Decoding the Chinese Internet A white paper on China's Internet economy September 2017 Agenda Foreword Characteristics of the Chinese Internet market • Market characteristics • User characteristics • Competition characteristics • Summary of Chinese characteristics Decoding the characteristics of the Chinese Internet market • Question 1: How has the Chinese Internet market maintained such strong growth? • Question 2: Why is the Chinese Internet market particularly dynamic and volatile? • Question 3: What are the key factors for success in the Chinese Internet market? Why have global giants failed in this market? • Question 4: How will the characteristics of the Chinese Internet market evolve in the future? Group, ng Inc. All rights reserved. • Question 5: What will be the impact of more Chinese Internet companies going global? Copyright © 2017 by © Consulti 2017 by Copyright The Boston China Internet report-EN-FINAL.pptx Draft—for discussion only 1 Foreword Context: The Chinese Internet is attracting increasing global attention China and the U.S. are the dual engines 2008 Number of Internet users in China reached 253 million, overtaking the 220 million in the U.S. driving the global Internet economy. However, these two markets are vastly Alibaba's GMV reached $248 billion, greater than that different. Jack Ma, chairman of Alibaba said, 2013 of Amazon and eBay combined. “If the US is a car-based country, then China today is driven by the Internet and mobile Alibaba, overtook Wal-Mart for the first time with a GMW of $490 bn, and became the world’s largest retail phones.” 2014 platform P2P lending volume in China reached $66.9 billion, 4 times that in the U.S. This report aims to unveil the key characteristics of the Chinese Internet 2015 Mobile payment transaction volume in China reached $8.5 trillion, 70 times that of the U.S. market, and explore their root causes. Shared bikes, a concept that originated in China, attracted U.S. startups to follow suit. OFO, after only 2 ng Group, ng Inc. All rights reserved. years, made the CrunchBase unicorn list with a $1 This report was led by the Boston 2016 billion valuation. Consulting Group, in collaboration by the Three technologies (incl. autonomous driving, etc.) leading Chinese Internet giants Alibaba and developed by Baidu were selected by MIT Tech Review as “10 Breakthrough Technologies in 2017”. Baidu. We hope that it will encourage further As of April, Ant Financial’s Yu’ebao surpassed JP consideration and discussions on the 2017 Morgan, with $165.6 billion AUM, becoming the world’s Chinese Internet market. biggest money market fund. Copyright © 2017 by © Consulti 2017 by Copyright The Boston Sources: Literature research, BCG analysis. China Internet report-EN-FINAL.pptx Draft—for discussion only 2 Agenda Foreword Characteristics of the Chinese Internet market • Market characteristics • User characteristics • Competition characteristics • Summary of Chinese characteristics Decoding the characteristics of the Chinese Internet market • Question 1: How has the Chinese Internet market maintained such strong growth? • Question 2: Why is the Chinese Internet market particularly dynamic and volatile? • Question 3: What are the key factors for success in the Chinese Internet market? Why have global giants failed in this market? • Question 4: How will the characteristics of the Chinese Internet market evolve in the future? Group, ng Inc. All rights reserved. • Question 5: What will be the impact of more Chinese Internet companies going global? Copyright © 2017 by © Consulti 2017 by Copyright The Boston China Internet report-EN-FINAL.pptx Draft—for discussion only 4 Market characteristics Size: China is one of the world's largest Internet markets The largest by Internet users and 2nd largest by online spending 710m Internet users in China, almost as China is leading the world except the US many as India and the US combined in online spending Top 10 countries by number of Internet users 2016 (100 Mn) Top 10 countries by online spending 2016 ($bn) China 7.1 US 1,133 India 4.6 China 967 -3X US 2.9 Germany 352 Almost 3x that of Brazil 1.4 UK 335 Germany Japan 1.2 France 309 Russia 1.0 Brazil 217 0.9 209 Nigeria India Group, ng Inc. All rights reserved. Germany 0.7 Japan 180 Mexico 0.6 Russia 155 Indonesia 0.6 Italy 74 Copyright © 2017 by © Consulti 2017 by Copyright The Boston Sources: CNNIC, Internet Live Stats, BCG analysis. China Internet report-EN-FINAL.pptx Draft—for discussion only 5 Market characteristics Growth: China is one of the fastest-growing Internet markets High growth witnessed in both Internet users and online spending Number of Internet users in China grew Chinese online spending grew at at 25% p.a. over the past 15 years 32% p.a. over the past 5 years Internet users (m) CAGR CAGR of online spending in selected countries 2012-2016 800 China 32%32% 710 China 25% India 31%31% 600 Russia 16% Brazil 12% 460 India 30% 400 US 8% US 5% 290 Germany 7% ng Group, ng Inc. All rights reserved. Brazil 120 22% 200 France 6% Japan 7% 130 South 6% Germany 