Author: Web Smith

As covered in the first in this series by Newsweek, the size and scope of China’s largest eCommerce exports are astounding. Shein is currently valued at $66 billion. Temu, whose parent company also owns Pinduoduo, is targeting $16 billion in 2023 gross sales, up from a previous $11 billion estimate. These companies are consumer darlings, but they’re far from the only rising platforms with ties to the Chinese Communist Party: TikTok, Lemon8, CapCut, TurboVPM, WeChat and SHAREit are each global players. According to a recent report by Quartz:

China’s rapid rise in the eCommerce space is part of a roadmap to dominate global markets, an agenda that worries US authorities. Cargo hubs and warehouses are vital to the success of fast goods delivery, but they come with heightened risks of being run with sophisticated technology serving as a trojan horse for spying operations.

At the core of the differences between the United States and China is how the nation’s economies (and by extension – governments) determine whether businesses will be allowed to proceed undeterred. For China, that answer tends to be no. For the United States, well, we just love cheap goods (Temu, Shein) and even cheaper entertainment (TikTok).

A law that allows low-price packages to enter the U.S. duty-free and with little customs scrutiny has enabled the breakneck growth of two e-commerce companies with roots in China: Shein and Temu. (WSJ)

China’s direct-to-consumer business will one day rival B2B sales to American retailers. To understand the impact of the March 2018 de minimis decision, consider that direct-to-consumer companies were not only excluded from tariffs – they were actually incentivized to sell to Americans. Latin for “about minimal things”, de minimis has been a sly loophole in the import trade laws, allowing packages valued under $800 to bypass the usual scrutiny, including import duties, taxes, or fees. This threshold, critics argue, has been adroitly manipulated by foreign eCommerce companies to gain an unfair economic advantage. The exemption, originally designed for American tourists, has led to over 1 billion packages entering the US in the fiscal year ending in September 2023, with Shein and Temu playing a significant role.

With new bills, Congress aims to checkmate such practices, targeting countries deemed as “non-market economies,” such as China and Russia. But there still exists an $800 exemption that allows DTC companies like Shein, Temu, Alibaba, and TikTok to ship here with minimal taxation on inventory.

In a world increasingly dominated by these platforms and more established eCommerce giants like Amazon and Alibaba, China’s rise as a global retail powerhouse has reshaped the industry landscape. Shein, Temu, and TikTok have captivated consumers worldwide, offering a plethora of affordable and trendy products buoyed by these de minimis exclusions. However, beneath the surface of bargain shopping lies a complex web of data collection and security threats that demand immediate attention. Building on previous insights and recent developments in the national security landscape, this research delves deeper into the multifaceted nature of this threat, exploring how it extends beyond commerce into the realms of national security and economic stability.

The Expansion of Chinese eCommerce

The explosive growth of Shein, Temu, and TikTok within the eCommerce sphere has left some American retailers struggling to keep pace. These Chinese-based platforms, with their user-friendly interfaces and lowest prices, have attracted tens of millions of American consumers. Capitalizing on the de minimis exemption, these platforms have grown exponentially.

This situation underscores the critical implications of America’s dependence on Chinese eCommerce platforms. My earlier report highlighted the economic impact of this reliance and the alarming access to first-party data that it affords China. The American irresistibility of bargain prices on desirable products further enhanced the wealth of information China possesses about American consumers. It’s essential to acknowledge that this threat extends beyond the economic realm, touching upon sensitive national security aspects. For the CCP, there is no line between the economic and the governmental – a reality that many Americans fail to comprehend. I use the term “governmental” as a catch all for intelligence, military, party leadership, and legislation.

The National Security Conundrum

It’s been noted in my initial writings on the matter that China’s acquisition of extensive first-party data through eCommerce platforms poses a significant national security concern. This data, encompassing information on consumers’ demographics, preferences, and even their home layouts, have far-reaching implications. Consider the recent lawsuits between Temu and Shein in United States courts. The suits show that both organizations are willing to fight over the growth ahead.

Expanding on the national security implications: The recent 60 Minutes segment featuring leaders of the Five Eyes intelligence alliance serves as a stark reminder of the perils posed by China’s ability to execute espionage at scale, buoyed by its eCommerce advancements in the United States.

