A year into China’s tech crackdown, the sky is no longer the limit for China’s Big Tech

  • Under a forceful clampdown by Beijing, China’s tech giants fell in line with new national priorities that emphasised hard technologies and common prosperity
  • As Big Tech companies came under pressure to reform their business models, an era of exceptional growth drew to a close

This year will go down as a tough period for Chinese technology firms, as Beijing moved to exert control over the once-freewheeling sector. In the second of a four-part series, the South China Morning Post looks at how 2021 became the watershed moment in the development of China’s Big Tech companies. The first part is here.

In early July, the head of ByteDance’s gaming studio outlined an ambitious plan to rival Nintendo and Activision Blizzard, after hiring 3,000 programmers and artists to work for his Nuverse unit, in a display of the company’s mantra to “take initiative and push boundaries”.

Outside Shanghai on the midsummer day that Yan Shou spoke, a chill was already blowing through China’s technology industry, as regulators across multiple disciplines from cybersecurity to taxation were stepping in to cool the feverish growth of the world’s largest internet-related ecosystem, ring-fencing how data collected from internet shoppers, readers, and vloggers could be used to nourish other businesses.

Within four months, ByteDance would reorganise its sprawling operations serving 1.9 billion monthly active users into six business units, including Nuverse in the game division. Founder Zhang Yiming exited the company’s board after handing over the daily running of the world’s most valuable start-up – and only hectocorn – to his co-founder.

ByteDance, whose value has shrunk from US$400 billion in the private markets to US$350 billion, is the largest of China’s Big Tech companies to have made the transformation during a watershed year in the industry’s unfettered growth. Jack Ma predicted in 2017 that the business of Alibaba Group Holding would grow to the size of the world’s fifth-largest economy by 2036. The company, which owns this newspaper, no longer emphasises its size, only the 2 billion customers it still aims to serve.

“The crackdown on tech companies and data usage has had a massive impact,” said Mark Tanner, managing director of research firm China Skinny, adding that the inability to use data as before has limited the ability of Big Tech to exploit their synergies. “It has both restricted what tech companies can do, but also made them sheepish about being too aggressive when trying new initiatives.”

Instead, China’s Big Tech companies are now aligning their strategies with some of the strategic imperatives that are closest to the heart – and policy priorities – of the Chinese government. They include Chinese President Xi Jinping’s call for “common prosperity,” and the authorities’ entreaties for Big Tech to engage in such “hard technologies” as semiconductor chips and artificial intelligence (AI) to help upgrade China’s economy amid a rivalry with the US.

This year, Alibaba unveiled an in-house general-purpose central processing unit (CPU) for use in its own servers. Tencent Holdings launched several self-designed chips for AI, video transcoding, and network interface control. ByteDance began a recruitment drive for a new team to develop AI chips.

The initiatives represent a new priority for Chinese tech companies, whose business models were built on the collection of large amounts of data from consumers – often through heavily subsidised services financed by early-stage investors – which are then processed by machine learning algorithms to produce individualised services and pricing.

This way, a shopping site knows exactly what products to recommend to a consumer, a short-video platform learns to bring up ads that a viewer is likely to click on, and a ride-hailing app can predict how much a passenger would be willing to pay in certain locations and weather conditions, and at which times.

But with new regulations such as the Data Security Law and Personal Information Protection Law, tech companies now find themselves having to grapple with one of the world’s most rigid data regimes, which could make it significantly harder for them to profit from the vast troves of user data that had driven a large part of their success.

“This was obviously a challenging year as major technology platform companies in China adjusted to the new regulatory reality,” said Paul Triolo, director of tech policy practice at consultancy Eurasia Group.

“Companies in sectors that were heavily targeted by regulators have seen their business models come under some pressure and have had to adjust to the new reality, in some cases hurting bottom lines.”

At the same time, as Big Tech firms shift resources into hard technologies, there are “some limitations on what can be achieved in the short term”, said Triolo.

China’s tech giants, which have thrived in the field of consumer technology, are only starting to build up their expertise in hard technologies.

“This is particularly true in sectors such as semiconductors, which have global value and supply chains, and where many Chinese firms are far behind their Western counterparts,” Triolo said.

As Beijing flexes its regulatory muscles, China’s tech giants have also rushed to answer the government’s call for “common prosperity” – a new initiative to reduce economic and social inequality.

Tencent and Alibaba have each pledged 100 billion yuan (US$15 billion) to further the cause. When a devastating flood hit China’s central province of Henan this summer, the wealthiest individuals in China’s tech sector immediately kicked off a donation campaign.

With public scrutiny mounting over the plight of tech employees working brutally long hours, ByteDance started capping overtime, while a Tencent-owned video gaming studio began encouraging staff to leave the office by 6pm once a week. Tech business leaders, many of whom had credited their zealous work ethic for the meteoric growth of their companies, have stopped defending the merits of punishing office schedules.