6% Korea 70 60 UK 8% Japan 5% 0 2000 2005 2010 2015 2020 Copyright © 2017 by © Consulti 2017 by Copyright The Boston Sources: CNNIC, Internet Live Stats, BCG analysis. China Internet report-EN-FINAL.pptx Draft—for discussion only 6 Market characteristics Potential: Huge potential is yet to be unlocked despite rapid growth, with Internet penetration lagging behind G20 peers Internet penetration of G20 countries (% as of July 2016) 92.0 91.1 88.5 88.5 88.0 86.4 85.7 85.6 85.5 71.2 69.2 65.6 64.7 56.4 52.2 52.0 50.0 45.1 34.3 20.4 ng Group, ng Inc. All rights reserved. UK Japan US CanadaGermany France South EU Australia Russia Argentina Italy Saudi Brazil China South Turkey Mexico India Indonesia Korea Arabia Africa Developed Emerging countries countries Copyright © 2017 by © Consulti 2017 by Copyright The Boston Sources: Internet Live Stats. China Internet report-EN-FINAL.pptx Draft—for discussion only 7 Market characteristics Internet-driven economy: Internet-related activities contribute 6.9% of China's GDP, among the highest in the world China is the world's 2nd most Internet-driven economy Share of Internet-driven GDP of total GDP (%, 2016) 8.0 6.9 5.6 5.6 5.4 4.0 3.6 3.4 2.8 2.4 ng Group, ng Inc. All rights reserved. South Korea China Japan India US Germany Canada France Russia Brazil Note: eGDP is an indicator developed by BCG to size the Internet economy of a country. It was used for the first time in “The Connected World” series report – The Internet Economy in the G20, a collaboration between BCG and Google in 2012. eGDP is calculated based on consumption, investment, state expenditure, imports and exports related to online retailing, network access and equipment. South Korea and India are rank highly due to the higher output value of ICT equipment imports and exports. If these areas are excluded from the calculation, China tops the list (6.4%), while South Korea and India drop to the 3rd (5.8%) and 8th place (3.2%) respectively Copyright © 2017 by © Consulti 2017 by Copyright The Boston Sources: National Bureau of Statistics of China, BCG analysis. China Internet report-EN-FINAL.pptx Draft—for discussion only 8 Market characteristics Impact: The global influence of Chinese Internet players is rising China accounts for 5 of the 10 Chinese unicorns accounted for largest public Internet companies in the 29% of the world’s total unicorns world (as of June 30, 2017) by quantity and 41% by valuation Global Top 10 Internet public companies Quantity distribution of Valuation distribution of by market capitalization ($bn) global unicorns global unicorns Google 636 Total #: 221 Total market cap: $79.6 Bn Amazon 463 Facebook 438 46% US 50% US Alibaba 356 Tencent 336 Priceline 92 ng Group, ng Inc. All rights reserved. Netflix 64 29% China 41% China Baidu 62 Jingdong 56 21% Other 13% Other NetEase 39 Note: Based on CrunchBase unicorn list as of May 31, 2017, which contained 63 Chinese unicorns and 112 U.S. unicorns valued at $1Bn or more. Copyright © 2017 by © Consulti 2017 by Copyright The Boston Sources: CrunchBase, BCG analysis. China Internet report-EN-FINAL.pptx Draft—for discussion only 9 Market characteristics Market structure: Market share of e-commerce and online finance are substantially larger in China than in US China vs the U.S.: Internet market revenue breakdown 2016 (%, estimate) 27 E-commerce 44 23 Social network/entertainment 5 Online finance 23 13 Basic applications 12 17 Public services Group, ng Inc. All rights reserved. 12 6 15 Other business/living services 3 China U.S. Copyright © 2017 by © Consulti 2017 by Copyright The Boston Sources: eMarketer, Analysys International, iResearch, Company financial statements, BCG analysis. China Internet report-EN-FINAL.pptx Draft—for discussion only 10 Agenda Foreword Characteristics of the Chinese Internet market • Market characteristics • User characteristics • Competition characteristics • Summary of Chinese characteristics Decoding the characteristics of the Chinese Internet market • Question 1: How has the Chinese Internet market maintained such strong growth? • Question 2: Why is the Chinese Internet market particularly dynamic and volatile? • Question 3: What are the key factors for success in the Chinese Internet market? Why have global giants failed in this market? • Question 4: How will the characteristics of the Chinese Internet market evolve in the future? Group, ng Inc. All rights reserved. • Question 5: What will be the impact of more Chinese Internet companies going global? Copyright © 2017 by © Consulti 2017 by Copyright The Boston China Internet report-EN-FINAL.pptx Draft—for discussion only 11 User characteristics User demographics: Chinese Internet users are on average 14 years younger than their US counterparts Age distribution of Age distribution of Chinese Internet users 2016 US Internet users 2016 Penetration Penetration by age group by age group 60+4% 12% 65+ 13% 66% 50-59 5% 21% 55-65 15% 82% 40-49 13% 39% 45-54 18% 99% 30-39 24% 88% 35-44 17% 99% 20-29 30% 91% 25-34 17% 93% Below 20 24% 51% Below 25 20% 46% Group, ng Inc.