- In the U.S., Europe, and Japan, Chinese firms are facing a barrage of restrictions including tariffs, investment bans, market access constraints, and technology transfer prohibitions.
- Despite these challenges, many Chinese companies have achieved significant success in the U.S., and others still see expansion into the American market as a viable option.
- The future growth prospects for many Chinese companies will be determined by how skillfully they navigate the political and regulatory headwinds in overseas markets.
Prevailing Winds is a China-focused blog written by Nicholas Borst, Director of China Research at Seafarer. The blog tracks the economic and financial developments shaping the world’s largest emerging market.
I recently embarked on two trips, one to Washington, D.C. to examine U.S.-China relations and another to China to meet with over a dozen Chinese companies. These trips highlighted a contradictory trend – Chinese companies are making an unprecedented effort to expand internationally, yet they face growing restrictions when entering the U.S. and other global markets.
Looking abroad for growth represents a major strategic shift for many Chinese companies. With the world’s second-largest economy as their home market, many Chinese companies have been content to focus on domestic growth. International expansion was too costly and difficult to justify when the Chinese market was developing so quickly. However, a slowing economy and a challenging domestic policy environment have changed that calculus for many firms. As a result, many Chinese companies are making a concerted push to expand into overseas markets.1
A Challenging Environment
International expansion can be difficult for any firm. It requires entering new markets, complying with foreign regulations, and contending with new competitors. For Chinese companies, the list of challenges is even more daunting due to geopolitics.
The United States, Europe, and Japan are the largest foreign markets available to Chinese firms and the most difficult due to political concerns. Public perceptions of China in these economies have become overwhelmingly negative. For example, a recent Gallup poll found that 83% of Americans have a negative view towards China.2
Policymakers in these countries have become focused on the strategic threat presented by China. Many view the links between Chinese companies and the Chinese government as a national security risk that must be addressed. Consequently, Chinese firms are facing a barrage of restrictions including tariffs, investment bans, market access constraints, and technology transfer prohibitions.
The scale of these challenges became clear during my trip to Washington, D.C. While there, I met with several U.S. officials involved in setting technology and investment policy. It is safe to say that the obstacles facing Chinese companies will grow even larger as the Biden administration seeks to limit China’s access to a wide variety of technologies viewed as sensitive. Beyond technology transfer, the U.S. government has now identified several areas of the economy as fundamental to national security, including semiconductors, artificial intelligence, biotechnology, clean energy technologies, and advanced telecommunications equipment.3 In these sectors, the U.S. government is focused on ensuring that American firms maintain a perpetual technological lead over Chinese companies and that global supply chains in these industries reduce their dependence on China.
Chinese Firms are Undeterred
Overall, it is a daunting picture facing Chinese companies as they attempt to expand into the U.S. and other key markets. Thus, it was quite surprising during my trip to China to meet with so many Chinese firms that were optimistic about their prospects for international growth. Some companies that I spoke with already had large international operations upon which they seek to expand. Other firms still derive most of their revenues from their home market but viewed overseas expansion as their most important future driver of growth.
Are these firms correct in their optimistic assessments or are they willfully ignorant of the growing challenges they face overseas? Let’s look at a few case studies involving the U.S. market to better understand the opportunities and obstacles facing Chinese companies as they expand abroad.
TikTok: A Social Media Phenomenon in Danger of Being Banned
No Chinese company has experienced more rapid success overseas than Bytedance. Its international social media platform, TikTok, has become one of the fastest-growing and most valuable tech companies in the U.S. and other developed markets. The video-sharing social network boasts around 150 million active monthly U.S. users.4 In 2022, TikTok earned an estimated $11 billion in advertising revenue in the U.S., more than Snapchat and Twitter combined.5 The company’s private market valuation has ranged between $200-300 billion.6 As its U.S. revenues have grown, TikTok has expanded its physical presence in the U.S., employing around 7,000 Americans.7
In a different geopolitical environment, TikTok might be viewed as an exemplar of successful international expansion. It has adapted its product for overseas customers and achieved wild success in a highly competitive market, besting entrenched U.S. competitors like Facebook in the process. Instead, TikTok is now becoming a cautionary tale for Chinese firms that fail to navigate the political and regulatory headwinds of foreign markets. The company has so far failed to address concerns from U.S. lawmakers that it may be sharing American user data with the Chinese government or promoting pro-China messages via its content algorithm. TikTok’s CEO recently had a disastrous congressional hearing which appears to have only increased these fears.8
As a result, TikTok faces the imminent threat of a ban in the U.S. In 2020, the Trump administration attempted to ban TikTok via executive order, but it was later overturned by the courts. In the meantime, several states, universities, and the military have banned TikTok from their official networks and devices. Congress is currently considering a bill, the RESTRICT Act, that labels China as an adversary and gives the Commerce Secretary the ability to effectively ban TikTok from the U.S.9
CATL: A Clean Energy Leader Battling Public Skepticism
Given the major push for the adoption of electric vehicles, you might expect investment in new American factories by the world’s leading electric vehicle battery manufacturer would be welcomed. However, Chinese battery manufacturer Contemporary Amperex Technology Co. (CATL) has faced significant challenges at the state and federal levels as it tries to increase its presence in the U.S.
