The Internet in China: How the Network is Shaping the PRC’s Economic and Social Landscape

By Eric Harwit

Chinese e-commerce and communications companies are playing leading roles in the nation’s continued Internet development. These corporations are expanding their roles in e-commerce, communications apps, and other fields that both support economic growth and help to narrow the rural-urban digital divide.

 

china-2China’s rapid Internet development and massive user number growth is showcased on an annual basis with the November 11 shopping bonanza known as ‘Single’s Day.’ That day, unmarried youth celebrate pride in their status with an online buying spree. E-commerce corporate leader Alibaba Group marked the 2015 event by displaying its clout on live television, with a featured appearance by James Bond actor Daniel Craig and a headline musical performance from American Idol finalist Adam Lambert. Jack Ma, Alibaba’s executive chairman and a man often ranked as the wealthiest person in China, provided enthusiastic banter. The day was a huge success for one of China’s largest Internet companies, with reported one-day sales of $14.3 billion, an increase of 60% over the previous year.

China’s Internet expansion will not only continue to fuel the economy, it may also help to ameliorate the country’s income gap and electronic digital divide.

No element of China’s economic growth over the past decade has been more dynamic than that of the explosive on-line sector. Giant Chinese Internet companies such as Alibaba have given the country’s more than 660 million users the opportunity to take part in e-commerce, communicate using cutting edge apps, and enjoy entertainment on computers or increasingly ubiquitous smartphones. While this rapid change has been most pronounced in the wealthy coastal metropolises, digital development is also making its way into the less developed inland, rural parts of the country. China’s Internet expansion will not only continue to fuel the economy, it may also help to ameliorate the country’s income gap and electronic digital divide.

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China’s On-line Marketplace Leaders

Collectively, the dominant corporations of China’s Internet growth are known as ‘BAT’. These are the search engine behemoth Baidu, the e-commerce leader Alibaba, and the telecommunications innovator Tencent. All three are privately owned and managed, though to prosper they must avoid running afoul of Chinese government political sensitivities. Baidu, launched in the year 2000, is capitalised at $74 billion, and has about 80% of China’s online search market; in 2010, early search rival Google effectively withdrew from this segment in China to protest government censorship of its search results. Alibaba, under Jack Ma, has grown to be a consistently profitable $213 billion company. Tencent provides a variety of on-line communications and e-commerce services. Its social media app, WeChat, now reaches some 600 million monthly active users.

All three companies seek to get the largest piece of a growing digital market pie. According to China Internet Watch, total retail e-commerce sales in China in 2015 will reach about $670 billion, making up some 16% of total domestic retail sales for the year. By 2018, retail e-commerce sales may reach more than $1.5 trillion, or 29% of all retail sales. Figure 1 (see below) charts the growth of China’s online retail sales since 2010.

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E-commerce is a bright spot on the larger Chinese economic scene. Total GDP growth is expected to slow to an annual rate of about 6.9%, the lowest pace since China’s boom began in the early 1990s. The Chinese government is seeking to stimulate the enormous domestic market to offset potentially declining export-led growth. On-line sales are making a major contribution to the effort. The rapid rise in the number of active smartphone users in China, now consisting of more than 500 million people, provides more fuel for growing digital consumer participation in the economy.

Perhaps the hottest part of China’s digital economy lies in ‘online-to-offline’ or ‘O2O’ services. For Uber-like car hailing services via a smartphone app, Alibaba has formed an alliance with Tencent to create Didi Kuaidi. The company now has some 70 to 80% of the domestic private car hailing market. It also claims 99% of mobile app taxi hailing. Like its American rival, Uber – whose Chinese service takes most of the rest of the Chinese ride-hailing market – the company offers generous subsidies for riders and incentives for drivers. Didi Kuaidi’s private car requests reportedly tripled from May to June 2015, with some 1.4 million daily rides completed. But, like Uber (in which Baidu is an investor), the venture is not yet profitable. It lost some $571 million in the first five months of 2015.

Chinese Internet companies have also sought to mimic America’s online group-coupon service Groupon. As with the car hailing services, bigger seems to be better. The major players are consolidating this area with multi-billion dollar combinations. In October 2015, for example, Alibaba’s group-buying service company Meituan agreed to a $15 billion merger with Tencent’s restaurant review service Dianping. Meituan leads the group-buying field with about 52% of transactions, in a total market worth some $12 billion. Dianping has about 30% market share, and forecast its revenue to triple to about $300 million in 2014. Earlier in the year, Baidu agreed to invest some $3.2 billion in Nuomi, a company that provides group coupons and services in sectors including restaurants, hotels, and movie tickets. Nuomi has nearly 14% of the group-buying market.

Despite the mixed success Groupon and other similar O2O companies have had in the US, Chinese Internet corporations are pouring huge investments into these ventures. The competition emerging between the giant companies indicates these services will persist into the foreseeable future.

