China's crackdown on tech has been centered around consumer-facing issues
Internet companies may be because Xi likes hard tech.
Chipmaking has a greater geopolitical importance (Noah
Smith/Noahpinion

China’s crackdown on tech has been centered around consumer-facing issues Internet companies may be because Xi likes hard tech. Chipmaking has a greater geopolitical importance (Noah Smith/Noahpinion

Perhaps because the definition of “tech industry” in different countries isn’t always consistent

"Smashing a Piggy Bank" by Images_of_Money is licensed under CC BY 2.0

People who follow business news will have noticed a curious and interesting phenomenon in the last few months. China is destroying its internet companies. The government effectively canceled Ant Financial’s IPO and then demolished the company. Jack Ma, founder of Ant, and the e-commerce company Alibaba was summoned for a meeting and disappeared for several weeks. After imposing a multibillion-dollar antitrust penalty against Alibaba, which is often compared with Amazon, the government also removed its most popular web browser app store from it and took other steps against it. Ma’s business empire is now worth less than it was.

Ma wasn’t the only target. Other fintech companies are being pursued by the government, such as those of Didi (China’s Uber) or Tencent (China’s largest social media platform). Chinese regulators announced that they would be reviewing Didi’s application for an IPO in America and would impose various sanctions against the company. Tencent and Baidu, two top Chinese internet companies, were also cited by the government for their past dealings. Top tech company leaders, including ByteDance (the owner of TikTok), were summoned by regulators. They were presumably also berated. Numerous Chinese tech companies are currently undergoing “rectification”.

It’s difficult for those not in China to understand what is going on because of China’s opaque, byzantine, complex nexus between party, government and big business. It is unclear who ordered these actions or the final result. It is difficult to understand why this is happening. Some people see it as an antitrust campaign similar to those in America or Europe. China’s leadership is known to want to stop the rise of other centers of power. But, how does the West compare? The U.S. antitrust movement is driven by the desire to limit the power of Big Tech companies. You might view the Chinese tech crackdown simply as a NeoBrandeisian move on steroids.

The Chinese crackdown is extensive and suggests that there’s a significant difference. Although the U.S. did take down some of its giant corporations — Microsoft, AT&T and Standard Oil — it ultimately didn’t destroy the industry these companies belonged to. It is unlikely that we will see any major actions against all U.S. Internet companies simultaneously. Instead, broad EU action will be in the form of new rules and not a massive crackdown. China’s attacks on its internet companies seem much more extensive. It’s not only targeting the largest companies but also the whole sector. Update: China appears to have reduced venture funding. You can’t suppress new entrants if you want to increase competition. China suddenly doesn’t like the technology industry.

It is odd because it has been a long-held belief in Western media that a tech sector was essential for innovation, growth and other things. For many years, American pundits believed that China’s economy was being held back because of the government’s refusal to allow access to information. This would prevent China from building a high-quality tech sector. China built a tech sector of world class quality, but now the country is trying to destroy that sector. This is not U.S. “innovation”.

However, China doesn’t seem to be imposing any restrictions on its tech companies. Huawei is one example. The government is going hell-bent-for-leather to try to create a world-class domestic semiconductor industry, throwing huge amounts of money at even the most speculative startups. It’s spending heavily on A.I. China is not destroying technology, it’s actually the internet-facing software companies that Americans call “tech”.

What is the reason Americans associate “tech” with Amazon, Google and Facebook? The first reason is America’s high performance in the consumer internet sector — this is different from our electronics hardware industries. Our consumer software industry has been hard-driving Asian rivals, but they have not yet managed to surpass us. Software companies also make lots of money — Facebook generated over $18 Billion in profit in 2020. This is three times the amount made by Honeywell or Micron, six times Cisco and six times that of Honeywell. Software companies that are successful have high margins due to their low overheads, network effects and strong brand values. This is true both for small and large software companies. Because we Americans tend to associate profit with value, we view the software-facing industry as our industrial champion and generate a lot of economic value.

China might see the world differently. The Chinese government may have decided that Tencent and Alibaba’s profits come from more rents than actual value-added — or they are simply using first-mover advantage in order to grab strong network effects. Or that the IP system favors these companies. There are certain Americans who think that Google and Facebook produce very little value relative to their profits. Perhaps China’s leaders have reached this conclusion for unknown reasons.

