In the past few weeks, as we could see China government had smashed their own “high tech” industry out of the blue which totally knocked off the foreign investors’ socks and make the market value of those companies drastically shrink.
The clampdown for high tech industry includes but not limited to:
- Delayed Didi’s (Chinese version of Uber) IPO in the U.S and make it off the app store
- Terminated Tencent’s exclusive music right
- Meituan (Chinese version of Uber eats) to be fined more than 1 billion dollars
- Banned Education industry (tutoring sector) from collecting money from capital market.
Now, you might be very curious the reasons why China government went after those tech titans. Was president Xi out of mind to destroy those digital companies which can compete with American companies and bring lots of wealth to Chinese people? What is the China top leadership’s intention? Before we get to the reasons, maybe we can understand the background story first.
The economy development in China and the rise of high-tech giants
Thanks to reform and opening-up, China has transformed from a country that could only meet the basic needs of people to the second largest economy. During the past decades, China GDP grew by 9.5% on average every year and China government helped more than 700 million Chinese people get out of poverty. What a huge and incredible accomplishment!
As we know, with the sufficient labor force and relatively lower labor cost, China has been the “world factory” for a long time. Hundreds of thousands of products are made in China and China apparently become the engine of world economic growth. However, China top leadership understand helping foreign country manufacture low-end products can bring in tons of money into China, but it’s not a long-lasted and sustainable strategy. It’s not helpful and beneficial for China to achieve the Goal — ”surpass & beat western power” and wash off “the Century of Humiliation”.
They need to introduce real “high tech”, such as semiconductor, and build their own high tech supply chain to upgrade their manufacturing industry. When it comes to semiconductor industry, It’s really capital-intensive and technology-intensive. It seems very difficult for a late mover like China to catch up with the first mover, such as Taiwan, Korea and U.S. Of course, China still works so hard to develop it but the result is not very promising.
In the same time, China government still try to scout different opportunities to develop its own industry to compete with U.S. In the late 2000s, there are more and more internet companies boomed in China. The government authority made every effort to protect the internet companies by building the great china fire wall which stops the foreign company entering into China and lowering the taxes or incentivizing them to make them have more advantage to compete against American companies. Honestly speaking, China government just let those internet companies can grow at all costs.
With the gov protection and huge domestic market, several internet companies gradually became the tech giants, such as Tencent (Chinese Facebook), Alibaba (Chinese Amazon), Didi (Chinese Uber), Meituan (Chinese Uber eats), Bytedance (Tiktok owner) and so on. By 2025, the digital/internet economy will make up 55% of China’s GDP.
The reasons why China crack down the high-tech industry
In the late 2000s, China government kind of count on those tech giants to create the wealth for the people as well as compete against American’s company. With time passing, more and more startups had grown as “Unicorn” and more and more people became the middle class. It seems China government didn’t rely on those tech giants that much anymore, and the top leadership in China began to think how to manage the unruly digital industry.
In 2014, the authority casted the first stone to Alibaba. Alibaba had been accused of selling illegal, dangerous and counterfeit goods, dealing with unlicensed vendors and offering promotions by the SAIC, the Chinese government authority, before it went to Nasdaq for its first IPO, but Alibaba did not get any punishment that time and even the Communist top leadership stepped in and smoothed things over. However, last year, Alibaba was not luck again. It was fined the record-breaking 2.75 billion for its antitrust violation and the Ant Group IPO in the states was rejected by the government authority. From that you can see China gov’s determination to take more stricter control over the industry was really strong and firm.
Here are the reasons why China cracked down the digital/internet companies:
1. Stricter control: With the increasing impact over the society, the government just realize they need to enact explicit rules on three key area: monopolies, fin-tech firm and data privacy protection. If they don’t do that, the digital companies are gonna boom too fast and will be too big to handle. China would like to reshape their tech industry for better fulfilling consumer’s benefit and not only humble the tycoons but also hold the sway over the unruly digital market in case the systematic problems happen.
2. Geopolitics perspective: Restriction of the access to critical components from American companies is like choking the Chinese economy, so China would like to re-focus on the real “hard tech” industry, such as semiconductor, to develop their own supply chain. Also, cracking down on the digital companies might steer the talented engineer’s way from software to hardware industry as well.
3. National priority: no matter it is a gaming industry (CCP said it’s spiritual opium) or consumer entertainment industry, they are not in line with CCP’s future priority. CCP would like to focus on the real economy that can really make contributions to the country and leads the country to prosperity. (AI, Semiconductor and Big data)
And here are the Impact after the clampdown:
1. Fiercer competition: Big tech companies in China usually take advantage of the policy that favored to themselves or the existing capital advantage they’ve already owned and then squeeze out the small competitors from the industry. Therefore, crackdown for big tech giants will make the smaller companies have the opportunity to capture more market share and make the competition fiercer instead of being controlled by tech titans.
2. The opportunity for American company: if the crackdown makes it more difficult for China’s largest company to expand, then the main beneficiaries would be American company. Even though the prospect of regulation in the U.S. remain uncertain, American companies still can acquire the potential future rivals to maintain their existing advantage.
3. Chilling effect on innovation: the direct intervention from government will decrease the entrepreneurial spirit in China and make startups type not that diverse. Everyone just needs to follow gov’s direction and align with CCP’s priority.
4. Keep low-key: All the big tech giants in China all pledging to atone for their transgression after scrutiny. All the tycoons try to brownnose China gov by donating a great amount of money to NPO or charity, or they need to keep in low profile.
5. No IPO in the U.S: China has already signaled it will make it harder for Chinese companies to list on U.S. stock markets, limiting their ability to grow and raise capital outside Asia. “All this is a lose-lose proposition
From my perspective, China’s clampdown on high tech giants is just like what China treat Hong Kong. Once you don’t have any value for them, you just need to be a good kid and follow their order. If not, the government gonna kick your ass.
Reference:
Economist
Times
Bloomberg
Washington Post
Dan Wang
Noahpinion
