China's digital transformation: The influence of internet on productivity and growth

The McKinsey Global Research Institute today released the digital transformation of China: The impact of the Internet on Productivity and growth (click to download the full report of PDF), the report points out that in 2013, China's Internet users continued to grow, the Internet is fundamentally restructuring the Chinese way of life.

The following is a summary of the contents of the report:

A digital revolution is surging in China. In 2013, the total number of active smart devices in China increased from 380 million to 700 million units. The same year, November 11, "Singles Day" day, online shopping platform Taobao and cat sales of more than 36.2 billion yuan (about 6 billion U.S. dollars). In addition, Baidu's online search volume of up to 5 billion times a day, hundreds of millions of Chinese people using Tencent's social applications "micro-letter." At present, China's Internet users reach 632 million and continue to grow. This means that the Internet is fundamentally reconstructing the Chinese way of life.

So far, China's internet has been more reflective of consumer-driven patterns. But the phenomenon will change as the internet penetrates more deeply into various industries. The higher the companies embrace Internet technology, the more efficient their operations will be, and ultimately the productivity gains. While the existing jobs of some practitioners may be replaced in the process, as the Internet creates new markets for innovative products and services, the demand for new skilled labour in the digital age will continue to grow.

China's Internet development in the past has been driven by consumers, not companies.

Given the speed of the Internet and the extent of its use, the Internet is expected to help China increase its GDP growth rate by 0.3%-1% from 2013 to 2025. This means that over the past more than 10 years, the Internet will likely contribute 7% to 22% of China's gross domestic product growth. By 2025, this is equivalent to 4 trillion to 14 trillion yuan a year of annual gross domestic product.

The internet will not only be one of the new engines of China's economy in the next few years, but more importantly, it would also change the pattern of economic growth. Over the past 20 years, China's growth in the form of massive capital investment and labour expansion has been unsustainable in the long term. And the Internet can provide new impetus for GDP growth in terms of productivity, innovation and consumption. As the Internet accelerates the formation of efficient market mechanisms and strengthens competition, the most efficient companies win faster. At the same time, the Internet makes information more transparent, helps to optimize investment decisions, and makes capital allocation more effective. It can also promote the skills of the workforce, increase labour productivity, reduce prices, make it easier for people to access information, and bring various conveniences to create consumer surplus. These changes will bring some risks and shocks, but will ultimately help China to achieve a more sustainable economic growth model.

China is moving towards a new era of digital transformation that will increase productivity and boost economic growth

The existence of the Internet, which provides an effective platform for millions of of daily online transactions and communication, has also played an important role in promoting the development of economies. To measure the size of the Internet economy in various countries, the McKinsey Global Institute launched the IGDP Index. China's internet economy accounted for only 3.3% of GDP in 2010, lagging behind most developed countries. By the year 2013, China's IGDP index rose to 4.4%, which has reached the level of the world's leading countries.

China's Internet economy accounts for more than the US, France and Germany as a share of GDP

China's internet has spawned a vibrant information, communications and technology industry, thriving social networks and the world's largest online retail market. Networks are increasingly being integrated into business ecosystems, but more far-reaching changes can be foreseen in the future. A recent McKinsey survey of China's chief information officer showed that Chinese companies accounted for only 2% per cent of their operating income, significantly below the international average of 4% per cent, but respondents predicted a significant increase in the proportion by 2015, a sign of the rapid growth of the Internet.

The report will focus on the impact of the penetration of the internet on China's six major industries, which account for 1/4 of China's GDP in 2013. Assuming that the Internet has a similar impact on other industries, and combined with the financial sector's role in increasing the efficiency of capital allocation, we expect the Internet to contribute 7% to 22% of China's GDP growth between 2013 and 2025.

7% is based on the conservative prediction of Internet applications, which assumes that current trends continue and that the constraints remain unchanged. The 22% optimistic estimate comes from the assumption that the appropriate enabling policy framework will soon be in place, with industries actively introducing new Internet applications and creating new markets for digital products and services. The two-digit gap suggests that if policymakers and business leaders grasp the historical opportunities for the development of the Internet, they will have the potential to drive economic growth. By 2025, the magnitude of the growth potential of gross domestic product could be as low as 10 trillion yuan.

