How China's Digital Economy Works With Jeffrey Towson

For this episode, we have with us Jeffrey Towson, a keynote speaker on Digital China and Asia tech trends, a business professor at Peking University and author of a great book, which is really a great reading to have a deeper understanding about China, very quickly. The book is called the One-Hour China Book.

Let’s dive into China’s economy and more particularly into China’s digital economy.

Table of Contents

How did you get to study the Chinese market economy?

Jeffrey Towson: I’m just an international business guy doing a lot of deal stuff out of the Middle East and slowly started doing more with Asia. This is good 15 years ago and I was sort of half in the developing world and half in the US and it was pretty clear that Asia was the place to be early on and China and Asia was just going to be a huge story.

So I was kind of on the ground and it’s pretty obvious what’s going to happen. So I started focusing more and more on China and Asia, and I’ve been doing that ever since. I still keep about half my time in China, half my time in the US which is just an endless opportunity because there’s always new stuff to do and it’s also pretty enjoyable life.

That’s where I settled, there’s one foot in China, one foot in the US which is, gets more and more interesting every single year.

Gennaro Cuofano: In the book, you actually mentioned six megatrends that shaped and actually are still shaping China and the Chinese economy.

What are the six mega-trends that shaped and are shaping China’s economy?

Jeffrey Towson: Me and my co-author Jonathan Woetzel of McKinsey highlighted those six mega-trends. China is confusing and there’s a lot going on. It’s a big place. It’s very complicated. What we did is we pointed, look,

There’s six at least major economic trends happening that are longterm. These are 30, 40-year trends. If you can understand those, a lot of the chaos becomes a lot more understandable.

The trends we started to look at were things that were driving the revenue or the cost structures of companies. Out of that, we identified six:

Number one is urbanization. Just the fact that when China reopened to the world in 1980, about 80% of the population was in the farms and 20% in the city, which is usually pretty much the inverse of most developed countries.

So there’s just been a steady movement of people into cities, which is still happening today, that creates a lot of economic drive.

We also looked at things like manufacturing scale,
A lot of money, capital,
Rising Chinese consumers, which is something that’s really become important in the last five to 10 years.
Digital China (the Internet)
And then what we call Brainpower Behemoth, which is just, you know, there are more and more people with advanced degrees. China’s not like it used to be in 1990. I mean it’s engineers and PhDs and artists and a lot of advanced skills now.

So we looked at those six trends and that’s held up pretty well over time, this little model we used. Most of the major companies you see are writing one or two of those trends. So so far, it’s held up. It’s been about four to five years, so we’ll see.

But I think it’s pretty solid. Most of those things are going on for at least another decade, if not longer. And then we’ll see.

What are those trends that you see are losing momentum and which ones are the ones that are really gaining momentum?

Jeffrey Towson: The ones that were easier to predict where urbanization, manufacturing, capital, just a lot of money because that’s just been steadily growing. I mean it’s literally a linear line to just drive from 1980 to today and it’s just a straight line.

The ones that were a little bit more unpredictable were rising Chinese consumers, which they were not really an economic factor 10 years ago. People didn’t talk about Chinese consumers 10 years ago. They weren’t buying much even though they had income and savings. Well, that’s changed dramatically in the last five to 10 years.

Now, they’re the world’s largest market for auto, for gaming, offline gaming, cinema, movies. I mean just one industry after the next, they’ve become the largest marketplace or in the top two.

That one is a late bloomer, and then Digital China, which is one of our six is the most unpredictable because crazy stuff happens all the time.

Most of China, the digital consumer stories are really about consumers. Most of the digital China story is mostly about consumers. That’s where things are really happening fast.

Alibaba, Tencent, social media, all that. That’s a lot of China consumers who turn out are almost entirely digital creatures.

You can’t talk about Chinese consumers without talking digital anymore. Everything happens on a smartphone. That’s probably the most unpredictable one, but it’s moving quick.

Gennaro Cuofano: You said at the beginning, and I think this is very important to stress out because still for many people, China is a huge block, but as you said it is a very complex country, which is a made up of many clusters also as you highlight in the book.

Did this digital megatrend change the way China looks like in terms of society, consumers?

Jeffrey Towson: I mean everyone knows there’s a lot of them. That’s not a big surprise. Everybody knows that they’re rising in their wealth. I think the part that gets underappreciated is how complicated they are.

China is arguably the world’s most complicated consumer market now.

I mean you can look at 30 million Chinese consumers live in caves. You can find Chinese consumers in the far West where you’ve got several hundred million of them that looked like a different country.

You go to downtown Beijing, you get more billionaires in Beijing than New York City.

