Outlook 2020: The China POV
The race to the next platform, led by 5G, Bytedance, and more
Written by Lin Liu, Chief Strategy Officer, UM China & Lydia Chen, Group Strategy Director, UM China
In 2019, China clearly made some choices and set some priorities. Thanks to the early adoption of 5G, a new wave of digital infrastructure building has started, and every established player is trying to use it to maintain its existing advantage or get ahead. This has meant that scale is often achieved at the expense of disruptions. In this outlook for China, we discuss the forces that are reshaping China’s digital and media landscape, and some of the nuanced mutations or departures from global trends: AR and VR are pushed to the backburner, for example, as platforms concentrate their resources to take full advantage of the 5G deployment.
The impact of the Sino-US trade war has further amplified the importance of domestic consumption, and the government’s ambition to structurally upgrade the economy and eliminate poverty nationwide has encouraged entrepreneurs to discover opportunities in the less-developed areas of the country. The dawning of 5G has also accelerated an infrastructure upgrade, both in the public sector — the new Daxing Airport serving the Beijing area, for example — and in the private sector, mainly in cloud solutions for retail, business solutions, gaming and emerging sectors like online education.
In 2019, we also witnessed an even closer alignment between the private and public agendas, resulting in an extension of China’s sophisticated mobile commerce infrastructure into less developed areas, and prioritizing cloud technology as the strategic focus. We saw a merger between the “digitalization of industries” and “industrialization of the digital.” Every major player sought ways to go further and deeper, and to evolve their business models as they expand and grow.
Overall, the 5G rollout is laying the groundwork for the development of IoT networks and ambient computing, while Bytedance apps are democratizing creativity and driving content consumption with algorithms. Instead of the widespread anxiety brought on by technological disruptions in the West, Chinese consumers are generally more optimistic about the transforming power of technology and eager to explore new applications enabled by 5G.
Race to the Next Platform
As a global leader in ecommerce development, China’s online retail volume growth rate exceeded 19.5% y-o-y in 2019, more than doubling its total retail volume growth rate of 8%, according to the National Bureau of Statistics. With the penetration of mobile usage hitting 72.5% in lower-tier (aka, less economically developed and urbanized) cities, which is almost on par with the more developed areas, mobile shopping took off. According to a report from the 44th CNNIC, by June 2019, the total users of ecommerce services in China grew 5.1% in six months, thanks largely to growing mobile adoption in rural areas. Further proving the point, Alibaba’s annual report revealed that 60% of its new users came from lower-tier regions in China.
The lower-tier cities and rural areas offer the greatest opportunities for growth. Take PinDuoDuo, KuaiShou and QuTouTiao, three of the strongest performing apps, where 68.8%, 64.1% and 64.9% of their users, respectively, come from lower-tier regions, according to data published by the Commerce Ministry of China. According to National Statistics Bureau’s data, in the first half of 2019, the growth rate of ecommerce volume in rural areas has reached 23%, which is 5% higher than the national growth rate.
The ecommerce giants have been the largest drivers in the rush to lower-tier cities. Taobao, with its “Plan for Thousand County” program, has strengthened its logistic network in rural areas, first to deliver commodity products to the villages, then in the future, to deliver fresh produce from the villages to the cities. This emerging market has generously returned rewards for the investment. In Alibaba’s Tmall 618 Mid-Year Shopping Festival of 2019, the number of users from lower-tier regions and their spending both grew by 100%, according to data from the Commerce Ministry. According to Trustdata’s report, 620 million users in lower-tier regions took part in the Double 11 Festival in 2019, registering an increase of 133.6%. In the past, these consumers did not have awareness nor access to upscale products due to the lack of advertising campaigns and retail outlets in their areas. Now, they can learn about the products on the internet, then place orders, which are delivered to their doors.
Other ecommerce players are also taking strong actions: JD.com prioritized lower-tier cities as its key growth market, launching its “24-hour to arrive in thousands of towns” program in 2019. Su Ning built out its “one-hour living circle” service, which enables customers in selected regions to get one-hour delivery, covering 85% of rural areas in China. The leveling out of retail distribution thanks to ecommerce will be part of China’s New Normal.
5G as the New Infrastructure
The impact of 5G is the most noteworthy in the evolution of the big platforms. Scale and speed are of the essence in China, and the deployment of 5G is no exception. According to data from China Mobile, there will be an estimated 110 million 5G users in China by the end of 2020, which will fundamentally create a new infrastructure and incubate new ecosystems.
5G is transforming how content will be delivered. Museums are one example: The Palace Museum in Beijing has more than 1 million items in its collection and what is exhibited is just a sliver of the collection. In 2019, the museum digitalized 50,000 objects for online exhibitions. With the arrival of the 5G network, this kind of visual database will be a larger part of audiences’ experiences. Similarly, we anticipate an upgrade in live streaming experiences, such as AR overlay and enhanced real-time interactions.