 

Trends in Social Media

E-commerce is by no means the only activity Chinese netizens carry out on the   Internet. Though Twitter is blocked in China, the domestic versions of the service, known as ‘weibo’ or ‘microblogs’ have enjoyed popularity for nearly a decade. The Sina Corporation, Tencent, and others host microblogs, which have grown to attract millions of popular content producers and hundreds of millions of followers. Entertainers, sports figures, and business commentators rank among the most popular weibo posters. However, political commentators who have crossed government lines in news reporting or criticism of the ruling communist party have been censored or, in some cases, arrested. Weibo use peaked in 2012 at about 310 million users, and Sina and others have struggled to make the technology profitable. In 2012, for example, Sina’s Weibo unit generated only $66 million in revenue.

With the decline of weibo, partly the result of government monitoring and censorship, a less public means of communication known as WeChat (or ‘weixin,’ in Chinese) rose to take its place. Created and developed by Tencent, WeChat is a free mobile phone messenger application with functions similar to Facebook’s recently acquired WhatsApp. WeChat allows users to send text and voice messages and share photos and video with close friends and family. They can also follow popular WeChat posters that have established public accounts. The service, outside of mobile data fees, is free. Tencent seeks profits by selling games and digital stickers to users and, in some cases, sending advertisements to targeted WeChat subscribers. WeChat has also introduced popular features for socialising, such as ‘look around’ or ‘message in a bottle’ to connect random WeChat users in the neighborhood or around the world. These have contributed to an explosion in user numbers: by the end of 2014, WeChat had more than 500 million subscribers in China, and tens of millions of addition users in other nations. The Chinese app lags behind the global leader, WhatsApp, which boasted more than 800 million active users in early 2015. Still, WeChat stands to increase the communications opportunities for the vast majority of China’s online population, and, potentially, for users around the world.

 

A Persistent Digital Divide

Internet use in China is still mainly concentrated in urban areas, with about 64% of city dwellers in mid-2015 accessing the digital network. In the countryside, there are some 186 million netizens, though this represents only about 30% of the rural population. Figure 2 (see below) shows the progression of penetration into both urban and rural areas. Problems for spreading digital access include affordability of equipment, computer literacy, and physical access to a fixed or mobile data connection.

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Still, government efforts to bridge the divide include investment in building Internet connection infrastructure. By the end of 2015, all cities and towns and about 94% of China’s nearly 700,000 administrative villages had fixed broadband access ports. Purchases from foreign equipment vendors such as Cisco Systems, as well as deployment of domestic telecommunications equipment made by Chinese companies Huawei and ZTE, contributed to this rapid infrastructure expansion. Government programs also facilitated rural Internet-connected smartphone purchases.

Internet use in China is still mainly concentrated in urban areas, with about 64% of city dwellers in mid-2015 accessing the digital network.

In bridging the digital divide, technologically sophisticated and increasingly affordable smartphones are the alternative to PCs for connecting rural people to the network. Foreign and Chinese private companies are playing a leading role in this arena. Apple’s iPhone has the greatest cachet among Chinese citizens, and a 12 to 15% market share. Domestic makers such as Xiaomi and Huawei make good quality smartphones for prices as low as about $100. Though rural per capita disposable income is now only about $1600, in contrast to urban disposable income of some $4400, these phones are affordable to many in the countryside. Some 85 percent of the rural Internet citizens now use mobile to go on-line.

Despite the overall lower penetration rate of rural Internet service, e-commerce is growing quickly in China’s countryside. In 2014, 77 million rural people shopped online, a 41% increase over the previous year. Urban online shopping increased only 17% over the same period.

Part of the reason for rural interest in online shopping is the lack of big-box Walmart or Home Depot-type stores in the countryside. Shopping via a computer or smartphone, rather than trekking to a nearby large town or city, is the most convenient and practical course for many rural dwellers. To capitalise on this demand, over the next three to five years, Alibaba will be investing 10 billion yuan (about $1.5 billion) to build 1000 county-level distribution centers and some 100,000 village drop-off points. This distribution network will facilitate rural residents’ access to the products they order online. JD.com, an online shopping rival to Amazon, is also expanding its rural delivery capabilities.

In 2014, 77 million rural people shopped online, a 41% increase over the previous year.

Tencent’s WeChat is also valuable for China’s have-less residents, as the app’s features allow greater ease of communication for both rural and less affluent urban citizens. For example, WeChat features voice and text messaging that, in contrast to traditional phone company billing practices, is charged under a less costly bandwidth usage rate. Voice messages also allow Chinese consumers who may lack high levels of literacy or the ability to easily input Chinese character text to communicate with family, friends, business associates and others who have downloaded the free app.

China’s slowing economy is the greatest obstacle to maintaining the rapid growth of e-commerce, and the spread of Internet access around the nation. As the second largest economy in the world faces problems of rising wages, an aging population, and the need to address internal problems such as pollution and income inequality, growth in the future may never return to the breakneck pace of recent decades. Moreover, as the Internet population approaches saturation, user numbers will increase as a tamer pace. Still, the hundreds of millions of middle class urban residents, and rural citizens only now getting their first tastes of online communication and commerce, will likely keep the Internet a core and vital part of China’s economy for many years to come.

 

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ericEric Harwit is a Professor of Asian Studies at the University of Hawaii. He has a Ph.D. in political science from UC Berkeley, has lived in Beijing several years, and speaks fluent Chinese. His most recent book is China’s Telecommunications Revolution. He has appeared on CNBC, and been interviewed by MSNBC, NPR, Time, and other media.

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