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How Chinese companies are solving TikTok problems

Afootball Fans who attended the Super Bowl last month in the sport’s heartland were treated to a surprise television commercial. In it, a woman magically switches between trendy but cheap outfits while browsing a mobile shopping app called Temu. The catchphrase — “I feel rich; I feel like a billionaire” — refers to the feeling of wealth evoked by Temu’s endless selection of clothes and their extremely low prices. Since launching last September, Temu has become the most downloaded app on the iPhone in the US. That’s quite a feat for the young Boston-based brand. Even more impressive is that Temu is from China.

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This is a critical moment for Chinese companies in the West. On the one hand, Chinese brands have never been more popular in the United States. Following Temu in terms of iPhone downloads is video editor CapCut and time sink TikTok. Fashion retailer Shein ranks higher than Amazon. This year it may complete one of the world’s largest initial public offerings (listings) in New York.

At the same time, the West is increasingly suspicious of Chinese companies, and geopolitical tensions between China and the West are rising. The United States has banned Chinese telecommunications equipment maker Huawei at home and crushed its efforts to capture Western markets. On March 6, it was reported that the German government was about to force mobile operators to stop buying Huawei equipment and replace installed Chinese equipment. TikTok could face similar harsh treatment. Several countries, led by the United States, are discussing a blanket ban on TikTok amid concerns that the Chinese government could use the platform for anti-Western propaganda or gobble up the personal data of Western users (both allegations that TikTok denies).

Targeting wealthy Western shoppers presents a conundrum for ambitious Chinese companies: how to do business in increasingly unpopular places? Companies like Shein, Temu and the beleaguered TikTok have all come up with answers that have a lot in common. Their success will determine the fate of Chinese business in the West.

Chinese companies began to prosper globally in the 1980s, as foreigners invested heavily in Chinese factories and shipped cheap goods to the West. Consumers buy these products almost exclusively through retailers such as Walmart or Western brands that source their products from China. Then, in the mid-2000s, Chinese companies began to establish operations in foreign markets. Before Uncle Sam snapped its wings, Huawei had been selling its own networking kit and handsets in the West. Other Chinese champions, such as appliance maker Haier, have acquired and nurtured Western brands (General Electric Companywhite goods division, in Haier’s case). Chinese companies bought nearly $90 billion worth of foreign retail and consumer brands between 2011 and 2021, according to data firm Refinitiv. Many of the targets are Western.

In recent years, however, the pace of transactions has slowed. In 2022, Chinese companies will spend just $400 million on foreign brands (see chart). Authorities in Beijing have become more cautious about capital flight, even as Western governments have become more hostile to such deals, often blocking them. Chinese brands looking to build a presence in the West have little rejoicing.Lenovo, a Chinese company, acquired in 2004 IBMof the PC sector, only 15% of the U.S. personal computer market, far behind life value and Dell, which collectively control more than half. Xiaomi, which is slated to overtake Apple as the world’s second-largest smartphone maker in 2021, has been unable to break into the U.S. market.

The latest wave of globalizing Chinese brands is taking a different approach. Jim Fields, a marketer who works with Chinese brands in the U.S., said many were initially focused on China before the covid-19 pandemic and China’s harsh response forced them to look abroad for growth. Domestic market. The likes of Shein, Temu and TikTok may grab the headlines, but hundreds of Chinese companies have been making similar forays — employing similar tactics — in the U.S., Europe and Japan.

The first is not to show off your Chineseness. economist Browsing the websites of dozens of companies, most could easily be mistaken for Western brands. Their names sound like English: BettyCora makes press-in nails; Snapmakers makes 3Man printer. Almost no mention was made of their country of origin. A young entrepreneur who is now planning to launch his brand in the U.S. has discovered a long-standing prejudice against goods made in China that are of poor quality. This perception is associated with the first wave of cheap factory goods in the 1980s. The rise in hate crimes against people of Asian descent in the United States in recent years has not encouraged companies to present themselves as Chinese. Most people looking to do this type of business avoid mentioning China as much as possible, the entrepreneur said.

The second common denominator is the use of technology to beat Western competitors on service and price. Many Chinese companies use their own websites and mobile apps to sell directly to customers. So they bypass retailers while gaining data on consumer trends, allowing them to react quickly to changes in demand — or, using sophisticated analytics, predict those changes and react ahead of time.