Collectively, the Chinese internet giants focused on cloud in 2019, believing that it would further assist their efforts to expand geographically and improve user experience. The cloud business grew by an estimated 52.8% in 2019, according to China Information and Communication Institution. Alibaba, which is the leading player in China’s cloud market with a 36% market share, announced it will upgrade all its business to the cloud platform. Riding on 5G’s bandwidth, the capability of cloud algorithm will be greatly accelerated. 5G will also allow online gaming services to offer gamers a more fluid and richer experience, one where they will not be held back by locations or hardware requirements. While still in the experimental stage, faith in 5G to enhance health and education services also remains strong.
The collaboration between the public and private sectors sometimes takes more direct forms. Tencent launched a cloud-based “We City” smart city system in July to provide intelligent solutions for city public management and services now covering Shen Zhen and Changsha, and Huawei will also provide smart city solutions for Shenzhen and Liyang.
Bytedance Drives Democratized Creativity with Algorithms
As technology is leveling out regional differences, it’s also encouraging more diversity in content, thanks to the increasing efficiency made possible by the fast computing power. This increased diversity is not only incubating cultural innovations, but also making niche campaigns and brands more viable.
The success of Bytedance — the owner of TikTok and Toutiao — is particularly noteworthy. Coming to the scene relatively late, its ability to gain consumer attention has been achieved at the expense of the incumbents, especially Baidu. By the end of 2019, Bytedance’s advertising market share rose to almost the same level as Baidu’s, both at roughly 22%, according to Totem Media. Bytedance’s success is not driven by a singular innovation in technology or user experience or culture, but by the optimization in matching content and audience, and lowering the barrier both to creation and consumption of content. Its products have profoundly impacted the cultural preferences of the Chinese people.
When TikTok first burst on the scene in 2018 with easy to produce, easy to discover short videos, many saw it as a content innovation empowered by algorithms. Soon, it became a guilty pleasure for everyone, full of frivolously cute and funny distractions. Beginning in 2019, user preferences began driving more diverse content on TikTok: Capturing real-life events, traditional crafts, news reports, technology, and sports have made the app more relevant to different groups of users. Thanks to the social nature inherent in the short video format, communities are forming around key opinion leaders and verticals. Interestingly, this movement coincided with the government’s policy to rein in the entertainment industry, which had been overtaken by well-paid pop idols and their rabid and juvenile fan bases.
As Bytedance carves more and more share out of BAT — gaming from Tencent, product recommendation from Alibaba — it’s a force that must be reckoned with, both as a business entity and as a cultural force that’s changing consumers’ search behaviors and tastes for content. Bytedance feeds consumers’ thirst for more “real content” vs. polished productions. This trend has also buoyed other content platforms, such as BiliBili and Kuaishou, and given rise to a new generation of salt-of-the-earth type KOLs (key opinion leaders). Among those currently capturing the attention of consumers are Li Ziqi, Li Jiaqi and Xu Dasao, who are all known for deep expertise, well-defined and unique personal aesthetics, and spunky personalities. Interestingly, these KOLs, who may have smaller followings than some of the manufactured idols from the entertainment industry, are appearing to be more sustainable.
While Bytedance is still in somewhat collegial relationships with BAT, we’re likely to see more clashes in the future as it ventures deeper into long videos, education, gaming, ecommerce, music and many more sectors. By optimizing the distribution of content and audience, it is redrawing the boundaries between China’s warring ecosystems.
Brand Takeaways
Given the vast scale and accelerating pace of change of the Chinese market, every brand must reflect on its market position, its goals and its capabilities. A mass-market brand must scale to keep up with the speed with which the digital infrastructure expands, while a smaller, vertically focused brand can also survive, as long as it stays true to its core audiences and true strength.
Despite the challenges, brands should be prepared for a fun time ahead. 5G is being deployed at an astonishing pace in China, thanks to efforts from both the tech giants and the government. Between the cloud solutions offered by the tech platforms, and the internet of things platform served up by the government, there are myriad possible configurations. Brands will need to pay close attention to emerging 5G applications and be prepared to act fast.
As we write this, the COVID-19 outbreak has put China and the world on high alert. On some level, this crisis has become a test for China’s new infrastructure and internet giants, and by and large, China’s strength in ecommerce and mobile technology has proven to be helpful. But there are also revealing pain points that are in need of solutions. Thanks to China’s leading position in mobile technology, information can now travel to everyone, which ironically means that every problem in China will be a national problem. As China moves to level out the regional differences, tech platforms are likely to evolve the same way: to become more uniform in quality and experience. Brands, needless to say, must keep up.
