China, by design: World-leading connectivity nurtures new digital business models TMT Predictions 2019
9 minute read
12 December 2018
China’s telecommunications systems will be second to none in 2019 and beyond—and it already has the world’s largest digital user base. These two factors will combine to drive business model innovation in an eclectic array of fields.
Deloitte Global predicts that China will have world-leading telecommunications networks in 2019 and most likely in the medium term. Its communications infrastructure will provide a foundation for the gestation and maturation of at least three significant new industries, each of which could generate tens of billions of dollars in revenue annually by 2023.
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In China, 600 million people will use their phones to make mobile payments as of the start of 2019, about 550 million people will regularly use their smartphones to shop online, and about 200 million people will use bikesharing services.1
Deloitte Global further predicts that, in 2019, China will have the world’s largest fiber-to-the premise (FTTP) deployment by a significant margin. At the start of 2019, China is likely to have over 330 million full-fiber connections, representing about 70 percent of the world’s total.2 FTTP enables gigabit-speed links to premises today, and typically operators offer a range of packages at multiple speeds; in the medium term, by 2024, multi-gigabit speeds should be possible.3
China’s strengths in connectivity will likely be a key factor in enabling it to diversify from manufacturing technology to developing—and executing—new digital business models.
For starters, China is likely to soon have the world’s largest 4G network, measured by both base stations and subscribers. At the start of 2019, it will have almost 5 million 3G/4G base stations and 1.2 billion 4G subscribers, representing at least a third of the world’s total.4 Only India could rival China’s billion-plus subscribers; as of the end of 2017, India had about 238 million 4G subscribers.5
Over the coming years, China is also poised to become one of 5G’s leading markets, enabled in large part by the volume and density of the 4G network that the country has already built out. China had almost 2 million cell sites in early 2018; this compares with about 200,000 in the United States.6 China has 5.3 sites for every 10 square miles; the United States has only 0.4.7 The existing density of the 4G network in China should reduce the incremental cost of rolling out 5G. In fact, China is expected to launch 5G on a wide-scale basis by 2020 and to be the leading 5G market, with 430 million subscribers, by 2025.8
As 2019 begins, China’s 4G network is likely to have limited areas with gigabit-speed service, with only the largest cities having these speeds.9 (For context, as of the start of 2019, few markets around the world will have such speeds, so China is not unusual in this respect). However, the rollout of 5G, as well as the extension of ultra-high-speed 4G, over the coming years should allow such speeds to become more widely available.
China’s world-leading fixed and mobile telecommunications networks should enable it to become the leading location for developing and deploying applications requiring hyperfast speeds of 500 megabits per second (Mbps) or more. In the near term, these applications may be predominantly delivered over fixed-fiber networks. Within two to three years, however, hyperfast speeds over mobile networks should become widely available in cities, thanks to 5G’s rollout.
The upshot of all this connectivity will likely be business model innovation, as step changes in connectivity enable new business models. At the end of the 1990s, for instance, broadband enabled e-commerce to flourish in multiple markets. Fiber-based broadband, including fiber-to-the-cabinet (FTTC), has been the prerequisite for the mainstream adoption of video on demand around the world over the past decade. The introduction of 4G helped the growth of live streaming from smartphones via services such as Periscope and Facebook Live, which launched in 2015, and services such as TikTok and Douyu in China. And faster connectivity has been transformational at the enterprise level: All cloud-computing-based services rely on high-quality connections.
Of course, connectivity alone isn’t enough to support new business models; a base of users—potential customers—must also exist. But the recent upgrades to China’s telecommunications networks have already provided a foundation for massive digital user bases, which are by far the largest in the world. These include:
- The world’s largest base of fixed and mobile internet users, with more than 825 million people projected to be online at the start of 2019. China had 772 million people online at the end of 2017, and 802 million by June 2018.10 With a population of 1.4 billion, China still has scope to connect hundreds of millions of more users.
