, and stream or download music and video content via the Internet, and around half play games online. And Chinese consumers have "leapfrogged" over e-mail -- only 53 percent of Chinese Internet users actively use e-mail, less than in any other major market. The average time online for Chinese Internet users increased from 2.4 hours per day in 2006 to 2.7 hours per day in 2009, compared with only 2.3 hours per day in the United States.

"We're seeing a set of behaviors that didn't exist a few years ago. And as a level of intense consumer activity shifts online, this is the beginning of a huge boom," said David Michael, a senior partner in BCG's Beijing office and lead author of the report. "The commercial relevance here is that a massive transformation in Chinese consumer habits is under way, and any company wanting to reach these consumers must first understand them."

The majority of China's digital consumption comes from those aged 35 and under, who make up 73 percent of China's total online population and account for more than 80 percent of China's online hours. Many of these users are sophisticated -- well educated and with white-collar jobs. For instance, young professionals, who represent 6 percent of all Chinese Internet users, have a remarkable 99 percent penetration. They are also the heaviest users, averaging four hours a day online. Yet while urban users may be the early adopters, growth is increasingly coming from China's vast rural areas. "Understanding the motivations and behaviors of these segments will be critical for businesses to tap into the potential that this trend offers," explains Michael.

One of the specific trends explored in the report is the embrace of e-commerce among Chinese digital consumers. Some 8 percent of the Chinese population shopped online in 2009, compared with just 3 percent in 2006. "We're at a tipping point in China in which consumers are crossing the threshold of trust and convenience -- and each incremental transaction further entrenches the e-commerce impulse," said Michael. "As disposable incomes increase, the potential for growth will rise dramatically." But even for those consumers who are skittish about online-payment systems or seller fraud, e-commerce platforms are increasingly becoming a clearinghouse for product information. E-commerce adoption is estimated to jump to 19 percent of the population by 2012.

The report highlights the fundamental structural characteristics of the Chinese e-commerce market. Chief among them are the prevalence of consumer-to-consumer transactions, many of which take place at Taobao, an online auction site that is part of Alibaba Group. Consumers in China still prefer cash transactions, with only 20 percent using online payment systems. "The potential impact of these structural characteristics on conventional retailers should not be understated," says Michael. "Many conventional retailers are starting to discover the plethora of Taobao sellers looking to compete with lower price points, or reaching out to different geographic regions, such as lower-tier cities and rural areas, that conventional retailers have difficulty serving today."

The report also examines the booming popularity of social-networking sites in China, and the opportunities in online advertising. Throughout 2008, social-networking sites in China rapidly gained hold among university students and young professionals, and by 2009 Chinese Internet users of all backgrounds and age groups were active in their use. Meanwhile, as consumption of online news and other portal-based information has continued to climb, so too has the growth potential of China's online-advertising market. Online advertising is taking share from magazines, newspapers, and TV, and will hit a projected 20 percent of total advertising in 2012, up from 8 percent in 2008.

The dominant digital players in the Chinese market are a crucial part of the story. Since BCG last conducted research on the Chinese digital market, in late 2007, the most successful local companies have roundly outperformed multinationals in every category of the Internet industry in China, driven by a deep understanding of Chinese consumers and by innovative approaches to meeting their needs. While interviews with consumers illustrate one dimension of China's digital-consumption ecosystem, the rise of these digital giants also helps explain how monetizing Chinese consumer behavior can work, and the report offers case studies of how they have established their market presences.

According to Yvonne Zhou, a principal in BCG's Beijing office and coauthor of the report, "Many consumer-oriented MNCs in China are operating under outdated assumptions about Chinese consumers' media and shopping behaviors, and are not adapting their go-to-market strategies to reflect digital consumption patterns." Any company committed to engaging Chinese consumers will need to grasp the trends and implications of the country's Internet-usage patterns, which China's Digital Generations 2.0 discusses in detail. Understanding the underlying needs and tastes of the different segments of China's digital consumers is vital to crafting an effective approach to communicating with them. Companies that fail to do so are at grave risk of losing touch with one of the world's most important growth markets.

To receive a copy of the report or arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About The Boston Consulting Group

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