CATL’s expansion into the American market is driven by several factors. Its home market in China is extremely competitive and currently facing a supply glut, which is pushing down profits.10 At the same time, U.S. demand for electric vehicle batteries is set to grow rapidly due to subsidies in the Inflation Reduction Act (IRA). The IRA, however, has strict local content requirements, meaning that components in electric cars must be produced in the U.S. or in other friendly countries to qualify for rebates.
The company already has a substantial number of foreign partnerships and a meaningful share of overseas revenue.11 But to enter the U.S. market more directly, CATL has established a partnership with Ford. Wary of its investments in the U.S. being blocked by the federal government, CATL and Ford have structured the partnership in a unique manner. Rather than a traditional joint venture, Ford will own the new multi-billion-dollar battery plant entirely through a subsidiary, thereby avoiding foreign investment reviews. CATL will license its battery technology and expertise to Ford through a long-term strategic partnership.
This arrangement has not been successful in mollifying concerns at both the state and federal levels. The battery plant was originally going to be built in Virginia. However, the factory ignited a major political debate with the Governor of Virginia declaring that his state would not host the plant due to CATL’s alleged connections to the Communist Party.
In response, Ford and CATL moved the planned location of the factory to Michigan. Yet, obstacles remain as a prominent U.S. Senator has introduced new legislation to block the plant from accessing federal subsidies through the IRA.12 A separate development does not augur well for CATL: a plan by another Chinese battery company, Gotion High-tech, to build a new factory in Big Rapids, Michigan, has become mired in controversy in local politics.13
Haier and TCL: Going Local in the Household Appliance Market
Two Chinese companies have made significant inroads into the U.S. household appliance market through a combination of product localization and strategic partnerships with American firms.
Haier is one of China’s largest home appliance manufacturers. In 2016, Haier purchased GE’s appliance business for $5.4 billion.14 At the time, the acquisition generated considerable controversy due to the acquisition of such an iconic American brand by a Chinese company and concerns that GE’s manufacturing operations in the U.S. would be outsourced. Haier chose to maintain manufacturing facilities in the U.S. and to keep GE Appliances headquartered in the U.S. with a significant American leadership team. Since then, it has seen its overseas business expand considerably, especially in the U.S. At the end of 2022, Haier’s sales in the North American market reached a record $11.4 billion (78.4 billion Renminbi (RMB)), accounting for almost a third of total revenue.15
TCL is another Chinese company that has become a major player in household appliances, most notably in televisions. After several years of rapid international expansion, TCL is now the second-largest global producer of TVs and has the number two market share in the U.S.16 The company is pursuing a premiumization strategy, progressively targeting the more expensive market segment currently dominated by Samsung and LG. In the U.S. market, the company has been strategic in its approach to data security, conscious that a Chinese company collecting American user data from their living room would invite scrutiny. In contrast to the Chinese market, where TCL TVs operate on the company’s proprietary operating system, TCL has partnered with Google and Roku in the U.S. to provide the operating systems for its televisions. This approach offers American customers a familiar user interface while mitigating many concerns that could arise if TCL were directly collecting the data.
Shein and Temu: E-commerce Sensations Facing Growing Backlash
Over the past few years, Chinese firms have pioneered fast fashion e-commerce in the U.S. The fast fashion e-commerce category focuses on rapidly producing inexpensive clothes that are in keeping with the latest fashion trends. For price-conscious customers, it’s a way to buy trendy clothes at a substantial discount. Critics of the industry believe that it is wasteful because the clothes are often cheaply made and designed to be discarded after a few uses.
Two Chinese companies have been at the forefront of the fast fashion e-commerce trend in the U.S. Shein, arguably the pioneer of the category, reached more than $20 billion in U.S. sales last year and has a private market valuation of around $100 billion.17 Shein’s success is now being targeted by TEMU, a subsidiary of Chinese tech giant Pinduoduo. TEMU garnered notable attention earlier this year when it ran a Super Bowl ad that encouraged customers to “shop like a billionaire.” TEMU’s app is currently number one in the shopping category on the Apple and Google App Stores with tens of millions of downloads.18
The success of Shein and Temu is inviting scrutiny of the companies and their business models. Industry and activist groups are attacking the two companies on several fronts. One major complaint is that the companies are exploiting U.S. import rules to avoid tariffs and taxation.19 Other groups a trying to link the companies’ products to human rights abuses in the Xinjiang region of China.20 Some critics are challenging the environmental impact of the fast fashion industry, arguing that designing clothing that will be quickly disposed is unsustainable.21 Finally, the data collection and data security practices of both companies are being scrutinized.22 These various lines of critique are finding a receptive audience in Washington, with several members of Congress indicating their willingness to investigate the companies.23 So far, it appears that the companies have had little success in quelling these concerns.
