YOUR SUPPORT COUNTS

Help CEDA shape the economic and social policies Australia needs for a brighter future. Make a donation today.

Opinion article

COVID-19 offers a preview of China’s digital future

Asialink Business China Practice Director, Nick Henderson, shows how China’s booming digital economy is supporting its recovery. He explores China’s digital landscape, as well as the response of Chinese business to COVID-19 and the lessons it has for Australian businesses.  

As the global economy continues to deal with the impacts of the COVID-19 pandemic, the Chinese economy now appears to be on the slow path to recovery.

However, the latest data is providing an indication of the extent of damage the pandemic has had. During Q1 2020, the Chinese economy significantly contracted by 6.8 per cent – the first negative growth rate since 1976. These figures are a direct result of the economic and social lockdowns imposed to stem the spread of COVID-19. This was preceded by the Chinese New Year period, when the largest global movement of people occurs, with more than three billion passenger trips.

The Chinese government had set a long-term economic growth target to double the size of the economy between 2010 and 2020, which now looks unlikely given the massive impact COVID-19 has clearly had on all aspects of the economy. However, as the world’s second largest economy, China’s is starting to recover from a much larger economic base than in the past.

To put this into perspective, Director of the ANU’s Australian Centre on China in the World, Professor Jane Golley, indicated on CEDA's blog, that even with modest growth projections, China’s recovering economy could increase its economic output by US$313 billion in 2020.

Even accounting for COVID-19 and an overall slowing, the Chinese economy is still expected to grow at different speeds and rates by sector over the mid to long-term.

China’s transition from a manufacturing-led to consumer-led economy will continue with its 400-million middle class driving demand. As incomes continue to rise, China’s upper middle class could conceivably reach 189 million by 2025.

During its challenging lockdown period, China’s digital economy became a central force, enabling many core aspects of life to continue. Online products and services offerings quickly adapted to enable consumption, remote working and learning, healthcare and even leisure to continue at scale.

Several of the shifts seen in both business models and consumer behavior, rather than being short-term, are now expected to become permanent features of China’s digital economy.

China’s two-decade digital economy evolution

Over the past two decades, China has developed an advanced and extensive digital economy which covers many aspects of government, business and society. It has invested heavily in next generation internet and mobile technologies, leading to massive user penetration rates and enabling new business models.

China’s population is truly ‘connected’ with an estimated 854.5 million fixed internet and 846.81 million mobile internet users.[2] The development of advanced network infrastructure combined with the gradual and now widespread adoption of enabling technologies like big data and AI (artificial intelligence) has powerfully combined to drive innovative offerings to consumers and business customers.

This sophisticated digital ecosystem development has been driven by domestic Chinese businesses that have evolved into large-scale industry players.

Digital economy conglomerates like Baidu, Alibaba and Tencent – collectively known as ‘BAT’ – have emerged and operate an extensive array of digital businesses and technology platforms. They are involved in everything from financial services (online payments), news and information, logistics and distribution, e-commerce, social media and messaging through to new online-to-offline (O2O) retail, cloud computing and mobile gaming.

Many of these businesses are vertically integrated, merging both online and offline business models (i.e. Alibaba owns logistics firm Cainiao and retailer InTime), and creating new retail models like Hema Fresh and 7Fresh which are leaders in O2O fresh food and supermarket retail.

China’s ecosystems have evolved exponentially since the early to mid-2000s, when first- stage e-commerce models emerged from Alibaba’s initial business-to-business B2B and Taobao’s consumer-to-consumer C2C trade platforms, into an immense value chain, with e-commerce sales of $7.1 trillion in 2019, growing at 17.6 per cent.

Central to this growth has been the online payment and finance ecosystem supported by apps developed by players such as Alibaba and Tencent.

Additionally, business models are designed to facilitate engagement and consumption through convenience of use and service trust. This extends from the range of choice in products and services to the safety and transparency of buyer/seller integrity mechanisms around such things as payment and delivery.

It is indeed true that many aspects of daily life in contemporary China are lived online – a case in point being the more than 350 million Millennial Chinese known as ‘digital natives’ who have grown up reliant on digital connectivity, smart phones, WeChat and of course online shopping.

Surge in online consumer engagement

In the midst of the COVID-19 lockdown during the Chinese New Year period, mobile internet traffic surged 36.4 per cent producing a huge rise in online consumption and home deliveries.

An overall increase of 20 per cent was reported as consumers bought essential items, including functional foods and health products. Online retail and food delivery company Meituan for example experienced a 400 per cent spike in online grocery sales in some cities.[3]

There were also major demographic shifts in purchasing behavior with those aged over 60 increasing their online shopping frequency and more than 90 per cent of those aged over 40 placing fresh food orders online. Online retailer Miss Fresh reported a 237 per cent rise in middle aged shoppers.

Social media use also exploded as people sought to stay connected while confined to home Online social media and messaging application, Weibo, for example was seeing more than one million reads per minute on COVID-19-related topics.

Innovative business models quickly emerged to capture the increased online demand. Marketing messages and channel mixes were adapted to reflect and meet the challenges people faced during the lock down. For example, Swisse effectively used livestreaming to run virtual yoga classes and to share health and wellness information online.

Phase of recovery

While China’s lockdown sparked a surge in online activity many other areas of the Chinese economy ground to halt.

There has been a double-digit decline across key economic indicators including the Q1 GDP fall of 6.8 per cent.[4] Retail spending overall was also down 20 per cent.

In some of the biggest hits, car sales were down 92 per cent, smart phone sales down 37 per cent and hotel occupancy was down 80 per cent.

But as much of the world continues to deal with the worst of the COVID-19 pandemic, China appears to have entered a recovery phase, with early signs of rebound in some sectors, including retail.

In the short term, however, China like most parts of the world will face significant operational challenges with global supply chains severely impacted by flight restrictions and the closure of air routes. Travel bans are also having profound impacts on international tourism and business. And demand in its key export markets, including the US and Europe, will take time to recover.

While overall consumer demand will eventually recover in China’s developed first tier geographic markets such as Shanghai, Beijing and Guangzhou, growth rates are still expected to be faster in emerging second, third and fourth tier cities.

As consumer and product segments recover, the importance of China’s digital economy in the life of the consumer will only solidify.

This presents opportunities for Australian consumer product businesses, but strong strategic planning is essential. China cannot be viewed as one generic market; it is highly segmented, and this extends to online behavior. This needs to be properly understood and supported by appropriate online channel strategies while smart and innovative digital marketing and consumer engagement will provide cut-through and relevance.

Australia is one of the most “China reliant” economies in the world,[5] accounting for around one third of our exports. It remains a challenging time for our economy and export sector which has been materially impacted by sharp reductions in overall Chinese demand during the COVID-19 pandemic. It is expected that recovering Chinese demand for Australian goods and services will be an important element of our own economic recovery.

But businesses need to be aware that the only thing constant about China is it is constantly changing, and they must have the agility to adapt to fast moving market conditions and consumer preferences if they are to succeed.
About the authors
NH

Nick Henderson

See all articles

Nick Henderson is the Director of the China Practice at Asialink Business. He has more than 17 years  experience in business development and operations in China. He began his career with IKEA and was instrumental in establishing the company’s first stores in Shanghai and Beijing. Nick was General Manager of the market entry and business development boutique advisory firm, Intralink. He has assisted more than 100 companies with their business growth in complex Chinese markets focussing on sectors including industrial, food and consumer, telecommunications, life sciences, environmental technologies and software.

Have some thoughts?
Share them with us

Use the form below to submit your comments to our platform. Please refer to our blog terms and conditions.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.