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China's Online Revolution

In the words of Jack Ma, the billionaire founder of Alibaba, now the largest e-commerce company in the world, “E-commerce in the West is the dessert, in China, it’s become the main course.”

China’s digital development will follow a different trajectory to the West. The fast growth of mobile technology and its applications are changing the tools used as platforms to reach investors and consumers and, more broadly, is driving the economic shift from investment to consumption.

China, the world’s second largest “e-tail” market estimates revenues reached US$210 billion in 2012, after growing at a 120 per cent compound annual growth rate since 2003. It is expected to show 15 to 20 per cent annual growth rates (before inflation), and to notch up between US$420 billion and US$650 billion in sales by 2020. China’s internet users currently number some 564 million people, almost as many as the USA and Europe combined.

With 75 per cent of these users accessing the internet on mobile technology, and currently over 1 billion phone users in the country, China’s online revolution will reshape how international and domestic companies engage with the Chinese consumer.

Online usage strong and growing

With a current penetration rate of approximately 42.1 per cent of the population, China accounts for one fifth of the world’s internet users. As smartphones and tablets make connecting to online networks easier for people in China, we will see the size of the internet population reach roughly 800 million users by 2015.

In comparison to the West, 90 per cent of China’s electronic retailing occurs on digital marketplaces such as PaiPai, Tmall and Taobao (think eBay or Amazon Marketplace) as opposed to directly between consumers and retailers.

The lower barriers to entry, well-developed infrastructure and fewer expenses associated with operating online has seen margins reach 8 to 10 per cent, slightly higher than traditional bricks and mortar retailers.

Furthermore, the top five physical retailers in China hold less than 20 per cent of the market, much lower than the 24-60 per cent market share held in comparable categories in the United States. This is due to the ultra competitive nature of a marketplace well able to exploit the high costs and inefficiencies faced by brick and mortar stores.

In addition, online marketplaces are generating roughly 40 cents more consumption for every 60 cents spent in physical stores. Consumers outside the country’s ‘first-tier’ cities tend to spend a greater portion of their disposable income than their first tier city counterparts. So, with prices on average 6-16 per cent lower online than offline, it is a much more affordable option for these consumers.

Internet sector boosted

In the West there is a lot of negative commentary surrounding internet in China, however, there is a huge amount of effort by the Chinese government to ensure that the internet industry is built so that it not only serves national goals but also commercial ones.

Currently, the internet sector is one of the fastest growing sectors in the Chinese economy. The microblogging industry in China has the biggest impact on everyday life and is the most effective platform for spreading news and views amongst Chinese people. A staggering 80 per cent of China’s internet users are aged between 10 and 40 and 62 per cent of mobile users are younger than 30 years of age.

China has over 600 million users of social networks, a higher portion of internet users than their American counterparts. Furthermore, Chinese Sina Weibo users (similar to Twitter), spend 35 per cent more time on the internet than their tweeting counterparts in the USA.

Sina Weibo is currently valued at around US$3.3 billion and is a very important e-commerce platform. Over 50 per cent of Weibo users searched e-commerce sites after noticing information on Weibo.

China has 242 million online shoppers, six times that of the United Kingdom. The average monthly value of mobile transactions in China is US$800 million, which equates to US$300, every second, and 59 per cent of smartphones have used their phones to shop online.

The fastest growing online activities in China are online banking and payments, group buying, online shopping and weibo, or microblogging, which are growing at 32 per cent, 29 per cent, 25 per cent and 24 per cent, year-on-year, respectively.

By 2014, e-commerce is expected to represent 7.4 per cent of China’s total retail market. Currently, China’s top three e-commerce sites are Tmall, 360Buy and Suning, the market is made up of a few big players with the top 10 sites accounting for more than 65 per cent of the market.

Room for innovators

China’s e-commerce entrepreneurs and innovators are revolutionising the breadth and depth of China’s online market. Tencent, China’s largest publicly listed internet company, was named the 8th most innovative company in China this year. Its mobile messaging app, WeChat (likened to Whatsapp) has over 300 million users.

Professional social networks are also becoming increasingly popular in China, with the number of people using these social professional networks increasing by 250 per cent in 2012 to 70 million users. Currently, the most popular professional network in China is Tianji, currently with 12.3 million registered users and interestingly, the well-known LinkedIn ranks only 7th in China with 2.8 million registered users.

China’s leading internet television company, Youku Tudou (equivalent of YouTube) has 310 million unique visitors each week and generates 1.6 billion hours of video each month.

