The China model: pros and cons of the tech crackdown

On the fourth floor of a harbourside mall on Grand Cayman, not far from touristy scuba-diving outlets and a jerk-chicken shack, is the offshored home of ride-hailing company Didi Global, one of China’s biggest technology firms. A few doors down are the internet companies Baidu and Meituan; Alibaba Group is registered at a post office box up the street, right across from Singh’s Roti Shop & Bar.

The Caribbean footholds, essentially leased mailing addresses, have no operational value but have made it easier for Chinese unicorns to attract European and American investors. They’ve been a bridge between East and West, a sunny symbol of the freewheeling capitalism tolerated by the Chinese Communist Party (CCP) as the cost of allowing its home-grown juggernauts to compete with their US counterparts.

But this journey started veering off course in October when Alibaba co-founder Jack Ma, one of the country’s most visible billionaires, blasted Chinese regulators for stifling innovation. President Xi Jinping’s government responded by quashing Ma’s plan to take Alibaba fintech offshoot Ant Group public and initiating an antitrust case against Alibaba. Ma disappeared from public view, his fortune dwindled and murmurs began about a broader realignment in the relationship between China’s government and its biggest companies. DiDi’s turn came on July 2, just days after its $4.4bn initial public offering in the US. Regulators ordered a security review, then demanded mobile stores remove DiDi’s apps.

Later in the month, the Chinese government announced a sweeping new regulatory framework for the online education industry, which it said had been “hijacked by capital,” then said online food platforms must ensure workers make at least the local minimum income. This gutted share prices of delivery giant Meituan, which was already facing an investigation into alleged monopolistic behaviour. In statements in recent months, Alibaba, Didi and Meituan said they would co-operate with authorities and work to enhance their compliance systems.

The government clampdown signals a new era of harsher oversight that companies won’t be able to avoid by registering in the Caymans or hiring in California. The world’s two largest economies seem headed down different paths as they grapple with the sprawling power that private tech companies have amassed. The authoritarian tinge is a risky pivot to some in and around the Chinese tech industry, and others see a chance for the country to gain an edge against its main geopolitical rival. “China is actually taking the lead in setting some boundaries around the power of Big Tech,” says Thomas Tsao, co-founder of Gobi Partners, a venture capital firm based in Shanghai.

Since the late 1990s, China has emulated Silicon Valley’s approach to innovation. Aided by Western capital and a generation of Elon Musk-like entrepreneurs — many educated overseas — the country saw Chinese versions of eBay and Amazon (Alibaba), AOL and Facebook (Tencent) and Google (Baidu) rocket to success while the government took a permissive approach to their behaviour and largely protected them from US competitors.

At first, Chinese companies replicated services that were unavailable in or not tailored to the country, but they’ve long ceased to be mere copycats of Valley rivals and now often outmanoeuvre the global competition. Super apps, including Tencent Holdings’s WeChat and Alibaba’s Alipay, handle everything from on-demand transportation to food delivery to paying utility bills — there’s nothing comparable in the US. These days, Apple, Facebook and Snapchat are racing to mimic features of these and other Chinese apps, instead of the other way around.

Just as in the US, unfettered growth led to increasingly powerful tech companies and CEOs who, operating with surprising independence, weren’t afraid to flex their power. China’s biggest tech companies periodically forced smaller competitors to integrate with their platforms or pressured them to sell out.

Some see the crackdown on Alibaba and Didi — along with actions against dozens of other tech companies — as long overdue. Andy Tian, who led Google China’s mobile strategy in the 2000s and is now CEO at Beijing social media start-up Asian Innovations Group, says it will be “positive for innovation” and “competition in China will be fiercer than in the US,” because smaller companies will benefit from policies that rein in the largest competitors.

Angela Zhang, director of Hong Kong University’s Centre for Chinese Law and the author of Chinese Antitrust Exceptionalism, says the intervention will reshape the tech industry in China faster than it could happen elsewhere. “The case against Alibaba took the Chinese antitrust authority only four months to complete, whereas it will take years for US and EU regulators to go after tech firms such as Facebook, Google and Amazon, who are ready to fight tooth and nail,” she says.

But if China is abandoning the Silicon Valley model, what will it replace it with? Insiders suggest it will be less founder-driven and more China-centric. President Xi’s government has called the data its tech industry collects “an essential and strategic resource” and has been pushing to tap into it for years. After a 2015 mandate, cities from Guiyang to Shanghai have set up data exchanges that facilitate the transfer of anonymised information between corporations. This could lead to a nationalised data-sharing system that serves as a kind of digital public infrastructure, putting a huge trove of data into the central government’s hands.

The danger with this approach is that it could have a chilling effect on innovation. As one Chinese unicorn founder puts it, this new China tech model would “help hold back some overcreative ideas.” Though this was meant as approval, it also can be read as a scarily restrictive view of innovation. The war for control over data could also threaten the Cayman Islands’ status as a bridge between the superpowers. China has already signalled it will make it harder for Chinese companies to list on US stock markets, limiting their ability to grow and raise capital outside Asia.

If the crackdown makes it more difficult for China’s largest companies to expand, the beneficiaries could be American tech giants. The prospects for regulation in the US remain uncertain, and Silicon Valley’s dominant players could keep buying up future rivals, winning at a global scale. Of course, if they do so by smothering start-ups that could develop into rivals, it could end up depriving the US of useful innovations just because Google or Facebook find them threatening.

The cost of China’s turn on tech is also being borne by its future business leaders. One China-based start-up founder, who requested anonymity to speak openly about a politically fraught subject, says tech companies are likely to be more cautious in rolling out riskier products, act with more reverence for CCP policy, and may try to avoid growing too huge, lest they draw unwanted government attention.

Yet another entrepreneur who’s operated for years in China scoffs at this notion. “No-one is going to say, ‘Oh, maybe I shouldn’t get too big, because then I run the risk of being shut down by the government,’ ” says this person, who also requested anonymity. “If I get to that point, where I’m so big that I’m getting shut down by the government, that’s amazing. That means I won. That means I’m the next Jack Ma.”

Bloomberg Businessweek. More stories like this are available on bloomberg.com.