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Asia’s Digital Dragon: $80 Billion and 1.1 Billion Users by 2015

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By Dian L. Chu, Economic Forecasts & Opinions

With just over 1.3 billion people (as of mid-2008), China accounts for about 20 percent of the world population and needless to say, is the world's largest and most populous country. Although the country’s population growth has been somewhat slowed by the one child policy (in effect since 1979), its internet population has been growing leaps and bounds over the last ten years. (Figure 1)

As of June 2010, China's netizenship climbed to 420 million, more than the population of the entire United States. However, the penetration rate of internet users remains low at only 31.8 percent, compared with a more mature U.S. market of near 70 percent.   

Some believe the growth rate of China’s internet users will slow along with its economy as the rate went from 53 percent yearly growth in 2007 down to about 29 percent in 2009 and is trending to be probably under 20 percent in 2010.

Now, McKinsey Quarterly just released a new forecast this week based on a survey conducted across China, India, and Malaysia. According to McKinsy, Asia’s internet users will reach more than 1.1 billion on by 2015 (Exhibit 1). Furthermore, within five years, this market may generate revenues of more than $80 billion in internet commerce, access fees, device sales, etc. (Exhibit 2)

Based on McKinsey’s projection, over the next five years, while China’s internet users will double in size hitting 55 percent of the population, India’s netizenship is posed to increase near five-fold to 28 percent of its population. However, due to market size and income levels, the revenue growth potential clearly resides with China, growing around 38 percent per year through 2015 (Exhibit 2). 

The McKinsey study also highlights the differences in the usage pattern and content preference among the three countries.  But although they are at very different stages of their digital evolution, all three have one trend in common-- the increasing use of digital media such as instant messaging, social networks, gaming, and streaming video.

This has vast implications in future marketing efforts for companies targeting the increasingly affluent Asian/Chinese consumers.  It also means tremendous growth opportunity for the technology sector such as communication infrastructure, content and web services providers, E-commerce platforms and high tech mobile devices.  

However, China--the biggest digital market of Asia--has proven quite elusive for foreign companies, mostly due to market specific factors including policies, and cultural difference. Homegrowns –such as Taobao.com (???) and Baidu (??)--without a doubt rule China with dominant market share advantage, while the de facto exits of Google and eBay serve as two business case studies of “How To Fumble in China”.

For instance, Taobao, owned by Alibaba Group (1688:HK), has over 80% of China’s online shopping market, trailed far behind by Tencent’s Paipai and eBay/Eachnet. there is already speculation about an IPO of Taobao amid strong growth.  Baidu (BIDU), on the other hand, boasts search market revenue share in China of 70 percent for the first time as of Q2 2010, while Google’s market share had languished from 31% to 24% in the same period. 

The good news is that things are expected to change with Beijing slowly starting to relax restrictions to let in foreign companies. Nevertheless, domestic companies like Alibaba and Baidu will likely share the bulk of the monetization potential of 770 million internet users in the next five year, while foreign companies learn and adapt to the treacherous market of China.

China already has one of the world’s largest optic transmitting network, and is spending billions to build up even more infrastructure. While the developed countries race to catch up, a fastly growing broadband population could bring an "Eastern shift" of technology innovation making China "the cool kid on the block", where the rest of the world look for the hottest devices and apps, very much like the U.S. and Europe today.

Meanwhile, investors interested in riding the digital dragon of Asia could invest through companies already with foothold in the region, and/or technology focused exchange-traded funds (ETFs).

Infrastructure companies such as Alcatel-Lucent (ALU), China Telecom (CHA), and China Mobile(CHL), niche mobile devices like iPhone and iPad by Apple (AAPL), in addition to Baidu (BIDU), are a few examples of individual stocks.

ETF choices include Global X China Technology ETF (CHIB), Claymore China Technology ETF (CQQQ), iShares China ETF (FXI), while iShares MSCI Taiwan Index Fund (EWT) gives exposure to “The Other China” that's more digitally advanced.

