Big US tech profits from Chinese ad spend

The trade relationship between China and the United States is subject to a lot of friction. But at least one area is booming: Chinese startups looking to establish themselves in the West are spending billions of dollars advertising services owned by some of Silicon Valley’s biggest tech companies.

Temu, the international arm of Chinese e-commerce giant Pinduoduo, is flooding Google with ads for absurdly cheap goods. With an IPO on the horizon, fast-fashion retailer Shein is flooding Instagram with ads for clothing and accessories at rock-bottom prices. Developers of Chinese video streaming and gaming apps are dumping marketing dollars into Facebook, X and YouTube to entice potential users.

Meta, the parent company of Facebook and Instagram, said on a call with analysts that China-based advertisers were responsible for 10 percent of revenue, almost double what it was two years ago. According to Meta’s Ad Library, Temu has placed approximately 1.4 million ads across Google services worldwide in the past year, and at least 26,000 different versions of ads on Meta.

“What companies like Temu have done is basically just pour a huge amount of money into advertising,” said Sky Canaves, senior retail analyst at eMarketer. “You can’t escape their ads on Facebook, Instagram and Google Search.”

The increase in spending shows how interconnected China and the United States remain, despite strong efforts by each country to become more self-reliant. The Chinese companies gain access to a large consumer base, and the Silicon Valley companies make money from a market in which they would otherwise not do business.

The marketing blitz is fueled by the global ambitions of Chinese start-ups. Domestically, the economy is no longer growing by leaps and bounds as it has for years, and companies are subject to a tangle of government regulations that have stymied their growth.

The crackdown on companies like e-commerce giant Alibaba and once high-flying ride-share provider Didi underscored the message that a company, no matter how successful, can be brought to its knees if it clashes with the Chinese Communist Party and its leader Xi Jinping.

“There is a limit to how much a company can grow in China,” said Andrew Collier, founder of Orient Capital, an economic research firm in Hong Kong. “Xi Jinping is very happy with Chinese companies making money abroad, as long as they toe the line within China.”

But operating globally has a price. It’s difficult to attract significant amounts of digital attention without paying Google’s parent companies, Alphabet and Meta. Together, the two companies sell the majority of all Internet advertising largely through their online sites such as Google Search, YouTube, the Google Play App Store, Facebook, Instagram, WhatsApp and Messenger.

For the most part, Alphabet and Meta products are not available in China. Attempting to offer their services in China meant having to comply with Chinese government censorship, leading to protests from employees at both companies.

Alphabet and Meta have such a wide reach in the rest of the world that Chinese companies are now turning to them.

The rush to release Temu and Shein has “single-handedly” driven up the cost of digital advertising, Etsy CEO Josh Silverman said on a call with analysts in November.

Discount Chinese e-commerce companies have attracted increasing attention in the United States in recent years, enticing buyers with cheap goods as inflation pushed up prices.

Temu opened its US location in September 2022. It sold things like a garlic press for $2 or a cotton swab dispenser for $1.50. Temu is now available in 50 countries.

With the tagline “Shop Like a Billionaire,” Temu is a voracious buyer of all forms of advertising, from cheap Facebook ads to expensive spots during the Super Bowl. Temu has the deep pockets of PDD Holdings, which operates Pinduoduo.

Bernstein Research estimates that Temu spent $3 billion on marketing last year. In a lawsuit filed against Shein in December, Temu said it serves about 30 million daily users in the United States. According to Sensor Tower, an app analytics company, Temu’s app is the most downloaded in both Apple and Google’s app stores.

Shein, which entered the U.S. market about seven years ago, also continues to spend aggressively on marketing. It does not sell products in China, although it is founded in Nanjing and relies heavily on Chinese vendors and the country’s supply chain.

Last year alone, approximately 80,000 ads appeared on Google, including product ads that appear next to search results. On Meta, Shein has more than 7,000 active ads, according to Meta’s Ad Library.

For Temu and Shein, heavy spending on Facebook is no guarantee of success. Nearly a decade ago, Wish, another popular e-commerce app that focused on cheap goods from China, spent hundreds of millions of dollars on Facebook ads. But the retail app failed to keep shoppers interested. Last month, Wish was sold to Singapore’s Qoo10, another e-commerce platform, for $173 million, one-hundredth of its 2020 stock market value.

Shein and Temu allow third-party sellers to upload product images directly to Meta’s advertising systems and display those products in their ads on Instagram and Facebook. These ads, which are targeted to users’ interests based on Meta’s vast amount of data, are generally more effective at attracting buyers.

Advertising spend is not limited to retailers. In recent months, Instagram has been flooded with previews of addictive short dramas: soap operas for users with limited attention spans. Each episode is usually one minute long and the series consists of approximately 80 to 100 episodes.

The shows are often overly dramatic, with catchy titles like ‘My billionaire husband’s double life” or “30 days before I marry my husband’s nemesis.”

These short dramas are popular in China, and a handful of companies – apps like Reelshort, DramaBox and FlexTV – are competing to export this form of entertainment. Instead of selling monthly subscriptions like Netflix, for example, the short-form apps use a model similar to online games, requiring users to purchase so-called coins that can be used to pay for episodes. A viewer can also earn coins by watching commercials.

Like games, these apps need a steady stream of users to get hooked on previews of the programs and feel compelled to spend money to see how the show ends. On Meta, DramaBox shows more than 1,000 active ads, according to Meta’s Ad Library, while Reelshort and Flex TV show hundreds of ads.

Another major Chinese advertiser on Meta is a Hong Kong-based game developer called First.Fun. The developer appears to be covering Facebook, Instagram, and even X with ads to promote its flagship game, Last War: Survival, with hundreds of paid previews.

The previews have enticed players to download the app. It is the fifth most downloaded app on Google Play and the 12th in Apple’s App Store.

Sensor Tower estimated that the game generated $22 million in revenue last month.

Marketing on platforms like Meta has given game developers a lifeline to customers outside the country as the Chinese government has made it harder to do business. The most recent example was in December, when Chinese regulators announced plans to limit how much money people could spend on online video games. The agency that drew up the plans withdrew its original proposals amid the protests, but Beijing has taken an increasingly hardline stance against the gaming industry.

The message has not been lost on game developers. On its website, Beijing Yuanqu Entertainment, the parent company of First.Fun, says it is focusing purely on overseas markets as it “firmly believes that China’s Internet industry will continue to internationalize.”

Claire Fu reporting contributed.