- The world’s largest base of mobile internet users—more than 800 million—with almost all of these using the mobile Web. In fact, almost all (97.5 percent) of China’s online citizens were using the mobile internet at the end of 2017.11
Combined with China’s advances in connectivity, the country’s enormous online user bases have, in recent years, catalyzed the emergence of three new mass-market industries—mobile payments, mobile commerce, and bikesharing—each of which is likely to have hundreds of millions of users at the start of 2019. Mobile payments, mobile commerce, and bikesharing have all relied on fast connections to spur broad adoption.12 While these services could all exist without 4G or high-speed broadband, they would likely be less useful, due to slower download speeds and higher latency; be more expensive to use, due to a higher cost per gigabyte; have smaller user bases; and generate less income.
We predict that 600 million people in China will use their phones to make mobile payments as of the start of 2019. This compares with 531 million mobile payments users at the end of 2017 and 474 million at the end of 2016.13 The largest platform, AliPay (owned by Alibaba), alone had 520 million users in February 2018.14 The value of mobile payment transactions in China reached 81 trillion yuan (US$12.8 trillion) in the first 10 months of 2017.15 This compares with an estimated US$49.3 billion worth of mobile transactions in the United States during the same period. In 2013, 3.8 billion transactions in China took place via nonbanking apps; in 2016, the volume was nearing 100 billion.16
We further predict that about 550 million people in China will regularly use their smartphones to shop online in 2019.17 In 2017, 506 million Chinese did so, a 15 percent increase over 2016. This positions China as having the largest base of mobile commerce users in the world.18
Finally, we predict that China will have about 200 million people using bikesharing services in 2019.19 In 2017, bikesharing users in China pedaled for a combined total of about 30 billion miles.20 All major cities around the world face the challenge of offering integrated transport solutions that allow users to coordinate their usage of different modes of transport (car, bus, subway, and train), with bicycles and scooters being used for the last mile. China is a leader in this regard.
What new applications could connectivity drive in China?
Looking ahead, China’s communications network is likely to be the foundation of several key new bandwidth-hungry applications that are likely to become mainstream (with hundreds of millions of users) and generate significant revenue (tens of billions of dollars annually) by 2024. These applications are likely to include machine vision, social credit, and new retail concepts.
Machine vision
Machine vision, an application of artificial intelligence (AI), is being deployed for various applications. In most case, high-speed connectivity is likely to be a prerequisite.
Machine vision is likely to play an increasing role in authentication. In the long term, one’s face may be the identifier used to authorize payment for everyday goods, or to verify access to public transport systems. Facial recognition compares the face presented with a stored image. The verification image may be stored in a passport or a phone, or it could reside in the cloud. Over time, the quality of the verification image is likely to become increasingly detailed.
Today, government bodies are using machine vision to identify people suspected of criminal activity. Scanning closed-circuit TV images is a task common to all police forces; machine vision can automate this often tedious but time-critical activity. High-speed connectivity can even enable footage to be scrutinized in the cloud. The application of machine vision to identifying criminals is being tested in many cities around the world, including Washington, DC,21 Dubai,22 and London.23 In addition, airports in the United States, Canada, Australia, and the United Kingdom are piloting the use of automated facial recognition to detect illegal aliens using a false identity.24
In China, facial recognition has been used on a trial basis to regulate access to train stations25 and airplanes,26 pay for fast food,27 verify the identity of taxi drivers,28 track the attendance of university students,29 and check into dormitories.30 One of the largest Chinese companies in this space, SenseTime, has stated that its software is used in Guangzhou, a city of about 25 million, to match surveillance images from crime scenes to photos in a criminal database. The system deployed in Guangzhou has identified more than 2,000 suspects so far.31 SenseTime is also reported to be working on a service that can parse data from thousands of live camera feeds.32 FTTP and 5G connections can enable these feeds to be uploaded in real time. The higher the resolution of each feed, the easier it becomes to identify individual faces or items of clothing.
Social credit
Social credit is a variation on traditional credit scores. An individual’s social credit is based on a person’s:33
- Credit history, which includes the person’s bill payment record
- Fulfillment capacity—that is, the person’s ability to fulfill contractual obligations
- Personal characteristics
- Behavior and preferences, which are tracked or inferred from buying habits (for instance, purchasing diapers is equated to responsible behavior)34 and even the number of hours a person spends playing video games
- Interpersonal relationships
AI, which relies on large data sets, can be used to iterate the algorithms used to determine each user’s rating.
