team finland future watch report "signals of online revolution for china"

China's Future Signals 2-5 years 10 March 2014

China Skinny

China Skinny | www.chinaskinny.com | [email protected] | +86 21 3221 0237 | Suite 805, 69 Yanping Road, Jing’An, Shanghai, China

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China's Future Signals

Looking 2-5 Years Ahead

10 March 2013

China Skinny


China Skinny


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Table of Contents

Executive Summary

Introduction & Overview

Signals:

1. Increasing Education Needs

2. Social Media-Integrated Rich Mobile Entertainment

3. Soaring Staff & Operational Costs for Businesses

4. The Trend Towards Wearable Technology

5. In-Car Telemetry Integration with Everyday Lives

6. Rising Independent Travellers

7. The Worsening Likelihood of Ill Health

8. Smarter Environmental Intelligence

9. Food Production Corporatisation

10. The Food Safety Movement

The Last Word

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China Skinny


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Executive Summary

The Chinese market is unique in the world. Whilst it presents significant prospects, its scale, rate of change and regional

variances, coupled with social changes makes it necessary to understand and anticipate trends to realise these

opportunities.

The following report assesses key Chinese political, technological, economic and social trends over the next 2-5 years and

combines them with some of Finland’s key strengths to define 10 B2B and B2C future signals. These signals provide

opportunitiy guidelines for Finnish companies to develop products and services most likely to service China’s future needs.

These signals are interrelated and may be best achieved with Finnish businesses collaborating on their strengths.

The first signal identifies Chinese parents’ focus on education, and the opportunities rising wealth presents for alternative

and complementary technical-based education tools, especially in the field of creativity. Finland’s excellence in both

education and technical/gamification positions it well to service this need.

Mobile gaming is soaring in China due to rising smartphone penetration. Integration with social media platforms such as

WeChat will create new opportunities for richer multi-player games, building on Finland’s leadership established by

companies such as Rovio Entertainment.

Soaring labour and operation costs in China, coupled with a shift to higher value industries will lead to increased demand

for online tools that create business efficiencies.

Wearable technology is set to boom in China, and Finland’s Nokia ecosystem, design leadership and sports companies

position it well for this. Likewise, in-car telemetry will grow faster than car ownership, capitalising on similar industries.

China is already the world’s largest market for outbound tourists, and travellers could double within the next five years, with

a shift towards independent travel. Something these tourists will have in common is a smartphone, so apps and services

that assist with travel are set to be in high demand.

Health is one of the biggest issues facing Chinese consumers, and online tools that integrate with health products, services

and health fads to capitalise on connected middle classes will find success in China.

One of the significant contributors to poor health is China’s environment. The Government, businesses and consumers

are all potential customers for tools which help deal with the worsening situation, providing many market niches.

To meet rising demand for food, China is moving away from small farms to corporate farms, which by proxy, will drive

demand for efficient farming tools and processes. Related technologies to monitor and create safe processes in food

production will also be sought after by businesses and consumers.

China’s unprecedented growth and transition present significant new market opportunities for Finnish companies, however

it is important that Finnish businesses understand China’s unique traits and challenges to create solutions to best service

these.


China Skinny


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Introduction & Overview

The Chinese market is like no other. Its scale, rate of change and regional variances, coupled with influences such as

political intervention, a rising middle class, urban migration, changing family dynamics, rapid modernisation and

internationalisation, and the increasing influence of the Internet, social media, eCommerce and smartphones has created a

market more dynamic and complicated than anywhere else.

The sheer scale of China means that meeting future needs of the country's organisations and consumers provides massive

economic opportunities, even for market niches.

China Skinny has assessed key Chinese political, technological, economic and social trends to identify ten key signals over

the next 2-5 years. These signals provide opportunities in both B2B and B2C and are well-suited to Finland's strengths

and areas of expertise. China Skinny has provided examples of Finnish companies that are well placed to benefit from

the opportunities in China, however this not an exhaustive list.

