China’s tech industry faces problems from the virus outbreak, regulatory crackdown and trade war

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SHENZHEN, CHINA – In this high-tech hub of China, engineers and investors fear the days of rapid growth are behind them.

The numbers are grim: Among China’s top three online companies, messaging and gaming giant Tencent’s stock is down 41 percent from a year ago, e-commerce giant Alibaba is down 59 percent, and search king Baidu is down 37 percent.

Notable entrepreneurs who were once rock stars keep their heads low. Among the tech executives who have stopped posting on social media and have hidden their past comments are Zhang Yiming, founder of ByteDance, which owns TikTok, Jean Liu, president of China’s transportation giant Didi Chuxing, and Wang Xing, founder of the popular meal-delivery app. Mituan.

Jack Ma, founder of Alibaba, has kept a low profile so that false rumors spread that he may have been arrested.

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China’s tech industry suffers from the complex challenges of regulatory repression, lockdowns at home, and trade sanctions from abroad. These problems make investors fear that the growth ceiling is closer to their heads than they previously thought.

“The optimism I hear now is about Vietnam, Indonesia and Singapore,” said Duncan Clark, founder of Beijing-based consultancy BDA, who has worked with China’s tech industry since the 1990s. “The dynamic has shifted from China.”

About a decade ago, China’s internet sector was awash with cash, as hawkish foreign investors scramble to get a slice of China’s mobile boom. Startups exhausted billions of dollars as Chinese consumers enjoyed convenient and cheap transportation, food delivery, and other applications backed largely by venture capital.

In recent weeks, whispers about layoffs at major Chinese internet companies have spread on social media and have been the focus of local media reports. The discussions were so extensive that China’s cyberspace administration took the unusual step of publicly commenting on companies’ hiring trends last month, saying it had met with Tencent, Alibaba, Baidu and others, and determined that companies were still hiring more people overall. What they have left since last summer.

“Recent online reports that several major internet companies are undergoing widespread layoffs have sparked heated public debate,” the Cyberspace Administration said in an online statement.

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However, Martin Lau, Tencent’s president, told analysts in March that the company would “simplify” its non-core business, saying the industry’s growth was becoming “frothy and unhealthy.”

“For several years, industry participants have overemphasized zero competition, aggressive marketing, reckless expansion, short-term growth, and corporate advantages, ignoring the most important elements of sustainable growth,” he said.

In Shenzhen, Tencent’s hometown, the local government is paying 10 percent of companies’ electricity bills this month as it seeks to ease some of their suffering. In a survey of 97 companies conducted by the Shenzhen Venture Capital Association in March, 93% of respondents said they were suffering from the economic effects of the pandemic, with some factories reporting losses of hundreds of thousands of dollars due to production suspensions.

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Some investors are tracking the moment when they started worrying until November 2020, when Alibaba’s mobile payment subsidiary Ant Group saw its public listing abruptly delisted by regulators. Its initial public offering was on the verge of being the world’s largest in history.

What appears to have angered Beijing’s financial regulators in a free speech. Some officials have long felt that the online financial sector has been allowed to expand too much without regulation. However, industry executives were stunned that Beijing would choose to abandon a massive initial public offering that would have presented China as the global leader in an evolving industry.

There were other signs in the following months that the organization was now taking precedence over growth. Didi Global, the Chinese equivalent of Uber, has announced plans to delist from the New York Stock Exchange after a cybersecurity investigation by Beijing into its operations. Stricter rules have been enforced for internet companies, including limits on children playing video games for three hours per week.

One of the investors, who spoke on the condition of anonymity, said the most surprising measure was the ban last year of online tutoring, a popular service among parents eager to give their children a chance at school. The sudden elimination of an entire profitable sector unnerved investors and reinforced the idea that regulations in China were volatile.

“It kind of ended up being zero,” this person said of a previously successful online education startup they invested in.

The fraught relations with the West also affected the industry. US sanctions continue to hamper research and development for the likes of Huawei, while a tense political environment hampers sales of many Chinese companies in Western markets.

There is also a regulatory system that is evolving naturally as internet companies grow in power. As with scrutiny of Facebook in the United States, Beijing is also reviewing the role Internet companies play in public life. Last year, China announced new regulations on technology companies’ use of consumers’ personal data and facial recognition checks.

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The coronavirus pandemic has added to the challenges facing the industry, with factory production suspended for weeks across the country and workers confined to their homes with short notice.

Richard Yu, head of Huawei’s consumer and auto business, warned in a social media post last month that there would be broad repercussions along the supply chain if Shanghai production remained suspended until May.

In Shenzhen, daily life resumed after a shutdown in March. But the border with Hong Kong, which has long been a gateway for Shenzhen tech companies to global investors, remains closed. Workers have had to add coronavirus tests every two to three days to their routine to maintain access to offices and public spaces.

“The steady economic recovery is facing pressures and challenges,” the Shenzhen Bureau of Statistics said in late April, in a report on the city’s economy in the first quarter. The office said retail sales of consumer goods fell 1.6 percent in the city, while the volume of imports and exports fell 2.8 percent.

Some observers, including Jörg Wootke, president of the European Union Chamber of Commerce in China, say Beijing appears to be easing regulatory crackdowns on the tech industry for now, in light of the country’s economic challenges.

The economy has absorbed enough shocks over the past year or so. “We have had a security crackdown, and the virus has spread to different parts of China,” Wootke said. “The opposite is true now.”

Wu reported from Taipei. Lyric Lee in Seoul and Vic Chiang in Taipei contributed to this report.

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