“After major investments in social responsibility programmes, technology companies will focus on improving conditions for workers in 2022 to ensure they are in line with the goals of common prosperity,” said Triolo. “To achieve this, they will have to accept slower rates of growth.”

Despite the changing tide, Big Tech firms remain the backbone of and a source of vitality for China’s economy, which is bogged down by a bloated state sector and a heavily indebted local fiscal system.

With 600 million people in China still living on a monthly income of 1,000 yuan or less, the Chinese market still has room to grow. Meanwhile, China’s tech firms are also looking to replicate their success at home in the overseas market.

TikTok has won the hearts of American and European teenagers in the same way that its sibling app Douyin, powered by the company’s secret algorithms, has hooked young Chinese users. Jiang Fan, the Alibaba executive credited with convincing hundreds of millions desktop users to move to mobile, is now heading Alibaba’s overseas business in search of the company’s next 800 million customers.
As 2021 comes to a close, Beijing appears to be recalibrating its relationship with Big Tech firms.

At the Politburo meeting earlier this month, which was meant to set the tone for Beijing’s policy direction in 2022, warnings about the “irrational expansion of capital” – which kicked off a regulatory campaign that erased more than US$1 trillion of stock market value – were no longer mentioned. Instead, Beijing said it would set up “traffic lights” to prevent the “barbaric growth of capital”.

The past year has revealed the slew of regulatory tools that Beijing has wielded to curb the influence of technologies and business capital in areas where it prefers to take control.

Tech firms operating in finance, one of the most heavily controlled economic sectors in China, have been reined in under financial regulations. Tutoring companies, which had proliferated both online and offline, have been banned from making profits from running cram schools for primary and junior middle school students. Businesses seeking to go public overseas could soon be required to go through data security reviews.

2021 will go down in history as the year when an era of exceptional growth for Chinese internet platforms came to an end, said Dan Wang, chief economist at Hang Seng Bank (China).

Investors have taken notice. Chinese tech stocks, once darlings for Hong Kong and New York investors, are among the worst performers of the year.

Shares of Tencent, which was looking to become the first Asian company to hit a US$1 trillion valuation, have dropped more than 40 per cent so far this year. Alibaba, which was seen as China’s answer to Amazon with their similar business models and market caps just five years ago, is now worth less than a fifth of the US giant after the Chinese firm’s stock price fell by half in the past 12 months.

Overseas investors who sought to buy into China’s growth story saw their faith shaken after US-listed education technology stocks tumbled under Beijing’s crackdown on the industry, as well as Beijing’s launch of an unprecedented cybersecurity review into ride-hailing giant Didi Chuxing just two days after its initial public offering in New York on June 30. After five tumultuous months that saw its shares plunged to half the IPO price, Didi announced in December it would remove its stock from New York to list in Hong Kong.

Even for venture capitalists and private-equity firms that are willing to take the risk, the justification is weakening. SoftBank, one of the biggest winners from the rise of China’s tech firms, said in August it would be cautious about Chinese investments. ByteDance, China’s most successful tech start-up in the past decade and owner of a US$400 billion social media empire, has to postpone its plan to go public to until at least late 2022 because of regulatory hurdles, a hiccup that has caused unease among some of its early investors who were expecting a quicker windfall.

Investor confidence has been further dampened by a broader business slowdown across the tech sector from e-commerce to video gaming. Alibaba, Tencent, e-commerce operator Pinduoduo and on-demand delivery giant Meituan all performed worse than analysts forecasts in their third-quarter earnings.

The results surprised many analysts who had already lowered their projections, but the performance of those companies proved worse than expected, said Tam Tsz-wang, an analyst at DBS Bank specialising in telecoms, media and technology.

“The question now is whether [top players such as Alibaba] have truly become too big to grow,” Tam said.

The slackening growth comes as China’s market is maturing: the number of internet users has reached a billion, and the overall economy is slowing down. Joseph Tsai, co-founder of Alibaba, said in an interview with CNBC in June that Alibaba’s rise coincided with the jump of China’s per capita GDP from about US$800 in 1999 – the year that the company was founded – to the present level of US$10,000.

That level of astronomical growth is unlikely to repeat. Even in an optimistic scenario, China will only double its per capita GDP between 2020 and 2035, Justin Lin Yifu, economist and professor at Peking University’s Institute of New Structural Economics, estimated in March.

For the first time, China did not put a concrete GDP growth rate goal in its 14th five-year plan released earlier this year, only saying that the number needs to remain at a “reasonable level”.

Authors: Tracy Qu, Jane Zhang, SCMP

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