Sector Report

China internet – Cloud-software optimisation, Adapting to adversity

by Elinor Leung / Sep 6, 2019


China internet firms are pursuing three new growth areas in consumption upgrading, urbanisation of lower-tier cities and acceleration in offline-to-online retail, and have become more advanced in boosting consumer spending with social ecommerce, short videos and mini programs. China is accelerating its deployment of 5G, a game changer that will create new industries and services. Ecommerce can thrive in the new normal, but advertising and content production will come under pressure.

GDP growth continues to slow, but 5G will create new industries and revenues
China’s GDP growth continues to slow given the US-China trade war and government efforts to curb credit risk. As part of its stimulus plan, the government has accelerated 5G deployment and granted licences this June. The network will cover all prefectural-level cities (about 290) by 2020. China can lead the world in 5G with its advanced telecom equipment makers, smartphone companies, content and service providers. New 5G applications such as AR/VR, cloud gaming, AI solutions and autonomous driving will be transformative for both consumers and enterprises.

Three growth engines for ecommerce
Strict new regulations and a maturing market have compounded macro pressures, but the worst appears to be in the past with earnings rebounding 22% YoY in 2Q19. Consumer plays have performed best, driven by newer growth areas: consumption upgrading by China’s 300m middle class, rapid urbanisation of low-tier cities and an acceleration in offline-to-online retail. Social ecommerce like personalised feeds, live-streaming and short videos help to boost spending.

Unlocking online shopping demand
AI-personalised recommendations and live-streaming unlock more online shopping demand especially for long tail merchants, products and users. Feeds work well with less-tech-savvy and low-tier cities users, while live-streaming effectively introduces new and infrequently purchased products. Short videos, the second-most popular usage of mobile in China with 650m people, have become a favourable advertising medium for ecommerce. Mini programs make it easy for merchants to build an online presence and encourage users to explore more low-frequency services.

Proprietary survey shows half of all purchases driven by social ecommerce
Our proprietary survey shows Alibaba and JD remain the most popular ecommerce platforms by far, though Pinduoduo is gaining traction. Half of all purchases are now based on recommendations by feeds, friends, live streaming, short videos or social media. Some 80-90% of users adopt mini programs to make purchases.