China's Internet Winners
Latest Articles

China's Internet Winners

Massive value is being created online by companies such as Alibaba, Tencent and a host of other dot-coms. A recent study by Credit Suisse finds the opportunities to be focused in three areas: data technology, gaming and upgraded consumption.

As often, when it comes to China, the figures are so big they make a marketer's eyes water. 40 million – the Middle Kingdom added that many Internet users in 2016, about equal to the population of California or Argentina. 750 million – that many Chinese are now regularly online, about 95 percent of those over mobile connections. 700 billion dollars – the summed market capitalization of the country's top-30 Internet companies.

In most cases, their profits just keep getting bigger. Within the top-30, some companies are looking at a 2017 increase of several thousand percent while others are up in the 100s of percent. However, not all that glitters is gilded: nearly half of the top-30 are pegged to post much lower growth in 2017 than 2016, with 5-6 forecast to incur losses on the year. So there is gold out there on the Chinese Internet, but pitfalls too, which led a Credit Suisse team of analysts to study matters more closely. Thomas Chong, Monica Chen and Alex Xie identified three key paths to becoming a long-term winner. Here's the rundown.

Data Technology

This starts with providing Internet connections, extends into offering platforms for people and businesses to anchor their web presence and continues into location-based services (LBS), performance-based advertising, online payment, video-streaming and social networking.

For instance, Tencent offers a free instant-messaging app called QQ that now has some 900 million users. Premium users can, for a small fee, upgrade to gaming, 'virtual pet' raising, music-streaming and blogging. They can also use the QQ Wallet that allows cashless payment – a huge trend in China. Tencent is not the only entrant in so-called Quick-Response or QR-payment field, where buyers and sellers settle their bills using smart phones to scan each other's QR code. Alipay, offered by its leading competitor Alibaba, is a major contender. Indeed, Tencent itself has two other QR systems – WeChat Pay and Tenpay. Altogether, Tencent and Alibaba control an estimated 90 percent of cashless payment – estimated by the Chinese Central Bank at some 5.5 trillion dollars and rising at over 30 percent annually.

Meanwhile, advertisers are reaching back through these same messaging and networking apps to promote their wares. They are particularly keen on live streaming, which of course requires a relatively fast data-connection. Over 50 percent of sellers on Taobao, a marketplace subsidiary of Alibaba, are live-streaming their product blurbs, and this is expected to increase to 100 percent over the next five years. Also on the rise is performance-based advertising (made famous by Google), where marketers pay not for the views, but for the click-throughs.

Game On

China's online gaming industry is a world beater. Its market is tipped to expand at a compounded 19 percent per year from 2016-19, triple the rate of the same business globally. Mobile gaming has the biggest buzz, generating 70 percent of Chinese revenues and growing even faster: in 2018 an expected 22 percent.

The key to expansion is intellectual property (IP), that is, development of new games based on animation, literature, videos and even so-called 'e-sports'. Some do it own their own: for example, Gui Chui Deng has developed online dramas and mobile games based on a novel 'Ghost Blows Out the Light'. Others are licensing in their IP, such as NetEase which has bought the Chinese rights to Onmyoji, a fantasy fighting adventure, and Index, a martial-arts combat challenge.

E-sports are expected to be next year's big breakthrough. These gaming competitions – with structures similar to professional football, basketball and other major leagues – are big in China, home to some 600 million amateur gamers. Some matches playing 'League of Legends' attract almost 1 million spectators. Recently the Asian Games announced plans to host e-sports in at its 2022 event (in China, unsurprisingly), and the Olympics are considering their inclusion in the 2024 Summer Games in Paris.

Better Living through Internet

China's 'story of the century' is the emergence of its middle class – now the world's largest at over 100 million adults, according to Credit Suisse's Global Wealth Report. This story continues: now it is spreading into online retailing and into rural e-commerce.

A major trend is something pioneered by Taobao: Key Opinion Leaders or KOLs. Known in the West as 'social media influencers', KOLs have enormous sales power. Fashion KOL Zhang Da Yi, for instance, reportedly in one day generated sales of 14 million dollars on Taobao: the 29-year-old has three Taobao stores covering apparel, cosmetics and lingerie – and maintain inventories as low as 2-3 percent of sales. Another KOL with the trade name of 'Mr Bags' is said to have inspired a buying frenzy on WeChat of Givenchy handbags: some 17 million dollars of them were snapped up in 12 minutes.

The other big movement is the spread of affluence to rural regions. People outside cities and far from modern retail are increasingly doing their shopping online. One of the leading online retailers, Tmall, now carries over 100,000 brands and currently is seeing volumes rise at 40 percent per quarter. Top sellers are the obvious suspects: personal care, infant formula and beauty products. Good for everyone: it's high time that people in the country share the same spoils as those in the city.

Eric Johnson,
freelance writer