Threat to banking

The rapid emergence of the internet industry in China allows for a broad range of online financial services, which pose a severe threat to the traditional banking and finance sectors. Emerging third party payment systems, peer-to-peer lending and microfinance services have the potential to eat into the role of the traditional established financial sector.

For example, the world’s largest e-commerce company, Alibaba, has a microcredit company that was founded in June 2010, which has lent over RMB12 billion to over 250,000 clients in the first quarter of 2013 alone. In addition, the non-performing loan ratio was much lower than that of similar loans made by financial institutions.

Further, in August 2012, Alibaba chairman Jack Ma, Ping An Insurance Group Chairman, Ma Mingzhe and Ma Huateng, the chairman of Tencent, set up an online insurance company which sells its products on the online marketplace, Taobao.

These new online insurance policies and products are a big threat to the sector’s traditional operators. In the first three days of sale, over RMB101 million was raked in and over US$815,000 of insurance products are sold on Taobao every day.

Even the mutual funds industry is being heavily influenced by the online revolution. With mutual funds companies being allowed to sell their products online, nearly 30 of them have joined the new funds payment process channel established by Alipay, China’s leading electronic payment platform. From July this year, investors were able to buy into funds at alipay.taobao.com.

Earlier this year on June 13, Alipay, Alibaba’s third party online payment services, launched a service that allows users to invest money into a market fund managed by Tianhong Asset Management. Just 17 days later, over 2.5million users had transferred RMB5.7 billion into the fund, now the biggest (in terms of number of clients) in China.

Alibaba’s success in China’s e-commerce and now financial services space is a huge threat to traditional financial institutions. The firm uses market transaction information to characterise and segment its users to promote financial services that they may be interested in, based on their profile. This is revolutionising the way financial institutions attract and retain clients.

The new revolution

Internet finance is reshaping the banking and financial industry as we know it in the West and creating a new system in China. What makes Alibaba so financially strong, is that funds transferred for the purchase of goods must stay with the company for 7 to 10 days, providing a constant revenue stream and pool of capital that can be used in the financial markets.

With rapid changes in the habits of customers in China, traditional lenders and insurers have no choice but to adapt to these changes or lose market influence. China Merchants Bank have offered integrated banking services on WeChat (messaging service similar to Whatsapp), soon after, both the China CITIC Bank and China Minsheng Banking Corp followed suit.

Lessons to be learned

The Australian retail and financial market needs to be aware of these changes, innovations and developments, especially as China (and other emerging countries) expands internationally, leveraging their direct access to China’s OEM factories and workshops.

With such developments affecting the traditional means of banking and as a catalyst for innovation, traditional commercial banks have moved online to protect their market share and business. For example, China Construction Bank’s e-commerce transactions have broken the RMB3.5 billion (US$570 million) mark.

To keep up with the changing market landscape both here and overseas, Western Banks and Financial Institutions must incorporate internet innovation into their China strategies. This will include having to rethink online strategies and sales growth in online portals. A review of Alibaba’s strategy and rapid development would be a good place to start. 


Surfing the BRICS

Everyone knows that the world has significantly changed. Whether the cause of this was 911, the fall of the Berlin Wall, the GFC, or simply the opening up of large, populated countries that have been closed to outsiders or unstable for decades, there can be no arguing that global economic, political and social power is shifting towards the emerging world of the “BRIC”s (Brazil, Russia, India and China) and other big rapidly emerging countries (eg Mexico, Indonesia, South Korea and Turkey) and regions (eg Asia, Continental Africa, Latin America and Eastern Europe).

Everyone is asking the same questions? Can the USA recover? Will the BRICs be able to fill the consumption gap? Is this an opportunity or a threat? Where are the low hanging opportunities? How do you get started?

To answer these questions, bold forward-thinking entrepreneurs and business leaders need to be considering the impact of five irreversible trends which are setting a new direction for business, investment and thought leadership. These are as follows:

1. Urbanisation

The developed world already knows the significant economic benefits that have been derived from the process of urbanisation. In the two centuries following 1800, the world's average per capita income increased over tenfold as a result of the ‘Industrial Revolution’ in Britain.  China and India, which had previously been two of the largest economies in the world due to their large populations and land mass are now catching up and experiencing their own ‘Industrial Revolution’ on steroids! In only 30 years, China is already half way through its own urbanisation process but still has a long way to move another 300 million people or so from rural to urban centres in the next 30 years.  