So there’s a huge fragmentation and complexity to them and it’s just getting more so because one, there’s a lot of them.

So when you get a lot of anything, you’re going to get a lot of complexity, and two, you still get this big spread between very, very developed market behavior like Beijing and Shanghai and behavior that’s out in the fields and in the mountains.

So it’s just this hugely complicated subject and the only way you can really understand Chinese consumers at this point is you have to go small. You have to study micro populations, Chinese moms, sports enthusiasts, inland consumers, dads. You just have to break it up that way and you find out people are very, very different.

Gennaro Cuofano: In the book, actually you also highlight one point which I found very interesting and it’s how actually people consume content. The consumption of the internet it’s really more intense for Chinese especially young people compared to Westerners.

How is the Internet affecting modern China?

Jeffrey Towson: Everyone knew there was going to be a lot of people with smartphones in China. That was pretty predictable. We’re seeing the same thing in India in the news and places like that. I think what surprised people was how enthusiastic they are. They just adopt things faster than in other countries.

Mobile apps take off like crazy and they spend more time online than other consumers in other countries. They contribute more. They post more. They add content more. So it just turns out they are some of the world’s most enthusiastic netizens are Chinese. That wasn’t necessarily predictable but it’s true.

The other thing to keep in mind is there’s a difference between regular consumers who go down to the supermarket and buy apples and online consumers because the online consumers effectively operate as a network. It’s not just one person. That person is sharing what another person is sharing. They’re interconnected.

If you have 300 million Americans or 350 million Americans, there’s a certain number of connections you’d get between them. When you have a billion Chinese consumers, it’s actually exponentially larger.

So digital China effectively operates like a network and it’s a very rapid and very vibrant.

That part is showing itself. When you see a new app take off in China, it goes from nothing to 100 million users in two months, three months. We don’t see that anywhere else that I’ve seen.

Gennaro Cuofano: One interesting thing is also that in China there is the phenomenon of super apps, which is something that we didn’t yet see in the West. In short, it seems that China is now at the stage where it’s creating its own innovations.

How did the Internet evolve in China compared to the US?

Jeffrey Towson: Most people in say the United States, they got on the internet by PC. You sit at home, you have your laptop, you have your desktop, they discovered Gmail. Then a couple of years later they discovered YouTube and then they slowly adapted to various tools over time.

That didn’t happen in China. People basically joined around 2009, 2010 only on their smartphones mostly.

There were some users before that was very small and they got all these tools at once. They went from nothing to I’ve got a smartphone, I can do messaging, I can do online video, I can do online gaming.

So they kind of jumped in the deep end of the pool and they only know the internet on smartphones.

The difference between a smartphone and a PC is one, you work on at home or your office and then you leave but the other one, you carry with you all day long. So they carry these around all day. They message, they take photos, they watch videos, all of that.

One of the things that were different early on was people don’t use email. I mean you send an email to someone in China, you better wait a week because they’re probably not going to check their email. It was all about messaging. So it started out with messaging with QQ (an instant messaging software part of Tencent) and that led to WeChat.

Then from there, they added payment, which was Alipay and WeChat Wallet. Once you had messaging and WeChat or mobile payments set up, that enabled E-commerce to happen on your phone anywhere you happen to be during your day.

That was the basis of the super app. It turns out people just live on their smartphones. It becomes the operating system for your life.

But we didn’t see any of those three steps in the US. People weren’t living on WhatsApp as much, although they are now. They were using email.

They didn’t adopt mobile payments because they were using credit cards which works fine, not awesome, but they were functional, and then E-commerce was something you did on your PC, not necessarily on Amazon, on your smartphone.

So we didn’t really see the super app emerge in the US at all although Facebook is trying it right now. We saw it in China and then we started to see it in Southeast Asia. Grab and Gojek are working on this. People are trying to build it in India in a lot of towns right now, but it emerged out of China first, and it’s not clear to me it’s going to emerge out of the US at all.

Facebook is basically copying WeChat right now. They’re consolidating their messengers, which is WhatsApp, Instagram, and Facebook Messenger first, and then they’re going to try and add mobile payment, which is Calibra, and then they’re going to try and add E-commerce. They’re basically trying to copy WeChat, but I doubt it will work.

Gennaro Cuofano: You also mentioned the importance of word of mouth as a way of consuming things. So Chinese, as you say, are very, in general, skeptical (from official sources). So this is interesting because it helps us better understand how Chinese people think.

How has (digital) word of mouth influenced the way the Chinese digital economy is evolving?

Jeffrey Towson: I mean word of mouth has been the way China has operated for a long, long time. Up until recently, the news was mostly government created, state-owned broadcast or state-owned media so people didn’t necessarily believe that at face value.

