Understand and Tap Into China’s Digital Generations

China’s expanding digital media and e-commerce markets offer opportunities for companies that understand the country’s Internet users.by David C. Michael and Yvonne ZhouChina has more than 420 million Internet users—more than the United States and Japan combined. This number, however, represents only one-third of China’s population, indicating how much room remains for expansion in the country’s digital market. According to surveys by the Boston Consulting Group (BCG), Chinese Internet users, defined as those who go online at least once a month, spent an average of 2.7 hours online daily in 2009, up from 2.4 hours daily in 2006 and 0.4 hours a day more than users in the United States.

Digital technology has fundamentally changed the way Chinese people live—how they read news, shop, travel, play games, watch movies, express themselves, and relate to others. Most significantly, e-commerce in China has skyrocketed since 2007. Companies committed to engaging Chinese consumers online must recognize that understanding Chinese digital consumers’ underlying needs and tastes is vital to crafting an effective communications approach. Companies must act fast, because the shift toward digital media and commerce has already become mainstream—and is gaining momentum at a tremendous rate.

China’s Internet users

According to BCG research, Internet penetration in China is expected to nearly double to more than 650 million users by 2015. Most of the country’s new Internet users come from rural areas—many of them young people who visit Internet cafes for the first time. In addition, young Internet users are already the most active online segment in rural areas. The under-30 population makes up 77 percent of rural Internet users, and nearly half of rural users are under 20 years old. In interviews with 1,700 people from 12 cities in China’s 22 provinces, BCG identified six categories of Chinese digital users, or “China’s digital generations.”

• Teenagers  Nearly 9 out of 10 teenagers use the Internet at least once a month (85 percent Internet penetration rate), and they spend an average of 2.7 hours a day online. These users generally focus on communication and entertainment activities, such as chatting, watching movies, gaming, and listening to music.
• University students  Even more active on the Internet than teenagers, this group has a 99 percent penetration rate. University students grew up with digital services and are now turning to the Internet to discover a world beyond family and friends, spending an average of 3.6 hours a day online. They use the Internet primarily for information, entertainment, and communication.
• Young professionals  Having benefited from China’s economic and social reforms, this group has relatively high income and education levels. They have a 99 percent Internet penetration rate and are sophisticated users of technology. They also spend the most time online, an average of four hours a day. Young professionals use the Internet primarily for communication and information, but they also buy and sell products online.
• Young gamers  This group, which bridges younger age groups, consists of people aged 19 to 35 who have not attended a university and whose incomes are usually lower than those of college graduates. Nearly 90 percent of this group uses the Internet at least once a month, and they spend an average of 3.2 hours a day online. They tend to play games, chat, and seek other forms of entertainment online. Though the Internet penetration rate of this group is less than that of university students or young professionals, young gamers make up a much larger proportion of the Chinese population in absolute numbers.
• Active middle-agers  This group, aged 36 to 55, has high income and advanced education—and a 67 percent Internet penetration rate. Active middle-agers use the Internet mainly to search for information and news, spending an average of 2.5 hours a day online. Though they are less attached to chatting and entertainment, they still use these services.
• Passive middle-agers  Members of this group have lower incomes and less education than active middle-agers. At 38 percent, this group’s Internet penetration rate is the lowest among the six groups. Passive middle-agers’ Internet use lags behind average online usage in nearly every area, especially in chatting, listening to music, downloading movies, and e-mailing. They have not grown up with the Internet and, because they lack money and education, use the Internet only selectively, if at all. Still, they spend an average of 1.8 hours a day online, so this group should not be overlooked.

The e-commerce revolution

One of the biggest trend shifts in China is the rise of e-commerce. As recently as 2007, many online consumers were wary of online purchasing and China’s apparent lack of enforcement or payment mechanisms. Business-to-business transactions accounted for most of China’s e-commerce activities. But things have changed significantly in the last few years. While business-to-business is still the largest e-commerce segment by total transaction value, consumer-to-consumer and business-to-consumer transactions are experiencing the fastest growth: Together these transactions totaled $37 billion in 2009 and BCG expects they will surpass $100 billion in 2012. BCG also expects business-to-consumer transactions to increase 61 percent annually, and consumer-to-consumer volume to increase 45 percent annually from 2009 through 2012. The rapid rise in urban Chinese workers’ disposable incomes in recent years has put more money in the hands of already-keen e-commerce users, further fueling the industry’s growth.

Roughly 8 percent of the Chinese population now shops online, compared with just 3 percent in 2006. BCG estimates that e-commerce use will jump to 19 percent of the population by 2012. Young professionals, who tend to be early adopters, are at the vanguard of this trend, with 49 percent shopping online. University students follow with 39 percent shopping online. Online shoppers cite low prices as their biggest incentive to shop on the Internet, followed by convenience, efficiency, and product choice.

