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China's Digital Transformation McKinsey Global Institute McKinsey Global Institute China’s digital transformation: The Internet’s impact on productivity and growth and productivity on impact The Internet’s transformation: digital China’s July 2014 China’s digital transformation: The Internet’s impact on productivity and growth The McKinsey Global Institute The McKinsey Global Institute (MGI), the business and economics research arm of McKinsey & Company, was established in 1990 to develop a deeper understanding of the evolving global economy. Our goal is to provide leaders in commercial, public, and social sectors with the facts and insights on which to base management and policy decisions. MGI research combines the disciplines of economics and management, employing the analytical tools of economics with the insights of business leaders. Our “micro-to-macro” methodology examines microeconomic industry trends to better understand the broad macroeconomic forces affecting business strategy and public policy. MGI’s in-depth reports have covered more than 20 countries and 30 industries. Current research focuses on six themes: productivity and growth; natural resources; labor markets; the evolution of global financial markets; the economic impact of technology and innovation; and urbanization. Recent reports have assessed job creation, resource productivity, cities of the future, the economic impact of the Internet, and the future of manufacturing. MGI is led by three McKinsey & Company directors: Richard Dobbs, James Manyika, and Jonathan Woetzel. Michael Chui, Susan Lund, and Jaana Remes serve as MGI partners. Project teams are led by the MGI partners and a group of senior fellows, and include consultants from McKinsey & Company’s offices around the world. These teams draw on McKinsey & Company’s global network of partners and industry and management experts. In addition, leading economists, including Nobel laureates, act as research advisers. The partners of McKinsey & Company fund MGI’s research; it is not commissioned by any business, government, or other institution. For further information about MGI and to download reports, please visit www.mckinsey.com/mgi. Copyright © McKinsey & Company 2014 McKinsey Global Institute July 2014 China’s digital transformation: The Internet’s impact on productivity and growth Jonathan Woetzel Gordon Orr Alan Lau Yougang Chen Elsie Chang Jeongmin Seong Michael Chui Autumn Qiu Preface Some 18 months ago, the McKinsey Global Institute published a report on the explosive growth of e-tailing in China, noting that the Internet was producing real macroeconomic effects by spurring incremental consumption. Today China’s consumer-focused Internet is transforming into a more business-oriented Internet. This next wave of digital development promises to have an even deeper impact on China’s economy—contributing not only to faster GDP growth but to growth that is based on productivity, innovation, and consumption. This research examines six representative sectors of China’s economy and analyzes the transformations that are taking place within them as new Internet applications take hold. It finds that these innovations will not only generate productivity gains but also lead to the creation of entirely new markets for digital goods and services. Beyond the effects within these sectors, the Internet creates information transparency that can improve investment decisions and make the allocation of capital more efficient throughout the entire economy. As business adoption of the Internet reaches critical mass, competition will intensify for companies and workers alike. Major industries may be entering a period of disruptive change, but China’s digital transformation could lead to productivity growth and rapid innovation. Even more important, it could produce societal benefits that include wider access to capital, a more effective health-care system, and a workforce with greater skills. This project was led by MGI senior fellows Elsie Chang and Jeongmin Seong, along with MGI director Jonathan Woetzel; McKinsey & Company directors Gordon Orr and Alan Lau; and MGI principals Yougang Chen and Michael Chui. The project team was managed by Autumn Qiu and consisted of Ellen Chang, Welson Li, Nancy Nan, Candy Tang, Betty Yee, and Sellina Yu. Thanks to Lisa Renaud and Lin Lin for editorial support and to our communications, operations, and production colleagues—including Marisa Carder, Fanny Chan, Deadra Henderson, Bo Jiang, Glenn Leibowitz, Julie Philpot, Rebeca Robboy, and Rebecca Zhang—for their much appreciated contributions. A number of colleagues made significant contributions to our fact base, including MGI director James Manyika, MGI principal Jaana Remes, and MGI senior fellow Jan Mischke. We also extend thanks to