Seven trends and phenomena that will shape China in 2018
1. Internationalization of Chinese innovation leaders
Chinese companies are becoming more visible overseas. Ads and shop signs for Chinese smartphone brands such as Oppo, Vivo, Xiaomi, OnePlus and Huawei have become part of the cityscapes of South and South-East Asia, the Middle-East, Africa, and South America. Tencent has not only upped its stake in Snapchat and swapped shares with Spotify; the company is also about to take on the world under its own brand with the launch of Arena of Valor, a worldwide version of the Chinese mobile game Honor of Kings which has 200 million registered players.
2018 could become the year when mainstream consumers around the world get to know Chinese innovation leaders beyond the tech giants. Xiaomi and Mobvoi will launch further iterations of their smart home and in-car connected devices. NIO will try to upend the global electrical vehicle market through its stylish automated electrical car. Chinese drone makers such as DJI and Ehang will continue to dominate the global civil drone market and showcase more spectacular projects such as the unmanned drone taxi service that was just launched in Dubai. Biotech startup iCarbonX will combine DNA and molecular profiling with medical, behavioral, and biometric data to tailor treatments, diets, skin care formulas, and exercises to individual users.
2. Belt and Roadblocks ahead
The Belt and Road initiative, an infrastructure program encompassing 80 countries, has been described as a signature policy of the current Chinese leadership and a central concept in Chinese foreign policy, and also as a roadmap for transitioning China to a new level of economic development. In 2017 it became enshrined into the country’s constitution, but also had setbacks in several countries.
Economic collapse in Venezuela exposed the risks involved in extending foreign loans within the Belt and Road program and left Chinese state-owned entities with bad loans. Nepal and Pakistan both withdrew from dam-building deals amid concerns over unfair distribution of benefits and public opinions suspicious of China’s agenda.
Nonetheless, China’s foreign minister Wang Yi revealed at a symposium in November that China under the Belt and Road framework has built 75 overseas economic and trade cooperation zones in 24 countries and that Chinese companies have invested US$ 50 billion and created 200,000 local jobs along the Belt and Road.
In spite of prospects of additional roadblocks, the program can be expected to continue full steam ahead during 2018.
3. Consumption moving beyond experiences
In line with the often-repeated thesis that Chinese consumers are becoming more experience-oriented, China’s box office expanded by 14% in 2017, hitting CNY 56 billion. The highest-grossing movie of the year was Wolf Warrior II, an action movie about a Chinese soldier protecting aid workers from rebels and arms dealers in an African country.
Chinese experience consumption is, however, becoming increasingly multidimensional. Two factors stand out as increasingly important:
The immersive theater production Sleep No More, in which theater goers become part of the scenes by donning beaked masks while moving through multiple environments where narratives are played out, was sold out through most of its yearlong sojourn in Shanghai. Another sign of immersion gaining traction is the Chinese travel agency Zanadu, which offers Virtual Reality travel experiences where prospective travelers can experience destinations and travel products through a VR headset before choosing them.
Amid a sustained shift toward e-commerce, a number of shopping malls started to offer courses in everything from cooking to handicraft. E-learning grew steadily and learning a new skill, such as a language, was reported by young consumers an important goal. On JD.com, the second-largest e-commerce platform in China, educational audio and video as well as music instruments were among the fastest-growing product categories. With the emergence of ‘new-style tea houses’ and cities such as Shanghai skipping straight to the fourth wave of coffee culture, China’s urban millennials were eager not only to display style, but connoisseurship as well.
4. An evolving notion of quality among Chinese consumers
Authenticity, pureness, and health are becoming increasingly important in defining quality among Chinese consumers and allowing brands to charge a premium. Fragrances, plant extracts, and organic cotton and silk textures are making their way into a growing number of product categories, from home care to skin care. Japanese and Korean brands are often leading these trends, but increasingly the originators of new concepts are Chinese brands. The Suzhou-based sanitary pad brand Mia, for example, has been leading the innovation in this category by launching a silk surface sanitary pad.
