Chinese business has been slow to embrace the internet. As it does, productivity should soar ... AT FIRST glance it would appear that China has gone online, and gone digital, with great gusto. The spectacular rise of internet stars such as Alibaba, Tencent and JD would certainly suggest so. The country now has more smartphone users and households with internet access than any other. Its e-commerce industry, which turned over $300 billion last year, is the world’s biggest. The forthcoming stockmarket flotation of Alibaba may be the largest yet seen. ... So it is perhaps surprising to hear it argued that much of Chinese business has still not plugged in to the internet and to related trends such as cloud computing and “big data” analysis; and therefore that these technologies’ biggest impact on the country’s economy is still to come. That is the conclusion of a report published on July 24th by the McKinsey Global Institute (MGI), a think-tank run by the eponymous consulting firm. It finds that only one-fifth of Chinese firms are using cloud-based data storage and processing power, for example, compared with three-fifths of American ones. Chinese businesses spend only 2% of their revenues on information technology, half the global average. Even the biggest, most prestigious state enterprises, such as Sinopec and PetroChina, two oil giants, are skimping on IT. Much of the benefit that the internet can bring in such areas as marketing, managing supply chains and collaborative research is passing such firms by, the people from McKinsey conclude. ... Although millions of Chinese businesses sell their products on Taobao, an online marketplace owned by Alibaba, vast numbers remain offline: only 20-25% of small firms in China are internet-connected, compared with 75% in America. This helps explain why the labour productivity of local small businesses is roughly two-thirds of the average for all firms in the country; the comparable figure in Britain is 90% and in Brazil it is 95%. ... In all, MGI predicts that “a great wave of disruption has just begun.”

Alibaba is the hottest e-commerce company of the past five years, a fusion of eBay and Amazon whose 386 million active users accounted for $394 billion in sales in fiscal 2015—six times the sales volume of its biggest Chinese competitor. The company created a huge marketplace and a sophisticated distribution network just in time to serve a generation of Chinese consumers attaining middle-class prosperity. “We are seeing Chinese consumers adopt new retail formats and online shopping faster than any of their global counterparts,” says Jasmine Xu, president of e-commerce for Procter & Gamble Greater China. Those trends fueled a rise so impressive that even the mighty Amazon became an Alibaba partner ... Today, however, Alibaba looks mortal. Its growth has slowed, hampered by China’s ebbing economy and by competition from a growing crop of rivals like JD.com. Its stock has fallen 26% from its post-IPO highs, from $115 to the mid $80s. To reignite its growth, chairman and founder Jack Ma and CEO Daniel Zhang plan to lean on U.S. companies—brands that hold enormous appeal in China. “This is an incredibly important strategy for the future of Alibaba,” Ma says. ... Alibaba is pitching itself as a shortcut to the world’s most populous market. Alibaba is helping foreign companies with marketing, data analytics, and shipping. And more recently it has sweetened the pot with a newer service, Tmall Global, that lets U.S. brands sidestep many of the taxes, regulatory hurdles, and logistics hassles that trip up foreign companies in China. ... Tmall, went live in 2008 with a business model sharply distinct from Taobao’s. Tmall is Zhang’s brainchild. He positioned it as a marketplace for higher-quality clothing, food, and electronics, with a focus on luxury brands. ... Tmall owes its growth to China’s rapidly expanding, brand-conscious middle class. Currently there are 109 million Chinese people with a net worth between $50,000 and $500,000, according to Credit Suisse, which estimates that those ranks could surpass 500 million by 2022. It’s a demographic that’s very comfortable with e-commerce: 40% of Chinese consumers buy groceries online, for example, compared with only 10% of Americans.

Under Cheng, Didi has expanded in just four years to 400 Chinese cities. The service lets users digitally hail and pay for taxis, private cars, limousines, and commuter buses. Cheng says 80 percent of all taxi drivers in China now use Didi to find passengers. So many people use the app, it can be difficult to get a cab during rush hour without it. Investors recently valued Didi at $35 billion, making it one of the most valuable private companies in the world. Uber, with operations in almost 500 cities on six continents, is worth $68 billion. ... Cheng was born in Jiangxi province, a landlocked region in eastern China famous for being the cradle of Mao Zedong’s Communist revolution. His father was a civil servant, his mother a mathematics teacher. He says he excelled at math in high school but during his college entrance exams neglected to turn over the last page of the test, leaving three questions blank. He got into the Beijing University of Chemical Technology, less prestigious than the upper-echelon schools. ... it turned out that Didi had a few advantages over the competition. Some were copying Uber’s U.S. strategy of working with limousine and town car chauffeurs. But there are far fewer black cars than yellow cabs in China. ... Instead of imitating competitors and giving away smartphones to drivers, an expensive proposition for a capital-strapped startup, they focused on providing their free app to younger drivers who already had phones and were likely to spread the word about Didi.