August 14, 2021
ÖF ALL CHINAS Achievements in the past two decades, one of the most impressive is the rise of its technology industry. Alibaba is home to twice as much e-commerce activity as Amazon. Tencent operates the world’s most popular super app with 1.2 billion users. China’s technology revolution has also helped transform its long-term domestic economic outlook by allowing China to move beyond manufacturing into new areas like digital health care and artificial intelligence (AI). A dazzling tech industry could not only fuel China’s prosperity, but also form the basis for challenging American supremacy.
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This is why President Xi Jinping’s attack on his country’s $ 4 trillion technology industry is so astounding. There have been over 50 government actions against dozens of companies over a dizzying range of suspected violations, from antitrust abuse to data breach. The threat of government bans and fines weighed on stock prices, costing investors around $ 1 trillion.
Mr. Xi’s immediate goal could be to humiliate tycoons and give regulators more leverage in unruly digital markets. But, as we explain, the Communist Party’s deeper ambition is to reshape the industry according to its blueprint. China’s autocrats hope this will strengthen their country’s technological edge while boosting competition and benefiting consumers.
Geopolitics can also spur them on. Restrictions on access to components made with American technology have convinced China that it needs to become more self-sufficient in critical areas such as semiconductors. Such “hard tech” can benefit when crackdown on social media, game companies and the like steers talented engineers and programmers in their direction. However, the attack is also a huge risk that can damage businesses and economic growth in the long term.
Twenty years ago, China hardly seemed on the cusp of a technological marvel. Silicon Valley dismissed pioneers like Alibaba as imitators until they were one step ahead of it in e-commerce and digital payments. Today, 73 Chinese digital companies are valued at over $ 10 billion. Most have Western investors and overseas-trained executives. A dynamic venture capital ecosystem is constantly creating new stars. Of China’s 160 “unicorns” (startups valued at over $ 1 billion), half are in areas such as AI, big data and robotics.
Unlike Vladimir Putin’s war against Russia’s oligarchs in the 2000s, China’s raid isn’t about insiders fighting for the loot. In fact, it reflects concerns motivating regulators and politicians in the West: that digital markets are prone to monopolies, and that tech companies are hoarding data, abusing suppliers, exploiting workers, and undermining public morals.
More police work was overdue. When China opened up, the party kept its finances, telecommunications, and energy under control, but gave free rein to technology. The digital pioneers used this almost lack of regulation to grow surprisingly quickly. Didi, which offers transportation, has more users than America has people.
But the large digital platforms also used their freedom to trample smaller companies. They prevent traders from selling on more than one platform. They deny basic services to food deliverers and other gig workers. The party wants to put an end to this misconduct. Many investors support this ambition.
The question is how? China is about to become a political laboratory in which an unaccountable state wrestles with the world’s largest companies for control of the essential infrastructure of the 21st century. Some data that the government says is a “factor of production”, such as land or labor, can become public property. The state can enforce interoperability between platforms (so that WeChat cannot continue to block competitors, for example). Addictive algorithms can be more closely monitored. All of this would hurt profits, but it could make markets work better.
Make no mistake, the crackdown on China’s unruly technology is also a demonstration of the party’s unbridled power. In the past, her priorities have often fallen victim to self-interest, including corrupt insiders, and she has been constrained by the need to woo foreign capital and create jobs. Now the party feels encouraged, is rapidly issuing new rules and enforcing them with renewed zeal. China’s regulatory immaturity is fully visible. The main anti-monopoly agency only employs around 50 people, but they can destroy business models with the stroke of a pen. Due process denied, companies grin and endure.
China’s leaders have spent decades successfully defying Western lectures on liberal economics. They might see their crackdown on the tech industry as a refinement of their policies of state capitalism – a blueprint for combining wealth and control to keep China stable and the party in power. Indeed, as China’s population begins to decline, the party plans to increase productivity through government directives, including the automation of factories and the formation of urban mega-clusters.
But trying to reshape Chinese technology could easily go wrong. It is likely to arouse suspicion abroad and hinder the country’s ambitions to sell services and set global technology standards in the 21st century, as America did in the 20th. A stunted growth would be felt well beyond China’s borders.
A bigger risk is that crackdown will weaken entrepreneurship in China. As the economy shifts from manufacturing to services, spontaneous risk-taking, supported by sophisticated capital markets, will become more important. Several of China’s leading tech tycoons have withdrawn from their corporations and public life. Would-be folks will think twice before trying to emulate them, not least because crackdown has increased the cost of capital.
Start slowdown
China’s largest tech companies now trade at an average discount of 26% per dollar of revenue compared to American companies. Start-ups like the minnows, who use map apps to take the ride from Didi, have nibbled on the government’s main goals. You don’t feel encouraged by the crackdown, but probably feel exposed. Economic development is mostly about creative destruction. China’s autocratic leaders have shown they can handle the destruction. Whether this tech turmoil also promotes creativity remains questionable. ■
This article appeared in the Leaders section of the print version under the heading “China’s Attack on Technology”.
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