Can Chinese e-commerce platforms Shein and Temu thrive in US and overseas markets?
It was only a short while ago that TikTok CEO Chew Shou Zi became a household name on Chinese social media because of his calm responses to the hostility from the US Congress, which characterised TikTok as "a spy balloon into your phone".
TikTok seems hardly the only victim caught in the crackdown. As user growth hits the ceiling in the Chinese domestic market which has turned into a dogfight, Chinese big techs are investing more overseas to tap into growth potential. Should we expect a rise in tensions?
The suspected breach of privacy and security is rife in tech industries, and Chinese companies are no different. EU regulators have fined Google and Facebook hundreds of millions of dollars for misuse of user data. But the West's distrust of the Chinese government has led to Chinese firms facing an overwhelming credibility crisis, with such anti-China sentiment extending beyond critical technology and spilling over to e-commerce platforms which were rarely a target of data-related criticisms in the past.
Chinese e-commerce platforms showing their mettle in the US
E-commerce is the new area where Chinese companies have garnered notable competitive advantage. This is no coincidence, as China boasts the most sophisticated e-commerce market with numerous companies that has fostered significant operational and supply chain capabilities over the years.
Shein, the fast-fashion retailer selling low-priced apparel, has become a phenomenon among the younger generation in the US and now accounts for half of all US fast-fashion sales. By moving its headquarters to Singapore and not doing business in China, it intendedly avoids being associated with the latter.
However, in April, US lawmakers intensely accused Chinese e-commerce companies, particularly Shein, of poor labour conditions in its suppliers and copyright infringement. Also, as a cross-border retailer, Shein delivers packages directly from a central warehouse in China to overseas consumers. Because of this, it was vehemently criticised for exploiting a tax loophole exempting import tax for shipments valued under US$800.
Within only a couple of months, it [Temu] has overtaken Amazon and Shein to be the most newly downloaded shopping app on App Store and Google Play.
Temu, owned by Alibaba's biggest rival Pinduoduo, quickly rose to prominence after the broadcast of its 30-second Super Bowl ad (allegedly costing the company a total of US$14 million) in February. By adopting Shein's strategy and curating a vast product portfolio, it has exceeded Shein in market value and taken numerous country markets by storm.
While squeezing suppliers' profit to the limit, its low-price strategy and a wide product range offer an appealing value proposition as global inflation shoots through the roof. Within only a couple of months, it has overtaken Amazon and Shein to be the most newly downloaded shopping app on App Store and Google Play.
A key difference between Temu and Shein is that the former employs a semi-platform business model; suppliers are similar to e-commerce "sellers" in that they distribute on the platform their own products, but have no control over pricing, fulfilment and marketing.
The US-China Economic and Security Review Commission policy analyst Nicholas Kaufman called Temu and Shein a "case study of Chinese e-commerce platforms outmanoeuvring regulators to grow a dominant US market presence". The fiery tensions between the two superpowers suggest that political scrutiny is unlikely to dissipate anytime soon.
...as local third-party sellers gain commercial success on Shein's marketplace, they will see themselves as a stakeholder and uphold the platform's sustained operations...
Overcoming obstacles
Then how can those companies achieve success away from home? Shein is reportedly introducing the platform business model - similar to the Amazon marketplace - allowing sellers in different countries to join and sell on Shein.
On one hand, using a platform model may help sidestep the critiques regarding import tax and labour abuse. Not only that, as local third-party sellers gain commercial success on Shein's marketplace, they will see themselves as a stakeholder and uphold the platform's sustained operations, in much the same way as influencers sued the US government to save TikTok and their own access to the fanbase.
On the other hand, the new business model goes against Shein's advantage which derives from a tight supply chain and full control over the product development cycle. Its market success has been relying on China's vast and efficient supply chains (a model called Customer-to-Manufacturer, or C2M). Now as products are no longer shipped directly from Chinese factories, it may be hard to sustain the cut-rate pricing.
Also, whether Shein's unique fast-iteration strategy will create conflicts with third-party sellers and cannibalise their sales remains to be seen. The company needs to develop new capabilities in local logistics in each market, which will necessarily involve a heavy investment and substantial operational costs.
...internal decoupling in both organisational structure and product offering seems a consensus as Chinese tech companies put a bet on overseas markets.
Meanwhile, amid the crackdown on TikTok, ByteDance has been diversifying its investment to an alternative platform, called Lemon8, which combines the features of Instagram and Pinterest focusing on lifestyle and high-quality content. While a different type of social platform, Lemon8 shares ByteDance's unique algorithm which underpins TikTok's worldwide success. For fear of further sanctions and a possible nationwide ban, TikTok influencers have actively nudged their fans to this new platform, creating initial momentum in user acquisition.
Unlike TikTok which conquered the US market first, Lemon8 started in Asia, achieving early success in Japan, Thailand and Indonesia. This helps in establishing Lemon8 as a global product before attracting mainstream attention in the US.
Other than changes at the business strategy level, internal decoupling in both organisational structure and product offering seems a consensus as Chinese tech companies put a bet on overseas markets.
Alibaba Cloud has distanced itself from Aliyun, the vast domestic business. ByteDance's enterprise collaboration product Lark, developed in Singapore, operates independently of its home version Feishu, and also stores user data separately. Similar to Lemon8, Lark eyes the neighbouring markets like Japan and Southeast Asia, shunning data scrutiny and fierce competition in the US.
Boomerang on domestic businesses
Some of those remedial tactics are not without risks. While appeasing regulators in the West, Chinese companies will most likely face greater backlash at home. As soon as word spread about Pinduoduo's change of headquarters to Ireland in corporate filings in May, it made an immediate media release stressing that its operations remained in Shanghai and the "relocation" was for compliance purposes only.
Any such move may be interpreted as disloyalty on Chinese social media and attract attention and criticism. Navigating the ideological divide and nationalist sentiments requires an intricate balancing act as most of those companies' main businesses will always remain in China.
... yet it may also raise eyebrows in the home country as those companies may have to treat overseas workers more favourably.
In addition, differing viewpoints on the rights of workers do not only stem from overseas regulators. Locally recruited employees also voiced concerns about Chinese big techs' subscription to long hours and hypercompetitive workplaces. Responding to stakeholders' demands is inevitable and value-creating in the long run, yet it may also raise eyebrows in the home country as those companies may have to treat overseas workers more favourably. However, none of these are new to multinational companies.
Multinationals have been caught up in geopolitical conflicts and dealing with legitimacy challenges and the liabilities of foreignness for decades. Establishing sound environmental, social and governance (ESG) performance is a common pursuit of any modern corporates seeking to grow shareholder value, and also helps fend off criticisms of Chinese tech giants (e.g. labour rights and copyrights).
While facing headwinds amid the political climate, Chinese tech companies have no choice but to march on, leading the new generation of emerging market multinationals. The fact that they survived the domestic competition means that they are adaptive enough to an ever-changing environment.