However, I believe there may be something more. GaveKal Dragonomics’ Dan Wang is a great analyst to read if you are interested in China’s economy and politics. The following is a passage I found in Dan’s letter for 2019.

It is bizarre to me that people have decided consumer internet is the best form of technology. It’s not obvious to me that apps like WeChat, Facebook, or Snap are doing the most important work pushing forward our technologically-accelerating civilization. It seems plausible to me that Tencent and Facebook might have a net negative impact on technological advancements. The apps they develop offer fun, productivity-dragging distractions; and the companies pull smart kids from R&D-intensive fields like materials science or semiconductor manufacturing, into ad optimization and game development.

San Francisco’s and Beijing’s internet businesses are skilled in business model innovation, leveraging network effects and R&D. I wish that we could stop referring to China as the leader in technology. China has an active consumer internet. The large number of internet users who order delivery, purchase household goods, or play online games does not automatically make them a leader in technology.

Dan is responsible for keeping his ears to the ground and listening to what China’s leaders think. He then relays those ideas to us. When he began to talk about consumer internet technology being “tech”, it made me wonder if China’s leaders thought the same thing. Dan then wrote this 2020 letter:

In the past few months, it has become clear that China’s leadership is shifting towards the belief that harder tech is better than those that allow us to dive deeper into the digital realm. Xi stated this year that digitization was important but “we must recognize and never deindustrialize” the real economy. This statement preceded antitrust and securities regulations. It also targets finance which, along with tech, is the most popular sector today.

The crackdown on China’s internet industry appears to be part the emerging country’s national industrial policy. China’s leaders have shifted the focus of the country’s industrial mix away from allowing local governments to simply throw resources at what will generate rapid growth, as was the strategy used in the 1990s and early 2000s.

What do they believe will be best for the country? I’d guess Power. The People’s Republic of China has a greater geopolitical as well as military strength than its counterparts.

You will need to have a lot of military hardware if you want to wage a war with the U.S., Japan, India, or anyone else. Materials, engines, fuel and engineering are all necessary. Because military technology is becoming increasingly digital-driven, you also require chips to power that hardware. You will also need firmware. For monitoring your adversaries and any attempt to destabilize or destabilize them, you will also require surveillance capabilities.

While it’s easy to forget, the goal of technological innovation was once to “win wars”. The NDRC, the OSRD and NSF were at the forefront of government funding of technology and research in World War 2. DARPA and NSF arose from this legacy. The U.S. government has always had a large share of research spending, so many of America’s top private sector tech companies are often derived from defense-related activities.

China's crackdown on tech has been centered around consumer-facing issues
Internet companies may be because Xi likes hard tech.
Chipmaking has a greater geopolitical importance (Noah
Smith/Noahpinion

Our priorities changed from survival to pleasure after the Cold War. Technology like Amazon.com and Facebook, which is fundamentally about enjoyment and consumption, became the centerpiece of “tech” for Americans.

China has never moved beyond survival mode. China’s leaders embrace economic growth. But that growth was always directed toward the goal of total national power. China’s youth may have more fun and are willing to make a profit, but their leadership skillset is not yet there. They have bigger fish to fry: they must avenge China’s Century of Humiliation, and claim China’s properful place in the sun.

So when China’s leaders consider what technologies the country’s entrepreneurs and engineers should be focusing their efforts on, it’s likely that they don’t want them to spend that much effort on things that are just for entertainment and convenience. They likely looked at the consumer internet sector to determine if it was worth investing capital or high-skilled labor. In classic CCP style, they decided to smash.

Up-to-dateThis is:

  1. This theory helps me understand why China suddenly shattered its for-profit education industry, but I am sure that there are more reasons.

  2. One other factor that some people have mentioned (see comment section) was that many of the Chinese internet companies penalized by China have high levels of foreign ownership. It could be partly about foreigners being denied access to Chinese tech.

  3. There are always people who don’t agree with this interpretation. This is one example of a contrary viewpoint. This is not a view I find convincing. However, I believe any evaluation of China’s goals that fails to recognize the centrality of total national power would be a little too diplomatic.

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Publiated Mon, 26 July 2021 at 02:58.43 +0000

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