A number of product categories have undergone commoditization over the last years, including cleaning detergents, personal wash, chocolate, and some consumer electronics categories. Conversely, product categories that have become increasingly premiumized include several related to health and beauty, such as skincare, toothpaste, yoghurt, milk, bottled water, and juice.
Origin is another factor in determining a product’s appeal. While the preference for foreign brands is becoming weaker in some areas, overall online retail sales of imported goods grew by an estimated 55% in 2017 (compared to 30% for online retail as a whole) and is set to reach 7% of overall online retail sales in 2018, up from 5.5% in 2017. JD.com reported that sales of imported goods on its platform increased as much as 70% year-over-year in the first eleven months of 2017.
5. New consumption concepts emerging from the periphery
Subcultures are rapidly gaining legitimacy as companies view consumption among non-mainstream lifestyle tribes as a venue for growth. An increasing number of services target segments such as LGBT and street culture fans. Bilibili, a video-streaming site founded in 2009 focused on ACG (Anime, Comic and Games) subcultures, has become the fourth most popular video site in China.
2017 has also seen the rise of several concepts that initially gained traction in rural areas and lower-tier cities before eventually triumphing in the big cities, including the popular video sharing app Kuaishou and the news app Qutoutiao. This reminds us, as we enter 2018, that there is still some truth in an old quote by the co-founder of Qihoo 360, a maker of anti-virus software: ‘Target the urban elite to make noise, target the masses to make money’.
6. Rising cost of online traffic drives new marketing approaches
Costs of online traffic and customer acquisitions have climbed high, as the internet user growth in China is plateauing and the majority of internet usage is concentrated to a handful categories that are dominated by a small number of giants. In some categories, the compound annual growth rate of the user acquisition cost was 77% between 2013 and 2017.
This has led to businesses exploring more cost-effective marketing channels. They have recently turned to platforms that provide new social marketing opportunities. These include Pinduoduo, which enables users to invite contacts on various social platforms to create group buys, and NetEast Cloud Music, a music-streaming app that has formed a unique online community through social features not commonly seen on music streaming platforms.
Starting from WeChat, a few of the biggest social apps added an application layer during the year that allows third parties to develop certain functions and features on top of these apps. This gives businesses more options for online services and marketing campaigns. The social service Pengyou Yingxiang, for example, noted that running every feature as a separate mini-program on WeChat substantially reduced operating costs, as some features went viral while others remained obscure.
7. State-led scientific and engineering breakthroughs
The breathtaking ambition of the Chinese national science and engineering agenda will extend into 2018 and beyond. Chinese engineers are currently evaluating the possibility to build a 1000-kilometer-long tunnel, the world’s longest, to carry water from Tibet to Xinjiang. Meanwhile, China’s space agency is preparing for a mission to the far side of the moon where it will attempt to grow plants and insects on the lunar surface. A third project seeks to develop a facial recognition system and database capable of identifying any of China’s citizens within three seconds – though technical difficulties will likely limit the implementation to the local level during 2018. A multibillion-dollar national investment initiative to support such and other ‘moonshot projects’ is under way, and may launch in 2018.
Artificial Intelligence has been a buzzword globally in 2017, but in China it became elevated to a matter of national security and competitiveness. The defeat of China’s Go champion Ke Jie by Google’s Go-playing computer AlphaGo in May 2017 was described as a Sputnik moment for the Chinese leadership. In July the State Council, China’s highest administrative authority, issued guidelines calling for China to become a global innovation center and for the domestic AI industry to reach an output of one trillion yuan by 2030. The document triggered numerous local funding initiatives. On the industry side, search giant Baidu unveiled its “All in AI” strategy, e-commerce leader Alibaba launched a global research and development initiative called Alibaba DAMO Academy to become an AI leader, and venture capital funding poured into startups in areas ranging from finance to healthcare – in some cases matched by funding from local government.