Similarly, a lot of the information comes from corporations. Well, they don’t necessarily believe that either.

In China, the way things have worked for 50 years is you ask your friend who’s a good doctor, what’s a good product, how good is that washing machine. The whole country has worked on word of mouth for a long time. When QQ and WeChat came along, that just basically moved it all online.

Even today when social and chat is a big part of e-commerce and other things in China, you chat with people about what you’re going to buy and online influencers, these people that talk about products on Youku and such, that’s the same phenomenon.

It’s okay, I don’t understand what this product is. I don’t trust anyone. I don’t trust the commercial, but I trust this one person I listened to on my channel because she seems like a pretty okay person.

That’s a version of word of mouth as well. It’s kind of a who do you trust. People trust who they know. That’s been a long-running thing within China. The internet just made it a lot faster.

You get these online influencers with just millions of followers as they talk about what handbags and lipstick to buy and discussion forums and things like that really are pretty vibrant in China.

You have so many people chatting about everything all day long that there’s a very energetic online conversation happening in China that didn’t exist 30 years ago. 30 years ago, if you lived in Beijing, you didn’t know people in Guizhou or Kunming. There wasn’t communication. There weren’t phones.

The country was very, very fragmented with the vast majority of people living in villages in farms up until 1980, 1990. So the internet kind of stitched everyone together for the first time. China has this ongoing discussion online. That’s a new thing for the country. That’s never existed before. So it’s interesting to watch.

Has the Internet also affected Chinese government influence on the economy?

Jeffrey Towson: I mean there’s a couple of levels to this. Definitely there’s a system of controls in the media and in some conversation. That definitely exists. Part of that is because of politically sensitive topics, which is what people tend to report on.

But there’s another level of it where the government does view it as it’s role to have healthy conversations, things that aren’t considered bad for society.

If you watch TV, people don’t have tattoos. They don’t smoke on TV because those things are not considered terribly good for society. So it’s not just about, controlling. It’s also about encouraging other types of topics, encouraging respect for your family, respect for your elders.

There’s a lot of this that is not as controlling as people like to think. It’s more about just a belief that there should be a healthy level of conversation that should be positive. You know, I think there’s a lot of value in some of that.

I think that’s a lot of bad behavior like if people are playing internet games too much, it adds… or too much about just showing naked women or almost naked women. That does get stopped because it’s not considered terribly good for the country. Which is it’s not a bad argument.

A lot of this has just been the evolving nature of the Chinese internet and definitely in the last couple of years, the level of let’s say transparency and control of the online world in China has dramatically increased.

So things that existed in 2009 would exist today. So yeah. But the tech has advanced pretty rapidly on all of these government’ish tools.

A lot of them aren’t run by the government. A lot of them are run by tech companies or run by media houses or run by people who make movies, and they know what they can include and what they can. I mean it’s a pretty complicated system, but it’s definitely getting more sophisticated tech-wise.

What tech companies are you following right now?

Jeffrey Towson: The big five or six. The Alibaba, Tencent, ByteDance, Baidu, Didi, Meituan. Those are the big giants by market cap. I also look at the telco players a bit. So Huawei, ZTE, China Mobile, China Unicom.

I focus mostly on software on the digital side. I mean software and data. But the hardware world is becoming more software’ish. You know, as networks become smart, as drones become smart, as refrigerators become smart, that really means adding software.

So more and more I’m looking at those more equipment type companies as they move towards software. Obviously, Huawei is in the news a lot this year. And then the AI companies that are just roaring up right now.

Most of them aren’t public yet, but there’s a good number of these almost purely AI companies like Megvii, SenseTime, Hikvision, things like that. They’re pretty interesting what they’re doing. It’s the same ones you see in the paper more or less.

How does voice search look like in China?

Jeffrey Towson: The big question is natural language processing. Can a computer hear you and understand it, and it turns out that’s actually pretty difficult. Computer vision is much more advanced commercialized, but Chinese companies especially like Baidu, which is the big search engine, they’ve been on this for a long time.

It has a lot to do with the fact that it’s actually pretty hard to type in Chinese on a cellphone. You can type on a smartphone or a PC in English quite easily but drawing the Chinese characters is actually kind of a pain. So people switched over to voice or started thinking about it much earlier.

So the accuracy levels, the numbers you read about it, it’s usually Baidu that they have a high accuracy level for Chinese inputted voice higher than English and that’s because it’s hard to type and draw the characters. That’s where it’s going. I’m not totally sure Alibaba is all over that situation with their team on Genie.

