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“Informatization” Spreads to SMEs in China

By Emily Liu
Posted: 14th August 2014 09:03
Investing in the internet stands to bring immense economic and productivity gains for China, and accelerate its economic restructuring towards a consumer-driven, innovation-intensive economy, according to a Mckinsey Global Institute report. China’s internet economy has been on a strong upward trajectory, growing to 4.4 percent of GDP in 2013, on par with the ratio of most advanced economies.
The growth achieved thus far, however, is just the tip of the iceberg. The digital revolution has been largely consumer-driven, and Chinese businesses are only just beginning to open up to the potential that the Internet can bring. Currently, Chinese companies spend on average 2 percent of their revenue on IT, much lower than the 4 percent international average, though strong growth momentum is slated to bring this to 3 percent by 2015.
SMEs, which contribute 70 percent of China’s GDP, stand to benefit the most, as the productivity and transparency brought about by web technologies will open up more capital sources for these firms. Cloud computing, online marketing and e-commerce platforms will also provide businesses with convenient, low costs ways to sell their products and interact directly with consumers.
For foreign investors, it is especially important to take note of how the internet is poised to transform the consumer electronics, automotive, chemicals and healthcare industries.
Consumer Electronics
As smartphones and gadgets become ubiquitous necessities in daily life, the online market for consumer electronics in China has really taken off. In the three years from 2009 to 2012, e-commerce in consumer electronics grew at a compound annual rate of 103 percent, while offline sales grew just 9 percent.
By 2025, Mckinsey predicts the creation of new markets spurred by the internet – e.g., smart appliances, Internet TVs, digital media content, and cloud computing services – will contribute some 14 to 38 percent of overall growth in the electronics sector, and create up to 7 percent more jobs in the sector.
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IT is also poised to revolutionize customer service, making possible the remote control of electrical appliances, 24/7 online customer service and remote repair services. Mobile streaming, data storage on the cloud and file sharing are also areas of expected growth.
The greatest productivity gains stand to be reaped in the Chinese auto industry, which has been suffering from problems of excess capacity and slowing growth in the market. Real-time data management will allow companies to optimize their supply chain processes and fundamentally close the productivity gap among Chinese automakers.
With the web rapidly becoming the preferred source of product information for consumers, auto firms are gradually moving towards online marketing and e-commerce. Services such as test driving offered at traditional showrooms may be irreplaceable, but the cost savings and convenience of online platforms such as Bitauto is undeniable.
Customer service could also be revolutionized, with driving assistance, maintenance alerts and remote diagnosis, cutting servicing costs and saving consumers a trip to the service center and two days without a usable car. Meanwhile, e-commerce sites like Youxinpai and Cheyipai will play a crucial role in the expected growth of the used car market, from the three million annually today to more than 20 million by 2020.
Although the chemicals industry consists largely of business-to-business transactions, the cost-saving potential of e-commerce platforms remains strong. As more companies expand to smaller, lower tier cities in China, online marketing and sales channels can quickly step in to build up the needed infrastructure.
Because of the chemicals industry’s comparative aversion to technology spending to date, it stands to reap significant productivity gains from the internet, even against rising costs due to tightening regulations. Real-time data could revolutionize supply chain management by facilitating production planning, inventory monitoring and customer demand tracking. Niche markets like precision farming and integrated product solutions, in particular, will benefit.
One of China’s largest challenges in the 21st century is to bring the technology of its healthcare system up to par to serve its massive population. At the most basic level, many hospitals and healthcare facilities in lower tier cities and rural areas still lack core systems such as electronic health records.
To address the great disparity between resources in large cities and rural areas, the government is also working to expand the Regional Health Information Networks (RHINs)—information systems that coordinate referrals and treatment between large hospitals and community health centers. Web-based technology such as telemedicine and remote monitoring will also facilitate such resource sharing.
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China’s massive population means that large hospitals are constantly overcrowded and overworked. Online appointment systems could go a long way toward reducing waiting times, and online consultancy platforms could help patients with smaller problems solve their questions quickly without having to make a personal trip to the doctor.
Mckinsey estimates that by investing in the internet, the healthcare system could save some RMB 110 billion to 610 billion in annual costs. More importantly, a better healthcare system will generate positive externalities economy-wide, as workers enjoy happier and healthier lives.
There remains much work to be done to fully unlock the economic potential of web technologies in these industries in China. Currently, the greatest impediments are weak regulations regarding online privacy and intellectual property, low technological literacy among the workforce and limited broadband penetration.
These, however, are primarily governmental issues. With up to 22 percent of China’s productivity and GDP growth through 2025 coming from the Internet, foreign investors for their own part must decide how to balance the downsides of greater IT integration (including staffing cuts and heightened competition via lower costs) against its immense potential for productivity.
This article was first published on China Briefing.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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