of the United Kingdom’s capitol city.
Since a balding hedge fund Vice President saw that internet usage was growing 2,300% per year, a single force has dominated commerce. As hundreds of millions began shopping online, a historic arbitrage opportunity existed for brands to rapidly scale through sheer mastery of marketing tactics on Meta, Google and Amazon.
The first edition in this miniseries argued that the arbitrage era was officially over. Our second edition explored the first new macro theme– the convergence of commerce and media and the notion of retailers as the fastest growing media businesses of this era. The third edition looked at the “three epochs of AI” in commerce and analyzed the ramifications of LLMs eating conventional product search.
But we’ve saved the biggest story for last: Chinese companies are rapidly disintermediating American firms from every aspect of commerce, with genuine brand building the final frontier left to conquer.
The fundamental raison d’etre of the American commerce operator is now an existential question. Commerce– already at the forefront of culture– is now going to be the main battleground of geopolitics for the next decade.
If you’re in this business, you’re in the great game.
Since a balding hedge fund Vice President saw that internet usage was growing 2,300% per year, a single force has dominated commerce. As hundreds of millions began shopping online, a historic arbitrage opportunity existed for brands to rapidly scale through sheer mastery of marketing tactics on Meta, Google and Amazon.
The first edition in this miniseries argued that the arbitrage era was officially over. Our second edition explored the first new macro theme– the convergence of commerce and media and the notion of retailers as the fastest growing media businesses of this era. The third edition looked at the “three epochs of AI” in commerce and analyzed the ramifications of LLMs eating conventional product search.
But we’ve saved the biggest story for last: Chinese companies are rapidly disintermediating American firms from every aspect of commerce, with genuine brand building the final frontier left to conquer.
The fundamental raison d’etre of the American commerce operator is now an existential question. Commerce– already at the forefront of culture– is now going to be the main battleground of geopolitics for the next decade.
If you’re in this business, you’re in the great game.
Since a balding hedge fund Vice President saw that internet usage was growing 2,300% per year, a single force has dominated commerce. As hundreds of millions began shopping online, a historic arbitrage opportunity existed for brands to rapidly scale through sheer mastery of marketing tactics on Meta, Google and Amazon.
The first edition in this miniseries argued that the arbitrage era was officially over. Our second edition explored the first new macro theme– the convergence of commerce and media and the notion of retailers as the fastest growing media businesses of this era. The third edition looked at the “three epochs of AI” in commerce and analyzed the ramifications of LLMs eating conventional product search.
But we’ve saved the biggest story for last: Chinese companies are rapidly disintermediating American firms from every aspect of commerce, with genuine brand building the final frontier left to conquer.
The fundamental raison d’etre of the American commerce operator is now an existential question. Commerce– already at the forefront of culture– is now going to be the main battleground of geopolitics for the next decade.
If you’re in this business, you’re in the great game.
Since a balding hedge fund Vice President saw that internet usage was growing 2,300% per year, a single force has dominated commerce. As hundreds of millions began shopping online, a historic arbitrage opportunity existed for brands to rapidly scale through sheer mastery of marketing tactics on Meta, Google and Amazon.
The first edition in this miniseries argued that the arbitrage era was officially over. Our second edition explored the first new macro theme– the convergence of commerce and media and the notion of retailers as the fastest growing media businesses of this era. The third edition looked at the “three epochs of AI” in commerce and analyzed the ramifications of LLMs eating conventional product search.
But we’ve saved the biggest story for last: Chinese companies are rapidly disintermediating American firms from every aspect of commerce, with genuine brand building the final frontier left to conquer.
The fundamental raison d’etre of the American commerce operator is now an existential question. Commerce– already at the forefront of culture– is now going to be the main battleground of geopolitics for the next decade.
If you’re in this business, you’re in the great game.
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The Tariff Paradox: Protection Becomes Surrender
The zeitgeist of commerce is held captive by what may or may not happen with tariffs under the incoming Trump administration. On the campaign trail, Trump proposed tariffs on Chinese imports as high as 60%, followed up by this week’s promise to enact 25% tariffs on all products from Canada and Mexico.