Social credit can be an alternative to traditional credit rating systems that rely on credit card history, mortgage payments, or time employed. In China and many other emerging countries, where such records may not exist for a large proportion of the population, social credit systems can fill the gap.35 (As of 2015, the People’s Bank of China maintained credit histories for only about 380 million citizens.)36
Consumers participating in social credit can realize multiple benefits, often financial, from having strong social credit, ranging from bike or car rentals with no deposit to loans at lower rates. Those with a high credit score can also use fast check-in facilities at hotels or even apply for travel outside of China with less supporting documentation.37
Trials of social credit have been developed by private companies in the United States and United Kingdom,38 but in China, social credit is expected to be deployed on a national scale. One social credit system has already been set up in China with the launch of Sesame Credit by Ant Financial, part of Alibaba, in 2015. Local governments have also set up social credit systems. The city of Rongcheng deducts a citizen’s score for traffic violations but adds to it for volunteering or making charitable donations.39
The more information that is shared, the more accurately a social credit score may predict behavior. Hence, again, fast connectivity may be a core factor in the success of social credit.
New retail concepts
The retail store is undergoing a digital reinvention around the world, often with tech companies leading the charge. In China, Alibaba and Tencent, both of which were formerly online-only businesses, are buying into physical retail and looking to use their digital knowledge to create better shopping experiences. Alibaba, for instance, has purchased stakes in Sun Art Retail Group, Beijing Easyhome Furnishing Chain Store, Intime Retail Group, and Suning Commerce Group.40
Tech companies, for their part, are looking to AI to improve supply chain efficiency and to optimize inventory and product recommendations. They are also experimenting with deploying cameras and developing autonomous stores. JD.com has invested US$4.5 billion in an AI-enabled retail center, whose aims include seamlessly integrating online and offline platforms as well as creating virtual fitting services and unmanned stores.41
Bottom line
China is well-known for being the world’s technology manufacturer; it is now becoming a leading designer of digital products, services, and business models as well.42 Its world-class communications infrastructure is likely to be a key enabler of this shift.
Its strong position in fiber connections and 5G should position China well to become the premier nation for the development of applications that rely on hyperfast connections. The ubiquity of fiber and high-speed mobile in China also provides a vast base of beta testers and users. Indeed, the sheer size of China’s market, as well as users’ receptiveness to trying out new ideas, may make it the venue of choice for trying out new digital concepts. For example, Wheelys, a startup based in Sweden, located its first autonomous concept store on the campus of Hefei University, about 450 kilometers (280 miles) west of Shanghai.43 A principal reason for locating the store in China was because of its citizens’ unrivaled familiarity with paying by phone.44
China’s strengths in connectivity should also catalyze the development of AI-based applications. AI depends on access to data sets—the larger, typically, the better. Thanks to the country’s 1.2 billion 4G subscriptions, 825 million internet users, 600 million mobile payments users, and 200 million bikesharers, Deloitte’s view is that some of China’s data sets are unparalleled in size. If these data sets deliver better algorithms, competitive advantage may follow. Perhaps in recognition of this, Chinese AI companies have been receiving significant funding: In 2017, Chinese startups received 48 percent of the total US$12.5 billion that went to AI startups.45
And AI isn’t the only technology attracting attention in China. The past few years have seen growth in overseas funding of Chinese tech startups in general, as well as rising valuations of a number of private and public Chinese tech companies. In fact, as of the middle of 2018, nine of the 20 largest tech companies in the world by market valuation were headquartered in China, with the other 11 based in the United States.46 Over the next five years, these rankings are likely to be keenly contested. Companies that are able to scale their ideas fastest are likely to end up stronger.
Technology Consulting
Today, business and technology innovation are inextricably linked and the demand for technology-enabled business transformation services is rapidly growing. Deloitte technology professionals around the world help clients resolve their most critical information and technology challenges.
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Get in touch
- Paul J. Sallomi
- Partner, Global TMT Industry Leader
- Deloitte Tax LLP
- psallomi@deloitte.com
- +1 408 704 4100
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