China’s internet landscape continues to rapidly grow and innovate in 2021, pushing internet companies to evolve and adapt, as the nation enters a new phase of development, according to the China Internet Report 2021 released on 31st August.
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Compiled by the South China Morning Post, the report highlighted the Chinese government’s tightening of internet regulations in the last twelve months, amid an increasingly saturated domestic market, evolving internet user demographics and geopolitical tensions that are causing headwinds for China’s tech companies.
As a result, these companies have had to investigate other market opportunities, adapt business models, home in on new customer segments and pivot to remain competitive in 2020 and the first half of 2021.
According to the report, China’s internet users increased by 85 million in 2021 year-on-year, totalling 989 million users, or 68 percent of the total population. Mobile internet users represented 68 percent of the population, and mobile payments users stood for 59 percent of China’s 1.4-billion population.
While the number of deals in China’s internet sector dropped by 11 percent in 2020, momentum has recovered in 2021, said the report, adding the total amount raised by companies in China increased 24 percent, thanks to several mega deals including Chinese grocery app, Xinsheng Youxuan, which raised a total of US$3.6 billion over four separate funding rounds.
Big Tech took divergent paths in their investment activities in 2020. Chinese conglomerate Tencent was the only tech firm to increase its investments last year, making 168 investments, followed by Xiaomi at 70 investments and Alibaba Group at 44. Newcomers, like ByteDance and Meituan, became more active, to report added.
Chinese tech companies have raised a total of US$46 billion on public markets since January 2020, with Hong Kong proving to be the preferred location for Chinese tech IPOs (64 percent of listings), followed by the U.S. (35 percent) with just 1 percent listing in China.
However, the popularity of overseas listings in the U.S. market – driven by a deep pool of funding and flexible listing rules – is changing, on the back of recent regulatory changes in the U.S. that target companies with links to the Chinese military and delists firms found to be non-compliant with auditing requirements.
Adding to the U.S. market barrier, the Chinese government in July revised its Measures of Cybersecurity Review, forcing platforms with data of 1 million or more users to undergo a cybersecurity review if they are planning to list overseas. The announcement has the power to derail the IPO plans for Chinese start-ups, with some firms already suspending or withdrawing their plans.
China’s geopolitical tensions with nations such as India have also had an impact on Chinese companies and their app operations in the neighbouring Asian nation.
Market share of Chinese apps in India stood at 29 percent in 2020, dropping in number from 38 percent in 2019 and 44 percent in 2018. The Indian government cited concerns over the transmission of users’ data to foreign servers and national security and privacy concerns as reasons for the shutdown. Similar actions took place in the U.S. in 2020. After President Donald Trump signed an executive order to ban transactions with TikTok,
Alipay and WeChat, President Joe Biden eventually reversed the order in June 2021.
However, both the political headwinds in India and the U.S. have driven China’s tech firms to look to other markets for growth, including Southeast Asia. The region’s above-average GDP growth and the rapidly rising internet penetration make it a promising market for its digital economy, which is expected to grow 24 percent annually through 2025.
The report added that Singapore is fast becoming a favoured location for the regional headquarters of Chinese firms, thanks to its perceived political neutrality, where Chinese firms have previously faced hardship.
Finally, the report highlighted the changing nature of the internet user demographic in China, unveiling three new battlefront markets for tech firms to attack: ‘silver economy’, the ‘sheconomy’ and ‘sinking markets’.
The silver economy relates to China’s rising proportion of elderly internet users. Pushed online thanks to Covid-19, 11 percent of internet users in China were aged 60 or above in 2020, up from just 4 percent in 2016. However, the penetration rate of internet among seniors, 42 percent in 2020, remained low compared to 70 percent overall, suggesting huge potential for this user group. The sheconomy relates to the increasing independence and confidence of female consumers in China.
More women in China were tertiary educated last year and participated in the work force, creating greater financial autonomy. As a result, consumer tastes of women have changed, with women focus on style, brands and reputation over price sensitivity when it comes for fashion and individuality and boldness when it comes to cosmetics, the report added.
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China’s ‘sinking markets’ refer to the markets of tier-3 or lower cities and rural areas. In 2020, the share of mobile internet users in sinking markets rose to nearly 60 percent, from 50 percent in 2018. Internet penetration, plus the ubiquity of smartphones there, has lured internet players to tap into the under-penetrated sinking markets. Sectors including financial services, work productivity, ride-hailing, e-commerce and daily services look poised for relatively rapid expansion, the report concluded.