China to the tech giants: Contribute or be punished

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SvD Näringsliv

This column was first published in SvD Näringsliv, in Swedish, on August 6th, 2021.

China’s attacks on the country’s own tech giants look like attacks on an entire sector, but behind it is a more conceived idea, writes SvD’s tech analyst Björn Jeffery. If companies do not contribute to China’s national goals, they are in a risky position.

“To get rich is glorious.”

That quote is often attributed to Deng Xiaoping, the man who was China’s supreme leader from the late 1970s until his death in 1997. It is debatable whether he actually expressed himself in that way, but it is in line with the distinct change of course China took under Xiaoping. His reforms and views on prosperity laid the foundation for what would become the new and economically fast-growing China we have seen in recent decades.

A more modern adaptation of the quote would perhaps rather be “to get rich is gloriousbut not in any way“. The Chinese tech sector has recently experienced this.

In a series of initiatives, Chinese authorities have pushed everyone from Alibaba founder Jack Ma to most of the education sector and, by all accounts, the entire Chinese gaming industry. All this within a few months. The company Didi, often described as Uber of China, fell sharply on the stock market in July when Bloomberg reported that the company could be severely fined for concerns regarding data security. In the worst case, they would have to delist from the stock exchange altogether.

The sudden outbursts can be seen as a way for the Chinese state to clarify the balance of power in a sector that has exploded in value and size for many years. Tech companies have done a lot to digitize China’s economy, but its success has become a double-edged sword.

The fact that there is a tug-of-war over market share is nothing new in either the tech or corporate world. The difference in China is that the successes in the tech world often take place at the expense of the Chinese state, which to a large extent represents the establishment that is being overthrown. When Jack Ma creates new banking and financial services with Ant Group, existing banks in the country are challenged. And who owns these banks? Well, usually the Chinese state.

But it is not only the amount of power that the authorities oppose, but also what it is used for.

One of the founders of Tech Buzz China, the Chinese analyst Rui Ma, believes that tech companies must both adapt to the national strategic goals for China, and create more value for the country than just money. These goals are, for example, to deal with the demographic changes in the country and to maintain its position regarding industrial production.

Rui Ma urges Chinese companies to try to understand the intentions of the regulation.

“Do understand the intent. What you probably need to first decide is if you can understand this framework. If you can’t, maybe don’t stick around. If you can, then you can start assessing risks. ”

The taxi service Didi does not help any of these national and strategic goals. Companies like Huawei, on the other hand, which produce digital infrastructure, still seem to have strong support from the authorities. This is despite the fact that the company, with its size, possesses both power and influence.

To say that China is marking its power against Chinese tech companies is therefore a truth with some modification. The marking is rather towards those who are not considered to contribute to more than their own income statement. The companies that steer their operations to be in line with China’s other national priorities should not have to be as worried.

China’s many investments in AI can also be seen in this light. It is a centralized technology that can be used for both industrial production and national security. It can be profitable in individual companies, but also contribute to more strategic goals.

The enormous success that, for example, the chat service Wechat has had in the country has created a platform for a completely new wave of Chinese companies. The demand created there is extremely valuable and has become a driving force in the Chinese economy. But when only two companies – Wechat and Alipay – have a combined market share for digital payments of over 94 percent, it is difficult not to see them as potentially problematic power players at the same time.

It is unclear what the ultimate goal is for the Chinese state’s new attitude. It is probably under development for themselves as well. What is happening now in China’s tech sector has never happened before. But it is clear that the country’s tech companies have a new reality, where companies must guess at what is required to be able to continue as before. And where an unintentional violation can suddenly become devastating.

This column was first published in SvD Näringsliv, in Swedish, on August 6th, 2021.

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