Banned online giants make billions in China
Despite bans, China is lucrative for online giants, writes Laurence Dodds
Mark Zuckerberg’s stance seemed unequivocal. Facebook, he pledged in a speech, would not operate in China, would not cooperate with the Chinese Government and would fight for an internet defined by American values. What he did not mention on that day last October was that Facebook had already raked in billions of dollars in advertising revenue from the People’s Republic — just one of many US tech firms that have found a lucrative back door in China’s famous “great firewall”.
It is fairly common knowledge that major Western web services such as Facebook, Google and Snapchat are banned in mainland China.
What fewer people realise is how many of them have found a way to make money there regardless by selling adverts to Chinese companies operating in overseas markets. Together, the three firms above are estimated to have made as much as US$14.8 billion ($23b) from China in 2019, even as the trans-Pacific tech war escalated to new heights of rancour.
“Companies in China want to become global, and they see Facebook and Google as a method to do that,” says Greg Paull, co-founder of R3, a marketing consultancy that counts Huawei and Tencent as clients. “Some of the [Western] companies that are banned in China are actually some of the most successful.”
Tech firms are very shy about giving figures. Facebook, Google, Twitter and Reddit all declined to give details of their Chinese revenue, while Pinterest did not respond to a request for comment. Only Snapchat deigned, in public financial documents, to disclose part of its haul (US$45 million in the three months to September 2019). Still, independent estimates give some idea of how big the market could be.
For Google, Paull estimates a Chinese take of about US$4b in 2019. Facebook appears to do even better: Brian Wieser, head of business intelligence at ad agency GroupM, calculates it made US$5.4b to US$10b last year. The latter figure would make China its second-biggest market after the US.
“Facebook is committed to becoming the best marketing platform for Chinese companies going abroad,” it said on social media in November.
Jamie MacEwan, a China expert at Enders Analysis, says Western firms “can cream off Chinese ad money without exposing themselves to the political and operational risks of running an app there”.
The Chinese Government gets help shifting the economy away from low-value manufacturing towards hitech industries. Chinese firms get “a useful marketing channel to reach foreign consumers and change perceptions about Chinese goods”.
Paull says ads are bought by everyone from huge outfits such as Alibaba and Lenovo, which spend hundreds of millions of dollars, to tiny fashion brands that sell directly to foreign buyers on Instagram.
Selling ads on a service that customers are forbidden to use has challenges. Chinese buyers are often unfamiliar with Western apps, and lack an instinctive grasp of how ads will be viewed. Many Western firms sell their ads through local partners such as Baidu, the dominant search engine.
A bigger problem is many Chinese buyers are directly competing with the companies they buy from. Bytedance, which owns video app TikTok, briefly became Facebook’s biggest Chinese customer while simultaneously ploughing US$300m into Google ads. But in 2019 it cut its spending drastically as it began to build its own ad sales network.
Finally, there are the political risks. When Twitter and Facebook shut down an alleged Chinese state disinformation campaign last August, a Government-linked Chinese think tank warned buyers “may have to reconsider whether the national interest is now at stake”.
“A full-blown trade war could lead Chinese advertisers to cut back on marketing their goods or services abroad,” says MacEwan. “The platforms could also be exposed to reputational risks in any scandal around Chinese online misinformation campaigns.”
Both MacEwan and Paull believe it is unlikely China would cut off the trade entirely. But it is just as likely that US companies might be forced to retreat by their own Government, which has already imposed harsh sanctions on Huawei.
If it goes further, the great Chinese back door might suddenly become a rather tight squeeze.
[Facebook, Google and Snapchat] are estimated to have made as much as US$14.8b from China in 2019