How Chinese companies are shaping the global e-commerce industry

Below are two posts I’ve recently shared on LinkedIn, but with additional information and insight for my Substack readers. Thank you for being a loyal follower here!

The watershed moment for the Chinese e-commerce industry

The Chinese e-commerce industry experienced a watershed moment recently: Pinduoduo (PDD) surpassed Alibaba to become the sector’s most valuable company by market cap, reaching $194.5bn compared to Alibaba’s $192bn.

The surge followed PDD’s Q3 earnings announcement, with the company reporting a staggering 94% yoy growth in revenue, 37% yoy growth in earnings, and 24.7% profit margin. The results are especially remarkable when you consider that PDD is just 8 years old and has only about 6% of Alibaba’s total headcount.

Beyond those great numbers, the key takeaway from the report is how Chinese e-commerce companies are aggressively eyeing overseas markets as their next revenue driver and reshaping the $6.3 trillion global e-commerce market in the process. For example:

• PDD is growing Temu, its budget shopping app for overseas consumers, at all costs and allocated a marketing budget of $2-$3 billion for this year. Temu is estimated to have handled $4.2 billion in transactions during Q3, likely yielding ~13% of PDD's total revenue. In just over a year since launch, the app has rapidly expanded its presence from the U.S. to 48 countries and is expected to generate more than $16 billion in revenue in 2023—then double that in 2024.

• Alibaba International Digital Commerce (AIDC), the highest-growth unit among all of Alibaba’s businesses, grew its revenue 53% in the latest quarter compared to 9% for Alibaba overall. Meanwhile, it’s starting an external financing round to accelerate its global expansion and acquire more customers overseas.

• Shein generated $23 billion in revenue in 2022, more than H&M ($22 billion) and UNIQLO ($16 billion), and it’s on pace for 40% revenue growth this year to reach $33 billion. The company has started the roadshow for its U.S. IPO, targeting a valuation of between $80-$90 billion. It will likely be one of the largest IPOs in years.

• TikTok Shop officially launched in the U.S. three months ago and surpassed $33 million in daily GMV during Black Friday, up from $5 million in September, with over 100,000 influencers participating.

While their domestic market is slowing and becoming more competitive than ever, Chinese e-commerce platforms have found a Product-Market-Fit overseas: Consumers outside of China faced with inflation and higher costs of living are looking for retailers offering better value for their money. For investors, the massive growth in markets outside of China help to compensate for the unpredictable regulatory changes these companies face at home, making the stocks more attractive. 

Three trends for Chinese cross-border commerce

Beyond the big numbers that these companies are generating, some very interesting things are playing out as they move into new international markets. Here are the three trends I’m watching right now:

They’ve got Amazon scrambling

Amazon may dominate U.S. ecommerce with a 38% share, but nearly half of its top third-party sellers are based in China. That could be a problem… It’s only a matter of time before these made-in-China products are available on Temu or Shein for 20% to 40% less. Why? Because China’s ecommerce players negotiate directly with Chinese factories and sell as wholesalers to the consumers in the West. The individual sellers on Amazon can’t match the cost savings that come with that bargaining power. To counter that market advantage, Amazon last week reduced the commission it takes on clothing priced below $15 from 17% to 5%. Additionally, Amazon announced the launch of an innovation center near Shenzhen, China, to support Asian sellers with product launches. That’s a complete reversal in strategy from 2021, when Amazon permanently banned over 3,000 Chinese seller accounts. The battle is also on for social commerce. Following the official launch of TikTok Shop in the U.S. in September, Amazon teamed up with Meta for the first time to allow Facebook and Instagram users to shop and check out with Amazon without leaving those apps. Expect to see more “seller-friendly” terms and social commerce initiatives from Amazon going forward as it gives sellers a chance to compete against these Chinese platforms.

They’re setting the market price for Google and Meta ads

Temu, which only launched a little over a year ago, accounted for 20% to 25% of ad impressions purchased on Google in Q4. Meta, in its latest earnings call, attributed the growth of its ad revenue to “a few of its larger China advertising clients”. That’s weighing on competitor platforms the cost of acquiring customers. “Shein and Temu are almost single-handedly having an impact on the cost of advertising, particularly in some paid channels in Google and in Meta,” said Josh Silverman, the CEO of Etsy, during the company’s earnings call in November. Etsy’s annual GMV has held flat since 2021, and the company recently laid off 11% of its staff. Compare that to Temu’s revenue growth from $0 to $16 billion in just 15 months, eBay, too, has struggled, with its “enthusiast buyers” shrinking to 16 million from 19 million in 2021. Relatedly, I’ve noticed a trend where Western consumer brands, from apparel to electronics, have started to form a closer relationship with their factories to iterate faster on product innovation and control more steps of the manufacturing process. As we enter an era of “expensive traffic” to sell consumer products, brand premium, product differentiation, and manufacturing efficiency will all be necessary to justify the increasing consumer acquisition costs and later drive retention.

They’re using joint ventures to side step geopolitics

Bytedance, TikTok’s parent company, announced last week that it will invest $1.5 billion for a 75% stake in a new joint venture between Tokopedia, the ecommerce unit of Indonesian tech giant GoTo, and TikTok Shop Indonesia. This goal: Get TikTok Shop back up and running in the country after its operations in Indonesia were virtually shut down overnight by regulators. Shein took a similar track in August when it acquired a third of Forever 21's operator, Sparc Group, to gain offline channels for reaching young U.S. shoppers—but, more importantly, to try to escape the scrutiny by U.S. regulators that comes with being tied too closely to China. Unfortunately, I believe that cross-border shopping platforms will be collateral damage in the continued geopolitical tensions between the U.S. and China. And the U.S. presidential election next year will only further complicate the situation. Therefore, joint ventures may be the new norm to get around this international tit-for-tat, giving TikTok, Shein, and Temu access to new markets—and growth—while local players get a piece of the action, too.  

You can read more of my insights on Chinese e-commerce companies here:

1. Shein & China Cross-border commerce 3.0

2. Is Temu Pinduoduo 2.0?

3. What is the next big thing in US E-commerce? TikTok Shop

It’s been an exciting year for this space, and I’m excited to see what happens in 2024. Wishing you and your family Happy Holidays and a Happy New Year. See you next year!