Can China Still Lead The World In Tech Without A New Jack Ma
Can China still lead the world in tech without a new Jack Ma?
China has chopped its global tech champions down to size, cracking down on antitrust abuses and reckless risk taking. But the heavy-handed approach could backfire on Beijing by strangling an entrepreneurial spirit that has proven fundamental to the country's fast economic progress.
Several Internet businesses have been scrutinized in the past several months over alleged monopolistic activity or other abuses of consumer rights. The ongoing probe — which President Xi Jinping has personally backed as vital to safeguard "social stability" — has led to record fines for some IT titans and substantial overhauls for others. More than $600 billion has been knocked off the value of the top tech stocks in recent months.
A number of China's most successful entrepreneurs have departed high-level roles amid the turbulence. Zhang Yiming, the founder of TikTok owner ByteDance, recently announced he would stand down as CEO at just 38 years old to take a less prominent role in the company. And Colin Huang, 41, indicated in March that he would retire as chairman of Pinduoduo (PDD), an upstart e-commerce startup that competes with the likes of Alibaba. Meanwhile, Alibaba (BABA) co-founder Jack Ma — China's most famous Internet entrepreneur — has mostly disappeared out of public view.
Zhang and Huang both claimed they were departing to try new things, and neither highlighted the government's focus on the IT sector in their remarks. Zhang's decision to stand down was not related to regulatory activities in China, a ByteDance representative said. Pinduoduo pointed CNN Business to Huang's public comments.
But it's hard to divorce their exits from the expanding government clampdown on technology.
"The atmosphere hovering over China's IT scene has grown increasingly toxic," said Alex Capri, a research fellow at Hinrich Foundation and a visiting senior fellow at National University of Singapore. He cited Zhang's move as "evidence that fear trumps ambition if the danger of public humiliation or some worse kind of punishment awaits those who defy the system."
But criticizing the system is crucial to the private enterprise that played a crucial role in China's journey from a poor country to one of the world's largest economic and tech superpowers over the past two decades. Losing that dynamic would not only risk weakening some of those gains, but may also make it much tougher for China to realize its lofty aspirations to dominate the world in the technologies of the future.
A state-driven economy
Wary tech executives need look no further than Beijing's public humiliation of Ma. The colorful and outspoken entrepreneur all but disappeared when he blasted China's state-controlled banking system last October for having a "pawn shop mentality," and accused the government of using stodgy and outmoded techniques to oversee a modern financial system.
It's not simply Ma's private reputation on the line. The businesses he founded have suffered too. Beijing barred Ant Group, Alibaba's financial unit, from going public, before forcing it to restructure and placing it under severe oversight. Alibaba was slammed with a record fine in April over antitrust issues. Ma's legacy is under siege elsewhere - he has apparently been forced to recede from an exclusive business school that he built.
"Part of the crackdown on internet tech businesses is motivated by the desire to decrease financial risk, as in curbing the lending activities of Ant," said Nicholas Lardy, a senior scholar at the Peterson Institute for International Economics (PIIE) who monitors China's economy. Ant owned around 2.15 trillion yuan ($333 billion) worth of consumer and small company loans this time last year.
But another reason "may be due to Xi's intention to break down alternative sources of power that could ultimately challenge the authority of the [ruling Chinese Communist Party]," Lardy noted.
Beijing's goal to establish heavier control over private enterprise originates from the government's assumption that a state-managed planned economy is more effective than one that relies on a free market approach, and more critically, more likely to allow the Party to keep its power.
"The leaders of the tech firms that have become too powerful for the comfort of Xi and the Communist Party are put under pressure, as the monopoly of power across the board by the Party cannot be allowed to be challenged," said Steve Tsang, director of the SOAS China Institute at SOAS University of London. "Hence, they individually take efforts to reassure the Party and Xi that they will not do so, by handing over the company leadership to protégés."
An unstable balance of power
China's internet companies aren't necessarily attempting to rock the boat. Alibaba has collaborated closely with the government on its Rural Taobao initiative, a program aimed at decreasing poverty among farmers by helping them sell commodities directly to urban consumers online. The company has built a government-sponsored software — Xuexi Qiangguo — that teaches Xi's political views.
"All of the big Chinese tech giants — in spite of their private nature — have cultivated a proximity to the government that presumably created the idea of balanced power relations," said Sonja Opper, a professor at Bocconi University in Italy who studies China's economy and its institutional transition to the private sector.
Tech entrepreneurs are also extensively represented in Party circles.Tencent (TCTZF) founder and CEO Pony Ma and Xiaomi founder and CEO Lei Jun both serve as members of the National People's Congress – China's rubber-stamp parliament. Baidu (BIDU) founder and CEO Robin Li and NetEase (NTES) founder and CEO William Ding are members of the Chinese People's Political Consultative Conference, the country's main political advisory body. Jack Ma is a Communist Party member.
"The Party groomed rock-star like superstars, [and] they were co-opted by making them members of the National People's Congress," Opper said, adding that tech entrepreneurs "definitely came to feel comfortable, because of their economic strength and global prominence."
"They began to raise a critical voice and began to seem like people who can challenge prevailing thinking," she said. "What we see now is how precarious this equilibrium was, and that control remained the government's key priority."
A risky strategy
Beijing's plan is fundamentally hazardous.
China's protracted economic miracle and swift climb as a leader in innovation has its origins in Beijing's farsighted decision in the late 1970s to give up some control over the economy and adopt a free market approach in many areas. China's tech industry, for example, was allowed to raise financing oversees. Early bets by Japan's SoftBank (SFTBF) (Alibaba) and South Africa's Naspers (NAPRF) (Tencent) roughly 20 years ago paid out handsomely all round.
Restoring a high degree of state control may constrain the freedom that these private enterprises have to innovate and stay up with significant global competitors.
Investors may lose the desire to pump money into private Chinese enterprises if they are afraid about "unwanted government meddling," Opper said, especially since such tech ventures sometimes take a long time to complete. And there's indications that may already be happening.
Alibaba has lost more than $240 billion in market value since Ant Group's IPO was canceled in November. Tencent has seen $173 billion in market value disappear since a peak in January. E-commerce giants Pinduoduo, JD.com (JD), and food delivery company Meituan, meanwhile, have lost a combined $231 billion since February high.
China's leaders don't want to abolish the private sector - it contributes about two thirds of the country's GDP and employs 80 percent of the employees. But it's pretty clear that Xi wants the state sector to lead, with private enterprises playing a complementary role.
"It's a conundrum," remared Lardy from the PIIE. "Xi wants the state to have a stronger role. That's pretty evident from all the things he stated from the last 10 years. He wants the government to play a bigger role to get things going faster."
But for Xi to realize his goal of turning China into an innovation leader by 2035 and a worldwide tech giant by 2050, he'll need to rely more on private enterprises than he expected.
The Chinese leader has increasingly underlined the need for China to overcome its reliance on the West for technology during the past couple of years, especially as Washington inhibits the ability for Chinese enterprises to access US tech. But the corporations driving innovation and progress in China aren't state-owned corporations. Rather, private enterprises are leading the way: Huawei and Alibaba, for example, accounted for more spending on research and development than any other Chinese company last year, according to the China Enterprise Confederation.
"Looking back, there is a reason why China's tech giants were able to develop," Opper added. "They enjoyed a degree of flexibility that allowed [them] to unleash productivity and innovation not seen in any state-owned business in China."
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