Urbanisation is a driving force for economic growth and expansion (urban growth alone produces an increase of 20% GDP per capita). It increases rural productivity, boosts demand for resources, commodities and energy and drives domestic consumption (urban residents spend 3.6 times more than rural dwellers). Forward thinking business leaders need to consider the potential of the world’s new “mega-cities”: Sao Paulo, Moscow, Mumbai, Shanghai etc.

2. Consumption

With rising incomes, minimal debt and rapidly increasing wealth, the emergence of a new middle class from emerging countries is perhaps the most exciting opportunity of all, and a good reason to be positive about the future.

In Asia alone, the middle class consists of 525 million people, accounting for 28% of the global middle class, and this number will triple to 1.74bn by 2020. Over 70% of the growth in global demand until 2020 will come from Asia, with private consumption reaching $8.6 billion by 2020.  There are already 3.5 billion consumers in developing Asia. By 2030, two-thirds of the world’s middle class will be in Asia and will account for 54% of total consumer spending.

As evidence of the exciting potential, car sales in China will grow at an annual rate of 5.3% and is anticipated to reach 30 million units in 2020.  Healthcare expenditure in Asia is expected to double by 2020. Food consumption of the ASEAN-5 is expected to reach US$180bn by 2020.  Bank lending has been expanding in Vietnam at 33% per year for the past ten years.

We live in the “Asian Century” but the consumption story is equally exciting in Eastern Europe and Latin America. What are you doing to tap into the growth of the emerging consumer?

3. Innovation

Its no longer true to say that, whilst the emerging world is good at copying things and applying cheap labour to create wealth for well known western brands, they will never be able to become true inventors, creators and innovators themselves. In fact, they are already leading the world in many areas of scientific development, including the bio-sciences, IT and in the development of new forms of sustainable energy. Brazil is already well known for its green credentials (45% of Brazil's total energy needs is already drawn from renewable sources) and China is transforming many industries with its massive investment in new renewable energy (hydro, nuclear, solar, wind, biomass and more efficient use of coal and existing energy sources).

“Moving up the value chain” is the mantra that you hear as you travel around the emerging world.  This creates a window of opportunity for innovative western leaders to export their capabilities, experience, know-how and technology to the emerging world and participate in the growth of these new creative industries.

4. Aspiration

Apart from an abundance of land, people and capital, the emerging world benefits from a dynamism and entrepreneurial spirit derived from a combination of ambition, energy and aspiration. In many countries (eg Brazil, India and Continental Africa) this aspiration comes with an exceptionally young demographic profile which will propel their economic growth long beyond the next century.  Don’t forget that only 30 years ago, most emerging countries were suffering from extreme poverty (for a wide range of largely uncorrelated reasons) and since opening up and attracting foreign investment, they have now had a taste of success and wealth which has energised the whole nation.

Don’t take too long to decide whether you believe this or not. By the time you do decide, it may already be too late to jump on board!

5. Globalisation

Despite a great deal of talk, words and catchy titles (eg “the world is flat”) the process of globalisation has only just begun. In fact, some argue that it hasn’t even started yet. The truth is that, despite the well known advances in technology, high speed broadband and inter-connectivity, the opportunity to connect and collaborate with other global business leaders and entrepreneurs in China, Brazil or Russia, or to outsource low level tasks to India, Indonesia or Vietnam, is as opportune now as its always been. The emerging world is literally your oyster if you are brave enough to take the plunge. Don’t mess around on the small waves. Surf where the big waves are!



China is Modernising not Westernising

I was recently interviewed for a story on ABC TV in Australia discussing the drivers of Chinese investment into Australia. Please click here to view it:



Tianjin – A key destination for  investment

Most Australians haven’t heard of the port city of Tianjin, but tucked away 137km southeast of Beijing is a flourishing metropolis which has been growing at an annual rate of 16.5% since 2007, and is home to over 13million people.  Prior to the founding of the People’s Republic of China, Tianjin (meaning, ‘a port for the emperor’) was the economic and financial centre of Northern China. Currently, Tianjin’s architecture is a culmination of its history as a colonial city mixed with its modern Chinese culture, a plethora of colonial buildings, modern skyscrapers and stylish suspension bridges. Now, an ultra-modern bullet train connects the city to Beijing, a journey taking less than half an hour, and plans for the next Beijing International Airport development show that it will be conveniently located halfway between the two cities.