Trump, of course, has a known penchant for blending populist talk with Wall Street friendly policy. Mere days into his first Administration, President Trump summoned Anthony Scaramucci into his office with a simple and humble request: “Can we break up Amazon? I hate this son of a bitch Jeff Bezos and I hate the Washington Post." During Trump’s first administration, Amazon ended up adding $1T. For its part, Wall Street seems to expect that Trump’s tariffs are mostly messaging bluster, a campaign talking point that Bloomberg’s Joe Weisenthal says is not yet being taken “seriously or literally.”
Wall Street is overconfident. Trump has a unique talent for making certain types of powerful people feel like he’ll implement their unique vision of American prosperity, while convincing them that the parts they don’t like are populist fan fiction. He very well could be for real this time. No one knows.
If broad, sweeping tariffs are implemented and the price of essentials goes up for American consumers, it will paradoxically help China capture more of the value chain. When everything imported gets more expensive, American consumers will turn to the cheapest possible option, which will be an industrial operation direct from Shenzhen, not a kitchen table entrepreneur from Schenectady importing and reselling products.
In aggregate, the (admittedly, somewhat reductionist) case for tariffs is that they are a healthy dose of economic quinine that will lead to more diversification in where American brands source product, alongside reshoring efforts and healthier domestic supply chains. I can imagine policymakers across the aisle looking at Mike Beckham beaming on Simple Modern’s Oklahoma factory floor and feeling we need to built policies that encourage thousands of entrepreneurs to follow in this footsteps.
I’m fearful that our government will inevitably end up fighting the last war, implementing tariffs designed for a bygone era when China was just a manufacturer and not a purveyor of cheap goods. The American punditry and policy-making apparatus have a really firm grasp on the fact that most of what we buy is made in China. I fear few policy officials on either side of the aisle have a deep appreciation for how much is sold directly by and marketed by China.
Marketplace Pulse founder Juozas Kazuikenas points out that products that are strictly “made in China” are decreasing in share of US imports. The future is beginning to take shape: mostly Chinese companies that hawk goods that are “made” in India or Vietnam to American buyers. Targeted tariffs that build on the Biden administration’s efforts to end the de minimis loophole could help reverse this tide, but they require an astute understanding of the game being played.
Tariffs notwithstanding, demographic and economic trends in China will only make this dynamic more intense.
Historically, most of the large Chinese brands selling to US customers are middlemen who don't directly manufacture products. Most Chinese factory owners are baby boomers, while third-party sellers are millennials trained in the internet school of hard knocks. However, as generations turn over and margins get compressed for factories and third-party sellers alike, they are starting to combine forces and become one entity.
This is effectively a combination of brutally tough businesses– many factories run on 5-10% margins while Chinese reseller businesses are often in the 7-15% range. Balancing both the production of goods AND mastering the idiosyncrasies of selling on American marketplaces is a tough game.
But what other options do Chinese entrepreneurs ultimately have? Chinese demographics are no longer able to lead a consumption-driven economy, so Xi has to dump the excess capacity onto the US market, and American consumers gobble it up.
Beyond Temu: The Real Chinese Playbook
Of course, a huge amount of said excess capacity ends up on Temu, which has been on a two-year crusade to conquer America. For now, it’s still a rounding error in the broader story.
From a sheerly patriotic perspective, It’s one thing when Temu lights money on fire to advertise unprofitably on Facebook— I’ve joked before that Temu’s Meta ad blitz was a $6B sovereign wealth transfer from Beijing to American 401k and pension holders. It’s another when indie Chinese private label sellers– who more and more will now also own means of production– advertise directly on Amazon and profitably grow their operations. Chinese factory magnates and a $1T+ American hegemony growing at the expense of American small and medium sized businesses is….politically complicated to say the least.
For all the chatter about Temu in the investor and operator zeitgeist earlier this year, the revenue generated from Chinese-owned businesses selling exclusively on Amazon with names like DOKOTOO and NUTSAAKK is orders of magnitude bigger. American shoppers bought roughly $200 billion worth of products from Chinese-owned businesses on Amazon last year. This equates to approximately a net $70 billion that lands in Amazon’s pocket, not counting the money that Chinese brands spent advertising on Amazon. For comparison, the gross merchandise value of transactions on Temu totaled about $15 billion in 2023, with roughly 60% coming from the US.