The speed and extent of Internet popularization will shape China's future economic growth

Perhaps more importantly, a new wave of the internet will help push China into a transition to productivity, innovation and consumption-driven growth. As the Internet promotes the evolution of Chinese industries from inefficiency to innovation and technology-led business models, the main role of the Internet will be to improve productivity. As enterprises accelerate the introduction of emerging technologies, including product development, supply chain management, marketing and customer interaction of the various operational links will be more smooth. The use of the Internet will boost China's labor productivity by 7% to 22% in 2013-2025 years.

Our forecasts also take into account the spillover effects of the financial sector on the economy as a whole in the context of efficient market competition. Large data (managing credit risk) and network channels (reducing transaction costs) enhance the ability and incentives of financial institutions to provide credit to SMEs. In the 2025, a more efficient allocation of capital would be expected to contribute 450 billion to 1.5 trillion yuan in the growth of China's GDP in the Internet.

In addition to its impact on GDP and productivity, the Internet has made it easier for people to work and live, creating huge consumer surpluses. The increase in transparency and competitiveness, while pulling down commodity prices, has increased the quality of goods, resulting in savings that can even lead to other consumption. The internet has also created broader values for society, such as helping individuals acquire vast amounts of information and learning tools to help government departments provide more efficient public services.

The internet has a neutral impact on total employment, but structural changes are unavoidable

The internet is reshaping China's labour market, and its impact will be more far-reaching over time. Despite changes in the employment situation, the net impact of Internet applications on employment demand in this report is neutral to slightly positive. At the same time, these changes will occur in the context of a slowdown in macroeconomic growth and a decline in the number of social workers.

The most significant impact may be in the structure of job opportunities. As some routine work is transferred to the Internet, the demand of the enterprises in some areas will be reduced. Some occupations will fade away and some responsibilities will gradually change. At the same time, enterprises to master information technology capacity of the staff demand is more and more big. Policymakers and business leaders need to think about the following two key questions: do the temporary unemployed have access to retraining? And can the education system nurture enough high-tech and professional talents to meet the needs of the new economy?

The new Internet technology will lead to the disappearance of some occupations due to the automation of existing business activities, but the loss will be offset by the new wealth and consumption growth created by the Internet. Research by the McKinsey Global Institute, 4,800 small and medium-sized enterprises, has shown that with the popularization of Internet technology in small and medium-sized enterprises, every 1 jobs lost will create 2.6 new job opportunities.

As competition intensifies, online price transparency compressed the margin of the product space, enterprises use internet technology to straighten out operations, do their best to improve the efficiency of the power more clearly. In the industry we study, by 2025, the productivity gains from new Internet applications can be reduced by 1.3% to 4% of the demand for employment, equivalent to 10 million to 31 million jobs.

But the internet is not just an automated tool, it is the power to rapidly expand the market. If Governments and industries take appropriate measures to support their development, the Internet will bring new products and services, while allocating resources more efficiently and even raising the overall demand for the entire national economy. All of these factors can create up to 46 million new job opportunities, including many highly skilled jobs.

The rise of up to 46 million new jobs will offset unemployment caused by productivity gains.

The role of Internet in the transformation of six major industries

In China, the huge economic value of the Internet has begun to show. Companies are starting to reform traditional business processes to cut operating costs, while some new markets worth billions of of dollars are almost overnight. To describe this transition in the economy as a whole, this study selected six representative sectors for in-depth analysis, covering different types of industries in manufacturing and service industries, including continuous production and discrete production, as well as businesses and services of a semi public nature.

At the same time, the Internet can generate disruptive innovations. As industry dynamics change, we do not attempt to predict winners and losers, but to study the major Internet applications that begin to penetrate different industries, quantifying their value contribution to the overall economy from a macro perspective. These contributions may not be immediately apparent, as companies must make huge investments in the near future. In the long run, however, their impact will gradually increase. By 2025, the Internet will make a significant contribution to GDP.

