Digital China: Powering the
economy to global competitivenessTHE 7TH ANNUAL INTERNATIONAL FORUM ON ECONOMIC
DEVELOPMENT AND PUBLIC POLICY
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of
McKinsey & Company is strictly prohibited
December 7, 2017
Rated #1 Think Tank 2016 (private sector category) by
the Global Think Tank Index, University of Pennsylvania
Jeongmin Seong
2McKinsey & Company
China became a
global force in
digital economy
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China’s digital economy is a story of commercial success and investor
excitement
1 Refers to third-party payments conducted through mobile transactions. For China, mobile payments exclude bank or UnionPay credit card transactions, digital wealth management, and
digital finance. For the United States, payments are in-person payments on mobile between buyers and sellers, and remote payments on mobile devices.
2 Defined as a privately held startup valued at over $1 billion.
NOTE: Numbers may not sum due to rounding.
Retail e-commerce transaction value
%, $ billion
Mobile payments, 20161
$ billion
Global unicorns, June 20162
%; number; $ billion
China United States Rest of the world
35.0
24.1
64.6
33.5
42.4
2016
<1.0
495
2005
1,915100% =
74
790
United States
11x
China
34.043.0
47.0
45.0
19.012.0
262
Number of
unicorns
Valuation
883100% =
SOURCE: PitchBook; Dealogic; eMarketer; iResearch; TechCrunch CrunchBase Unicorn Leaderboard; McKinsey Global Institute analysis
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Fintech Virtual reality Autonomous driving
Wearables Education technology Robotics and drones
3D printing Big data AI and machine learning
China is in the global top three for venture capital investment
in key technologies
1 Based on the nationality of the venture-capital investor. Coinvested deals are counted under each nationality. Investments in startups with multiple technologies are counted in each
category of technology.
NOTE: Not to scale.
Venture capital investment in leading technologies, 20161
$ million
493
668
1,793United Kingdom
Japan
United States 5,437
China 7,158
Germany
20
73
166
1,312
France
Japan
United Kingdom
China
United States 1,437
142
264
268
357
582United States
Australia
United Kingdom
Japan
China
95
134
170
992
United States
Canada
Germany
United Kingdom
China
1,724
145
163
217
681China
1,282
United Kingdom
India
Japan
United States
59
96
129
227
728United States
Canada
Singapore
Japan
China
181
181
182
221
602
Japan
Germany
China
Russia
United States
554
651
942China
6,065
Russia
Singapore
United Kingdom 1,673
United States
329
473
900
Japan
1,222
China
United States
United Kingdom
Australia
3,782
SOURCE: PitchBook; McKinsey Global Institute analysis
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Three factors are driving further development of China’s digital economy
Well-capitalized digital giants building rich digital ecosystem
Big and young market enabling rapid commercialization on a large scale
Government allowing innovators room to experiment
11years to put money-
transfer cap for mobile
payments
Baidu, Alibaba, and
Tencent (BAT)
accounting for
42%venture capital
investment
731million Internet users
100billion renminbi AI
application market
announced in NDRC1
plan
Superapp with
90functionalities
282million digital natives
Over
1
2
3
1 National Development and Reform Commission.
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Total Internet users
Mobile Internet users
95 79 91
Mobile Internet users as proportion of total online users, %
86
Digital natives1
39 31 26
Digital natives as proportion of total online users, %
37
287
434432
731
EU
2.5x1.7x1.7x
United StatesIndiaChina
262
343371
6952.7x
India United StatesEUChina
75135160
282
China India United StatesEU
3.8x
China enjoys scale advantages, with a large base of 695 million mobile
users and 282 million digital natives
1 Defined as Internet users aged 25 or under.
Million, 2016
China Other countries
SOURCE: China Internet Network Information Center; Internet & Mobile Association of India; World Bank; Statista; Internet Live Stats; McKinsey Global
Institute analysis
1
8McKinsey & CompanySOURCE: Source
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10McKinsey & CompanySOURCE: Company announcements; McKinsey Global Institute analysis
Chinese players have developed superapps that offer a one-stop
solution to consumers Number of features by key application categories1
Alipay
1 Includes newly released app features based on press releases and grouped into 12 key categories: education, entertainment, health, shopping, dining, social, finance, communication,
transportation, utilities and social services, media, and charitable donation.