The Occam’s razor on Temu is that it is a massively unsustainable, government-subsidized Ponzi scheme that will implode in a blaze of glory. To reach sustainability, Temu has to incept a massive swathe of American consumers with the notion that it is the cheapest place to buy goods while ultimately raising prices to near Amazon levels and offering slower delivery. There are some early signs that they are making incremental progress to that end but it’s a tall task to say the least.
But in the grand scheme of things, it doesn’t matter if they pull it off. Temu’s fundamental worldview won the moment Amazon decided to release Haul, its final affront to the concept of commerce as culture. Atlantic writer Ian Bogost calls Haul “an omen of the slop era of online shopping. Now shopping neither satisfies a need nor sates a desire. “It burns up time and moves money around,” says Bogost.
As Amazon rolled out Haul, a conglomeration of Chinese brands under a holding company called AuGroup was getting ready to list on the Hong Kong Stock Exchange at a $5B HKD valuation. AuGroup’s IPO filing includes a detailed account of “The Amazon Incident”, a period of time in 2021 when Amazon suspended thousands of seller accounts for comically egregious violations of their terms of service. AuGroup owned many of these accounts and took a $300M hit to their business. Yet, AuGroup still thrives on Amazon; the vast majority of the hundreds of seller accounts it operates left free to run their black hat playbook.
Amazon is nothing if not the ultimate coldly rational capitalist machine. The most powerful American company has examined the competitive landscape and decided that its future is existentially dependent on cozying up to Chinese entities with scale.
Amazon of course is now 5+ years into its courtship of Chinese sellers while Meta really ramped up action in China in the wake of the iOS 14.5 fallout three years ago. The new kids on the block are moving much faster. Just months into launching its eCommerce offering that is taking the industry by storm, AppLovin is thirstily looking to go right to the highest margin source. Your margin remains their opportunity.
When Brands Cross the Pacific
Six years ago, Scott Galloway gave a keynote at Code Commerce that in retrospect, predicted everything that has come to pass in this era of our business. It was effectively a lifetime ago in tech— voice technology and 3D printing were all the rage. With one sentence, he shot down the zeitgeist by proclaiming, “America has a 3D printer; it’s called China.”
Prof G’s broader point was that while China had taken over most facets of commerce, Chinese enterprise had yet to master even the most rudimentary facets of building recognizable brands: making brand-building the last great American moat. The talk is vintage Galloway—a mix of uniquely astute and self-evidently inane takes delivered with snarky cynicism, panache, and bordering on jingoistic American pride. But was it correct?
Even in 2018, Lenovo, Hisense and Haier had crossed the chasm into recognizable brand territory. This trend has only accelerated as Chinese brands born on US marketplaces have further entered the mainstream.
The real question may be one of perspective: Are Anker and Levoit truly brands? Whether they build these brands through intricate artistry or just by brute-force flooding the zone with ads does not matter; the end result is the same. Once upon a time, Toyota, Samsung, and Mitsubishi were just silly-sounding amalgamations of letters to American ears. Like so many things, brand recognition happens gradually, then suddenly.
One thing is for certain—the more commerce becomes a commoditized series of funnels and best practices, the quicker Chinese “capital B brands” will be built. China will make, sell, market, and cultivate commerce. In that vein, the greatest threat to American supremacy in commerce is the proliferation of the Shoppy Shop.
The Inevitability Trap
Almost exactly six years ago, the research firm CB Insights ran a cute little March Madness style poll that asked clients and followers one simple question: “Which company’s shares are best to buy and hold on to for 10 years?” The resulting infographic below is a beautiful little Silicon Valley time capsule.
In the final, Alibaba triumphed over Amazon with 63% of the vote. And how could it not? Between meteoric growth in China’s GDP, a burgeoning Chinese middle class, and the potential to bring AliExpress directly to the American consumer, Alibaba’s ascent to trillion trillion-dollar enterprise was inevitable.
My brother in commerce, if you did the sensible and obvious thing and bought 1,000 shares of Alibaba stock in late November 2017 for $191,900, you’d have (checks notes) $86,670 as of this writing. That’s good for a cool 53% loss, not factoring in pesky inflation. All this during a time when Alibab’s revenue grew by $100B and the Chinese economy grew by 7%+ YoY.
Nothing is inevitable. And I ask again, where in commerce does the value truly lie?
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