The ten signals identified are: education tools, smartphone entertainment, business efficiency, wearable technology, in-car

telemetry, independent travel, health aids, environmental intelligence, food production corporatisation and food safety.

We have focused on areas where technology and the Internet will have a significant impact.

In this increasingly integrated world, many of the signals are related to one another as seen in Chart A: China Future Signal

Connectedness. Collaboration between Finland's key businesses and industries will see it ideally placed to take

advantage of the significant future potential of China's economy.

We hope that you find these forecasts enlightening and helpful, and look forward to providing a further study into the

chosen signal.

Chart A: China Future Signal Connectedness


China Skinny


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1. Increasing Education Needs Summary

With most families having one child in China, parents have just one chance for their offspring to succeed and provide for them in

their retirement. Chinese parents place great importance on education, and it is not unusual for them to spend more than 30%

of their household income on education. According to research by Boston Consulting, Chinese parents stated education would

be their number one priority if they were given a 25% increase in discretionary spending. A significant rise in incomes between

2016-2019 will drive spending on education. There will be a rapid rise in education-related services that complement existing

schooling and enhance areas poorly provided for such as creativity. A natural preference for devices such as smartphones and

tablets will drive adoption of scalable, tech-based educational tools. Finland's education system is rated as the best in the

world, which coupled with creative technology companies, sees the country well placed to take advantage of this. Gamification

(Section 10) is becoming an increasingly popular way to learn, and could combine Finland’s excellence in both education and

gamification.

Rating [A] Education spending will grow faster than incomes overall creating a significant opportunity for tools that capitalise on Finland’s

lead in education, tech and gamification.

Macro

Viewpoint:

[A] Consistency with policy trends.

Consistent with Chinese Government aims to encourage creativity and

raise education standards.

[A] Consistency with technology trends.

China is part of a global trend to utilise technology to create interactive

educational tools, in addition to rising mobile and tablet adoption.

[A] Consistency with economic trends.

Middle class households in China will increase from 8 million in 2010 to

57 million by 2020 with a large portion increasing spending on education.

[A] Consistency with social trends.

Education is a key Confucian ideal and has always been important with

Chinese, however as China becomes more competitive, parents

understand they need to differentiate their children’s education and focus

on areas such as creativity.

Disposable Income Growth versus Household

Education Spending

Source: National Bureau of Statistics of China & Euromonitor

Micro

Viewpoint:

[A] Market Impact.

Fill gaps such as creativity addressed poorly by Chinese education

system.

[A] Spirit of Innovation.

Innovative solutions will be required to drive adoption.

[A] Uniqueness.

Chinese parents place even more focus on academic education than their

Western counterparts.

Notes The Chinese Government fiercely guards its education sector, and foreign education businesses located in the Mainland require

a Joint Venture with a local company.


China Skinny


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2. Social Media-Integrated Rich Mobile Entertainment Summary

With more than 500 million online smartphone users in China, there is already a significant market for mobile entertainment. Of

the 14.7% of Chinese smartphone users who paid for an app in the first half of 2013, 63.7% paid for a game, more than double

the next highest category. Chinese consumers’ lifestyles are ideally suited to mobile entertainment, with a high portion of public

transport users, and a low percentage doing out-of-home evening activities such as sports and going to the pub. 4G handset

sales in China are forecast to grow 1500% this year to 72.4 million, and given the average Chinese consumer purchases a new

device every 6 months, within 2-5 years, China Skinny estimates more than 350 million consumers will have a fully featured

smartphone with a minimum of 4G data speed. 570 million games were downloaded on WeChat alone over a 3-month period

in 2013, sewing the seeds for fully integrated social-networked, multiplayer games. In addition, external accessories that

enhance the gaming experience through all senses will create unlimited possibilities for significantly richer gaming experiences.

Over the next 2-5 years, the mobile gaming industry will grow at a faster rate than mobile penetration overall. Companies such

as Rovio Entertainment, and its ecosystem, strongly position Finland to take advantage of the opportunity.

