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The Many Battlefronts for Chinese Technology Companies
The recent cancellation of Ant’s IPO and investigation of Alibaba by the Chinese government has sparked a wide-ranging discussion about the outlook for Chinese technology companies heading into 2021. In November, China’s government proposed new rules targeting large, homegrown tech behemoths in an alleged effort to curb anti-competitive behavior. One of the proposals could require companies to obtain approval to file for a variable interest entity—the legal tool the firms use to list overseas. Another rule would prevent larger tech companies from abusing their scale to price goods below cost. Simply put, the proposals could certainly add significant hurdles to companies’ operations. And indeed, the government has already hamstrung Ant—at least as far as its market access is concerned; though it looks increasingly likely the government has more in mind for Ant than just scuttling its IPO.
One of the biggest questions on most investors’ minds is how far the Chinese government will go with its crackdown. Or whether this is even really the beginning of a broader crackdown—it may not be. Perhaps the government intends to make something of an example of Alibaba and Ant. After all, they’re far from the only large, influential tech companies in China that have gradually amassed sufficient followings that their sway is potentially meaningful—a big consideration in a country that for all its increasingly capitalist tendencies is still a one-party country. Perhaps forcing some change and sending a message via an Alibaba/Ant crackdown only is sufficient warning to other companies that could possibly be in the crosshairs.
It adds another concern to a growing list of battlefronts for Chinese names. China’s intensifying geopolitical disputes with Europe, the US, India and other countries increasingly involve China-run technology—particularly in the US’s case. The US has banned Huawei and implemented other high-level blacklists like chipmaker SMIC. And ongoing efforts against TikTok and WeChat continue playing out in US courts. The UK has followed suit, banning some of Huawei’s 5G equipment, and Sweden has proactively banned it from its 5G networks. This despite China’s threat that it would enact a retaliatory ban on Ericsson and Nokia if the EU as a whole were to move against Huawei, which it has yet to do.
Where China tech companies may be most stuck between a rock and a hard place is India—which has banned 170 Chinese apps and could soon do the same to Huawei amid its ongoing border dispute with China. Meaningful action on India’s part could prove particularly damaging to Chinese technology given India represents one of the world’s fastest growing online markets—e-commerce in India is expected to reach $200 billion by 2026. India also represents an enormous opportunity in terms of 5G, artificial intelligence and other next-generation technologies. Dented relations with China could lead India to turn to natural competitors in the US.
The questions entering 2021 certainly outnumber the answers. For China’s tech firms, a big question is what the companies will look like once the looming regulatory push and geopolitical squabbles end. It hardly seems to be in China’s best interest (or the party’s for that matter) to do such damage that its major global competitors are no longer fit to compete—particularly given leadership has such explicit goals of increasing China’s domestic consumption and economic activity. Technology companies would seemingly play a big role in increasing the likelihood China hits many of those goals.
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