Models of Success?
The examples discussed earlier underscore several key takeaways. Despite geopolitical concerns and market access restrictions, many Chinese companies have achieved significant success in the U.S., and others still see expansion into the American market as a viable option.
Nevertheless, rapid success often attracts criticism and government scrutiny. This is especially true if a company operates in a sector considered sensitive to national security or those with alleged connections to the Chinese government. The Chinese companies that have faced the least resistance are those that collaborate closely with local partners or maintain a substantial local presence that operates with a high degree of autonomy.
Following my visits to Washington and China, it is evident that identifying successful models of international expansion will be crucial for the growth of many Chinese companies. The next several years will provide numerous examples of Chinese companies experimenting with strategies to overcome the challenges of expanding abroad amid a tense geopolitical environment. Firms that succeed may be rewarded with growth opportunities substantially larger than what their home market offers. Conversely, firms that fail may be excluded from the world’s most important overseas markets. Perhaps most intriguingly, the companies that succeed may do so because they possess a degree of operational sophistication and competitiveness that sets them apart from their peers.Nicholas Borst,
- As of March 31, 2023, the Seafarer Funds did not own shares in the securities referenced in this commentary.
- The views and information discussed in this commentary are as of the date of publication, are subject to change, and may not reflect Seafarer’s current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Seafarer does not accept any liability for losses either direct or consequential caused by the use of this information.
- Culpan, Tim. “When 1.4 Billion Consumers Still Aren’t Enough.” Bloomberg, February 16, 2023.
- Silver, Laura, et al. “Americans Are Critical of China’s Global Role – as Well as Its Relationship With Russia.” Pew Research Center's Global Attitudes Project, April 12, 2023.
- Sullivan, Jake. “Remarks by National Security Advisor Jake Sullivan at the Special Competitive Studies Project Global Emerging Technologies Summit.” The White House, September 2022.
- Shepardson, David. “TikTok Hits 150 Mln U.S. Monthly Users, up from 100 Million in 2020.” Reuters, March 20, 2023.
- Satija, Bhanvi, and Krishna Chandra Eluri. “TikTok’s Ad Revenue to Surpass Twitter and Snapchat Combined in 2022 - Report.” Reuters, April 11, 2022.
- Baigorri, Manuel, Ben Bartenstein, and Dong Cao. “UAE Spy Chief’s Firm Buys Into ByteDance at $220 Billion Value.” Bloomberg, March 14, 2023.
- Spangler, Todd. “TikTok, Facing Possible U.S. Ban, Claims It Has 150 Million American Users.” Variety, 21 Mar. 2023.
- Chew, Shou. “Testimony Before the U.S. House Committee on Energy and Commerce.” U.S. House of Representatives, March 23, 2023.
- Warner, Mike. “Restricting the Emergence of Security Threats That Risk Information and Communications Technology Act.” United States Congress, March 7, 2023.
- Ren, Daniel. “Chinese EV Battery Producers Will Exceed Domestic Electric-Car Makers’ Demand Threefold in 2025: Report.” South China Morning Post, November 28, 2022.
- “CATL 2022 Annual Report (宁德时代新能源科技股份有限公司 2022 年年度报告).” CATL, March 2023.
- Shepardson, David. “Rubio takes aim at planned Ford US battery plant using Chinese technology.” Reuters, March 9, 2023.
- Razdan, Khushboo. “Opponents of Michigan EV Battery Plant Hone in on Chinese Firm’s Communist Party Cell.” South China Morning Post, April 12, 2023.
- “GE Agrees to Sell Appliances Business to Haier for $5.4B.” GE News.
- “2022 Annual Report.” Haier Smart Home Co., Ltd., March 30, 2023.
- “2022 Annual Results.” TCL Electronics, March 10, 2023.
- Olcott, Eleanor, and Arash Massoudi. “Shein Gives Investors Lofty Revenue Projections as It Prepares for IPO.” Financial Times, February 17, 2023.
- Rankings for both stores were accessed as of April 13, 2023.
- Morse, David. “The Pleasure Island of Shein.” Coalition for a Prosperous America, February 2023.
- Shut Down Shein. “Coalition Launches to ’Shut Down Shein,’ Protect Americans from Foreign Influence.” PR Newswire, March 23, 2023.
- Shoaib, Maliha. “Shein’s New Resale Programme Won’t Make It Any More Sustainable.” Vogue Business, October 18, 2022.
- Kaufman, Nicholas. “Shein, Temu, and Chinese e-Commerce: Data Risks, Sourcing Violations, and Trade Loopholes.” U.S.-China Economic And Security Review Commission, 28 Mar. 2023.
- Congressional-Executive Commission on China. “Bipartisan Group of Lawmakers Seeks Answers from Administration About Enforcement of Forced Labor Legislation.”