Xiaomi has an AI assistant that’s moving pretty quick, so does Baidu. So I mean these are the equivalents of Alexa and Google for the West, but we’re seeing three or four different companies in China doing this. Yeah, I think it’s going to move pretty quick but yeah, the recognition aspect is problematic. It actually turns out it’s pretty difficult. So we’ll see.

Can it get past basic understanding or is it going to be stuck at this sort of rudimentary understanding for a long time, which could be the case. I don’t know. We’ll see how it plays out, but it’s pretty tough. The AI assistants are a big deal right now in China.

For anyone trying to expand and build a digital business in China, what suggestions do you have?

Jeffrey Towson: Most of the cool digital stuff in China is consumer-focused. The B2B side, the enterprise side is actually pretty slow and it’s not as advanced as the US or the West. So the consumer side is where China is really the frontier of a lot of things.

Within that, probably the most important thing is to understand digital marketing and social media because it’s very aggressive in China. If you’re not doing that, you can’t sell anything to anyone.

So what you see is a lot of big fortune 500 companies studying their teams in China in terms of digital marketing and then taking those lessons and applying them in the rest of the world.

That’s the area I’d start focusing on. Things are moving really fast and probably more advanced than just about anywhere you’ll find mostly. So digital marketing, social media, stuff like that.

What’s the “coolest” thing right now in the digital marketing space in China?

Jeffrey Towson: Probably the coolest thing I think is how content is driving e-commerce that we had these KOLs, these online influencers come up, and they’re basically content creators.

They create videos, traveling through Paris, looking for handbags and then they use that to sell their own stuff, buy my handbag. But they’re also contracting with major brands to promote their stuff.

Brands are doing this in a large part as a replacement for hiring celebrities or spokespeople because the KOLs (Key Opinion Leaders) can move more items.

It’s turning out that content is a very powerful and authentic way to drive e-commerce and it’s got a depth of content and thinking and an authenticity that is really quite powerful. That’s something that we see in China more than anywhere else. I think that’s pretty interesting.

Then the other stuff is short-form video, which is TikTok go in. You know, that was a China thing, but that’s taking off in a lot of countries right now. Live streaming, micro-gifting.

There’s a lot of China’s stuff that’s different than the West. Podcasting is actually very popular in China and it’s easier to monetize in China than it is in say the US where there’s not really any ad market for podcasts.

So there’s a couple of things where China is related. Usually, all of these things tie to consumer behavior because that’s where things are really innovative.

Micro-gifting is very popular. Online influencers, E-sports is huge in China and people play online and people just shower them with little gifts of money and things.

So yeah, there’s a lot of interesting models bubbling around, and it’s not just China, it’s really Asia. A lot of interesting stuff happening.

What kind of content are Chinese users consuming the most?

Jeffrey Towson: Especially short video. One of the reasons TikTok took off so quickly was these are 15-second videos. One, it turns out they’re a lot more addictive when you’re hitting a new video every 15 seconds.

The other thing is it engaged more of the China network that… Let’s say there are 500 million people who have smartphones and good data plans and can watch Youku and whatever.

But short video anyone could do.

So all one billion people who have WeChat can watch the short video even if you’re just a farmer in a field and you have a very basic cell phone with a very basic data plan because you don’t have a lot of money, you can watch a short video because they don’t take much memory.

You can also film your own short videos just with your phone.

So it engaged a much bigger percentage of the network of consumers, not just to consume but also to produce content. That’s one of the reasons that is doing so well in lots of poor countries because anyone can do short video no matter how skimpy your data plan is or how basic your cell phone is.

You can do WeChat. You can do a short video and a couple of other things even if you have a little bitty data plan. That’s one of the reasons I think that’s powerful. Also, it turns out it’s super addictive.

It also turns out it’s really good for digital advertising because of every, let’s say fourth or fifth video is a full-screen 15-second video advertisement, which is a heck of a lot better than a banner ad after a search engine inquiry.

It turns out it’s really good for video advertisements when you get a 15 second Hyundai ad that covers your whole screen. That’s a lot better than a banner headline. It really works on a lot of dimensions. It’s pretty clever as a business.

What sources do you suggest to stay up to date with China’s digital economy?

Jeffrey Towson: I’m literally launching this week Jeff’s Asia Tech Class where basically I’m going to start teaching online on my website, which is jefftowson.com.

It will be a freemium model so people can basically log in every week and get about 90 minutes worth of teaching on all of this.

We’re going to layout a good year or two worth of courses and people can learn as much or as little as they want. But yeah, I’m going to start systematically teaching about all of this. That’s launching this week really.

What’s the best way to contact you?

The easiest for contacting me is probably LinkedIn because I’m on there a lot. It’s either LinkedIn which is easy to connect and then I do my Asia Tech Class and my little newsletter on my website.

So those are two of my two main little channels.