Rating [B] Finland’s experience, insights and ecosystem for creating successful games places it in an excellent position to create

innovative social games, and gain access to social network APIs.

Macro

Viewpoint:

[B] Consistency with policy trends.


Integration of gaming with social media platforms coupled

with constantly improving smartphone capacity and data

speeds.



Chinese youth spend more time on their smartphones and

have smaller range of competing interests to games than

most nationalities.

China's Mobile Game Revenue

Source: iResearch

Micro

Viewpoint:

[A] Market Impact.

Established social media gaming channels will create a

viral route to market for appealing games.

[A] Spirit of Innovation

With such a competitive gaming market, gamers need to

innovate to create cut through.

[A] Uniqueness

The ubiquity smartphones and social networks such as

WeChat and it’s interconnectedness with the gaming

community provides the most established mainstream

gaming platform in the world.

Notes Gaming consoles are currently illegal in China, meaning mobile entertainment has had less competition from other channels.


China Skinny


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3. Soaring Staff & Operational Costs for Businesses Summary

Labour costs in China are rising more than 10% a year. Related costs such as office rental are also mounting, with Beijing now

the forth most expensive location in the world, costing more than New York and Tokyo per square metre. Coupled with that,

Chinese businesses are increasingly moving away from low-skilled industries such as low cost manufacturing and focusing on

higher value sectors. Each of these trends is driving up the cost of staffing, training and retention in China. China Skinny

predicts between 2016-2019, it will become commonplace for Chinese businesses to invest in tools that enable them to increase

staff efficiencies and automate tasks, with cloud-based solutions and apps less susceptible to piracy. Finland is well placed to

service this need with a strong reputation for efficiency and technical solutions, with companies such as Tieto.

Rating [A] The shift to efficient workplaces in China over the next 2-5 years presents significant opportunities for Finnish businesses who

provide technical solutions that meet the need.

Macro

Viewpoint:


A key Government imperative is to raise wages in China which will

drive the need for efficiency tools; and

The 12th Five Year Plan aims for value-added output of emerging

strategic industries to account for 8% of GDP, driving further focus on

efficiency.


The cost of labour in China has reached tipping point, with businesses

now justifying technological investment over additional labour.


Economic growth and the corresponding business expansion is

creating increased price and service-focused competition, and

competition for skilled employees.


The Chinese workforce is shifting from manufacturing-focused to white

collar and service-based.

Wage Inflation in China

Source: The Ministry of Labor and Social Security for the PRC Micro

Viewpoint:

[A] Market Impact.

Reduce issues around staff churn;

Service increasingly important need for customer service; and

Support efficiencies in business.

[B] Spirit of Innovation

[A] Uniqueness

In the space of a decade, China will develop from a cheap labour

economy into an advanced economy where efficiency tools and

automation are imperative.

Notes ***


China Skinny


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4. The Trend Towards Wearable Technology Summary

Finland’s leadership in design and mobile technology puts its businesses in a strong position to capitalise on the rising trend of

wearable technology in China. A Baidu survey discovered 93% of Chinese Internet users were aware of wearable technology,

with 75% willing to purchase, although the industry is still in its infancy. Health, fitness, sports, social media, child monitoring,

employee efficiency, information and entertainment tools and aids could utilise the unique opportunities from wearable

technologies. Fitness, health plans and social sharing are the top three perceived uses by consumers and companies such as

Suunto, Amer Sports and Polar Electro could collaborate with Nokia equipment engineers and related ecosystems to develop

solutions to meet this need.

Rating [B] Whilst wearable tech is not a essential pressing need in China, China’s large population and love of gadgets presents a

significant niche well suited to Finland’s tech and sporting strengths.

Macro

Viewpoint:



Chinese consumers are looking for gadgets and

online tech that integrate with other life needs.

[B] Consistency with economic trends.

[B] Consistency with social trends.

