Why China is attacking its own big tech sector

The market capitalisations of several of China's major tech companies have taken a severe beating

China doesn't always put profits first

On the face of it, it seems strange.

A national government deliberately and effectively wiping billions of dollars of value from a group of companies that at one time had been grouped together under the banner of “national champions.” Big Tech in China has taken a pummelling on the markets in recent weeks, but not because trading conditions have turned sour, but because the government has.

But just as China is much more multifaceted than it initially appears, so too is its tech sector, and not every company is suffering the same fate.

So, while one-time darling of Chinese cheerleaders Jack Ma has now fallen from grace and the multi-billion dollar listing of his company Ant Financial has been scuppered, tech conglomerate Huawei sails on unmolested.

What gives?

It’s more than just a question of the right executives handing over the right amount in brown envelopes to the right government officials.

In fact, it’s more likely part of a deliberately thought out strategy.

After all, China is not the country it once was just a couple of short decades ago, when any kind of growth was to be championed, and a sector like software, where margins are traditionally large, was given every encouragement in the name of the onward march of GDP.

Now, China has to some extent arrived. To be sure, it can’t quite challenge America properly yet. But it’s got within shouting distance, and the time has come for the government, under strongman Premier Xi Jin-Ping, to start to think strategically.

In fact, consumer-facing tech hasn’t had a clear run in China for some time. The collapse into scandal of various bike-sharing apps a few years ago heralded a certain souring of the public mood towards the tech sector in general, especially as there are, as in the Western world, concerns about data security.

That might seem ironic in a country that wields the most advanced surveillance systems in the world, but the difference with the consumer tech was that it wasn’t only impacting consumers’ freedoms, it was hitting them in their wallets.

So, it’s been widely held for some time that companies like food-delivery service Meituan, ride-hailing service Didi and online travel service Ctrip are engaged in what’s known locally as “big data back-stabbing”, or mining consumer data in order to manipulate prices upwards.

The Chinese consumer is at last beginning to make demands and, on this issue at least, the government is willing to take notice.

That’s because the Chinese government also has its own agenda when it comes to tech companies. Last year, President Xi made a pronouncement the significance of which was missed by many observers.

“We must recognize the fundamental importance of the real economy,” he said, “and never deindustrialize.” 

On one level that might be seen as a response to the cultural and economic conflicts now wracking the USA, where several decades of deindustrialization are now seen as root causes of many of the country’s social ills.

But it goes deeper than that.

The Chinese economy has always been centrally controlled, and anyone who suggests otherwise is dreaming. The periodic disappearances under house arrest of the leaders of its top conglomerates serve to remind not only the industrial and economic elite but also to the rest of the population who’s in charge. The founder of Alibaba, Jack Ma, is the latest to disappear and then to reappear, chastened.

That this latest round of wing-clipping only goes to underline the point is incidental, though. The point is that the control has always been there, and those that pull the levers of that control are now seeking to take the country down a different path.

Note the parallel attack on for-profit online educational companies. This is essentially a harking back to the old days, a top-down reinforcement of equality that prevents the bourgeoisie pulling too far away from the masses.

The attack on consumer-facing big tech is similarly ideological, and runs in part in the tradition of moral regeneration programmes that have their roots back beyond the rule of the CCP to the times of Chiang Kai-Shek.

Profit is not the be-all and end-all of a communist state. Power is. That the consumer-facing tech companies were profitable was useful as long as it helped the Communist Party in enhancing its power. But if that same tech becomes merely a series of sophisticated leisure-oriented applications, then its’ utility becomes more questionable.

In and of itself, that might not matter. But there’s still the question of China’s standing and power in the world to consider. And the Chinese Communist Party is becoming increasingly aware that its hard technology rather than consumer software that will be essential in pursuing that agenda. It’s no good whatsoever if the best Chinese minds are being sucked away into consumer-facing technology by the promise of higher wages and the glamour that Jack Ma once enjoyed. Much better to set those minds to work creating the next generation of artificial intelligence, of robotics, and of electronic engineering.

That’s why Huawei, which makes hard technology is able to continue unmolested. And its no coincidence either that shares in China’s semiconductor champion, SMIC, have surged this week.

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