China ‘smashes’ its tech sector to build a new template for growth

Joseph Dana

Beijing has been cracking down on China’s homegrown technology companies, and this has accelerated in the past few months. This has, unsurprisingly, prompted speculation of China’s motives. But the explanations proffered so far by experts betray a palpable lack of sophistication.

The crackdown is monumental and potentially paradigm-shifting, and will fundamentally redefine what “progress” in the technology sphere means. Its ramifications will ripple across the global tech community. Economies hoping both to elevate their tech sector and partner with Chinese firms should take note.

In recent months, the Chinese government has forced several leading companies to make decisions that severely affect their operating models. The most visible example was when Beijing in essence canceled the initial public offering (IPO) of Ant Group and drove its founder, Jack Ma, into hiding for several weeks.

The government has also targeted fintech companies and started antitrust inquiries into companies such as Tencent and Baidu.

Billions of dollars in market value were lost across the Chinese tech sector in July, as investors tried to make sense of the waves of regulatory pressure. Alibaba, Kuaishou and Tencent (which owns WeChat) – often called the Chinese versions of Amazon, YouTube and Facebook – lost US$344 billion in market capitalization.

On the surface, it looks like China is dismantling its tech sector. But why would it do such a thing? Isn’t China supposed to be world’s biggest technology copycat? So why is it taking down successful versions of the West’s most successful tech firms?

Bloomberg analyst Noah Smith thinks it might have something to do with China’s military-technology sector. (He isn’t alone.) Many resources (including the talent of China’s gifted engineers and programmers) have been pouring into the consumer tech sector. Beijing might instead prefer to redirect that talent toward nationalist aims, the thinking goes.

In Smith’s view, the link between geopolitical power and the consumer Internet sector has become “too tenuous to keep throwing capital and high-skilled labor” at the latter. So the decision was made to curtail its power and ability to access resources.

There might be a smidgen of truth to this, but it’s too simplistic. Not everything is about war and military strength. Indeed, it is a failing of the West’s understanding of China that it views the policy prescriptions of a government that serve the interests of 1.4 billion people through a small number of lenses – security, economic competition, Taiwan.

Such are the limits of its bandwidth that even Tibet is no longer the celebrated cause it once was, having been supplanted by the Uighurs in Xinjiang.

In truth, China’s consumer tech sector is just starting to make progress in emerging markets around the world. While they still lag behind major US tech companies, Chinese firms have made deep inroads in parts of Asia, Africa and Europe.

Given the size and depth of China’s technology talent pool, the country should be able to invest in its military needs while allowing profitable companies to develop organically. China can walk and chew gum.

A better interpretation of the crackdown might be that the government doesn’t see fundamental value in particular segments of the tech sphere that is in essence in the business of keeping people engaged by the lowest common denominator of entertainment.

This is still a state controlled by the Communist Party of China, a state that remains deeply torn by the tension between economic advancement and what it sees as frivolous bourgeois distractions.

Applications like TikTok create great value for advertisers and big profits for their owners. The algorithms that companies like ByteDance, the owner of TikTok, deploy are immensely powerful. But it is difficult to argue that they serve the advancement of society; more likely, they sap productivity.

This is not to say that the Chinese government is focused on the intellectual enlightenment of its people. Far from it. China’s leadership is interested in power, and these consumer platforms don’t seem to be offer much in that department.

Instead of investing in more technology focused on cat videos, why not use that talent to develop, for example, quantum computing?

China’s leaders don’t want to continue to be seen as imitators of the West and have been frustrated that despite its many and significant advances in the pure and applied sciences, the country is continuously derided for a lack of scientific and technological sophistication and imagination.

Because Beijing does not need to worry about consumer backlash and can divert resources in the technology sector with little or no pushback, it is possible that it will direct resources to the commercialization of scientific advancements made by its university laboratories.

In doing so, it will rewrite what has come to be understood as progress in technology, exemplified in the last couple of decades by the likes of Apple, Google and others in Silicon Valley.

This ultimately means a rewrite of the playbook of competition.

The power of Silicon Valley technology companies is almost unparalleled in history. But if China redefines progress in commercial technology, the rest of the world’s tech sector will have to up their game in the face of diminishing returns from 30-second dance videos and shoot-them-up video games, to say nothing of the enabling of disinformation defended as free speech by social-media firms.

As China “smashes” its technology sector to shift the industry’s focus, maybe it’s time for a similar reckoning in the rest of the world.

This doesn’t mean dismantling companies, but a fresh conversation about the role of consumer technology in society. China may be redefining technological progress in the 21st century.