China’s global espionage campaign is a growing and unprecedented threat to national security. Intelligence leaders, including the FBI director and those from the Five Eyes alliance, have issued warnings about the alarming extent of this espionage threat.

The combination of China’s global espionage campaign, Russia’s invasion of Ukraine, and the Middle East crisis has raised doubts about the intelligence community’s ability to effectively address these challenges and confront what seems to be an insignificant eCommerce problem. Driven by China’s autocratic government and advanced technology, that “insignificant problem” undermines the rule of law and poses a major threat not only to the United States but also to its allies. The situation calls for increased vigilance and coordinated efforts to counter this multifaceted threat.

They’ve yet to address the pressing need to address both the economic and national security aspects of China’s eCommerce threats.

Addressing the Dependence Dilemma

To counter this threat effectively, it is crucial to recognize that America’s reliance on Chinese eCommerce is not merely a matter of convenience but also a symptom of deeper economic issues. Factors such as inflation and economic instability have driven consumers toward these platforms in search of affordability. To mitigate this threat, it is imperative to improve the American economy, halt inflation, and provide affordable alternatives capable of competing with Chinese eCommerce giants.

Citing my earlier essay: As outlined, the remedy to this problem extends beyond immediate security concerns. It necessitates economic reforms, bolstering domestic industries, and fostering transparency regarding data collection and security risks. A stronger economy with more competitive offerings will reduce dependence on Chinese platforms, thereby mitigating national security concerns. This basic logic seems to go ignored by American political and economic management officials. It’s a three-pronged approach to reducing dependence on this class of foreign bargain marketplaces that trade cheap prices with deeper reach.

• Improve transparency
• Highlight privacy concerns
• Mitigate economic dependence by improving economy

Improve transparency: One of the most significant challenges in countering the threat posed by Chinese eCommerce is raising awareness and promoting transparency. The recent 60 Minutes segment featuring intelligence leaders emphasizes the gravity of the situation. It is incumbent upon authorities to educate the public about the risks associated with unchecked data collection. Citizens must understand that this isn’t merely an issue of individual privacy but a critical concern for national security. This connection has yet to be publicly accepted despite the first essay being featured in Newsweek and then expanded upon by the publication’s internal staff.

Understand China’s first-party data strategy and privacy disruption: China’s mastery of collecting and mining first-party data is central to its commerce and technology industries. This data collection, predating similar Western efforts, provides Chinese companies with invaluable insights into consumer behavior. It allows them to refine algorithms and tailor their offerings accordingly. This data-driven approach has raised legitimate concerns about privacy and data security, as the massive volumes of data collected could potentially be misused or abused. Reports have suggested that data collected by Chinese commerce companies has been used for discriminatory purposes and surveillance. The inseparable relationship between some Chinese tech companies and the government has intensified concerns about data’s potential use in matters of national security. Chinese officials do this well. China’s Ministry of State Security made the following statement in September, noting “a decade-long cyber espionage campaign against Huawei servers.”:

It has long been an open secret that the United States has long relied on its technological advantages to conduct large-scale eavesdropping on countries around the world, including its allies, and carried out cyber theft activities.

Mitigate economic dependence: To counter the multifaceted threat posed by Chinese eCommerce effectively, the United States must adopt a holistic approach. The tentacles of Shein, Temu, and TikTok’s influence on America will only grow. According to Jing Daily’s reports: “With 150 million American users, the [TikTok] app is well-loved and deeply embedded in people’s daily lives — and could soon be integrated into their shopping routines as well.” Cheap goods, cheaper entertainment. American officials need to prioritize the enacting of economic reforms, the strengthening of domestic industries, and fostering greater transparency regarding data collection practices. A robust economy with competitive alternatives will reduce dependence on Chinese platforms, thereby mitigating national security concerns.

