Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: And now onto today's show.
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Speaker: Hello from HSBC Hong Kong and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Harold van der Linde, head of Asian Equity Strategy, back in the hot seat.
Speaker: Fred's away.
Speaker: Actually, I haven't seen Fred for quite a few weeks now, but rest assured we will be reunited soon.
Speaker: On today's podcast, we're asking, should US and European online retailers be getting worried as Chinese players expand beyond their home market?
Speaker: My guest is Charlene Liu, our head of Asia, internet and gaming research, and she's based in Singapore.
Speaker: She'll be bringing us up to date on which Chinese names are pushing abroad and why.
Speaker: From HHBC's Global Research, you're listening to Under the Banyard Tree.
Speaker: If you happen to be watching the Super Bowl a couple of weeks ago, or more specifically the commercials during it, you might have noticed some computer animated figures dancing around to a catchy jingle with the tagline, shop like a billionaire.
Speaker: Well, that advert was for Temu, a budget-friendly Chinese online retailer that's breaking into the US market.
Speaker: And it's not the only one.
Speaker: Many of China's most widely used e-commerce platforms are looking abroad for business and stepping up competition in the West.
Speaker: Joining me to talk through this is Charlene Liu, Head of Asian Internet and Gaming from Singapore.
Speaker: Charlene, welcome to the podcast.
Speaker: Thank you for having me.
Speaker: So tell us, why are these Chinese internet companies so eager to go into other markets?
Speaker: And what is the market size we're really talking about?
Speaker: Sure.
Speaker: Obviously, you know, these China e-commerce giants are looking overseas because the growth at home has started to really slow down.
Speaker: There are a combination of factors.
Speaker: I mean, first is, you know, e-commerce already account for 37 percent of total retail spending in China.
Speaker: And that's in 2022, meaning penetration is already quite high.
Speaker: And obviously, you know, recent macro slowdown had weakened consumption as well.
Speaker: But the most important reason, like you mentioned correctly, Harold, is that the opportunity sitting outside of China is massive.
Speaker: We're looking at USD 2.6 trillion e-commerce market outside of China, and that could provide tremendous opportunities for these guys.
Speaker: So where are these opportunities around the planet?
Speaker: So I think we will highlight two being U.S. and Western Europe as the top two most attractive markets that they can branch into.
Speaker: U.S., you're probably looking at a one trillion e-commerce sales, and that's back in 2022.
Speaker: Penetration at 22%.
Speaker: I mentioned China's is already sitting in 37%.
Speaker: Western Europe is a smaller market.
Speaker: We're talking about roughly 560 billion USD.
Speaker: But penetration rate is even lower at 16%.
Speaker: Both offers tremendous opportunities, like I said.
Speaker: So when we're talking about penetration, we're talking really about people going to an online shopping platform instead of walking to a shop and buying their stuff over there, right?
Speaker: And that's 37% in China, 22%, I believe you said, in the US and even lower in Europe.
Speaker: So these Chinese companies have...
Speaker: have really been able to develop that domestic market, learn their lessons, know how to do that, and trying to bring that now into the US and into Europe.
Speaker: I know a lot of companies in China are working on this, but there are kind of three, four companies that are really at the forefront of this, right?
Speaker: Who are these players and what do they do, Charlene?
Speaker: You're absolutely right.
Speaker: There are four major players, two that the audience might be more familiar with, and that's Alibaba and TikTok.
Speaker: And there's also Timu as well as Sheen.
Speaker: So Alibaba obviously is a very well-established e-commerce player, and they're already big in EU, ASEAN, South Korea and Latin America.
Speaker: TikTok, on the other hand, is a short form video platform, and they make money through live streaming e-commerce, whereby they try to sell their goods by tapping into users' interests.
Speaker: The other two, TmU is in fact the overseas arm of China Pinduoduo.
Speaker: And again, like Alibaba, they are a full-fledged retail platform and they do aggressive marketing efforts.
Speaker: So, you know, earlier on we mentioned, you know, they were featured on Super Bowl, right?
Speaker: Last but not least is Sheen and they started out as a fashion retailer.
Speaker: They have now by this point expanded to become kind of a full range product model.
Speaker: But they were known or they became popular because they had a very responsive supply chain, which allowed them to very efficiently design, produce and distribute trendy and low price clothes in a short period of time.
Speaker: Thanks, Charlene.
Speaker: Well, let's take a quick break and then I want to focus on two questions.
Speaker: How are they going to build out their businesses?
Speaker: And what are really the challenges and the risks that they're facing in doing so?
Speaker: Hello listeners, this is not the Super Bowl or a Chinese e-commerce ad, but we do have a half-time message of our own.
Speaker: We want to tell you about HSBC's Global Investor Summit, which is just over six weeks away.
Speaker: It's being held right here in Hong Kong, bringing together investors, corporates and business thought leaders from across Asia and the world, including our own analysts here at HSBC Global Research.
Speaker: That's the HSBC Global Investor Summit on the 8th to the 10th of April 2024.
