INSIGHTS | What China’s census tells us about the future of tech

Last week, China released its once-a-decade census figures. The results are largely in line with predictions: The nation saw its slowest population growth in decades, and the proportion of older people continues to grow. Some have estimated that China’s population will start to decline in 2027. What do these numbers mean to China tech? 

Bottom line: The demographic dividend that tech companies have enjoyed to fuel their growth in the past decades seems to be coming to an end. China’s population is growing older, which will pose challenges for both internet startups in Beijing and smartphone factories in Shenzhen. But there are also opportunities as the country moves to raise productivity and to upgrade its labor-intensive manufacturing sector into smart factories. Even as the overall population levels off, the urban and educated population is still growing fast.

Here are the key numbers:

• China’s population was 1.41 billion in 2020, 0.7% more than that of the year before and 5.4% more than that of 2010, when the last census was conducted.
• Average annual population growth was 0.54% over the past 10 years, down from an average rate of 0.57% between 2000 and 2010.
• The portion of Chinese over the age of 60 was 18.7% in 2020, a sharp rise from 13.3% in 2010.
• The percentage of Chinese aged between 15 and 59 was 63.35% in 2020, down from 70.1% a decade before.
• The percentage of Chinese who had received a college education or above was 15.5% in 2020, up from 8.9% in 2010.
• Around 902 million Chinese, or 63.9% of the population, now live in urban areas. The number was around 666 million in 2010, or 49.7% of the total population then.

The challenges

Internet population: For many years, tech companies’ growth has relied on the ever-growing number of internet users. 

• But China’s internet penetration is heading to a state of saturation. China’s internet users stood at 989 million by the end of 2020. That was already more than 70% of the population.
• As population growth slows and internet penetration plateau, growth will be harder for internet companies.

Population aging: “Aging has become a basic national condition of China for a period of time to come,” said Ning Jizhe, the head of China’s National Bureau of Statistics, at the release of the census data.

Higher wages:

• For decades, China’s manufacturing industry relied on an endless supply of young workers who are willing to work for low wages. It is now the world’s largest exporter of consumer electronics like smartphones and personal computers. 
• Now, workers are in shortage and labor costs are rising, prompting contract makers to shift some production lines from China to neighboring countries like Vietnam and India.
• China’s gig economy—including its booming ride-hailing and food-delivery markets—also relies on widely available cheap labor. The situation is unlikely to maintain with a lower childbirth rate and an aging population.

READ MORE: 996 and China speed—Slowing growth in the face of a changing workforce

Less innovation? Fewer young people may mean less innovation, argued Liang Jianzhang, a professor at China’s Peking University and a demographics expert. 

• Liang is also the founder of China’s largest online travel agency Ctrip. He resigned as Ctrip’s executive in 2006 to focus on demographic issues. He argues (in Chinese) that China should spend around 1% to 5% of its GDP on encouraging more childbirth.
• Liang told Chinese media after the release of the census data that population aging would keep more older workforce in the labor market, preventing young people from entering the market and thus, curb innovation.
• Decreasing demand would also hurt innovation, according to Liang. “Hotels in China are in surplus, but the entire demand for hotels is now declining,” he said. “No one will build new hotels, and new hotel technologies will have no testing ground.” (Our translation)
• A 2019 paper by Li Zipu, a professor of Zhongnan University of Economics and Law, found that population aging had a negative impact on several provinces’ science and technology innovation, after their proportions of the elderly exceeded 13.3%. Li argued that an aging population and delayed retirement age will discourage enterprises from hiring young workers and that the existing younger generation may lose opportunities for promotion in their careers. 
• Another paper by Shanghai University of Finance and Economics’s Wang Wei and Jiang Zhenmao, however, argues that population aging has positive effects on technological innovation because elderly workers may turn their experience into new methods. Their study was based on the number of patents filed by different age groups.

The opportunities

The productivity market: As the so-called demographic dividend of China ebbs and labor costs rise, demand for productivity tools is surging. Enterprise service software became one of the hottest VC investment segments in China.

• China’s software as a service (SaaS) market is still small but has been seeing impressive growth. The market was worth RMB 19.4 billion ($3 billion) in 2019, up 34.2% from the previous year.
• Automation is sounding more lucrative to enterprises than ever. Research firm IDC estimates that China’s robotic process automation (EPR) market will grow at an annual compound growth rate of 64% from 2018 to 2023. The market was worth $1 billion in 2020, said IDC.
• “Once the Lewis turning point is passed, we enter the neoclassical development stage. Labor supply shifts from surplus to shortage, and economic development no longer relies on the crude input of labor force, but on the improvement of production efficiency,” Shao Yu, chief economist at Orient Securities, wrote in a note (our translation). China reached the Lewis Turning Point in 2013, according to Standard Chartered.
• China’s latest five-year economic plan has vowed better vocational education and more investment in automation and digital infrastructure.

READ MORE: Chasing opportunity in China’s SaaS scene

Healthcare: Population aging also means investment opportunities in areas such as healthcare and elderly care, said analysts. As spending increases, both startups and big tech are rushing to digitize these industries.

• With no major incumbents, senior care may be ripe for innovation, wrote Luo Zhineng, an analyst at brokerage Yuekai Securities. “China’s senior care industry has not yet formed a mature business model, with small scale and immature profit model, and its development level lags far behind the huge number of aging population in China. As the ‘one-child generation’ becomes the backbone of society, family elderly care will gradually give way to institutional elderly care” (our translation). 
• An investment note by China Securities analysts Huang Wentao and Wang Zexuan said that an aging population will bring in a surge in demand for healthcare services. The rural population may rely especially on services enabled by remote-communication technologies.
• The Covid-19 pandemic has already fueled investment in medtech. Healthcare apps that went public in the past year include JD Health, Medlive, and Tencent-baked WeDoctor.

READ MORE: High tide for healthcare apps?

Industrial upgrading in tech: To offset the impact of the aging of the country’s workforce, China has long been pushing for a transformation and upgrading of its manufacturing sector. 

• Strategies that have been taken into place include “Smart Manufacturing,” which aims at digitizing factories.
• “More importantly, China (should) continue to sustain growth through technological development, go for high tech, go for high value-add, go for transformation of the whole supply chain, in order to support the economic growth on a sustainable basis,” Raymond Yeung, Greater China chief economist at ANZ, told CNBC this week.
• Yeung said upgrading China’s manufacturing sector is a “more realistic” approach than trying to renew population growth.

Growth in cities: Another good thing to look at China’s census data is how much the urban population has grown in the past decade—it grew more than 35% between 2010 and 2020. Most of China’s urban population growth in the past five years was in small cities, according to a report (in Chinese) by Evergrande Research.

• This means the user pool for companies seeking to tap into the “sinking market”—China’s lower-tier cities and small towns—is huge, and is in high-speed growth.
• China’s current urbanization rate is 63.9%. The goal set in China’s latest five-year plan that ends in 2025 is to raise the rate to 65%, which means an increase of roughly 15.5 million people living in towns and cities.
• Companies that have seen great success in the sinking market include e-commerce upstart Pinduoduo, video-sharing app Kuaishou, and news aggregator Qutoutiao.

Additional contributions by Julia Lu.