2 As of April 2017.
NOTE: Numbers may not sum due to rounding.
90
39
13
2011 201722014
Media
1
Health
2
Charitable donation
3
Dining
3
Education
4
Entertainment
5
Communication
5
Shopping
6
Utilities and
social services
8
Social
8
Transportation
10
Finance
35
2
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Top 50 startups in China3
China’s Internet giants are providing funding and talent to the broader
digital economy
Other
BAT
BAT alumni-
founded
14
30
50
6
BAT
invested
Venture capital investment from China vs. United States, 20161
%; $ million
1 Includes completed domestic venture capital investment deals only.
2 BAT = Baidu, Alibaba, and Tencent. FANG = Facebook, Amazon, Netflix, and Google.
3 According to CrunchBase, which ranks global startups based on number of connections within the platform, community engagement, funding events, news articles, and acquisitions.
NOTE: Numbers may not sum due to rounding.
42
90
58
10
2,334 31,006100% =
20162013
96 95
60,990
5
20162013
36,987100% =
4
China United States
BAT2 OthersFANG2
SOURCE: PitchBook; CrunchBase; McKinsey Global Institute analysis
2
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Chinese government left space for innovators to experiment : Mobile
payment exampleSelected examples Commercial move Regulation event
2000 2005 2010 2015
Money-transfer cap2005 2016
Alipay’s online money-transfer service (from
debit card to Alipay account)
Online money-transfer cap
imposed by the government
11 years
Alipay’s launch of
escrow services
E-commerce requirements
for consumer-goods claims
Customer protection
(escrow and goods
claims)
2005 20149 years
Online payment2003 2010
Taobao’s first online
payment transaction
Payment business license to third
party passed by the government
7 years
2011 2016Barcode-based
mobile payment
Alipay's launch of
barcode-based
payment services
Barcode payment
standard released by
the government
5 years
Online payment
transactions
$ billion
<1 2 149 1,811
SOURCE: Official regulatory announcements; SAIC and Ministry of Commerce; Alibaba, Baidu, and Tencent annual reports; McKinsey Global Institute
analysis
3
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Digital forces
are reshaping
value chains
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Three digital forces are reshaping value chains
Disintermediation Disaggregation Dematerialization
Using digital to cut out
middlemen
Breaking up large items and
repacking as services
Turning the physical into
virtual
▪ eBook
▪ Streaming music
▪ Ride hailing
▪ Shared property
▪ E-commerce
▪ Online travel agency
Examples
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Potential value shift/creation, 2030
% of industry revenue pool Examples
Consumer goods
and retail
Omnichannel, analytics-driven business
model, platform going upstream
Sharing economy
Automotive and
mobility
Car connectivity
Omnichannel
Integrated mobility solution
Health care
Big data
Internet of Things (IoT)-enabled treatment
Shared medical resources
Freight and
logistics
E-forwarding platform
Crowdsourced delivery23–33
12–45
13–34
10–30
Digital forces can shift (and create) between 10 and 45 percent
of the industry revenue pool across players by 2030HighLowCase
SIMULATION
SOURCE: McKinsey Global Institute analysis
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Value shift patterns
% of total digital disruption
Disintermediation and disaggregation are the major forces in value-
chain restructuring
HIGH SCENARIO
Disintermediation Disaggregation Dematerialization
6
85
9
66
27
7
42
2
56
6 3
91
Consumer
and retail
Automotive
and mobility
Health careFreight and
logistics
SOURCE: McKinsey Global Institute analysis
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Eighty-five percent of Chinese shoppers have already adopted omnichannel,
and their expectations of the experience are rising
1 Weighted average of five key product categories, including consumer electronics.
NOTE: Numbers may not sum due to rounding.
