ByteDance Faces Growth Slowdown in China Amidst Douyin's Decline, While TikTok Thrives Overseas
ByteDance, the parent company of TikTok and its Chinese counterpart Douyin, is experiencing a significant slowdown in growth within China. Despite its rapid rise fueled by advertising revenue and e-commerce expansion, recent reports indicate a deceleration in ad revenue and e-commerce sales on Douyin. Meanwhile, TikTok's operations in Europe and the United States tell a different story, showcasing robust growth in advertising and e-commerce sectors. This contrast highlights the shifting dynamics of the global digital market and poses critical questions about ByteDance's future strategies.
ByteDance's Growth Slowdown in China
In late 2020, ByteDance founder Zhang Yiming cautioned that the company had "used up all its big moves," signaling potential challenges ahead. His prediction seems prescient as the company's primary revenue driver—advertising—is now losing momentum. In the first three quarters of this year, ByteDance's China division saw its ad revenue growth plummet from approximately 40% to less than 17% year-over-year. This significant decline underscores the intensifying competition and market saturation in China's digital advertising space.
E-commerce Challenges on Douyin
A substantial portion of ByteDance's advertising revenue—over 50%—is derived from merchants on its platform. However, Douyin's e-commerce sales growth has dwindled from over 60% at the start of the year to less than 20% in September. This downturn is attributed to a fiercely competitive low-price environment and a profit-sharing model with livestreamers that eats into margins. The platform's initial success in leveraging livestream e-commerce is now facing headwinds as consumers and merchants alike seek more sustainable and profitable avenues.
Limited Growth in Life Services
Despite efforts to diversify, advertising revenue from life services businesses remains under 5% of ByteDance's total ad revenue. The company's expansion into this sector is being stymied by competitors like Meituan, whose defensive strategies are slowing ByteDance's progress. Meituan's stronghold in local services and its robust merchant network present significant barriers to ByteDance's ambitions in this arena.
Douyin's Shifting E-commerce Strategy
Originally, Douyin focused heavily on livestream e-commerce, capitalizing on the popularity of real-time engagement with consumers. Recognizing the need for diversification, the platform later introduced the "Douyin Mall," allowing users to browse and search for products more traditionally. In an aggressive move to capture market share, Douyin adopted a low-price strategy in 2023 to compete with platforms like Pinduoduo and Taobao. However, this approach led to diminishing returns. The recent shift away from focusing solely on low prices has resulted in a significant slowdown in sales growth, indicating the challenges of balancing competitive pricing with profitability.
Life Services Business Faces Hurdles
ByteDance's foray into the life services sector saw impressive initial growth, ballooning from zero to over 300 billion yuan in sales within two years. Yet, this rapid expansion attracted intensified competition from Meituan in late 2023. Under new leadership from Pu Yanzi, the company shifted its focus to expanding its merchant base rather than competing solely on price. This strategic pivot included restructuring sales teams and adjusting compensation models to enhance efficiency. Despite these efforts, overcoming Meituan's entrenched position remains a formidable challenge.
Challenges in Competing with Meituan
Meituan's dominance stems from its strong ground presence and tight control over merchants. The company has bolstered its position by enhancing its membership system and offering targeted discounts, making it difficult for ByteDance to match these localized incentives. ByteDance's attempts to replicate Meituan's success are hindered by its relative lack of experience in local services and the substantial investments required to build a comparable infrastructure.
Organizational Changes and Impact on Non-Core Businesses
In response to these challenges, ByteDance restructured into six business units in late 2021. This reorganization aims to allow for clearer financial accountability among different segments. However, the ripple effects have been felt across the company, with non-core businesses like VR (Pico) and gaming divisions experiencing significant layoffs. The Feishu (Lark) team, ByteDance's enterprise collaboration tool, also faced substantial staff reductions. These cuts indicate a strategic refocusing on core competencies amid slowing growth.
Future Outlook for ByteDance
The next three months are critical for ByteDance, particularly with the upcoming fourth-quarter e-commerce season. If growth fails to rebound, the company may need to reevaluate its business priorities and consider further reductions in non-core areas. The sustainability of livestream e-commerce is under scrutiny, with some experts skeptical about its long-term potential. High commission rates for hosts—ranging from 15% to 40%—contrast sharply with platforms like Alibaba, which only takes about 5%. This discrepancy raises concerns about the profitability and scalability of the livestream model.
"I've never been optimistic about livestream e-commerce. It's likely that its share of the overall e-commerce market will max out at around 30%. In livestream e-commerce, the platform, hosts, and merchants all need to make money, and the hosts usually take a high commission. The logic behind livestream e-commerce is essentially to fleece naive consumers, and such consumers won't make up a large proportion of the market."
Contrasting Success: TikTok's Growth in Europe and the USA
While ByteDance grapples with challenges in China, its international arm, TikTok, is experiencing rapid growth in Europe and the United States. As of 2024, TikTok has evolved from a popular short-form video app into a significant player in digital commerce and advertising in Western markets.
TikTok Shop Expansion
TikTok has been aggressively expanding its e-commerce platform, TikTok Shop, allowing businesses to sell directly to users within the app. Initially launched in Southeast Asia, the service has rapidly expanded into the U.S. and parts of Europe. TikTok's native shopping experience integrates social interaction with seamless purchasing, making it highly effective for product discovery and impulse buying. Brands and creators are increasingly using TikTok Shop to promote and sell products directly in videos, solidifying the app as a central hub for social commerce.