US customs data shows that more than 10% of Chinese imports by value are now sent directly to customers, up from under 1% a decade ago. (DW)

China’s eCommerce giants have swiftly expanded their influence, not only reshaping consumer behavior but also posing significant threats to national security. The remedy to this problem lies a proactive approach to addressing the economic and legislative influences that accelerated the 1% to 10% growth over ten years. This didn’t happen in a vacuum. The lessons from the past should inform our path forward in safeguarding our nation’s interests. If left up to the American consumer’s own devices, he or she will choose a low price or free entertainment over the understanding of its greater impact. We do the same with respect to our consumption of microplastics, unhealthy foods, and other lifestyle choices revolving around overconsumption.

Capitalism is truly American. And while it has its sincere benefits, it can be used against us. That’s the best way to explain the impact that our consumer decisions are being used by others that may not have the long-term best interests of the American consumer at heart.

By Web Smith | Edited by Hilary Milnes with art by Alex Remy and Christina Williams

The logistics industry is historically known for its conventional business models. Similar to other markets like ‘big tech’ or direct-to-consumer, venture capital clouded said model. While freight forwarding demand rose over the previous several years, the financiers looked prescient. With the market’s fall back to earth, the growth-over-unit economics model has crashed with it – leaving a wake of companies that once seemed invincible.

A swarm of ‘unicorns’ like Flexport, Convoy, and Deliverr promised to redefine the landscape with their tech-driven solutions. The demise of at least one of these unicorns has become the new platform for punditry on venture capital’s role in businesses that were once devoid of the business model required to make the financing work. There is much to dissect: the journey of these logistics unicorns and the nuanced interplay of technology, market dynamics, and organizational culture in the modern logistics arena.

Convoy and Flexport, with their blitzscaling approach, epitomized the logistics unicorn, garnering massive valuations. Convoy, with its disruptive business model, showed a steep trajectory of growth, vying for a share in the logistics market by undercutting prices and leveraging venture capital to buy market share. However, the reversal in Convoy’s fortune underlined the fragile foundation of hyper-growth models. Flexport’s tale was no different. The acquisition of Shopify Logistics, though ambitious, became a quagmire of cultural misalignments and operational disruptions, culminating in a significant layoff​. These cases accentuate the precarious nature of aggressive scaling without a solid operational and cultural integration framework. Business Insider recently reported:

The integration of the Shopify Logistics team into Flexport had been rocky, five employees said. Some employees saw cuts to their base pay when they joined Flexport, two said. Confusion over compensation continues even now, four months after Flexport acquired the business from Shopify.

Flexport’s acquisition of Deliverr came at a time when the logistics industry was already grappling with considerable challenges. It coincided with a period of significant market volatility exacerbated by the ongoing global pandemic and its ripple effects on global supply chains.

Both represented in the above data – the integration of Deliverr into Flexport’s operational matrix presented a complex set of challenges. As Flexport endeavored to integrate Deliverr into its framework, a series of unforeseen challenges unraveled. The complex endeavor of merging Deliverr’s technology platform with that of Flexport revealed significant incongruences, particularly as the two platforms were built on different coding languages. The seemingly insurmountable task of fully integrating these divergent systems exposed the brittle nature of rapid, perhaps hasty, technological integration in the face of market pressures and investor expectations.

The differing organizational cultures, operational models, and technological infrastructures between the two entities added layers of complexity to the integration process.

In a remarkable contrast, Shopify exhibited a level of prudence by offloading its logistics arm when the integration with Deliverr hit a roadblock, showcasing an ability to recalibrate strategies based on evolving circumstances. I explained this in a May 2023 essay on where Shopify will be in one year:

As Amazon narrows its focus and others in retail prepare for a period of hyper-efficiency, Shopify’s eschewing of so many valuable employees and initiatives will give way to a product focus that will be rewarded by markets.

Shopify is a software business and it will succeed as one, it is not the business of manual labor and analog communication.

Another multimodal freight forwarder, DSV saw its third quarter air cargo volumes fall 14% year on year. DSV’s chief executive Jens Bjørn Andersen was recently quoted: “A real recovery in global freight volumes does not seem to materialise in 2023.” DSV, with its traditional business model, demonstrated resilience in the volatile market, underscoring the importance of a balanced approach between technological innovation and grounded operational practices. But all in all, it was not enough. Andersen is due to step down as CEO in 2024.