Note: Full report of the McKinsy Quarterly is available here (free registration)

Disclosure: No Positions
Dian L. Chu, Sept. 24, 2010

 


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Sun, 09/26/2010 - 10:44 | Link to Comment 99er
Sun, 09/26/2010 - 09:37 | Link to Comment YuShun
YuShun's picture

Having a factual error in the first sentence of an article does not inspire confidence in the opinions that follow. China is not the largest country.

Sat, 09/25/2010 - 16:37 | Link to Comment Djirk
Djirk's picture

I believe this number will be dwarfed by the number of mobile phone users. Lots of upside in connected Asia.

Sat, 09/25/2010 - 16:36 | Link to Comment Djirk
Djirk's picture

I believe this number will be dwarfed by the number of mobile phone users. Lots of upside here in connected Asia.

Sat, 09/25/2010 - 14:21 | Link to Comment Edward G. Rendell
Edward G. Rendell's picture

I always imagine Dian L. Chu to talk like the character Ms. Swan, an Asian manicurist, on a comedy sketch show--"He looka like a man."  "How so?"  "Yeah, y'know, ev'ry'ting--he looka like a man." Discussion switches from China to Asia (via McKinsey) abruptly back to China (perhaps a strain in the McKinsey report) and then back to Asia.  The upshot is, "China company looka like a buy."  "Which one?" "You know...the China company...and ev'ryt'ing...it looka like a buy."  

Valuation of Baidu? Currency risk? Local economy risk? Political risk? "It looka like a China company, and ev'ry'ting, y'know...it looka like a company.  Yeah, you buy company, y'know..." 

Sat, 09/25/2010 - 14:15 | Link to Comment Sudden Debt
Sudden Debt's picture

Ebay is a company that went over the hill a long time ago. Now they only sell fake and crappy stuff and the site is filled with scam artists.

Google on the othe hand is a international medium. The fact they don't use it that much shows that the international communication lines are going down and might even signal a slowing in international trade.

And even so, also google will one day go up into thin air as they are not able to replicate their succes.

Sat, 09/25/2010 - 13:41 | Link to Comment Jesse Liversore
Jesse Liversore's picture

Hey take a little more time and take a stand on a security rather than a long list of stuff.  FXI wont do much good to play this trend.  I bet if you did more homework you could come up with less of a data dump and something more compelling.  What about tower companies over there.  That is a cash flow biz that has tons of growth left in the soon to be 2nd and 1st world countries.  Companies like American Tower, crown castle are interesting.

Next G (currently held by Priv Equity) will be an interesting play if/when it goes public.  They make fill in nodes for densely populated areas and reduce the burden and cost of putting up more and more big towers.

Sat, 09/25/2010 - 13:01 | Link to Comment wafflehead
wafflehead's picture

yeah right! the fact is these chiney people dont buy anything from the internet. People that buy internet traffic for their ebusiness buy traffic from countries like the US, UK and others in western europe while traffic from China and Russia is considered money down the toilet. I know what i am talking about since i have such a business.

Sat, 09/25/2010 - 15:18 | Link to Comment tom
tom's picture

But what you're talking about is the value of Russian/Chinese traffic to your American company. It's zero because Russians/Chinese buy very little over the internet from the US.

Russia and China are relatively closed markets. Generally only well-off people seeking luxury items not available in their local markets would pay the cost or have the clout to get an international package through customs.

That doesn't stop Russians and Chinese from selling online to local customers. They're all over that.

Sat, 09/25/2010 - 15:54 | Link to Comment Hunch Trader
Hunch Trader's picture

It's also zero because extremely few US companies ship overseas...

Even Google sunk Nexus One by refusing to ship intl.

 

Sat, 09/25/2010 - 15:46 | Link to Comment wafflehead
wafflehead's picture

youre thinking about items which require physical delivery in which case I would agree with you that i cant make any conclusions. But what I am talking about are goods that are sent over the internet which are mostly not produced in those countries.

Sun, 09/26/2010 - 07:42 | Link to Comment tom
tom's picture

Sounds like this may have to do with 99% intellectual property piracy rates.

Also, fewer people have cards, they're more cautious to use them, and banks are more restrictive (usually you have to prior call the bank each time you use the card over the internet). A lot of people who buy physical goods online pay COD to the shipping company. That's true even in some EU countries.

And of course, average incomes are just lower, especially in China.

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