To many multinationals, digital China is the mother of all untapped markets. At 384 million as of 2009, China already has twice as many Internet users as the U.S. and Japan combined. Just as important is the intensity with which Chinese are connected—an average of 2.7 hours online each day. That translates to Chinese eyeballs glued to e-commerce sites, blogs, mobile applications, and games for 1 billion hours each day, twice as many as in the U.S.
So far, many Western companies have been caught flat-footed. Savvy Chinese Internet companies like Tencent (700:HK), Alibaba.com (1688:HK), and Sohu (SOHU) are running circles around Western Internet giants, utterly dominating a fast-growing, $37 billion consumer e-commerce industry. Many foreign consumer-product and services companies are missing out, too. At a time when tens of millions of Chinese each year are newly embracing online shopping, it is essential to move beyond traditional television and outdoor advertising.
The good news for foreign companies is that the game is still early. China's online population is projected to reach 650 million in five years as the Web penetrates deep into the interior. The percentage shopping online is expected to surge from 9 percent in 2009 to 19 percent in 2012. And digital activities still nascent in China such as social networking, mobile broadband services, and online advertising are poised for explosive growth.
To succeed, multinationals must shed assumptions that have worked well in the West. Instead, they must carefully study the idiosyncrasies of Internet use in China and the online impulses of its digital consumers.
Mind you, China isn't a snap for anybody. The government can change the rules swiftly. On June 22, for instance, the Culture Ministry announced regulations for online gaming that sent shares of Tencent tumbling. Big urban markets like Beijing and Shanghai are also getting saturated from some online services.
Still, no other market matches China's enormous potential. To understand this market in all its diversity, BCG undertook an extensive study that included interviews with 1,700 Chinese, ages 14 to 55, in 12 cities and rural areas in 11 of the nation's 22 provinces. We broke this population into six distinct segments—teenagers, university students, young professionals, young gamers, active middle-agers, and passive middle-agers. We also divided these interviews among cities of different sizes, from mega-metropolises like Beijing and Chengdu to smaller, less affluent cities such as Yibin in Sichuan province.
The picture that emerges is of an online population that is destined to become the world's most strategic e-commerce market in the years ahead. For example, our research found that a stunning 99 percent of university students and professionals ages 22 to 35—the key consumers of the future—are online an average of four hours a day. And they are already comfortable buying goods and services online.
But this digital population must be approached quite differently than in the West and even other big emerging markets, such as Brazil, India, Russia, and Indonesia. China's leading Internet companies know their habits well, which helps explain why Tencent has attained a market capitalization of $36 billion, Baidu (BIDU) of $28 billion, and Alibaba.com of $10 billion.
One crucial difference is that consumers in the U.S., Japan, and most other nations primarily use the Internet for e-mail and searching for information. In China, by contrast, 87 percent communicate online via instant messaging. More than 80 percent of Chinese users also download music and films, compared with 38 percent in the U.S. and just 23 percent in Japan.
The most important gateway into this world is QQ, the instant-messaging service owned by Tencent and arguably one of the world's most valuable digital franchises. There are more QQ accounts in China—523 million—than there are people in the European Union. Tencent illustrates the value of getting consumers hooked on a social networking platform and growing along with their needs. Many Chinese get free QQ accounts as teenagers to chat and continue to use it to build and maintain relationships. They then grow addicted to Tencent's gaming modules.
The new regulations, which among other things require gamers to register with their real names and limit sales of items using "virtual currency," may slow Tencent's momentum. But there's no denying the value of its franchise. Young professionals interviewed by BCG described how they log on to QQ when they wake up, play games such as QQ Farm and World of Warcraft during work breaks and when they get home, and buy "clothes" for their avatars on QQshow. Tencent earns revenue from games, online ads, and links to e-commerce sites.
China's younger digital generations are also growing at ease with e-commerce. Some 39 percent of university students and 49 percent of young professionals shop online, spending an average of $294 each in 2008. The majority go to the Internet first to get product information and compare prices. These groups are also more likely than others to pay for purchases electronically. And they are buying increasingly complex products, such as apparel and consumer electronics.
For many Chinese, there are big advantages to shopping online. The Internet has made prices highly transparent and offers products often not found in local stores, especially in smaller cities. But winning the trust of Chinese consumers requires lots of hard work.
Lessons from Homegrown Companies
Foreign marketers have much to learn from mainland trailblazers like Taobao, part of the Alibaba Group. To ease anxieties over quality, Taobao offers refunds to buyers who have felt cheated. It also encourages buyers to rate sellers, and displays those ratings on its site. This helped Taobao seize a commanding 85 percent share of the consumer-to-consumer online market.
One young Beijing professional we interviewed, Christine, 26, exemplifies this loyalty. She scours Taobao daily for deals, promotions, and special products. In 2009, she spent $905 on Taobao, 30 percent of her annual shopping budget. Purchases range from a camera and keyboard to jewelry.
Companies like Goodbaby, meanwhile, show that customer loyalty can be nurtured by offering valuable services. A market leader in baby-care products, Goodbaby has made itself a continual presence in the lives of young mothers with a Web site that hosts blogs, baby-care tips, and doctor referrals.
There is still plenty of opportunity for foreign entrants. We project business-to-consumer transactions will grow 61 percent annually for the next few years. Other big markets are still in their infancy. China has 739 million cell-phone users, for example. But only a small portion of those phones are connected to broadband. That will change as 3G networks are built out and become affordable.
What must multinationals do? To be sure, they need attractive, engaging Internet sites. But they must also master such powerful tools as mobile phones and text-messaging services that keep Chinese connected across the farthest reaches of the country. They must acquire deep understanding of how their target markets interact with the Web and continuously offer services and products that meet those markets' evolving wants and needs. One route is to work through established domestic sites. Another is to recruit experienced local marketers and empower them to run digital media campaigns with Chinese characteristics.
The time to start doing all of this is right now, while Chinese consumers are forming views on which names to trust and before the competition becomes even more entrenched.