Consumer electronics: Opening up new markets for innovative electronic products

The internet has unleashed a huge innovation drive for consumer electronics products, including devices such as smart home appliances and network TVs. For example, Haier development of intelligent home solutions, the user's home appliances and home entertainment, security and lighting and other systems connected. Chinese consumers have shown a strong interest in digital movies, TV shows, music, games and other media content. About 70% of Chinese netizens watched online video in 2013, and about 50% used the mobile internet to watch online video. 10 Consumer cloud services for data storage, file sharing and other uses will be one of the main sources of growth.

The internet is also helping the industry to increase production efficiency while expanding the market's consumption needs. As a result of the expansion of the scope of suppliers, enterprises can use the most appropriate price to purchase the required products. At the same time, marketing transfer to the network platform after the accuracy of higher. From 2009 to 2012, the annual composite growth rate of e-commerce in the consumer electronics sector reached 103%, while the composite growth rate of entities was only 9%. 111 of companies even listen to consumer insights through the development of crowdsourcing products. As the smartphone maker Millet launches the official online community, fans ' recommendations for product improvement are reflected in the weekly software updates.

By 2025, the Internet is expected to contribute 14% to 38% of the overall growth of the industry. 12 The Internet can also generate up to 7% 13 job growth for the industry and its associated value chains. The vast majority of growth is likely to come from new markets for smart home appliances, internet television, digital media content and cloud computing services, depending on internet coverage and speed.

Cars: Building new sales and services

Faced with slowing growth and overcapacity, China's auto industry is under increasing pressure to boost productivity. The internet will help Chinese carmakers and companies in related value chains to overcome these challenges and create new growth models. Leading manufacturers have used real-time data to optimize supply chain inventory levels and transport lines.

The collaboration between McKinsey and Chinese carmakers shows that the best performers have a 5 times-fold faster inventory turnover than the worst. In the future, consumers will get more and more information through the Internet, and the Internet can help carmakers manage the escalating cost of marketing. Skoda and Volkswagen are trying to sell cars through the official website or the cat, and the vertical web sites such as easy cars, auto house and so on have also developed rapidly.

In addition to providing more safety and driving performance, interconnection will create a series of new market and service opportunities for the automobile industry, such as maintenance reminders and remote condition detection, both for the dealers to save the service cost, and for the owner to save time. In China, GM's OnStar provides GPS and maintenance reminders, while BMW's connecteddrive provides remote control via smartphones.

Mercedes Benz recently released the "Mercedes Me" digital platform to integrate current and future services for consumers. Local car companies are now focused primarily on first-time buyers, with limited information, but with the upgrading of consumer spending, interconnectivity will provide valuable insights into the future of automotive and value-added services for carmakers. The Internet of Things opens up new markets for aftermarket, such as car maintenance reminders and remote condition detection. The internet can also track and even lock up vehicles that default on loans, so banks and distributors are more willing to lend to small and medium-sized enterprises that have insufficient credit records.

China's second-hand car market is growing, the development of space is still very large. It is predicted that the used-car market will grow faster than the sales of new cars, from the current 3 million vehicles per year to more than 20 million vehicles in 2020. E-commerce platform excellent credit racket and car easy to beat for dealers to provide a reliable second-hand car, to help consumers find satisfactory cars, improve the transparency of each transaction information, thereby eliminating the current market development of the main obstacles. Some of the leading Web sites offer a comparison of used-car deals, and the growth momentum of used cars will continue if there are third-party services like the US Carfax and Kelley Blue book, providing the convenience of automotive history and fair value assessment.

Large car rental and service providers cut sales and market costs by building an online platform, while taxis and luxury car rentals began using the Internet to optimize fleet scheduling. Passengers can use a drop-by-taxi and fast mobile applications to the nearest taxi.

By 2025, Internet technology is expected to contribute 10% to 29% of GDP growth in the automotive sector, with 60% of the increase in productivity. Our assessment of Internet applications tends to be neutral to the employment impact of the automotive industry and its associated value chains, with a maximum increase of 1.5%. New markets, such as second-hand cars, remote services, and commercial vehicle subprime mortgages, can create up to 280,000 jobs to offset the 200,000 jobs that may be lost due to productivity gains in existing operations.

