Tiktok’s superpower – a nightmare for Xi Jinping

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SvD Näringsliv

This column was first published in SvD Näringsliv, in Swedish, on September 16th, 2021.

While the Chinese authorities are pushing their tech companies hard, a silent revolution is taking place at the same time. Tiktok, Shein and Tencent pose a serious challenge to American tech giants – but their success is perhaps also their biggest Achilles heel.

“I think we should talk to them. If nothing else to make it more expensive for Yahoo.”

It’s entertaining to read the Google management’s internal emails from the winter of 2005, when they became interested in the startup Youtube. At the time, advertising executive Jeff Huber, who is also behind the quote above, speculated that a price tag could land at $10-15 million.

A little more than a year later, Google made their move and bought the video site. However, they had to pay $1,65 billion for the company, so Huber’s precision with price could have been better. At the time, it was one of Google’s biggest acquisitions, and it raised concerns about a valuation bubble.

However, Youtube grew to become the world’s second largest search engine – after Google’s own. An analyst valued Youtube at around $300 billion in 2019, if it were an independent company. It has been considered to have an almost impenetrable position in the video market.

Or impenetrable until now, perhaps one should say. In Sweden, the Chinese app Tiktok has been downloaded more times this year than both Netflix and Disney+. And this week, the analysis company App Annie reported that users of Tiktok now on average spend more time there than on Youtube in both England and the USA.

Although Youtube is still bigger when looking at the total user time, the shift is significant. This is the first time anyone has managed to seriously challenge Youtube, and in addition there is the threat from China. Traditionally, Chinese tech companies have otherwise been mainly successful in their local market.

It’s not just Tiktok that has succeeded in breaking into the western world’s tech markets. Sweden’s most downloaded shopping app is neither Zalando, Blocket nor Amazon. It’s called Shein, which together with Klarna dominated the shopping category in both Apple’s and Google’s app stores throughout 2021.

Shein has also made a big impact in the United States. In June, the Chinese company had larger e-commerce sales in the US than both H&M and Zara, according to a report from the analysis company Earnest Research. The market for so-called “fast fashion” grew 15 percent in the US from January to June. Shein’s growth during the same time? Almost 160 percent.

Shein is not a classic fashion company but should rather be considered a tech company. They have adopted an established business model with low prices, fast trends, and high turnover and increased the speed considerably. According to industry media, the company can take a garment from idea via design and production to sale in the app in less than three days. Shein has launched at most over 5,000 new products – in a single day.

In the way they work, they can predict the next popular product and what will be in demand, Jialu Shan, a researcher at the IMD School of Business in Switzerland, told SvD this summer.

The model works. According to Chinese media reports, Shein made a profit of 10 billion dollars last year – about 86 billion SEK. In comparison, H&M made a profit of 2 billion SEK in 2020.

Another area where you see new Chinese dominance is in the gaming world. From being a market where the USA and Japan were at the forefront, Chinese Tencent and Netease have now sailed up as some of the world’s largest gaming publishers. Tencent has, among other things, released the game Pubg, which has the most players in the world, and also owns the Finnish game studio Supercell, which is behind “Clash of clans” – one of the world’s most successful mobile games.

The new global tech success may be a factor in President Xi Jinping’s plan to regain control of them. In recent weeks, Chinese authorities have reportedly developed legislation to prevent certain tech companies from being listed abroad, and announced the opening of a new domestic exchange for small and medium-sized companies.

China’s tech companies are now facing a complicated market situation. The success abroad has made them catch the eyes of the outside world, and the competition will intensify considerably. Youtube will not give up first place without a fight and maintaining its newly gained market share will be a challenge in itself.

For President Xi Jinping, the balancing act is not easy either. Too strong challengers among tech companies can threaten the balance of power with the Chinese Communist Party’s position in the country. The Financial Times reported that Beijing wants to divide the payment company Ant Financial into several parts – one of which would be partly owned by the Chinese state. At the same time, Chinese success in this sector will make the whole country look good – all over the world. It is geopolitically valuable.

Both the authorities and the tech companies now need to tread carefully. Can the tech companies manage to handle both increased international competition and the Chinese state at the same time? If not, China risks losing the position it has worked for over 20 years to achieve: successful global tech – made in China.

This column was first published in SvD Näringsliv, in Swedish, on September 16th, 2021.

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