In his annual 2014 predictions for China, Orr highlights two important phrases: productivity growth and technological disruption. In follow-up to the previous post, “Digital China on the Rise,” Orr elaborates on the effects of digitalization on the business world in China.
Disruptive digital practices
“In China for the last few years, the cost of many things – like the cost of factory workers, energy/water/land costs, and the cost of borrowing capital from banks – are going up and consequently the profitability across many industries has been declining. So the way you address that is through improved productivity. In the past, when Chinese companies had a problem, they would say: ‘Ok, we will hire 10 more people to fix the problem.’ Now they reconsider the problem in greater detail and say: ‘Should we be using technology to fix the problem?’” Orr explained.
So the question that comes up is, which kind of industry would get the most benefit out of the digitalization trend and which the least? According to Orr, this is a tricky question to answer.
“What can happen to industry is an enormous amount of volatility, not being winners or losers in industries,” he said. “Take the banking industry for example. The banking industry is going to change tremendously, we’ve already started to see some of that, but the incumbent banks that have their real estate and tens of thousands of branches are going to have challenges because of their cost structure. So there could be winners and losers, but most importantly and most excitingly, there would be lots of volatility.”
“The same applies to the retail industry. Some companies can have a strong physical presence, but they have to have a strong online presence as well. I mean, if you are a travel agent selling airline tickets that is not necessarily the most appropriate business model. If you are a real estate company building shopping malls, you have to certainly change your business model because it won’t be as easy to attract people as before,” he added. One clear example of that is the change in the banking practices not only in China, but globally.
The Rise of Online Banking
Compared to other countries, Chinese consumers love doing things online. What we are curious to know is if people will do more online banking by means of these newer private banks or ICBC and China Merchants?
When asked his thoughts on whether more and more Chinese consumers were adopting online banking, the clear answer was yes! “What we’ve seen is that it is incredibly easy to get the initial online deposit; 80 million people have already done it. What consumers are looking for is an easy way to gather the deposits and that is what the Internet does. But now that they’ve got the money, they have to find somewhere safe to keep it and also have a risk management process in place so that you don’t lend the money to companies that are going to go bankrupt or will be unable to pay back or run away with the money. That is the hard part,” says Orr. “But it is up to Chinese regulators to decide on how fast the number of Chinese people who do online banking will grow and how much they choose to restrict this. The point that was made about process management is incredibly important. Because the regulator says to the traditional banks: ‘You have to hold a certain amount of capital against bad debts.’ You know Internet banks today are not holding any capital against their debts and that has to change.”
“The hardest job in China today is public regulation of financial systems,” the McKinsey director said.
What do you think? Is the regulation of financial systems really that difficult in China? Leave your comments below!
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