Speaker: HSBC clients reach out to your representative for more details and to secure your spot.
Speaker: Now back to Harold and Charlene.
Speaker: Welcome back.
Speaker: We've talked about Chinese internet giants that are trying to branch out beyond the domestic markets.
Speaker: We've seen there's a tremendous market opportunity there.
Speaker: Different companies have a sort of different models that they try to explore in getting there.
Speaker: So, Charlene, how are these companies trying to get into, say, the US and the European markets and how they try to be different than the existing players and try to gain market share there?
Speaker: Sure.
Speaker: I think one key point of differentiation is that they really leverage their budget-friendly product offerings.
Speaker: So to give you a sense, products on Timo on average are 60 to 80% cheaper than those offered on Amazon.
Speaker: Obviously, Timo, for example, again, using them as an illustration, innovative business models that they've introduced, like the consignment model,
Speaker: whereby basically if it's a merchant, they can just hand over their goods and they take care of everything from fulfillment to marketing, etc.
Speaker: has really helped to boost participation from the small and mid enterprise merchants that help to enrich the offering there.
Speaker: So these are some of the strategic differences that they introduced here.
Speaker: And from a geographical standpoint, obviously different platforms approach this market slightly differently.
Speaker: Temod obviously has made huge progress in the US, marketing Super Bowl, like we mentioned earlier, but Alibaba, for example, which I mentioned, they were already big in many other markets, chose to relatively shy away from the US market.
Speaker: So not on full force there.
Speaker: And because they are taking into consideration dual political risks.
Speaker: So the opportunities there, these companies have different models, but there are all sorts of risks and challenges that they need to overcome.
Speaker: Can you summarize a little bit what the problems are that they need to really think about?
Speaker: Sure.
Speaker: So geopolitical and regulatory risks are definitely among the biggest obstacles when expending overseas.
Speaker: One example is in the U.S., imports of value below $800 USD are exempted from tariffs.
Speaker: And currently, it really benefits platforms like Shein's and Timo.
Speaker: But then, you know, there are news around it being a potential 60 percent terror proposed by Trump.
Speaker: All of that could impact U.S. demand for Chinese goods, obviously.
Speaker: Actually, if we were to kind of draw from lesson learned, AliExpress in Europe, when the new 21% in part VAT was being introduced, tax that is, we saw definitely a sharp fall in orders.
Speaker: Outside of geopolitical and regulations risk, there are also considerations or challenges.
Speaker: First would be logistics infrastructure or the lack of that is.
Speaker: Middle East would be a market that would be really representative of that challenge.
Speaker: There's obviously cultural differences.
Speaker: So for example, we mentioned
Speaker: You know, social e-commerce, it was not as popular in the US and Europe market, at least at the start.
Speaker: So, you know, platforms like TikTok would really need to educate their users there.
Speaker: Last but not least, you know, Forex exchange fluctuations there would also introduce some challenges here and there.
Speaker: I think Turkey being an excellent example.
Speaker: So Charlene, what you're telling me is that because of kind of weak demand and the fact that e-commerce is already really established in China, these companies are looking for opportunities offshore, so outside of China, and particularly the US and Europe.
Speaker: We're talking about trillions of dollar market opportunity.
Speaker: We've identified the key players.
Speaker: We know that they try to come into these markets to compete on lower prices, discounting, consignment models, as you call it, but also focusing on different geographies in these areas.
Speaker: And we know that geopolitics, cultural differences, regulations are some of the key risks here, right?
Speaker: So that's what's developing here.
Speaker: So let me end with one final question.
Speaker: If I would be a major player in having an e-commerce platform in the US or Europe or anywhere in the world, how worried should I be about these Chinese companies entering my home territory?
Speaker: Sure, you know, Chinese players, like you said, would definitely bring competition with them.
Speaker: But then our view is that in the U.S. and Korea, the existing players should be more resilient and should see limited impact from the new competition, partly because of their products offering, because of their superior customer services and logistics set up.
Speaker: But, you know, social commerce can be a potential threat because it is a new business model.
Speaker: And that is particularly true in ASEAN.
Speaker: So players there might see themselves, you know, increasing spending on sales and marketing.
Speaker: And, you know, that brings me to the last point.
Speaker: Some of the social media platform would therefore benefit potentially from this, from increased spending because it could mean higher advertising budget.
Speaker: Fantastic.
Speaker: So it looks like there's a great opportunity, but how these companies are really going to grab that and the competition here is going to be the big story for these companies over the next couple of years.
Speaker: And I suspect we will have to revisit it in future podcasts to see how this is unfolding for these Chinese internet companies, as well as actually for the Asian, European and the American companies.
Speaker: Charlene, thank you very much.
Speaker: The pleasure is mine.
Speaker: Well, that about wraps things up for another edition of Under the Banyan Tree.
Speaker: Great to be back with you and looking forward for Fred to come back as well.
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Speaker: Thanks as always for tuning in.
Speaker: We'll be back again, same time, next week.
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