Has the dream of TikTok, Xiaohongshu, and the Chinese internet conquering the world been shattered?

Last week, after about 500,000 American users flocked to the Chinese social media app Xiaohongshu to protest the U.S. government's impending ban on TikTok, the platform was filled with adorable and heartwarming moments.

These self-proclaimed "TikTok refugees" paid a "cat tax" to join Xiaohongshu by posting photos and videos of their cats. They answered many questions from their new Chinese friends: Is it true that in rural America, every family has a big farm, a big house, at least three kids, and several big dogs? Do Americans have to work two jobs to support themselves? Are Americans really bad at geography, with many thinking Africa is a country? Do most Americans get two days off a week?

Americans also asked their new friends questions. "I heard every Chinese person has a giant panda," one American Xiaohongshu user wrote. "Can you tell me how I can get one?" A user from Jiangsu Province replied with dry humor: "Trust me, it's true," and posted a photo of a panda doing laundry.

I spent hours scrolling through the so-called cat tax photos, chuckling at the cute and sincere replies. This is what the internet is supposed to do: connect people. More importantly, from a purely product perspective, Xiaohongshu demonstrates the competitiveness of any random Chinese social media app.

With a billion internet users in China and a hardworking, resourceful army of engineers, Chinese internet platforms are world-class in design, functionality, and user experience, as TikTok previously and Xiaohongshu now have shown.

But why aren't more people outside China using Chinese apps?

There was a time when China's internet giants seemed ready to take over the world. Remember the excitement when Alibaba had its initial public offering in New York in 2014? Remember when Didi acquired Uber's China brand, Youbu, in 2016? Remember when Facebook imitated WeChat and a partner at Silicon Valley firm Andreessen Horowitz touted the power of WeChat's features? At one point, five of the world's top ten internet companies by market value were Chinese. Today, Tencent, the creator of WeChat and a gaming company, is the only Chinese internet company still in that league.

China's biggest internet companies still make products that can compete with any in the world. Their employees work harder than their Silicon Valley counterparts. (Many are on the "996" schedule, working from 9 a.m. to 9 p.m., six days a week.) Despite the U.S. ban on exporting high-end semiconductors to China, they have still made remarkable progress in artificial intelligence. But the world seems to have forgotten China's internet leaders, viewing them only as part of a technological and geopolitical threat.

The internet industry has failed to live up to people's expectations. Why? How did it happen?

In 2017, I wrote a column in another publication titled "Behind the Great Firewall, China's Internet Is Booming." I told English-speaking readers not to focus solely on China's censorship and its impulse to copy Western companies, because China was developing its digital industry at an incredible scale and speed.

That year, Tencent's revenue grew 56%, and e-commerce giant Alibaba's revenue soared 60%. Didi raised nearly $10 billion, mostly from international investors.

All of that seems like a lifetime ago. Now, it's much harder for Chinese internet companies to thrive.

China has fallen into its worst economic downturn since the Mao era. Not many people believe the government's announced 5% growth rate for 2024. Consumer confidence is low, and Uniqlo and Starbucks, two consumer brands that thrived in China for years, are losing customers to cheaper brands.

When a country's economy is in bad shape, it's hard for one of its pillar industries to perform well. Tech companies' earnings reflect this.

As China's population continues to decline steadily, having fallen for three consecutive years, it's hard for big tech platforms to find new users. WeChat already has about 1.4 billion accounts, more than China's population. Even second-tier social media apps like Xiaohongshu, popular with young, affluent, urban women, have only accumulated over 300 million users. For these companies, international expansion is a natural next step.

ByteDance, TikTok's parent company, has become the envy of the industry due to its overseas success, with its international business growing much faster than its domestic one.

But the U.S. effort to ban TikTok highlights the difficulty Chinese internet companies face in expanding overseas. As the Chinese Communist Party tightens control over the private sector, countries around the world have become increasingly reluctant to entrust their citizens' personal data to Chinese companies that ultimately answer to Beijing.

The outside world, including the U.S. government, has good reason not to trust these companies. In a country where the government owns almost everything and often wields state power arbitrarily and ruthlessly, the private sector has always walked on thin ice. Internet companies are subject to strict scrutiny and must self-censor to survive. In recent years, all major companies, without exception, have had apps removed from app stores or faced fines or penalties from regulators.

It is well known that Chinese leader Xi Jinping does not like the digital industry unless it is used to advance his national rejuvenation agenda.

"The real economy is the foundation of a country's economy and the source of its wealth," he said in 2018. "Economic development must never deviate from the real to the virtual at any time."

Xi has made clear in that speech and on other occasions that he prioritizes advanced manufacturing over the internet industry, and he prefers state-owned enterprises over private ones.

This set the tone for the government's crackdown on Alibaba, Ant Group, Didi, and Tencent's video game business in 2020 and 2021. China's strict "zero-COVID" measures paralyzed the economy in 2022, causing some of the biggest internet companies to post financial losses for the first time in years.

Around this time, China's "wolf warrior diplomacy" and its close ties with Russia forced many countries to reconsider their view of China as a vital part of the global economy. Some now see China as a threat to democratic institutions and world peace. Many Western countries have a worse view of China than a decade ago, and fewer people are interested in visiting China.

China's internet companies and investors are increasingly caught between an authoritarian government at home and suspicion or even hostility abroad.

Due to tense geopolitics and China's unpredictable policies, most Western investors now consider China's tech sector not worth investing in.

Endowment funds and pension funds at U.S. universities have stopped giving money to venture capital firms to invest in Chinese startups. A generation of Chinese investors who helped create some of the most successful tech companies have begun lives of golf, marathons, and hiking.

Investors in stock markets around the world are similarly uninterested in Chinese internet companies.

One investor recently told me that when she joined a hedge fund that once managed over $100 billion in 2017, about 40% of its emerging market holdings were Chinese tech stocks; now it's less than 3%. The person was not authorized to comment publicly and asked not to be named.

The ecosystem that once nurtured a vibrant tech industry has been damaged. Reduced investment means fewer startups, far fewer companies doing IPOs overseas, and Chinese tech companies' stock valuations are much lower than their U.S. counterparts'. Xiaohongshu, the social media app that U.S. TikTok users have turned to, was founded in 2013 and has not yet gone public.

The investor said these companies are still competitive. But she also said that in the eyes of the world, they no longer have value.

Source: New York Times