Shopper purchasing patterns, 20171
% of digital consumers who purchased and researched
39
Evaluate online
and shop offline
Omnichannel
throughout the
journey
Pure online
Pure offline
Touch and feel
offline, shop online
11
39
7
4
58
68
56
57
12
18
11
24
VR experience at
offline stores
Check offline stock
status online
Shop online, exchange/
return offline
Scan QR codes
to shop online
Ever usedExcitement/intention to use
Omnichannel expectation vs. usage, 2017
% of online shoppers (n = 2,350)
SOURCE: McKinsey iConsumer China Survey 2017; McKinsey Global Institute analysis
CONSUMER AND RETAIL
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Integrated mobility solutions can fundamentally change how people move
and create ripple effects in adjacent industriesPotential value gain
Potential value loss
Integrated
shared mobility
solution
Shared
cars
Shared
public
transit
Shared
bicycles
Insurance
companies
Car dealersDigital/technology
companies
Telecom
companies
Car-parts
suppliers
Automakers
Properties
Consumer
attitudes toward
car ownership
are changing 40%
60%
I can live without a car and I can
rent when I need a car
In contrast to before, owning a
car is no longer a status symbolShared mobility
solutions are
penetrating
rapidly
30%
67%
E-hailing or car-
sharing penetration
17-minute decrease
in commuting time
Electricity providers
Fuel suppliers
SOURCE: McKinsey China Auto Consumer Survey 2016; China Shared Economy Survey 2017; McKinsey Global Institute analysis
AUTOMOTIVE AND MOBILITY
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IoT devices in health care can help prevent disease, improve diagnosis, and
change behavior
123
260
20162003
76
36
85
42
China’s chronic
disease population is
increasing rapidly
Million
33
59
34
81
Treatment
However, patients are often
undiagnosed and untreated
IoT solutions can help in disease
diagnosis and treatment
Diabetes
%, 2015 or
latest available
year
Diagnosis
Hypertension
%, 2014
China
United States
Wearables Injectables
Telemedicine Online
consultation
Mobile devices Monitoring
devices
SOURCE: American Diabetes Association; Ministry of Health, China; World Bank; McKinsey Global Institute analysis
HEALTH CARE
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1 Empty running is calculated as the percentage of total vehicle kilometers when the vehicle is empty.
2 Channel distribution based on a March 2016 survey by the China Federation of Logistics and Purchasing (sample size is up to 3,183 trucking company owners or truckers).
3 Regular orders mainly from consignees, trucking companies, and transshipment hubs.
Digital solutions can address market fragmentation and utilization challenges
in road transportation
5
8
10
16
18
28
Not specified
Referral by third-
party logistics firms
Online platforms
Connection to
truck terminal
Scalpers
Friends
Regular orders3
10–15
United
States
~10
Germany
35–40
China
OfflineOnline3332
20162012
Stagnant volume growth
yet highly fragmented
market
Road transportation
volume in China
Billion tons
High ratio of empty-running
vehicles in China
Average empty running ratio in
road goods vehicles1
%, latest available data
Low online penetration of
shipment matching
Channel distribution to receive line-haul
shipments for trucking in China, 20162
% of respondents (n = 3,183)
~7.5 ~7.2
Number of registered
trucking companies
Million
SOURCE: China Road Transport Association; China Federation of Logistics and Purchasing; Fung Business Intelligence; Analysis; McKinsey Global
Institute analysis
FREIGHT AND LOGISTICS
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How to facilitate
and prepare for
digital disruption
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Digital strategy matters (more) in China
SOURCE: Source
Maximize value from
data and analyticsAdopt bold strategy
Engage with China’s
policy and regulators Build agile organization
Use the power of China’s
vast digital ecosystem
Digitize operations
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Chinese government can play multiple roles in digitization
Reach global consensus
on digital governance
Manage labor market
during digital disruption
Promote
healthy competition
Be an investor in, and consumer
of, digital technologies
