What is up and down in “The Big Tech-crackdown”
By Peter Lisbygd
Over the last few months clouds over the booming Tech-sector in China have grown darker and darker. Chinese regulators are tightening control over technology firms in dramatic ways that we have not seen before.
As new regulatory measures - even outside the tech-sector - have taken global headlines recently, a new “red gameplan” is taking form in China. This means that a part of the business dynamics that has been driving the Chinese economy for the last two decades, have changed.
Investors need to understand the new dynamics in the market to get good returns, and for the kids in China it is game-over, at least for a while.
There are many ways to look at the current Tech-crackdown unfolding in China. In this blog I will share my perspective on what is going on, what we can expect in the future - and my take on the long terms business drivers that will take China into the next decade of stable growth.
The harsh Chinese government interventions can be roughly categorised in three main areas.
1) The Tech-giants have become too big and too powerful
Chinese Tech-giants have grown to undesirable sizes. A company like Alibaba Group have managed to grow their business roughly 50% YoY for the past 10 years, while generating massive profits simultaneously. An impressive growth story – even in a global context. Alibaba have already contributed greatly to the Chinese society, but the context is changing, and the government now want to regulate sectors that have been given an open playing field for too long.
The governments perspective is that companies like Alibaba (internet conglomerate), Meituan (food delivery), Tencent (gaming & internet conglomerate), and Pinduoduo (e-commerce) have become too big and too dominant and thereby are taking advantage of their monopoly-like position in the market.
We have seen the same trend unfold in the EU, where large fines have been issued to especially American tech companies. The major difference here is the magnitude and the fact that Chinese government interventions came more sudden and therefore send shock waves through the stock market.
It started with Alibaba collecting a fine of record breaking $ 2.75bln for anti-monopoly violations and abusing its dominant market position. A few days later, more than 30 other tech companies were summoned to a meeting with the authorities with a strong call to correct their business practices, and several fines have been issues since.
The legislation though is not new in China, but was only properly implemented on November 10th 2020, with a new draft of the rules for regulating Internet platforms. It was a week after the government suddenly blocked the listing of Alibaba's financial sister company Ant Group.
Ant Group has since been forced to restructure to live up to new legal requirements on an equal footing with other financial companies after having run freewheels for many years as a platform for, among other things, risky quick loans.
According to SupChinas brilliant ongoing coverage of the Tech Crackdown, regulators have already ordered Ant Group to separate two of its credit and lending businesses, Huabei and Jiebei, from the rest of the company.
2) It’s all about DATA security
The Chinese government wants better control over the data that the big tech companies collect from millions of users. Among both Chinese officials and private citizens there is a growing scepticism towards the tech giants.
China is already by far the largest digital economy in the world and the big tech giants have been growing almost exponentially based on the free access and use of the massive volumes of data. Companies have been able to train their AI-algorithm to be the best in the world in various categories - based on the massive volumes of data they possessed.
But the game is changing. Regulators are now taking back a part of the control, giving Chinese citizens more privacy at the same time. The new Chinese data security law goes further than the GDPR in some areas and could ultimately repeal companies for mishandling data. We have already seen specific actions since the law was enforced on September 1st.
According to SupChina, China’s internet regulator in a closed-door meeting told Alibaba, Tencent, ByteDance, Baidu, Huawei, Xiaomi, NetEase, and others, to stop blocking external links to competitor sites. The tech giants have historically blocked links and services by rivals on their platforms, creating what analysts have described as “walled gardens.” This is just one example of new regulation where big tech needs to comply.
Obviously, there are also a lot of big politics in the new data security law as well. The Chinese government has already introduced new rules that prevent Chinese IPOs in the US, as the authorities must approve overseas IPOs for companies with more than a million app downloads.
The Chinese driving service Didi, which is the world's largest in its field had its app removed from the Chinese app stores just two days after the company's IPO in the US. The explanation was that Didi had violated China's data security protocols.
The Chinese government is concerned that data on Chinese citizens may be leaked to the US authorities through the exposure that Chinese companies gain from being listed in the US.
It is the governments desire that more companies will be listed in Hong Kong, Shenzhen and Shanghai, and the newly announced Beijing Stock exchange, which is also the case for most Chinese listings.
The Chinese government has long recognized that data is the most important raw material of future business, and they are now regulating to obtain control in an uncontrolled market.
3) Social inequality in the agenda
The last and perhaps most overlooked reason for the harsh course against tech companies in China is social inequality. The gap between rich and poor has widened in China over the past three to four decades, and it is a potential source of social unrest.
It's a theme that President Xi Jinping has been addressing since he came to power in 2012, so the current showdown against China's ultra-rich tech entrepreneurs is not so surprising.
Most analysts find it difficult to give an exact explanation of what's up and down, but the interpretation is that one has focus on “growth at the expense of the public interest.”
In this new era of “social regulations” online tutoring and online gaming have taken the headlines lately. The government want an end to the endless long nights of gaming for Chinese minors and have now limited gaming to maximum 3 hours weekly from Friday to Sunday. This will for sure have a short-term impact on the world largest gaming company Tencent.
Thus, it becomes the tech giants' most important task in the coming time to demonstrate that they benefit to the Chinese society in a broad sense.
Conclusion
The current crackdown is a strategic gear shift from the government. China is entering a new era of its development – with more focus on sustainable growth and clean and green development, clearly underlined in the latest 5-year plan.
The focus is about identifying and rectifying industry misbehaviour and establish regulation that emphasize compliance, social responsibility, and fair and proper behaviour.
Let’s not forget that Tech regulation is a global theme – but for sure we have not seen the last regulation of the tech sector in China.
If you are an investor, you may consider a sector shift but for long-term investments the fundamental growth story of big tech in China is still there.
On top of this, the battle is ON for the hardcore technology that will define China as a sophisticated high-tech innovator and make it the biggest economy in the world very soon.
For long-term investors that believe in the ongoing Chinese growth story, I see no reason to make major adjustments or sell out. In fact, now may be a good time to buy more.
Also, bear in mind that many Chinese companies have been affected by this – without really being a part of the regulation.
If you need to adjust your portfolio and still want to be part of the growth in China, you could look at companies within the areas of green transition, new energy, semiconductors, 5G, biotech, as well as robots and automation.
There are still great investment opportunities in the Chinese marked but you need to navigate with an eye focused on Beijing.
WHAT IS UP AND DOWN IN “THE BIG TECH-CRACKDOWN”?
October 21. 2021 / 10:00-12:00 CET
Over the last months, clouds over the booming Tech-sector in China have become darker and darker. Chinese regulators are tightening its control over technology firms in dramatic ways that we have not seen before.