This “manufacturing on demand” will triple Shein’s U.S. sales between 2020 and 2022 to more than $20 billion. Its app attracts 30 million monthly users in the US. Hundreds of Chinese companies are experimenting with this model in the U.S. market. Halara is an emerging women’s clothing retailer with approximately 1.5 million digital visitors per month to its app. Rival Newchic attracted 1.7 million viewers. Xin Cheng of consultancy Bain & Company says the ability to understand customers through data analytics is a big advantage in developed markets.

These companies’ clever use of technology and supply chains allows them to restrict non-Chinese assets—their third common strategy. Zou Ping, of China research firm 36Kr, said light assets were attractive to investors. It helps cut costs and reduces the risk of stranded assets if Western politicians tighten the screws.

For many Chinese brands, their only western assets are customer-facing websites and apps. Although it recently opened a distribution center in Indiana, Shein ships most of its merchandise directly from China to buyers in the United States. Although it’s based in Boston, Temu has no warehouses in the US, let alone factories (although it doesn’t rule out storage). Naturehike is a camping gear manufacturer that has conquered the West and Japan without hiring a single person outside of China. Instead, spokeswoman Wang Fangfang said it was boosting its on-demand manufacturing capabilities to better understand customers far away.February CATL Agreed to supply Ford with electric vehicle batteries by licensing its patents to the U.S. automaker rather than building a factory in the United States.

made in China? Who, me?

The most high-profile way some Chinese companies have guarded against Western backlash and Communist Party interference in their Western operations is by distancing their governance structures from China. The first well-known company to pursue this strategy is ByteDance, TikTok’s parent company. From the start, it separated TikTok’s popular Chinese sister app, Douyin, from the version used in the rest of the world (which is not available in China). TikTok then moved its headquarters to Singapore to be independent of decisions made by ByteDance’s Beijing headquarters. Now it reportedly wants to create a US subsidiary responsible for securing the app, which will report to an external board rather than ByteDance. As far as ByteDance is concerned, it stresses that its headquarters are in the Cayman Islands, not China.

Given that none of this has fully appeased Western regulators, other Chinese companies are going further. Last year, Shein also moved to Singapore from Guangzhou. The city-state is now its legal and operating base. Add to that its plans to go public in New York, and when you call Shein Chinese, its executives almost throw a tantrum. More businesses may adopt a version of this model.

The success of these strategies is difficult to measure. Export data from China does not differentiate between Chinese brands and goods made for foreign customers. Many packages are sent by courier and do not count as exports. But it is clear that, at least in some areas, Chinese brands are taking market share in the West. Anker has become one of the largest suppliers of mobile phone chargers in the United States. About half of its $1.8 billion in global sales in 2021 will come from North America; less than 4% will come from China. Some Chinese makers of smart appliances, such as robot vacuum cleaners, rank among the top sellers globally, along with U.S. and German companies. One of them, Roborock, has overseas sales of $500 million in 2021, or 58% of its total revenue, up from 14% two years ago. The US is its main market. Chinese companies such as EcoFlow are expected to dominate local home power bank sales.

Investors are bullish.shining listing It could be blockbuster.Singapore-based fund Hidden Hill Capital raised nearly $500 million last year TPG, an American private equity firm that invests in Chinese companies that support the supply chains of future global brands. Still, some of the entrepreneurs behind these success stories are concerned. One problem is overcoming the bad reputation of the “Made in China” label. Today, knockoffs or low-quality imitations can damage the reputations of Chinese companies investing in research and development. In 2021, Amazon banned 600 Chinese brands for fear they would post fake reviews of their products.

But Chinese bosses are losing sleep over the deterioration of Sino-US relations. Many see TikTok as the leader.In January, the company said it would build a data center in the US to store local user data and give US authorities access to its algorithms; March 6 wall street journal It is reportedly pursuing a similar deal in Europe. Despite the assurances, the bill passed Congress, allowing President Joe Biden to ban the app.

If Beijing and Washington continue to part ways, which seems likely, American politicians may target other Chinese apps. For companies that collect data on shopping habits — which is to say most consumer-facing companies — this turns their technological advantage into a geopolitical vulnerability. Facing this threat requires an entirely different level of ingenuity.

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