Facebook (FB 1.18%) once operated in China, but it was banned following the Urumqi riots in 2009. The Chinese government claimed that independence activists used Facebook as a communication tool during the riots, which resulted in nearly 200 deaths. Some investors might assume that Facebook's lack of a presence in China indicates that it hasn't made any money in the People's Republic over the past decade.
But ironically, China remains Facebook's second-largest market by annual revenue after the United States. Pivotal Research analyst Brian Weiser previously estimated that Facebook generated $5 billion to $7 billion from Chinese advertisers throughout fiscal 2018, which equaled roughly 10% of its top line.
That's why it wasn't surprising when Facebook recently hired a new engineering team in Singapore to develop new ad-buying tools for Chinese companies. Facebook also declared that it was "committed to becoming the best marketing platform for Chinese companies going abroad" in a WeChat post last November. Let's see how Facebook still generates so much revenue from China, and if that business could lead to a return for its core apps behind the "Great Firewall."
Selling overseas markets to China
When Facebook operated in China, it sold ads that targeted Chinese consumers. But after Chinese regulators banned its core social network, Facebook pivoted its Chinese advertising business and allowed Chinese companies to target overseas consumers.
Chinese companies that wanted to reach Facebook's global audience, including ByteDance's TikTok and tech giant Huawei, flocked to the platform. Facebook sold those ads through resellers, since its core business was still banned in China.
In its last 10-K filing, Facebook stated that it generated "meaningful revenue from a limited number of resellers representing advertisers based in China," but didn't disclose an exact figure. Those resellers include companies like MeetSocial, Cheetah Mobile, Papaya, and Powerin.
Why Chinese companies need Facebook
Facebook's advertising platform appeals to Chinese companies for three simple reasons. First, the Chinese economy is currently growing at its slowest rate in three decades. Large companies want to escape that slowdown by expanding overseas, where Facebook's ads can help them establish a brand presence.
Second, many Chinese companies are struggling with the saturation of the domestic market in certain segments (like smartphones), along with unpredictable government regulations. Expanding overseas could reduce their exposure to those headwinds.
Lastly, Facebook requires Chinese advertisers to maintain business pages on its social network. That requirement increases Facebook's number of business pages, which surpassed 60 million in late 2016, and allows Chinese companies to directly communicate with overseas consumers. Chinese companies can't officially access Facebook, but they can easily circumvent the Great Firewall with VPNs (virtual private networks).
Why Facebook needs Chinese advertisers
Facebook generated 98% of its revenue from ads last quarter. However, its growth in active users and ad revenue is gradually decelerating in the U.S., Canada, and Europe, where it faces intense scrutiny over a streak of security and privacy breaches.
That slowdown is troublesome, because its users in the U.S., Canada, and Europe generate much higher average revenue per user (ARPU) than its users across Asia and the rest of the world. Bringing China's advertisers to those developed markets could offset that slowdown.
Facebook is also reportedly taking major Chinese clients on trips to India and the Middle East, and suggesting that those regions -- which generate stronger active user growth than its Western markets -- offer additional marketing opportunities beyond the United States.
But will Facebook ever return to China?
Facebook clearly wants to return to China. It already took baby steps back into the country with a VR partnership with Xiaomi and the experimental photo-sharing app Colorful Balloons. CEO Mark Zuckerberg also took Mandarin lessons and bought President Xi Jinping's book, The Governance of China, for his employees.
Yet Facebook still faces a long uphill battle in relaunching its social network in China. Its application to open an "innovation hub" in Hangzhou to support local start-ups in China was previously approved, but was recently pulled following a clash between Zhejiang officials and the Cyberspace Administration of China.
Last year, Zuckerberg pledged to never build data centers in countries with "a track record of violating human rights like privacy or freedom of expression," and claimed that he "could never come to agreement" with China about the terms of operating its social network there.
Alphabet's (GOOG -1.29%) (GOOGL -1.34%) Google also ran into similar conflicts when it tried to develop a censored search engine in China, which sputtered out in late 2018 amid internal clashes. But like Facebook, Google still remains active in China through experimental apps, partnerships, and investments.
The key takeaways
Facebook doesn't offer its main apps in China, but it's still one of the country's top advertising platforms. Its new team in Singapore will likely develop new products to bolster that growth, and helping Chinese companies reach overseas markets might actually be preferable to going toe-to-toe against market leaders like Alibaba, ByteDance, and Baidu in China's saturated market for domestic ads.