Chemical Industry: Promote industrial chain upgrade

China's chemical industry is in the process of upgrading--chemical companies compete on low-margin commodities and start developing more high-end products. At the same time, widespread public concern about the environment has led to increased regulation and a rise in the cost of businesses. Affected by this, chemical enterprises urgently need to optimize the production process. Internet technology can help chemical enterprises to solve these problems.

By providing real-time data that is refined from supplier inventory, freight logistics to downstream customer requirements, the Internet can improve the accuracy of forecasts and optimize production planning. The use of these tools is still in its infancy in China, but large manufacturers have a strong incentive to accelerate development. The internet can also help chemical companies keep abreast of the latest developments in science and industry, and cooperate with customers and external experts to improve their research and development capabilities. At present, the impact of the Internet on the industry is limited, but as the chemical enterprises will expand sales to small and medium-sized cities, it is also possible to promote the development of E-commerce. Some companies have set up their own network platform, or with Alibaba (rolling information), HC Network, or Guangzhou chemical trading and other third-party platforms to cooperate.

Enterprises can use the Internet of Things to provide comprehensive solutions, such as water treatment programs for industrial enterprises. Fine farming is another new market: sensors can collect and process real-time data on water and nutrient levels in farmland and automatically generate the fertilizers and treatments needed.

By 2025, the contribution of the Internet to the GDP growth of the chemical industry is estimated to be 3% to 21%. Productivity gains could lead to a 3% loss of employment in the industry and its associated value chain. New markets can offset this impact, but in many areas the growth of new markets depends on the extent to which the Internet of Things is developed. The harmonization of technical standards can accelerate this process, enabling enterprises to use the same industry platform without having to specialize in developing their own systems. Traditionally, it investment in the chemical industry is lower than in other industries, especially in China. In order to maximize the potential of the Internet, chemical enterprises need to increase investment in technology.

Finance: Serving new retail and business segments

With the further relaxation of regulation and the increasing influence of internet finance, the competition in the financial industry is becoming more and more fierce. These trends may erode profits, making it more urgent for financial institutions to use information technology to reduce costs and exploit new markets.

The bank can reduce the risk of non-performing loans by analyzing the real time data points of the Internet Shanghai quantity. Banks, securities and insurance companies have set up a network platform to improve the effectiveness of marketing and interaction with customers. According to ICBC's estimate, the online transaction costs are only one-seventh of the network counter. 15 increasing risk management and reducing transaction costs will enable banks to serve more individuals and SME clients.

At present, Chinese consumers have about 60% of the financial assets placed in bank deposits, but the Internet reduces transaction costs, but also reduce the threshold of investment banking. Online money market funds, discount brokers and Third-party online markets are beginning to emerge. The online payment platform provides the key foundation for the network retail trade, and also promotes the growth of the entity retail consumption.

By 2025, the Internet is expected to contribute 10% to 25% of GDP growth in the financial sector. But productivity gains could cut employment by up to 5%, especially in the area of sales and customer service.

On the other hand, as Internet tools are widely used in finance, capital allocation will be more efficient, creating 5 million to 11 million jobs for other industries.

Given the financial innovation of the Internet, the regulatory framework for the financial sector needs to be further clarified. Internet finance blurs the boundaries of loan, payment and investment areas governed by different regulators, which requires cooperation to achieve a predictable and unified regulatory framework. The challenge for regulators is to keep pace with change and to strike a balance between encouraging innovation and reducing risk. At the same time, to build a strong credit system, regulators also need to develop clear data-sharing rules and protect user privacy.

Real estate: from bricks to mouse

Chinese buyers and renters are increasingly inclined to search the web for their ideal home. Similar to SouFun E-commerce platform, providing developers, brokers, personal landlord listing information, real estate advertising and search functions. With the ability to find bona fide homebuyers faster, developers and brokers can optimize real estate search and trading processes, reducing marketing and inventory costs. Local governments can now build land for the online trading platform to increase information transparency. In addition, Taobao, China's largest c2c website, launched a mortgage auction platform in 2012.

