China may still be classified as an emerging market, but on the Internet it has arrived. By 2015, China will add nearly 200 million users, reaching an Internet population of more than 700 million—almost double the combined number of Japan and the U.S. (See Exhibit 1.)
If not by 2015, then shortly thereafter, China will likely become the largest online retail market in the world, with close to 10 percent of retail sales occurring online. It already has more online shoppers than any other market, including the U.S.
While China is a huge online market, it is not an easy one. Although consumers are rapidly gaining sophistication, they have their own patterns of online consumption and behavior that are different from those of consumers in the West. The big three Internet companies—Alibaba, Baidu, and Tencent—have a firm hold on their corners of the market (e-commerce, search, and messaging, respectively) and are working hard to consolidate their positions and move into new fields.
The Boston Consulting Group has regularly tracked the evolution of China’s digital consumers since 1998, and this report is the latest in our series chronicling the epic transformation of China’s consumer landscape. Companies that want to succeed in China’s consumer market must understand both these new consumers and their rapidly evolving digital lifestyles. They also need to learn how to reach, sell to, and retain these consumers as they create the world’s most important consumer market of the future.
Just a few years ago, the digital life in China was dominated by young urban residents. Not any longer. The nation’s overall penetration rate will exceed 50 percent by 2015, compared with 38 percent in 2011. The Internet will soon replace newspapers as the medium with the second-highest daily reach, after television, in urban areas. Among individuals under the age of 30, the Internet’s penetration is almost as high as television’s.
Increasingly, the Internet is becoming a staple in the everyday life of Chinese consumers across a wide spectrum of lifestyles and incomes. In fact, the Internet has spread so widely and so quickly that we have added two groups to our Internet market segmentation: seniors (defined as individuals aged 51 and over) and rural residents.
Rural residents will contribute more than one-third of the Internet’s growth between 2011 and 2015—a rate faster than between 2008 and 2011. The urban senior segment will likely grow by 22 percent annually between 2011 and 2015, making it the fastest-growing segment. (See Exhibit 2.)
In 2011, Chinese consumers spent 1.9 billion hours a day online—an increase of 60 percent from two years earlier. This surge was powered by both an expanding Internet user base and a greater online presence. The average time online per person increased from 2.8 to 3.6 hours per day between 2008 and 2011. Chinese users average about an hour a day more online than U.S. Internet users. Television viewing, meanwhile, declined from 1.7 to 1.4 hours during those years.
Far from crimping the expansion of the Internet, the government is encouraging its growth. During the current five-year plan, which runs through the end of 2015, the government has committed to spending $250 billion on broadband infrastructure. Indeed, in response to consumer demand for more and faster Internet, the government launched an antitrust probe of China Telecom and China Unicom that has prompted the two dominant carriers to agree to accelerate their broadband rollouts, lower prices by 35 percent, and increase speeds.
As the quality of infrastructure improves, the Chinese will be surfing the Web more often at home and at work and less often at Internet cafés. They will also be relying on their mobile phones. In 2011, 69 percent of users said they used their phones to access the Web—up 30 percentage points in just three years. The share of hours spent accessing the Internet on mobile devices is rising rapidly among all age groups. In fact, seniors spent 30 percent of their Internet hours on mobile devices in 2011, compared with just 9 percent in 2008. Mobile access will rise as 3G penetration increases from 9 percent in 2011 to 31 percent in 2015.
As the Internet becomes ubiquitous, it will play an even larger role in China. Half of Internet users say that the Internet is their most trusted source of information, followed by television at 30 percent and newspapers at 15 percent, according to our research. Trust and familiarity go hand in hand. The more time that consumers spend on the Internet, the more they trust it.
Young professionals and university students lead the pack in putting their faith in the Internet, with 70 percent and 63 percent, respectively, citing it as their most trustworthy information source. Only 27 percent of users aged 51 and over, on the other hand, said that the Internet is their most trustworthy information source. (See Exhibit 3.)
In the early days of the Internet in China, users gravitated to leisure pursuits such as watching videos and listening to music. Those activities are still highly popular, especially among younger users. China has local sites similar to YouTube, such as Tudou and Youku, which have agreed to merge, and similar to Hulu, where traditional programming is offered, such as iQiyi and LeTV.
As their comfort level and sophistication have grown, users have branched out from entertaining themselves to a more diverse mix of activities including those they once avoided, notably e-commerce. Between 2008 and 2011, the online share of consumer spending increased from 11.8 percent to 14.3 percent. Between 2011 and 2015, per capita online spending will likely rise by 15 percent annually, more than doubling the expected overall increase in consumer spending and reflecting both the rising level of trust by consumers and the greater protections put in place by merchants.
Along with e-commerce, users are spending much more time on community-oriented and information activities. Community-oriented activities include e-mail, instant messaging (IM), and forms of social media. (See Exhibit 4.) Sina Weibo, a Chinese version of Twitter, has attracted more than 300 million users in less than three years of operation. Sina Weibo once handled 32,312 posts per second, surpassing Twitter’s peak traffic record. Weibo (pronounced WAY-bo) means “microblog,” and there are several competing services, but Sina’s is the most influential.
Weibos are generating both national and local conversations on important social issues that have historically been kept under wraps. In July 2011, one of China’s bullet trains crashed in Wenzhou, in the southeast of the country, killing 40 passengers. Sina Weibo quickly became, in the words of a Wall Street Journal columnist, “a conduit for inconvenient truths and cynical speculations about the accident.”
Environmental activists have begun to post daily or even hourly readings of air quality in China’s pollution-draped cities. The publicity generated by these readings has forced the government to revise its policies on collecting and publicizing air quality data in a nation where hundreds of thousands of premature deaths are attributable annually to air pollution.
The government has an uneasy relationship with this new-found passion for public discourse. In late March, Sina Weibo and Tencent Weibo, the two largest microblogging sites, temporarily suspended the ability of users to comment on posts. This restriction was part of a temporary crackdown on social networking brought on by political unrest.
As the Internet in China becomes a home for digital shopkeepers and an instrument for public discourse and social change, it will also start to look and feel similar to the Internet of more developed nations. In fact, in some cases, Chinese consumers are more avid users of online services than U.S. consumers are.
For instance, 79 percent of Chinese Internet users send instant messages, compared with just 21 percent of U.S. users. They are also bigger consumers of online music (79 percent versus 61 percent) and e-reading (40 percent versus 7 percent). (See Exhibit 5.)
When Chinese consumers access the Internet from mobile devices, they are frequently more adventurous than their counterparts in Japan and the U.S., listening to music, reading books online, or engaging in social networking. (See Exhibit 6.)
Chinese Internet users are also maturing. Between 2008 and 2011, the average age of an Internet user rose from 24.7 to 28.9 and approached the average age of users in the U.S. (30.0) and Japan (30.4). The aging of the Internet reflects both new users and the general aging of the population. In 2011, the 51-and-older segment made up 24 percent of the Chinese population; by 2015, it will make up 28 percent.
Maturity means that future growth of the user base will slow. China’s Internet population is expected to increase by 8 percent annually between 2011 and 2015—one-half the annual rate of the previous two years.
However, opportunities will continue to expand, even as user growth flattens. Online retail sales, for example, are projected to grow more than 30 percent annually between 2011 and 2015. Companies that acquire scale and customer loyalty in China’s online market will have achieved a solid foothold, ensuring future growth.
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