Discover more from Vermilion China
#47 - The Chinese App Invasion Begins
With the failure of multiple US administrations and sessions of Congress to ban TikTok or CapCut, the main assault of Chinese tech is currently unfolding. Apps like Lemon8, Temu, Shein (希音), and TikTok/TrendyBeat are set to burrow their way into the American market.
Of course, these apps will have all the same security problems as TikTok. Issues with Temu have already been documented, and these apps have pre-existing mainland China counterparts that are radioactive.
Unique E-Commerce Threats
Temu and Shein are primarily e-commerce platforms vice social media like TikTok, or Lemon8. This raises a crop of new issues concerning forced labor, supply chains, circumventing US trade law, and further erosion of the US industrial base.
First, a recently released Congressional report has outlined that neither Temu nor Shein currently have nor plan to have a compliance program ensuring that their super cheap products do not originate from Xinjiang, a region banned in American law from trading with the US. Xinjiang is a PRC autonomous zone and home of the Uyghurs, a Muslim minority Beijing is currently conducting genocide against (which includes forced labor for commercial products).
Second, both companies rely on the city of Guangzhou primarily and the Greater Bay Area secondarily to provide the innovation, scale, entrepreneurship, logistics, capital, and 关系 (connections) to become large successful international entities. However, the most important economic factor may still be cheap labor. Concerns over slave labor aside, Temu and Shein’s normal factories in Guangzhou are verified sweatshops which amazingly violate even watered down PRC labor standards.
Third, Temu and Shein are able to operate in the US import tax-free, unlike their competitors. This is because both firms abuse the US de minimis trade provision, which does not require taxation, warehousing, customs inspection, or port duties for packages under $800. Temu and Shein are essentially pretending to be individuals or small businesses (not massive corporations) sending packages to other individuals. Both are fast casual clothing concepts primarily marketed toward Gen Z Americans, so a single order is rarely over $800.
Fourth, this is a tariff-dodging attack on an already battered US industrial base. Walmart, Target, and Amazon are held to higher standards than labor law violating Shein in China. Even if the above US companies have partners in China, authorities in Beijing will ensure that Temu and Shein enjoy special privileges that US companies do not.
Both companies are almost certainly in a ramp up period and going deep into red ink in order to carve out market share in the US and other western countries. These Chinese firms are betting that a race to the bottom will drive down prices long enough to force their competitors (Target, Walmart, H&M, Zara, etc) to go out of business or permanently lose major market share.
Not to be outdone, TikTok is testing an integrated e-commerce platform currently called Trendy Beat. ByteDance (TikTok’s parent company) is able to identify trending products on TikTok and then acquire the item or manufacture it in house through the Trendy Beat subsidiary, crowding out the existing manufacturer.
The Killshot - Zero Trade Reciprocity
ByteDance (nominally a company but in actuality directed by the communist party) is now rolling out Lemon8 in the US, an Instagram clone clearly conceived to compete with Meta’s Instagram. Lemon8 is primarily geared towards sharing photos and supporting e-commerce; what a surprise.
What US legislators and voters fail to understand is that Beijing will continue to march through the American tech sector grabbing market share just as in the past with US manufacturing until Silicon Valley becomes the new rust belt. By not adopting reciprocal trading practices, Washington lets Chinese apps practice unregulated commercial warfare in the US while banning any US tech company’s ability to make any money in the Chinese market. Beijing is hoping that the basic financial math eventually gives Chinese companies an easy win despite US innovation and quality.
The modern app space is super lucrative, but is no longer the highest tech domain of cutting edge innovation. This means it is vulnerable to capture by malign Chinese economic warfare just like low to middle value chain manufacturing of the past.
There is clearly not a scintilla of fair trade spirit in Beijing’s heart, and this is especially true in this arena. As mentioned, the PRC currently bans FaceBook, Instagram, Snapchat, WhatsApp, Pinterest, Twitter, Reddit, Tinder, and ironically enough, TikTok from entry into the Chinese domestic market. This has allowed Chinese apps the extended time necessary to make competent enough national champion bizzaro versions of all the above apps.
What Comes Next?
In the near term, look for more Chinese entrants into the US app market. First, Look for the Chinese app 快手 (pronounced Kwai Show) marketed under the English name Kwai. 快手 is primarily a live streaming app (as opposed to a short video app like 抖音 / TikTok) popular in China outside what are known as Tier 1 cities. 快手 has extremely popular content from many users who reside in the countryside, as they live stream the agricultural aspects of their lives. Kwai will not be a TikTok clone, but will test the US market to see if an app purpose-built for live streaming is ready to take a big market share.
Second, a large Chinese firm will likely attempt to push into the US online dating app market. There are multiple possible entrants, including MoMo’s ( 陌陌 ) TanTan ( 探探 ) app and a potential TikTok dating app built as an app-within-an-app. Whatever firm is first, expect the rollout to be orchestrated from Beijing, with only a single Chinese app released first so that it does not have to compete against both US companies and another Chinese app at the same time.
In the mid term, expect ByteDance and Twitter to begin laying the foundations for the transformation of their existing offerings into an everything app. This is the concept of an app like Tencent’s Wechat ( 微信 ) which handles messaging, video calls, banking, travel bookings, mobile payments, identity verification, ride hailing, utility payments, online dating, and many other functions.
With everything apps there is clearly the problem of dystopian levels of government control, as the PRC has shown with its social credit score experimentation. Don’t expect that to slowdown Zhang Yiming or Elon Musk.
In the long term, All of the problems associated with these apps (privacy, surveillance, targeting, influence operations, etc) will become more acute as tech companies embed artificial intelligence into their commercial platforms. AI capabilities will give these firms much greater awareness and control over the massive amounts of personal data they already harvest. US legislators should begin considering if the personal data an individual generates belongs to them or not.