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Charting China’s digital destiny

The country could suffer billions in lost productivity if it doesn't accept new digitally driven ways of doing business.

By Guanghai Li and Matthew Robinson

INTRODUCTION

How does a country know where it stands in the digital revolution? Is it a vanguard member, a fast follower or simply a digital dawdler? The difference could mean billions of dollars in economic value generation.

To find out, leaders can employ a new approach developed by Accenture and Oxford Economics. By assessing a nation’s use of digital technologies and the degree to which its businesses and institutions have been transformed by this revolution, this metric measures what we call a country’s “digital density.” But this is more than an exercise in taking a country’s digital pulse: Boosting an economy’s digital density score can lead to greater productivity and faster GDP growth (see "Behind our methodology").

The digital density scores of 17 of the world’s major economies, the focus of our initial research, reveal a wide range of performance, suggesting strong upside potential for many of these nations. Case in point: China, which, in 10th place in our rankings, is currently located on the far side of the digital density divide and could benefit enormously by increasing its performance in this critical area. 

We’ve featured China in this article because among the nations studied, it has the most to gain: The impact of a 10-point increase in digital density in terms of economic value created would significantly exceed the impact of the same increase in the United States and dwarf the projections for the other countries we reviewed. 

Accenture research suggests that a 10-point boost to China’s digital density score could generate an increase in total factor productivity (which measures how efficiently and intensely an economy utilizes inputs in production) of 0.65 percent a year by 2020. This would, in turn, lead to a 0.5 percentage point increase in the average annual GDP growth rate for China over that period, generating almost $420 billion in new value at today’s prices. By comparison, the United States would see an extra $365 billion in value from a 10-point boost. 

Not standing still

That’s not to say that China is currently standing still, digitally speaking. In fact, demand for online technologies in the country has exploded, judging by its more than 630 million Internet users and its nearly 530 million mobile phone subscribers. In 2013, the total value of China’s e-commerce transactions exceeded $1.6 trillion. Furthermore, when we polled business leaders worldwide, the highest percentage of CEOs who believed that digital technologies would play a significant role for their businesses in the near future were found in China. And a similarly high percentage of Chinese executives believed that technology-based productivity improvements would provide the biggest boost to their competitiveness.

Measured by these indicators, China seems to be in a good place digitally. But in other areas critical to its digital density performance, the country is less well positioned.

A country’s digital density score has four main components: making markets, running enterprises, sourcing inputs and fostering enablers. Breaking down China’s score within these components can reveal important insights about the economy’s strengths and weaknesses:

Overall, China’s strengths include a culture that combines supportive government policies and a robust private-sector entrepreneurship, both of which have embraced digital technologies quickly. This potent mix has created a few highly visible and successful “digitally contestable markets” (Accenture’s term for the new market ecology and industry convergence that digitization enables) in the retail, travel, entertainment and financial services sectors.

Take China’s leading search-based e-commerce platform for the travel industry, for example. Qunar.com’s platform allows users to find the best deals by aggregating highly fragmented travel product information from tens of thousands of service providers and integrating it with user search queries to display real-time information. In 2013, Qunar.com’s 234 million web users and 53 million mobile users made 2.64 billion search queries for air tickets and 377 million queries for hotels.

However, while a handful of Chinese enterprises like Qunar are effectively exploiting digital technology in running their businesses, most companies are a very long way from utilizing its full potential.

Other critical gaps in the country’s digital density occur within the fostering enablers component, in the areas of management quality, labor market efficiency, speedy connectivity and ease of starting new businesses. China also exhibits lower-than-average innovation levels and organizational flexibility, especially in its big, state-owned enterprises. These deficits stand in the way of a higher score.

Digital laggard? Or digital leader?

The following analysis examines the four main components of China’s digital density score in relationship to the combined performance of four other countries—the Netherlands (which achieved the highest digital density score among the countries studied), along with the United States, Japan and Germany (which together with China are the world’s four largest economies).

Making markets 
This category focuses on the levels of digitization achieved by existing businesses in an economy and the effectiveness of online solutions in creating new markets.

In this area, China substantially outperforms the other four digital density players in promoting cross-firm collaborations. For example, one Chinese resources company works with both buyers and sellers of coal and coal chemical products in its own highly efficient online marketplace.

Overall, the country’s market-making performance is comparatively strong: Its consumers clearly embrace digital technology and thus flock to new digitally contested markets, and its business leaders recognize the potential of these new technologies. Government policies also support the creation of future digital infrastructure, including universal Internet connectivity, and encourage both online transactions and advertising. 