Chinese consumers place high importance on social

capital gained from having the latest gadgets.

Wearable Tech Expected Uses by Chinese

Source: Baidu

Micro

Viewpoint:

[B] Market Impact.


Utilises Finnish strengths in innovating mobile

devices, apps and sports.

[B] Uniqueness

Notes ***


China Skinny


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5. In-Car Telemetry Integration with Everyday Lives Summary

The China auto industry has become the largest in the world. In 1990, there were just 5.4 million cars on the road in China, now

there are more than 20 million sold a year. China's increasing middle classes will see this growth continue for decades - in

2012 there were just 8.3 cars for every 100 people in China, versus 61.2 in Finland and 79.7 in the USA. China is forecast to

buy half of the world’s new cars by 2020. China’s smartphone usage amongst the middle class who own cars is among the

highest in the world, leading to increasing consumer demand for integrated in-car technology. Chinese consumers have a

preference for embedded factory-installed telemetry systems. However, increased fragmentation and dependence on

smartphones will see demand for device and hybrid solutions soar within the next 2-5 years. Nokia equipment engineers and

related ecosystem are well placed to take advantage of this growth.

Rating [B] Although in-car telemetrics are not of primary concern for the majority of Chinese consumers, there are still significant numbers

of car owners in China, almost all of whom are big smartphone and other technology users.

Macro

Viewpoint:



Technology is becoming increasingly integrated with

Chinese consumers lives.


Rising incomes in China are driving car purchases,

which by proxy, will raise demand for in-car

telemetrics.

[B] Consistency with social trends.

New Vehicle & In-Car Telemetry Sales in China

(Millions of Units)

Source: BAIH, NBS China, CAAM, IHS

Micro

Viewpoint:

[B] Market Impact.


Solutions will need to be innovative and specifically

meet Chinese driver needs.

[B] Uniqueness

China’s scale makes it unique, with significant

opportunities from the half of the world’s car sales

expected in China in 5 years.

Notes ***


China Skinny


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6. Rising Independent Travellers Summary

More Chinese tourists are going overseas every year. In 2012, 83 million Chinese travelled internationally, growing to 94

million in 2013. Rising incomes and relaxed visa restrictions mean as many as 200 million could travel in 2017 according to

CLSA. Although Chinese have traditionally joined tour groups on overseas trips, an increasingly confident traveller wanting

new and unique experiences is travelling independently. In late 2013, 62% of Chinese going abroad said they preferred

travelling independently; China Skinny expects this to rise to 80% by 2019. The majority of these tourists will have a

smartphone, ensuring that there will be a significant market for mobile tools that meet the unique needs of Chinese travellers,

such as catering to emergency health concerns, shopping aids (Chinese shop more than any other nationality when abroad),

tools for travellers lacking confidence when speaking English/other languages, Chinese restaurant finders, etc and tools

integrated with wearable technology (Section 5) and in-car telemetry (Section 7). Finland’s strengths in the mobile and online

app segment positions it well to take advantage of this rising trend.

Rating [B] Whilst there are countless opportunities to provide apps and tools to hundreds of Chinese travellers, Finnish companies are

most likely to have success focusing on market niches.

Macro

Viewpoint:


Government policy is reducing visa restrictions

for lower-tier denizens coupled with countries

lessening their visa restrictions will drive

Chinese tourism abroad.


Increased smartphone adoption will create

channels to reach travellers.


Rising incomes are driving travel growth.


Chinese consumers are increasingly valuing

life experiences, which is driving tourism

growth.

Outbound Chinese Tourists

Source: CORTI, CNTA, CTA, CLSA

Micro

Viewpoint:

[B] Market Impact.


