Chinese consumers have emerged as leading users of mobile communications, instant messaging (IM), and Web 2.0 services, pushing the boundaries of digital activity in ways unimaginable just a few years ago, according to a new report by The Boston Consulting Group (BCG).

The report, "China's Digital Generations: The 570-million-hour opportunity", describes how Chinese consumers have become power users of mobile services, relying on their handsets to watch videos and movies, play games, and share music. Not content to use IM only for sending text, Chinese consumers are also actively sending video and voice messages. And they have embraced Web 2.0 activities, reading and writing blogs on a wide variety of subjects more frequently than U.S. consumers, playing massively multiplayer online role-playing games, and engaging in other interactive, community-based pursuits.

"Many people in the West think that China is still early in its digital development. In fact, however, in many activities such as IM and online role-playing games, China is more advanced than the United States and other Western economies," says Christoph Nettesheim, one of the report's coauthors and a senior partner and managing director in BCG's Beijing office.

The magnitude and speed of these developments, according to the report, have outpaced the common understanding about digital life in China. China has the most mobile-phone and Internet users in the world. In 2007 alone, more than 80 million Chinese acquired their first mobile phone, and nearly 40 million became Internet users.

With this influx of new digital consumers, China now has more than one-half billion mobile-phone subscribers and 210 million Internet users. China's Internet users spend an average of 2.7 hours a day surfing the Internet-or, collectively, just under 570 million hours daily. Close to half of China's 1.3 billion people own or have access to a computer, a mobile phone, or both.

China's Digital Generations points out that although overall penetration remains much lower in China than in developed countries, a steep adoption curve will ensure continued growth for years. At current growth rates, the proportion of Chinese consumers with digital access could increase to 87 percent by 2015. One challenge will be to increase rural penetration. Today 80 percent of the nearly 600 million urban Chinese consumers have access to either a PC or a mobile phone, compared with 19 percent of the 725 million consumers who live in rural China.

China's Digital Generations has profound implications for all multinational companies that seek to access the Chinese consumer. "Many western MNCs in China are spending heavily on traditional forms of advertising," said coauthor David C. Michael, a senior partner and managing director and head of BCG's Greater China practice, also in the firm's Beijing office. "They risk losing touch with their target Chinese consumers, because increasingly these consumers are online-not watching TV or reading newspapers. MNCs in China need to revolutionize their thinking about how to reach and build relationships with Chinese consumers."

Nettesheim added, "Every Western company wants to grow in China yet fails to grasp just how quickly the Chinese consumer is changing. This dramatic shift toward digital media is just one example of the rapid pace of change here. Companies ignore this at their peril."

China's Digital Generations is a product of a massive research project that involved interviewing 3,700 people from 12 cities and conducting eight focus groups. One of the key findings of this research is that the Internet offers Chinese consumers new horizons for accessing information, sharing opinions, communicating, and seeking entertainment. The research also confirms that consumers currently shy away from electronic banking and online shopping because they don't trust Internet security.

In the course of this research, three generations of digital users in China emerged:

• Little Emperors. People aged 14 through 25 are Internet addicts, yet they remain highly distrustful of the quality of the content they find online.
  
• Reform Beneficiaries. People between 26 and 35 have easily adapted to the opportunities of the Internet and highly value the diversity it provides.
  
• Frugal Middle-Agers. People between 36 and 50 are less comfortable with digital services. They often stick to using simple voice-only services, text messages, and news search services.

Piracy and low price levels have generated skepticism about the ability of companies to make money in China's digital markets, but local players have adopted creative solutions to produce profits and stimulate share price growth, according to China's Digital Generations. In 2007 digital goods and services generated an estimated RMB 580 billion in revenues.

By 2015 revenues are expected to exceed RMB 1.8 trillion. China's digital market has produced several leading local players, such as Tencent and Sina, that have been able to beat their global counterparts by investing aggressively, customizing their services to suit Chinese tastes, and figuring out which promising business models to pursue.

The report suggests steps that companies can follow to more effectively reach China's new digital generations.