The purchasing activity of online shoppers is impressive—roughly half of them made at least 11 online purchases in 2008, and 40 percent of them spent more than $294 online that year. People are buying more complex products on the Internet, with apparel and accessories, books, cosmetics, and consumer electronics topping the list in 2008, compared with books, digital greeting cards, and flowers in 2004.

Users can pay for goods online in various ways in China, including by cash upon delivery. E-commerce sites, such as Taobao (www.taobao.com), China’s online shopping and auction website, are increasingly using online payment platforms, though such platforms are still in the early stages of development.

The expanding supply of Web 2.0 (web applications that facilitate shareable content and collaboration) product information on business-to-consumer and consumer-to-consumer websites has helped quell Chinese consumers’ worries about product quality. On these platforms, users write comments that evaluate products to keep other consumers informed. Though 28 percent of Chinese Internet users shop online, 36 percent obtain product information online. Again, university students and young professionals conduct considerably more research online before purchasing compared with other demographic groups.

Another key element driving the popularity of consumer-to-consumer transactions is selection. Even in large cities such as Beijing, product choice online is often far more diverse than choices available in stores. For those who live outside commercial hubs, the wide selection of goods online is even more valuable.

Price transparency is also vital. E-commerce users benefit from access to hundreds of thousands of small retailers that sell goods at a tiny margin more than wholesale prices. These sellers do not necessarily trade in so-called “shadow goods”—goods that entered China at below-market prices; some are official retailers and maintain brick-and-mortar shops while also selling on websites such as Taobao. Location is still important, of course, and many buyers prefer to purchase from sellers whose physical stores are near enough so customers can seek product support if necessary.

The consumer connection

China’s digital generations represent vast opportunities for any consumer-related company, but such companies must understand the needs and preferences of China’s different segments to capitalize on user trends. Over the long term, it is only a matter of time before China’s younger digital generations shift into mainstream Chinese society. Connecting with this generation now will allow companies to grow with consumers as their habits evolve.

Incorporate consumer behavior into your business model

Companies that engage with Chinese consumers must interact with them through digital channels and develop new capabilities to fully exploit these channels. With the pace of change accelerating, it is imperative that companies act now. What will this entail?

• Be visible in the places where target customers spend time  Because the average Internet customer spends nearly three hours a day online, companies need a rich and attractive web presence to increase awareness of their business, brands, and products. Remarkably, many companies still do not properly showcase themselves on the web. Many companies do not update their websites frequently or adequately because corporate budgets for web development are often limited and skepticism about the importance of e-channels remains high. Web development capabilities are also in short supply in China.
• Provide services that Chinese consumers consider valuable and unique  Another crucial feature of a successful website is useful content that draws and retains users. Though a company could provide this content itself, it could also harness the power of Web 2.0, allowing user-generated content to create loyalty.

Integrate the Internet into your go-to-market strategy

The rise of consumer-to-consumer e-commerce in China has had huge implications for retailers. Companies looking to stay competitive and relevant should consider the Internet’s role in the market before developing a coherent go-to-market strategy.

• Consider online-channel strategies  Companies will want to weigh whether to set up their own independent site, create a Taobao-hosted site, allow authorized retailers to act as retail channels, or leave their online sales unmanaged. Though all of these approaches have merits, many companies must bear in mind that they are playing catch-up with intermediaries that have already established their brands’ market presence. Given the rise of Taobao, companies should start by assessing the extent to which their products are sold by third parties and strategize how to ride that wave. Few companies realize how extensively their products are already being sold on Taobao, how many online sellers are doing so, and the impact of this trend.
• Focus on price management  The rise of Taobao and other e-commerce platforms creates major challenges for consumer companies in China with regard to price management. The platform has brought a level of price transparency that few companies desire, and the site’s geographic reach has reinforced this transparency throughout the entire country. Companies with products sold online and via traditional channels will need to confront the challenge of maintaining consistent pricing across channels.
• Build on the e-commerce opportunity  The consumer-to-consumer platform presents an enormous opportunity to expand the regional presence of brands. The Taobao channel can reach markets and consumers that are otherwise inaccessible. Companies can also use Taobao and similar platforms for other purposes, such as aggregating market information. Authorized retailers of a company’s product on Taobao likely have access to customer demographic information that a company does not. Actively engaging customers on Taobao can generate valuable data on consumer behavior that can help shape the next phase of a company’s marketing strategy.