Innovative solutions to market niches will drive

demand

[B] Uniqueness

Notes ***


China Skinny


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7. The Worsening Likelihood of Ill Health Summary

Health is the number one concern for affluent Chinese. Cancer, diabetes, obesity, infertility, premature births and antibiotic

usage rates are all soaring, attributed to rising pollution, food safety issues, increasingly stressful urban lifestyles and an aging

population. Putting money away to cover future health issues is the top reason for China’s high saving rates. By 2019,

increasing ailments and awareness of health, coupled with an highly tech-literate population, will create significant opportunities

for healthtech tools and products that provide an alternative to, or are complementary to China’s crowded health system.

Demand for proactive solutions will also rise. Online/app developers and smartphone accessories can work with Finland’s

established Healthtech companies such as Mendor, Planmeca Group, Arc Dia and Suominen to create attractive solutions for

Chinese customers.

Rating [A] Health is already an industry of primary importance in China, and will continue to grow over the next 2-5 years based on current

trends, presenting significant opportunities for Finnish companies.

Macro

Viewpoint:

[A] Consistency with policy trends

Health is a leading focus for the Chinese Government, who

have invested 270 billion Euro in healthcare reform since

2009. Numerous other prime Government focuses such as

pollution can trace their roots back to health.

[A] Consistency with technology trends

Advancements in technology are addressing health issues

globally.

[A] Consistency with economic trends

In addition to rises in general health spending, BCG

forecasts China’s health and wellness market will be worth

nearly $70 billion by 2020.

[A] Consistency with social trends

Increasingly urban lifestyles and aging populations are

driving health awareness and concerns.

China's Worsening State of Health

Micro

Viewpoint:

[A] Market Impact

Provide complementary, alternative and proactive service to

meet China’s soaring health needs.


Innovative technology solutions are most likely to meet the

needs of China’s mounting health issues.

[A] Uniqueness

China’s health issues are extreme internationally, and the

infrastructure is not up to a standard to support an

increasingly wealthy middle class.

Notes ***


China Skinny


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8. Smarter Environmental Intelligence Summary

It’s no secret that China’s environment is among the worst in the world. Just 1% of China’s 700 million urban dwellers breathe

air considered safe by the European Union. 90% of China’s cities’ groundwater is polluted to some degree, with almost two

thirds severely polluted. Pollution contributed to over 1.2 million deaths in 2012 and is the primary reason for 80% of Chinese

who plan to emigrate. China’s pollution is a major issue for all segments of China, from the Government, to business, to

consumers. Although the Government is focusing on reducing heavy polluters, rising non-renewable electricity consumption

and car usage will continue to worsen pollution levels over the next 2-5 years. Rising awareness and negative sentiment will

also drive demand for solutions. Tools that can measure, monitor and address China’s pollution at any level stand to

significantly benefit in China, with environmental measurement companies such as Vaisala well positioned to benefit.

Rating [B] Although China’s environment issues are significant, opportunities for Finnish companies are likely to come from providing niche

solutions such as measurement and monitoring.

Macro

Viewpoint:


Inviting of foreign investment environment protection

industries is a key pillar of the 12th 5-year plan.

Between 2011-2016 the Chinese Government plans

to invest 350 billion Euro on environmental

protection, with significant investment likely to

continue until 2019 and beyond.

[B] Consistency with technology trends


Pollution is a substantial drain on the economy from

a productivity, health and emigration standpoint.


Air and water pollution, are Chinese consumers'

fastest growing concerns and the number 1 reason

for emigration.

Daily Average PM2.5 Pollution 2013

China's Worst 10 Cities

Source: China's Ministry of Environmental Protection, ALA, WHO

Micro

Viewpoint:

[B] Market Impact


[A] Uniqueness

Although other cities around the world are polluted at

similar levels, the scale of China’s pollution,

awareness and size of middle classes affected make

it unique globally and provide large opportunity for

niche solutions.

