Last week, U.S. President Donald Trump signed two executive orders banning the U.S. WeChat and TikTok apps, arguing that the Chinese-owned apps pose a national security risk to the U.S.
"The data collection [by WeChat] threatens to give the Chinese Communist Party access to personal and protected information of the Americans," says the WeChat regulation. The Chinese government has denied allegations that WeChat and TikTok are disclosing user data to central authorities.
The US decision to ban TikTok, a video streaming platform from the Chinese company Bytedance, has arguably attracted more attention due to the popularity of the app among American users. But Trump's ban on WeChat, a messaging app from Chinese company Tencent, is what worries big US companies.
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In China, WeChat is not just a messaging app, it is an important part of everyday life. For the 1.1 billion users of the app, Facebook, WhatsApp, Uber, Postmates, Amazon, Expedia and a mobile wallet are combined in one. Additional applets contain dozens of other features.
On Thursday, the Wall Street Journal reported that a group of American companies, including Walmart, Apple, Disney and at least nine others, raised concerns with the Trump administration that the WeChat ban is undermining their ability to do business in China could.
The White House has not clarified whether the ban will apply to US companies operating in China, and companies may not know about it until September when US Secretary of Commerce Wilbur Ross determines which transactions will be covered by the order. Currently, however, the ban threatens to cut off an indispensable tool for any American company operating in China.
How exactly are US companies using WeChat in China? A good example is Walmart, the retail giant that is # 1 on Fortune's Global 500 list. According to Yuwan Hu, Research Director at Daxue Consulting in Shanghai, it is a platform for customer relations, a mobile payment system and an e-commerce website.
When Walmart posts to its public WeChat account, the news regularly draws hundreds of thousands of visitors. This shows that the company has a "large base" of WeChat followers compared to other brands, says Hu.
The Trump administration has targeted the Tencent-owned WeChat over national security concerns, which the platform says are unfounded. Jay L. Clendenin / Los Angeles Times via Getty Images
The company has also created its own mini-program on WeChat. WeChat Pay, the app's mobile payment system, enables consumers to place orders for home delivery and scan and pay for items when shopping in stores. In 2019, Walmart said 30% of all transactions in China came through WeChat Pay.
Ultimately, losing these features could make Walmart less competitive in an increasingly competitive environment, Hu says. Competitors include Alibaba's supermarket chain Hema, launched in 2018, and more established Chinese retailers such as Haorun Wanjia and Lianhua.
Walmart did not respond to Fortune's request for comment.
"Chinese consumers are not as loyal as western consumers," says Hu. "If a service doesn't meet expectations, it moves to other retailers or providers who offer better quality service."
In fact, Chinese customers are loyal to WeChat. And that is the crux of the problem for US companies. Consumers in China would rather ditch a retailer or service provider than give up WeChat's vast ecosystem.
A recent unofficial poll on Weibo, a Twitter-like platform in China, found that 95% of users wouldn't buy a phone that didn't have access to WeChat. The results undoubtedly caught the attention of Apple. If the U.S. ban means Apple can no longer offer WeChat on its devices, the company's roughly $ 44 billion business in China is at risk.
When businesses are cut off from WeChat, they can replicate some of their functionality elsewhere, but other aspects of the app are harder to replace.
For example, WeChat Pay can be exchanged in many use cases for its main competitor, Alipay, the mobile payment arm associated with Chinese tech giant Alibaba. Retailers typically offer both services, says Chelsea Tam, Tencent analyst at Morningstar, but availability varies by region and retailer. For example, in 2018 Walmart signed an exclusive relationship with Tencent in which Alipay was discontinued and WeChat Pay was only used for mobile payments in Walmart branches in western China.
Apple is particularly vulnerable if the WeChat ban affects US companies in China, as Chinese consumers are more loyal to the app than to devices. Budrul Chukrut / SOPA Images / LightRocket via Getty Images
For companies like Walmart, Apple, Nike, and Costco, it would be more difficult to replace the megaphone of their WeChat public accounts or the seamlessness of mini-programs running in the larger WeChat environment. Again, Alibaba is the closest alternative. Tam says it supports mini-programs and online stores for certain businesses, but as of now, the WeChat ecosystem is “dwarfing Alibaba” in terms of the number of mini-programs and the people who use them.
Tencent launched its internal WeChat mini-programs in January 2017, giving Alibaba a year-round head start, which launched a similar service on Alipay in July 2018. The mini-programs were quickly expanded on both platforms. By June 2019, Chinese research firm QuestMobile found that WeChat had 2.3 million mini-programs and Alipay had 200,000. The report also found that the WeChat mini programs had nearly 700 million active users per month in June 2019, compared to Alibaba's 400 million.
Ultimately, no other app can match WeChat's reach and marketing power in China, says Jeffrey Towson, private equity investor and finance professor at Peking University in Beijing. "WeChat is the most important mechanism for reaching and connecting with Chinese consumers," he says.
The immense cost of losing such a tool is why US companies are "encouraging Washington to think a little more about the ban," said David Ahlstrom, a management professor at the University of Hong Kong.
The US government has yet to explain the scope of Trump's order and indicate whether the WeChat ban will only apply to users of the app in the US or also to US companies using the platform in China.
The mandate states that "any WeChat-related transaction" is prohibited to US residents, citizens, or "corporations organized under the laws of the United States".
Dan Wang, a technology analyst with Beijing research firm Gavekal, says the ban allows the US government, as it is written, to "limit" US corporations' interactions with WeChat, suggesting US multinational corporations in China to be cut off from the EU platform is certainly within the realm of possibility.
WeChat owner Tencent believes the US will interpret the ban tightly. In a call for profits on Wednesday, Tencent's chief financial officer John Lo said the ban was "very clearly" that it would only apply to the US. "As a result, we don't see any impact on companies that advertise on our platform in China," said Lo.
However, in a speech in Prague on Wednesday, US Secretary of State Mike Pompeo indicated a looser interpretation of the WeChat and TikTok bans. "If you read [the prohibitions] it's even wider," he said. "We're going to make sure American data does that." not fall into the hands of an adversary like the Chinese Communist Party. "
Towson says he ultimately expects the White House to make exemptions from the WeChat ban on US companies operating in China because it "makes no sense" for the US to so thoroughly undermine American business interests in the country.
The US has announced that it will begin enforcing WeChat and TikTok bans on September 20. Until then, U.S. companies and even individual citizens who rely on WeChat in China can exist in a state of uncertainty.
"I use [WeChat] 50 times a day," says Towson. "As an American citizen in China, I'm not entirely sure what this ban means to me."
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