China APP market: almost saturated in largest cities, what potential for emerging cities?

The Chinese market represents today the largest base of mobile users in the world, with nearly 1.3 billion mobile users. Moreover, in a country with unequal development regarding regions and consumption level, mobile usage shows an outstanding national coverage, including less-urbanized areas still showing great potential of growth. How China APP market can take advantage from the potential of China’s tier 3 and 4 areas though?

The most APP-dependant online market in the world

China APP marketChina has the largest population of 4G users in the world, with more than 450 million users in early 2016 (among nearly 700 million users). This figure is expected to keep rising in the next months, especially regarding the high-advanced equipment and market structure as well as the claims from local authorities to develop online connection in tier 2, 3, 4 cities and rural areas. China Mobile, the #1 player among Chinese operators, has for instance more than 1 million 4G base stations all over China, including less urbanized areas, to ensure as soon as possible a nearly complete national coverage. Moreover, in 2015, nearly 90% of Chinese users get online on their mobile regularly. This figure rose to more than 95% in the most urbanized area, but is still rather high (above 85%) in Tier 3 and 4 cities and rural areas.

This mobile market is fueling various related market, and especially the APP market. Chinese users have proven to be easy adopters of new APPs requiring mobile data access. For instance, Wechat has now almost 600 million monthly active China-based users (more than 700 millions in total worldwide). The Chinese APP stores are accounting for more than 2 third of worldwide downloads.

One of the driving forces of this APP industry is the sharing or on-demand system, which has been made famous by Uber or Airbnb worldwide. The car-hailing market is also a good example of this situation. While International players such as Uber have got a grasp on the market in tier 1 cities, Alibaba also invested $15 billion and dominates the car-hailing service market through its solution DiDi DaChe (DiDi Chuxing). The structure of this specific market will then be strongly influenced by the rapid development of these solutions in tier 2, 3 and 4 cities.

Urbanized areas are nearly saturated, growth is in China’s tier 3 and 4 cities

PP users rural areas ChinaThe online market seems to be nearly saturated in China’s tier 1 cities (Beijing, Shanghai, Guangzhou) and the major players are now looking into less urbanized areas to maintain their growth. About 50% of new online users in the first half of 2015 were coming from less urbanized regions. Moreover, some reports showed that online shopping increased at a rate of more than 30% in these regions when the same growth was fewer than 15% in tier 1 cities and the trend is not expected to flatten off. This development has been made possible, beyond the rising income of households in these areas, through the strong efforts from authorities as well as Chinese IT giants to develop equipment, network and awareness in these regions.

However, the development of APPs will have to face some challenges, in term of usage and switching costs as well as technical capabilities. It is also important to remember that, while the solution offered might be similar, user patterns are still much influenced by their location. Differences in the buying process, in the payment methods, in the income level and in the user network habits will significantly change the type of consumption and the features favored by online users.

For instance, payment by cash is still strongly favored, especially in tier 3 and 4 cities. Alibaba and Tencent are then trying to increase digital payment usage in these regions through high-incentive. Alipay has nearly 400 million users now (500 for the entire Chinese mobile payment market) and the reach is increasing in less-urbanized areas. However, this issue should be kept in mind of APP developers willing to localize their solution of e-commerce, car-hailing, booking or online gift.

How to efficiently reach tier 3 and 4 cities

Uber ChinaThis effort made to improve coverage and Smartphones usage in tier 2 to 5 cities are actually driven by the outstanding potential for local and international APPs in these specific regions.

Alibaba, the China’s leader of online shopping, has been a major player in this development. The objective is clear from Alibaba. While the group is expanding internationally and investing heavily in this purpose, small Chinese cities represent a strategic stake for the growth of its domestic retail business which should support the global strategy. It should also support the development of its operating system Aliyun OS.

To ensure the growth of their activities in tier 3 and 4 markets, Alibaba firstly worked with the leading Chinese operator China Mobile to distribute low-cost Smartphones to users in these regions. The same strategy has been applied by DiDi DaChe (now DiDi Chuxing) for its development in tier 2 to 5 cities, where few drivers had Smartphones before the brand supply some of them to kick-off their car-hailing and car-pooling operations.

In a second step, Alibaba announced future investments reaching $160 million by the end of 2018. Alibaba has developed some programs – Taobao Towns (tier 3 and 4 cities) and Taobao Villages (rural areas) – to better integrate this population into its whole e-commerce environment, especially in term of sellers and online shops. The company also recruited and trained local partners to be the firm relay in these regions. These representatives will assist sellers and shoppers to operate online and communicate toward most sought products.

Finally, Alibaba developed its operations in less-urbanized areas through the optimization of the logistic chain. Alibaba scaled delivery efforts across China by investing in specialized firm such as China’s logistics leading firms such as Shanghai YTO Express and building more warehouses and increase operational efficiency.

To develop its ecommerce operations in China’s tier 3 and 4 markets, Alibaba has shown great adjustment to the specificities of the less urbanized population. It has mostly been made through 3 pillars: equipment & infrastructure, market education and creation of local relays.

Daxue consulting has run several research projects in the mobile and app areas and has been able to follow up the development of some of its clients with actionable advice to design go-to-market strategies in 2d-, 3d- and 4th cities up to what is called in China as “countryside”. Our focus has been to understand how to scale size and unlock all the potential of where the growth is now in China: beyond 1st-tier cities.