our research colleagues Tim Beacom, Ningkun Hu, Shumi Jain, Karen P. Jones, Xiujun Lillian Li, Hongying Liao, Terry Sun, Yang Wang, Jing Xiao, Frances Xu, Lei Xu, Tony Zhou, and Xin Zhou. This report benefited greatly from the support and expertise provided by numerous McKinsey colleagues across the globe and from a range of industry practices. We are grateful to Markus Allesch, Nick Arnold, Wouter Baan, Diego Barillà, Dirk Breitschwerdt, Philip Bruno, Jacques Bughin, Elizabeth Bury, Jamie Cattell, Amy Chen, Jason Chen, Joe Chen, Mei-Jung Chen, Rae Chen, Jayson Chi, Violet Chung, Costanza Citrini, Joseph Cyriac, Julian Dai, Olivier Denecker, Fey Deng, Karel Eloot, Mauro Erriquez, Dan Ewing, Xiyuan Fang, Maxine Fu, Stefan Fürnsinn, K Ganesh, Paul Gao, Bill Gerhardt, Fang Gong, Geliang Gong, Peter Groves, Mingyu Guan, Andreas Habeck, Dörte Hahn, Joseph He, David Henderson, Sheng Hong, Eddie Huang, Daniel Hui, Sheinal Jayantilal, David Jiang, Sebastian Kempf, Thilo-Anyas König, Jan- Christoph Köstring, Axel Krieger, Kenny Lam, Joshua Lan, Franck Le Deu, Dan Leberman, Martin Lehnich, Nicolas Leung, Guangyu Li, Vincent Li, Yinuo Li, Wenkan Liao, Marc Lien, Nathan Liu, Li Ma, Lars Markworth, Dmitri Mishustin, Timo Möller, Alexander Ng, Tunde Olanrewaju, Gregory Otte, Michael Phillips, Philipp Radtke, Gérard Richter, Dave Rogers, Robert Schiff, Sha Sha, Kai Shen, Philipp Siebelt, Ari Silverman, Sebastian Sjöberg, Kevin Sneader, Min Su, Florian Then, Christopher Thomas, Kevin Wei Wang, Larry Wang, Dominik Wee, Florian Weig, Jun Xu, Max Yang, Peter Zarth, Haimeng Zhang, and Daniel Zipser. We are also grateful for the challenge and advice provided by our academic advisers for this research: Martin Baily, the Bernard L. Schwartz Chair in Economic Policy Development at the Brookings Institution; and Xinmin Gao, vice president of the Internet Society of China. In the course of the project, we interviewed more than 50 regional experts and business leaders to understand the emerging Internet in China and around the world. We extend our thanks for their time and insight. This independent MGI initiative drew on data and expertise from the Alibaba Group Research Center and Baidu Development Research Center. Part of our analysis was made possible through this collaboration, and we are grateful for their assistance. As with all MGI research, however, this work is fully funded by the partners of McKinsey & Company and has not been commissioned or sponsored in any way by any business, government, or other institution. This report furthers MGI’s mission to understand the forces transforming the global economy, identify strategic opportunities, and prepare for the next wave of growth. We welcome your comments on the research at [email protected]. Richard Dobbs Director, McKinsey Global Institute London James Manyika Director, McKinsey Global Institute San Francisco Jonathan Woetzel Director, McKinsey Global Institute Shanghai July 2014 From a consumer- oriented Internet … 632 million Chinese Internet users in 2014 700 million Active smart devices ~US$300 billion 2013 e-tailing sales 4.4% Size of China’s Internet economy as a share of 2013 GDP—higher than the United States or Germany … to a more enterprise- driven Internet 7–22% Up to 22% The Internet’s contribution The Internet’s contribution to the total GDP increase to China’s productivity expected through 2025 growth by 2025 RMB 610 billion Potential annual savings in health-care expenditures by 2025 RMB 10 trillion Annual GDP at stake by 2025, equivalent in size to Australia’s current GDP Contents Executive summary 1 1. China’s digital transformation 17 2. The Internet’s growing impact in the consumer electronics, automotive, and chemical sectors 33 3. Productivity gains and positive spillovers in finance, real estate, and health care 55 4. China’s digital agenda: Capturing the Internet’s full potential 95 Appendix: Technical notes 111 Bibliography 119 Executive summary China is in the midst of a digital revolution. During the course of 2013, the number of active smart devices grew from 380 million to 700 million.1 On Singles Day, the e-commerce marketplaces Taobao and Tmall posted more than RMB 36 billion (almost $6 billion) in sales in just 24 hours. Some five billion daily searches are made through Baidu, and hundreds of millions communicate via WeChat, Tencent’s mobile messaging app. Now with 632 million users—and counting—the Internet is fundamentally altering the fabric of daily life in China.2 Until now, China’s Internet has been largely consumer-focused (Exhibit E1). But that is about to change as the Internet penetrates more deeply across major sectors of the economy. As companies embrace Web technologies, their operations become more efficient, translating into productivity gains. While
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