Running enterprises
This component measures how well businesses embrace digital technologies in functional areas like supply chain management and strategy formulation. 

While China’s businesses do well in digitizing their strategy processes and their business models, they underperform most of the other economies in the comparison group when it comes to using these technologies to manage human capital, innovation, and research and development. Chinese businesses fall behind those in three of the four other countries in digitizing their processes, reflecting their lower ICT (information, communications and technology) investments. 

There are three factors that prevent Chinese businesses from operating more like digital enterprises. First, right or wrong, companies feel little pressure to change. Why should they, they reason, as long as the cost of labor, land and resources are so low. (Ironically, these advantages are in fact rapidly disappearing.) Second, most domestic Chinese enterprises are unwilling to adopt new technology. Finally, the workforce lacks important skills and capacities in ICT and other digital disciplines. 

Sourcing inputs
This category looks at how well an economy employs digital technologies to source and utilize the means of production—labor, capital, and plant, property and equipment (PP&E)—and how online solutions alter the ways companies procure these inputs. 

China’s financial services companies achieve solid mid-range performance on the digital density index in their use of digital technology, a result of the boom in Internet financing platforms and services focused on providing capital to rapidly expanding enterprises. 

But while China leads the other four economies in digitizing PP&E, it ranks second lowest when it comes to using technology to manage labor. Not all Chinese companies are behind the curve when it comes to finding talent, however: One leading online crowdsourcing platform for professionals has more than 9 million users. 

Fostering enablers
The fourth category measures how well an economy’s institutional and socioeconomic environments facilitate the use of digital solutions. 

Despite scoring high in both society’s attitudes toward digitization and in long-term regulatory outlook, China ranks lowest among the five economies analyzed here in ease of doing business, access to connectivity, government spending and organizational flexibility. Take connectivity: China ranks 62nd on the World Economic Forum’s networked readiness index—which measures a nation’s capacity to foster competitiveness via its ICT infrastructure—putting it behind Mongolia.

Ambitious goals

Based on our analysis of China’s digital density scorecard, we believe the country should pursue three parallel approaches to achieve greater digital density. 

  • Invest in digital capital. China should create faster Internet speeds and better mobile access, and increase the number of information, communications and technology specialists to the levels in the European Union, where these specialists exceed 3 percent of the workforce.

  • Build digital institutions and marketplaces: Expand digital marketplaces and provide 98 percent of Chinese households with broadband Internet access. Upgrade the general business environment, improving management quality, labor market efficiency and the ease of starting a new business. Lower the regulatory burden on businesses and provide incentives to invest in ICT.

  • Digitize business behaviors. Encourage Chinese enterprises to employ digital technologies to reduce costs though productivity and internal efficiency improvements. Other steps should include boosting process efficiencies; optimizing production and inventory costs; increasing responsiveness; adopting new cost models; and reducing time spent on non-selling activities. Businesses can also generate innovation and growth by improving customer service; identifying digital business strategies that deliver new business outcomes; developing new products and services; exploring new customer channels; expanding into different markets; and deploying new pricing and earnings models that increase profitability.

A concerted effort along these lines, involving both the public and private sectors, could put that 10-point digital density boost well within China’s reach by 2020, along with the $420 billion in new value it promises to deliver. 

BEHIND OUR METHODOLOGY

Measuring an economy’s digital density
Accenture’s digital density index measures digitally led economic productivity. A higher score suggests broader and deeper adoption of digital technologies, skills, ways of working and regulatory frameworks. The index covers more than 50 indicators across four equally weighted areas of economic activity: making markets, running enterprises, sourcing inputs and fostering enablers.

The indicators include the volume of transactions conducted online; the extent to which companies employ automated interactions to communicate with one another; and the use of cloud and other digital technologies to streamline processes. Indicators also measure the technology skills of businesses, whether industries use digital platforms to access capital and talent, and the degree to which governments and businesses support and accept new digitally driven ways of doing business.

OUTLOOK: ACCENTURE’S JOURNAL OF HIGH-PERFORMANCE BUSINESS

As a showcase for the most innovative thinking on high-performance business,Outlook focuses on six core themes: Redefining Competitiveness, Digital Disruption, Global Operating Model, Open Innovation, Sustainability and Workforce of the Future. We feature original content devoted to these topics as well as a selection of unique insights offered by professionals throughout Accenture.


Authors

Guanghai Li

Guanghai Li is Accenture’s Digital Strategy lead for Greater China. He is based in Shanghai.

Matthew Robinson

Matthew Robinson is the managing director of Policy Research at the Accenture Institute for High Performance. He is based in London.

Mail to Matthew Robinson. This opens a new window.



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