Partnerships and Live Shopping
The platform has been partnering with large retailers and e-commerce platforms to integrate product catalogs and facilitate smoother transactions. Live shopping events, where influencers and brands sell products in real-time through TikTok live streams, are gaining popularity in Europe and the U.S., drawing inspiration from China's successful live shopping culture.
Enhanced Advertising Capabilities
TikTok's advertising ecosystem has matured, offering sophisticated targeting options and various ad formats, including:
- In-Feed Ads: Native video ads that blend seamlessly with user-generated content.
- Branded Hashtag Challenges: Campaigns that encourage user participation and can go viral, driving significant engagement.
- Shoppable Ads: Ads linking directly to products, allowing quick purchases within the platform.
Major brands across sectors like fashion, beauty, and technology are investing heavily in TikTok ads due to the platform's strong engagement with Gen Z and millennial audiences.
Influencer Marketing and Affiliate Programs
Influencers remain a cornerstone of TikTok's ecosystem. The platform's Creator Marketplace and affiliate marketing programs enable influencers to promote products and earn commissions from sales. This approach has been particularly successful in the beauty and fashion industries, where creators can link products directly in their content.
Capturing the Younger Demographic
TikTok's user base primarily consists of Gen Z and millennials, who are more accustomed to discovering and purchasing products through social media than previous generations. The app's format of short, entertaining videos makes it an ideal platform for quick product pitches and has led to a cultural shift in shopping habits.
AI and Algorithmic Personalization
TikTok's powerful recommendation algorithm plays a crucial role in product discovery, matching users with content and ads that align with their interests. This personalization increases ad effectiveness and conversion rates, making TikTok particularly attractive for e-commerce.
Will China's Slowdown Impact TikTok's Western Growth?
The slowdown of ByteDance's e-commerce and advertising growth in China raises questions about potential challenges for its operations in Europe and the U.S. However, several factors differentiate the dynamics in China from those in Western markets.
Market Saturation and Competitive Landscape
- China: The market is highly saturated with intense competition from established platforms like Meituan, Alibaba's Taobao, and Pinduoduo. Aggressive pricing strategies have led to profit erosion.
- Europe and U.S.: The e-commerce and short-video advertising markets are still growing, with fewer direct competitors. There's more room for expansion as TikTok continues to innovate and capture market share.
Livestreaming E-commerce Differences
- China: Livestreaming e-commerce is more mature and is facing challenges like high commission fees and market saturation.
- Europe and U.S.: Livestream e-commerce is still in its early stages, with significant growth potential as it gains traction among younger audiences.
Advertising Trends and Consumer Behavior
Western markets exhibit different consumer behaviors and preferences. While there may be long-term concerns if similar structural issues arise, TikTok's current growth trajectory in Europe and the U.S. remains robust.
Intensifying Competition Drives Chinese Platforms to Expand Globally
The cutthroat competition in China's short video e-commerce and advertising sectors is prompting other major Chinese platforms to accelerate their global expansion, particularly into Europe and the U.S.
Why Chinese Platforms Are Eyeing Western Markets
- Saturated Domestic Market: With limited room for growth in China, companies like Kuaishou, Xiaohongshu (Little Red Book), and Bilibili are exploring international opportunities.
- Emerging Demand: Western markets are showing increasing interest in livestreaming and social commerce, areas where Chinese platforms have significant expertise.
- Technological Advantage: Chinese platforms can leverage their advanced technologies and successful models to capture new audiences.
Strategies for Global Expansion
- Localized Approaches: Adapting content and pricing strategies to suit local consumer behavior.
- Leveraging Livestream and Short-Video Commerce: Introducing "shoppertainment" models that combine entertainment with instant purchasing options.
- Building Cross-Border Ecosystems: Facilitating direct access to Chinese products for Western consumers through integrated e-commerce ecosystems.
Challenges Ahead
- Cultural and Regulatory Barriers: Navigating differences in consumer behavior and complying with strict data privacy and content regulations.
- Established Competition: Facing formidable rivals like Meta and Google, which have deep resources and existing brand relationships.
- Monetization Models and Trust: Adjusting commission structures and building consumer trust amid geopolitical concerns.
Potential Platforms to Watch
- Kuaishou: Operating internationally under Kwai and SnackVideo, it could challenge TikTok with its short video and social commerce expertise.
- Xiaohongshu (Little Red Book): With its focus on fashion and lifestyle, it appeals to consumers seeking curated shopping experiences.
- Bilibili: Targeting niche communities in anime and gaming, it could leverage its community-driven model for global growth.
Conclusion
ByteDance's slowdown in China highlights the challenges of maintaining rapid growth in a saturated and highly competitive market. While Douyin grapples with declining ad revenues and e-commerce sales, TikTok continues to flourish in Europe and the U.S., capitalizing on untapped potential and cultural shifts toward social commerce. The contrasting fortunes underscore the importance of market dynamics and strategic adaptation. As Chinese platforms look beyond their borders, their success in global markets will hinge on their ability to localize strategies, navigate regulatory landscapes, and compete with established players. The next few months will be critical for ByteDance and its peers as they navigate these complex challenges and opportunities on the international stage.