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After decades of playing second-fiddle to larger Tier 1 and Tier 2 cities, lower-tier cities in China are increasingly becoming important consumer markets. And these smaller cities present a significant area of growth for the country’s ecommerce sector.
According to Morgan Stanley, China’s annual consumption market is expected to grow from $4.4 trillion in 2016 to $9.7 trillion by 2030. However, Tier 3 and Tier 4 cities will account for almost two-thirds of the increase. By comparison, Tier 1 cities will contribute 9% of the growth, with Tier 2 cities chipping in 21% and rural areas accounting for 7%.
Morgan Stanley cited the lower cost of living and higher birth rates as some of the reasons why lower-tier cities are growing. And, to be clear, smaller cities in China are still huge given the country’s massive population. Lanzhou, for example, was considered a lower-tier city by Morgan Stanley’s standards, but the city still boasts a population of roughly 3.7 million.
In the aggregate, these “smaller” lower-tier cities can add up to a substantial number of people. A January 2016 survey by McKinsey & Company found that the number of digital buyers in Tier 3 and Tier 4 cities totaled 257 million, more than the 183 million in Tier 1 and Tier 2 cities.
Income in lower-tier cities is also on the rise. Morgan Stanley reported that disposable income among urban households in Tier 3 and Tier 4 cities was 55% of their Tier 1 counterpart’s income in 2016, and it’s expected to reach 64% by 2030.
Lower internet penetration rates, once seen as a bottleneck inhibiting ecommerce growth in lower-tier cities, are gradually climbing. According to data from GroupM, the internet’s reach hit 89% among consumers in China’s Tier 3 and Tier 4 cities in 2016, up from 75% the previous year.
This potential growth area has not been lost on China’s ecommerce players, several of which are investing in technology to overcome other challenges faced by lower-tier cities, such as delivery logistics. For example, ecommerce platform JD.com earlier this month provided details on its plan to use drones, as well as automated warehouses and other unmanned delivery vehicles, to lower costs and speed up deliveries to China’s lower-tier cities and rural areas.
China’s largest ecommerce players are also expanding into physical stores, many of which already have locations in smaller cities, as part of a bid to provide customers with an omnichannel experience.
Alibaba, for one, has already announced a slew of deals designed to boost its offline presence in recent years, including a tie-up with department store company Shanghai Bailian Group to upgrade operations using big data and technology at 4,700 store locations across China. In addition, Alibaba reportedly spent billions to acquire Intime Retail Group, one of China’s largest department store chains, which operated nearly 30 store locations and 17 shopping malls as of June 2016.
Using data collected from sensors, infrastructure and networked devices, smart-city projects are helping municipalities improve efficiency, boost sustainability and encourage economic development. They are also creating more collaborative environments among cities and their businesses and residents.
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