Technological Disruption: Blessing or a Curse? The allure of disrupting the logistics sector through cutting-edge technology was clearly irresistible. However, the failure of some unicorns revealed the idealogical pitfalls. While technology promises efficiency and cost-reduction, the Convoy and Flexport cases highlight how the overly aggressive pursuit of market share and rapid scaling can lead to a precarious business model, unable to withstand downturns.

On the flip side, the advent of intelligent solutions for domestic and international forwarding, returns optimization, and fit software presents a lower-cost approach to technological integration​ that minimizes the exposure retailers may have with the traditional logistics industry.

The Flexport saga brought to the fore the criticality of organizational culture. The cultural discord post-acquisition of Shopify Logistics resulted in a loss of employee morale and operational synergy, eventually leading to layoffs​. This underscores the necessity of a productive and unified organizational culture to navigate the intricate waters of mergers and acquisitions in the logistics techno-sphere. The inflated valuations and the investor euphoria surrounding the logistics unicorns reflected a certain level of detachment from the ground realities of the logistics market. The drastic re-rating of Convoy’s valuation when the freight market collapsed illustrated the harsh reality of market dynamics clashing with investor optimism​.

Lessons and Forward Pathways. The tales of Convoy and Flexport serve as cautionary narratives for the logistics sector. They underline the imperative for a balanced approach towards growth, technological integration, and organizational culture harmonization. The pragmatic strategies of Shopify and the steady approach of DSV provide a blueprint for sustainable growth and resilience in the face of market volatility.

Due diligence in acquisitions: The sequence of acquisitions and offloadings underscores the importance of thorough due diligence before embarking on acquisitions, especially in a volatile market. It’s crucial to assess not only the financial viability, but also the technological compatibility and cultural alignment between the entities involved.

Technological resilience: The challenge faced in integrating disparate technological platforms accentuates the need for building technological resilience. This includes adopting flexible, modular, and interoperable systems that can accommodate or integrate with diverse technological architectures.

Cultural synergy: Cultural discord can pose significant hurdles in the integration process post-acquisition. It’s imperative to foster a culture that is adaptable, inclusive, and conducive to seamless integration.

Investor and market expectation management: The pressure from investors and market expectations can drive companies towards aggressive growth and acquisition strategies. There’s a need for a balanced approach that weighs the benefits of growth against the risks associated with rapid expansion and acquisitions.

Agile operational models: Adopting agile operational models can enhance the ability to respond to market fluctuations, technological advancements, and unforeseen challenges. This includes embracing a culture of continuous learning and improvement.

Enhanced regulatory compliance and risk management: Ensuring compliance with evolving regulatory frameworks and having robust risk management strategies in place can mitigate the fallout from unforeseen market dynamics.

Strategic partnerships: Instead of outright acquisitions, exploring strategic partnerships or alliances might provide a more flexible approach to tapping into new markets or technological capabilities.

Customer-centric approach: Remaining grounded in delivering value to customers can guide decision-making and operational strategies amidst the tempest of market and technological evolution.

Sustainable growth: Adopting a philosophy of sustainable growth, as opposed to blitz-scaling, may provide a more stable and sustainable trajectory in the long-term, aligning operational realities with market expectations.

Innovative solutions: Exploring innovative solutions such as AI and machine learning for better logistics and supply chain management, employing intelligent solutions for domestic and international forwarding, and investing in research and development to stay ahead of the technological curve.

The forward pathways for logistics and tech-centric enterprises lie in synthesizing these lessons into a coherent strategy that navigates the delicate balance between technological innovation, market demands, and operational sustainability.

The death of logistics unicorns like Convoy and the trials of Flexport are emblematic of the broader challenges and opportunities within the logistics sector. They offer critical insights into the delicate balance between technological innovation, market dynamics, and organizational culture. As the logistics sector continues to evolve, the lessons from these narratives hold the promise of guiding the sector towards a more sustainable, resilient, and technologically harmonized future. Through a lens of balanced growth, prudent technological integration, and a robust organizational culture, the logistics sector can leverage the promise of technology while staying grounded in the enduring principles of operational excellence and market prudence.

By Web Smith | Editor: Hilary Milnes with art by Alex Remy and Christina Williams