Leverage the collective power of the digital network

Web 2.0 allows companies to develop two-way communication with Chinese consumers, who can contribute to a company’s marketing and brand-building activities. In China, where Internet users have flocked to blogs and other pursuits that allow individual expression and personalization, online activities are an especially powerful lever. Companies can test advertising messages online and even allow product enthusiasts to drive viral-marketing campaigns. Companies can implement a few online strategies:

• Encourage customers to express their enthusiasm for a product  Such customers, who can become an effective sales force, can also participate in after-sales support by exchanging questions and answers on product-specific bulletin boards. Intel Corp., for example, has launched a blog in China that allows visitors to express their ideas freely, enabling the company to tap its customers’ concerns and needs.
• Customize products and services for China’s online consumers, communities, and channels  With online activities so central to the lives of many Chinese—and playing a role in everything from learning and shopping to dating and leisure—companies can set themselves apart by delivering high-quality online experiences and creating innovative products and services. Banks should understand their customers’ digital behavior to optimally design online and mobile-banking services, food and beverage companies need to adapt their products to fit a lifestyle that revolves around a computer screen, and technology companies should develop different products for different user groups.
• Reach out to influencers such as university students, young professionals, and young gamers  To address the needs and earn the trust of China’s new digital consumers, companies must court influence brokers who network, are vocal, and have gained a following online. As a first step, companies should simply be aware of “online chatter.” Only then can they join the conversation by, for example, sending press releases to popular bloggers or answering questions and adding comments on online forums. Because consumers may balk at a commercial intrusion into what they regard as a noncommercial space, companies must walk a fine line between being part of the discussion and being seen as an agent trying to dominate or manipulate it. One way to counter the latter perception is to set up company- or product-specific discussion boards and blogs.

Use the Internet to advertise brands and build trust

Branding is a new but critical activity for companies in China. BCG’s research suggests that brands are more relevant for Chinese consumers than for their counterparts in Europe or the United States. Given the lingering reluctance that Chinese consumers display toward online transactions and commerce, the power of brands—and their ability to convey trustworthiness—is especially important on the web.

Many companies, however, continue to target consumers through traditional channels, such as television and outdoor advertising, which were prevalent during the country’s initial economic liberalization. Many marketers still regard television as the most effective medium for building basic brand awareness, but the Internet allows companies to deliver more targeted and specific messages whose impact can be more easily measured (see Advertising in a New Age of Media). Companies that want to build brand recognition online should:

• Explore the potential of the rapid mobilization of the Internet  As mobile-phone and Internet use dramatically increases, companies will have greater opportunities to exploit these media but should also consider the convergence of online consumer habits in a single mobile device. Companies will want to create services that cater to mobile-Internet users and develop mobile platforms in their marketing strategies.
• Earn higher returns on advertising dollars by using integrated online-marketing campaigns  Even with the convergence of mobile devices and Internet use, companies should take an integrated, multichannel marketing approach. This strategy allows companies not only to maximize their returns on advertising expenditures but also to better target customer segments.
• Reach out to consumers in lower-tier cities and rural areas  China’s digital revolution is built on Internet and mobile-telephony infrastructures that extend deep into the western reaches of the country. This coverage will allow companies to overcome an enduring challenge: reaching consumers in small cities and regions at the edge of existing distribution channels (see the CBR, November-December 2010, Reaching China’s Next 600 Cities). Digital devices offer a fast and cheap way for companies to access those potential customers directly. At minimum, companies can educate consumers about products and solicit feedback.
• Build organizational capabilities to address the digital space  To fully exploit digital opportunities, companies should build organizational skills by strengthening teams in consumer research and online marketing and ensuring that sales operations can manage multiple channels. Creating online-marketing capabilities will be especially challenging because marketing and sales professionals who understand consumers’ use of the Internet and mobile phones are in high demand and few advertising agencies in China have fully embraced online and mobile platforms. Against such constraints, global companies’ headquarters might be tempted to interfere in Chinese marketing and sales activities. Because of the need for speed and local knowledge, however, these activities should be handled on the ground.

Mobile Internet: the 3G opportunity

One distinctive feature of the China market, as compared with other markets, is that mobile-phone owners use their devices for a broader range of activities, particularly for entertainment and communication needs. In addition to calling and sending text messages, Chinese mobile-phone users send multimedia messages, play music and games, download ringtones, and watch videos on their phones.

Though the number of Chinese mobile users reached 233 million in 2009, mobile-Internet use in China is still far from developed—and it is unclear how much of this activity is mobile-broadband usage. The current lack of a developed mobile-broadband market points to an expanding opportunity for mobile applications in the future, particularly as third-generation (3G) technology develops.

The future of digital technology in China

The adoption of the broadband Internet by Chinese consumers has already transformed the market landscape, and will continue to do so in the years ahead. In 2011-12, smartphone adoption will likely increase dramatically, and broadband Internet connections will rise. More consumers will become comfortable buying online, and will turn to the Internet for advice on major purchase decisions. Companies that seek to win over the Chinese consumer must make effective use of Internet platforms to reach and influence these consumers.

[author] David C. Michael ([email protected]) is senior partner and managing director of the Global Advantage Practice at the Boston Consulting Group (BCG) in Beijing. Yvonne Zhou ([email protected]) is principal at BCG in Beijing. [/author]