E-commerce platform allows real estate developers, contractors and hotel chains to purchase construction materials, facilities, equipment and decorating materials on various e-commerce platforms. By consolidating orders for many small wholesalers, the cost of purchasing can be reduced by 5% to 30%, and small vendors can directly dock with buyers.

The internet has also created new business areas. For example, a property management company can establish an online community to keep in touch with the owners of a particular community. Such communities are often used for routine management and maintenance or to provide value-added services, although privacy and security remain problematic.

From a broader perspective, the Internet is shaping the demand for commercial real estate. Network retailing reduces the demand of physical outlets, but improves the demand of modern warehousing real estate with advanced logistics. Some of the malls are becoming more entertaining and consumer-oriented. The new service Web site, which links travellers to homeowners willing to rent houses, is putting pressure on the hotel industry, although the holiday house lease is slower to spread in China than anywhere else in the world.

The quantifiable impact of the internet on real estate is fraught with uncertainty. By 2025, GDP growth in the industry is expected to be 3% or 6% per cent lower than the Internet. As the Internet brings productivity gains and reshaping demand, it could also reduce employment opportunities for the industry and its associated value chains by as much as 8%. In addition, the Internet is likely to lead to changes in property prices, as buyers and renters get more information and higher transparency lowers the price premium generated by asymmetric information.

Health care: expanding coverage, reducing costs

China is aggressively reforming its health-care system, with ageing populations and chronic illnesses weighing on existing systems. Hospital funding may be the key determinant of whether health reform will succeed. However, once the health reform succeeds, the Internet will become an important tool for improving the efficiency of the health care system. Many lower-level hospitals, community health facilities and rural clinics now lack technical systems. Even in the big city of the three hospitals, information management is still very decentralized. The change from paper records to electronic management system will greatly improve the management level of public health care in China. Structural imbalances are one of the biggest challenges facing China's health-care system. 80% of the resources are concentrated in the city, the patient even if the minor problems to do everything possible to the big hospital treatment. The Regional Health Information Network (Rhins) can help to alleviate these problems by networking large hospitals and community clinics, coordinating referral and treatment issues. At present, the Regional Hospital Information Network has been implemented in Shanghai and Beijing, and gradually extended to other major cities in the country. Telemedicine and remote testing establish a new link between patients and medical experts hundreds of of miles away, to some extent easing the imbalance in medical resources. These ideas are developing rapidly in China, but the benefits of hospitals and doctors must be effectively coordinated in order to realize their full potential.

The internet can also improve the level of treatment. For example, the clinical decision support system assists physicians in the diagnosis and is alerted if the prescribed drug may have adverse reactions. Electronic medical records and online tracking systems help develop disease treatment norms, and doctors can visit learning sites (such as Clove Garden) to learn about the latest research.

Now, people can visit the hospital and the doctor's website to learn about the hospital. Because these tools make treatment outcomes and patient satisfaction more open and transparent, hospitals and doctors must do better. The online reservation system can alleviate the queuing problem of the three-armour hospital, and the online consultation platform can let the patient ask the doctor directly.

Pharmaceutical companies and medical device manufacturers can expand research cooperation through large data to improve the efficiency of clinical trials. In order to strengthen the supervision of the drug supply chain, eliminate counterfeit drugs and prevent abuse, drug electronic Regulatory code has been applied. E-commerce will eventually expand the over-the-counter drug market and improve marketing efficiency.

The internet can save 110 billion to 610 billion yuan a year for health and health spending, which will account for 2% to 13% of the health-care cost growth from 2013 to 2025. 16 efficiency gains could reduce the industry and its associated value chain up to 2% of jobs. But at the same time, a more efficient system will generate more indirect benefits, improve people's quality of life, and build healthier and more efficient labor forces.

While information initiatives such as electronic medical records and regional networks have made positive progress, governments need to act to encourage hospitals, physicians, pharmaceutical companies, medical equipment companies and payers to use internet-based tools and systems. At the same time, the privacy of personal medical information is critical. New regulatory policies are needed to control risk, monitor the quality of new drugs and services, and prevent fraud and misleading information on the Internet.