Tianjin is the sister city of Melbourne and is one of the four municipalities that has “provincial status” level and therefore reports directly to the Central Government in Beijing. It is the sixth largest city in China in terms of urban population and the fifth largest by urban land area. Manufacturing represents approximately 60% of Tianjin’s economy and the Binhai New Area development zone has attracted many global giant to its ports, for example, Airbus and Caterpillar. Tianjin is also an important industrial base in China, with its major industries including petrochemical, metalworking, car manufacturing and textiles. Furthermore, the Chinese government has identified the Binhai New Area in Tianjin as the future hub for ‘vocational training’ in China, which is a fast growing industry in China as companies further understand the value of  vocational training for the long term development of their organisation.

Tianjin is one of the country’s leading destinations for Foreign Direct Investment. In the first quarter of 2013, the city approved 141 FDI programs which attracted USD5.1billion into Tianjin’s economy and was an 18% increase from the previous year. These figures are even more impressive when compared with the whole of China, which attracted USD29.9billion in the first quarter, only a 1.44% increase on that of the previous year.

Tianjin, the fourth largest port in China, has attracted 110 of the world’s top 500 companies. The Tianjin Economic-Technological Development Area (TEDA) which is located within the Binhai New Area, is located 40km from Tianjin’s city centre and is consistently ranked as China’s best performing free trade zone and has become one of the preferred manufacturing bases for foreign multinationals. TEDA focuses on four key industries: (1) electronics and communications; (2) biomedicine and biotechnology; (3) advanced manufacturing; and (4) food processing. In fact, Scandinavian pharmaceutical company, Novo Nordisk, has selected Tianjin to build the largest insulin production plant in the world, with investments totalling USD400million. In addition, Motorola’s Tianjin manufacturing facility is one of the biggest in the world and Samsung’s current Joint Venture with Central Tianjin Electronics Corp has seen the establishment of the biggest mobile manufacturing and R&D base outside of Korea.

Tianjin’s geographic location and economic significance has seen it become a major communications hub for Northern China. With the largest man-made port in the world, the largest air-freight facility in the region and railways linked in all directions (and into Europe), it is no wonder that the significance and importance of the development of Tianjin is reflected in the nation’s five year plan. Often described as living in the shadow of Beijing, Tianjin workers are actually slightly better off than their Beijing counterparts with a minimum wage that is 4% higher than that of Beijing and a lower cost of living.

An approach that was pioneered in the 1980s, saw Chinese authorities choose Tianjin as a “proving ground” for policy experiments including those surrounding financial services. If successful in Tianjin, the policies may be carried out nationwide. As an example, in late 2006, the Chinese government established the country’s first equity fund heavily reliant on bank lending, the Bohai Industrial Investment Fund, with an initial investment of RMB6billion, which was expected to reach RMB20billion within 15 years. As a result of this experiment, the growth of the funds industry has exceeded many expectations and is forecast to become one of the largest in the region.  

With respect to the banking sector, the total credit issued in Tianjin has grown faster since 2009 than anywhere else in China mainly as a result of the post GFC economic stimulus package. In addition, ANZ currently holds a 20% ownership in the Bank of Tianjin and is the second biggest shareholder. The Bank of Tianjin is valued at $2.3billion.

Yujiapu Financial District

The Yujiapu Financial District, which has been described as the “future Manhattan of China” is currently under construction in Tianjin and is set to be the world’s largest financial district (9.5million square metres). The financial district represents a RMB200billion dollar investment by the Tianjin government and will be built in four stages. The city will comprise of 47 skyscrapers that will be constructed on the salt flats in Tianjin. The first dozen buildings constructed in the new financial district will have four times the combined floor space of the Empire State building! The Government has strategically created incentives for businesses to transfer their legal residency and offices to Tianjin. In particular, tax incentives to private equity funds has seen over 50% of the country’s private equity funds relocate their office space to Tianjin. This strategic move has also attracted many of China’s “princelings”, the sons and daughters of current and former senior Chinese officials, who are highly involved in the private equity industry in China.

The Tianjin government provides a great variety of investment incentives to attract companies and their capital to Tianjin. Incentives cover a range of industries including: financial institutions, Agricultural technology companies, Science and Technology R&D and to a variety of incorporation structures including Sino-Foreign Joint Ventures and establishment of Headquarters/Regional Headquarters.

The Tianjin story is a very important one in the past, present and future of China. As a key destination for foreign and domestic investment, as a city with world-class infrastructure that has attracted some of the brightest minds in the country to its opportunities for strong growth and development – it’s time for businesses looked beyond Beijing to the role that Tianjin can play in connecting China with the rest of the world. 



Interview on Business Events TV

I was pleased to be involved in co-hosting a senior delegation from Yiwu in China with Caroline Hong and the SME Association of Australia and was interviewed on Business Events TV discussing opportunities for Australian SMEs in China

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