As part of the RBC Asian Equity team’s ongoing insights into China as a leading digital economy, we look at how the technology sector has had a profound effect on China’s rural communities.
Despite 2021’s regulatory crackdown, which may have taken some wind out of the sails of the sector, the digitalization of services looks set to continue unabated in 2022. Indeed, we believe that new growth from traditional industries is a key trend and one that will be critical in reshaping China’s economic opportunities in years to come.
One such ‘traditional industry’ is agriculture, which has undergone huge digital transformation in recent years. Rural internet users have increased considerably and a RMB$422 billion market of e-commerce-ready agricultural products has emerged, driven by consistent policy support and the robust infrastructure build-out in rural China.
The C2M revolution
China’s consumer-to-manufacturer (C2M) channel, whereby leading Chinese tech companies (and even ride-hailing company Didi Chuxing) started to sell farm produce directly to consumers, has become a key driver in shaping the country’s e-commerce landscape. This enabled many of China’s 1.3 billion consumers to purchase agricultural products, usually in bulk, through a few simple clicks on their mobile devices, being able to bypass distributors and middlemen for the first time.
Furthermore, these e-commerce platforms pioneered the widely-adopted Community Group Buy (CGB) model, which saw platforms start to market and deliver brands to group leaders who are often local residents of the same community. In turn, these residents (or CGB leaders) take on the role of local distributors. Platforms aim to distribute fresh produce to reach end consumers at the peak of the life cycle, in order to minimize food wastage. They have become a powerful driving force in minimizing such waste in China, pouring billions of Renminbi into physical warehouses as well as algorithms in recent years, in a bid to optimize storage and delivery efficiency. An example of this is being able to forecast demand so that farmers can plan capacity ahead of time.
Opportunities for investors
Whilst Beijing recognizes the need to digitalize its rural communities in order to achieve its long-term development goals, so we as investors under the importance of investing in innovative companies that are well positioned to create sustainable social and economic value.
With a long track record of bottom-up stock picking and local expertise, we are well positioned to seek out these digital champions, knowing that they will add value to investors’ portfolios over the long term while bringing commercial, societal and environmental benefits through their business models.