Notes ***


China Skinny


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9. Food Production Corporatisation Summary

China’s rising middle class are eating more food every year, with China forecasted to account for almost half of the global

increase in food demand between now and 2050. Over 15% of China’s arable land suffers from soil pollution. Coupled with

climate change and urbanisation, increasingly less land is available to produce significantly more food. The Chinese

Government aims to supply almost all of food demand domestically, requiring technology that enables farms to do more with

less. Part of this shift will be enabled by the trend moving away from small individual peasant farmers to company-operated

farms, who will start to utilise connected technology to monitor and produce food more efficiently over the next 2-5 years. This

technology could include telemetry providing monitoring and control through online tools. The falling cost of smartphones in

China will bring the Internet to the majority of rural Chinese by 2019, putting technology solutions into the hands of the farm

workers, in addition to urban white collar farm company workers. Like In Car Telemetrics (Section 7), the Nokia equipment

engineers and related ecosystem could collaborate with farm machinery companies such as Sampo-Rosenlew.

Rating [A] As a key Government focus, there will be significant investment into efficient farming in China, creating large opportunities for

synergies between heavy machinery manufacturers and tech companies.

Macro

Viewpoint:


The Chinese Government has had a long standing

target of 95% food self sufficiency; and

China's 12th Five Year Plan supports foreign

investment in modern agriculture.



Rising demand for food is a direct result of economic

growth in China.


A stable food supply is one of the key contributors to

overall social stability.

Food Consumption Trends in China

Source: SSBc

Although the Food consumption table above only displays data until

2010, it is utilised to illustrate the broad categories of increased

consumption as Chinese consumers get wealthier, a trend that will

continue until 2019 and beyond.

Micro

Viewpoint:

[A] Market Impact

A stable food supply will be secured.


[A] Uniqueness

The scale and rate of the transformation of China’s

food supply chains is unique globally.

Notes The dairy industry is an example of farming corporatisation in China, where the Government had aimed to move 70% of

production from small farms to company-operated farms by 2011. However, just 40% of production was from

company-operated farms by 2013.


China Skinny


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10. The Food Safety Movement Summary

China’s infamous 2008 melamine dairy scandal and resulting 300,000 victims brought China’s abysmal food safety standards to

light. Social networks and an increasingly transparent state media have raised awareness further and as consumers become

wealthier, they are demanding safer food. Whilst some of the need for safe food will be met by rising imports, China’s domestic

food supply is focused on improving its safety and reputation. Finnish tech firms have opportunities from both a B2B

standpoint, such as agricultural technology (Section 3) and processes (Section 2), and B2C such as tech developers and food

producers like Raisio Group, HKScan and Olvi working together to create competitive advantages selling to Chinese consumers

through smartphone and web tracking of food origins, to packaging with companies such as Huhtamäki.

Rating [A] Food Safety is one of China’s most pressing social issues providing significant opportunities for technology solutions for process,

packaging and food producers from Finland.

Macro

Viewpoint:


The Government is committed to fixing the food

safety issue allocating significant resources to

regulation, process changes and propaganda.



The rise in consumers with the ability to pay for

safe food is a direct result of economic growth in

China.


The market is demanding safer food, with a lack of

trust in local food and beverage driving imports to

57 billion Euro by 2018.

China's Food Safety Issues & Sentiment

Source: PEW Research

Micro

Viewpoint:

[A] Market Impact

Increased reliability in food supply; and

Increased transparency and efficiencies in food

supply.


[A] Uniqueness

China’s vast supply chain and rampant corruption

contribute to a food safety issue that is unique

globally, especially in a market with such a sizable

middle class prepared to pay for safe food.

Notes ***


China Skinny


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The Last Word

China’s unprecedented growth and transition presents significant new market opportunities for Finnish companies.

However, the complexity and dynamism of China means that it is important to fully understand China’s unique traits and

challenges before investing to create solutions to capitalise on these opportunities.

This report has provided a high-level view into future opportunities based on trends and signals in China, and deeper

investigations should be made into understanding the intricacies of a segment should Finnish companies look to pursue

these opportunities.

China Skinny hopes that Tekes and the desired audience have found this report helpful and insightful. We look forward to

providing further investigation and analysis into the chosen signal.

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