From competition enforcement to data privacy, China’s crackdown on its tech giants is driving sweeping reforms on how tech companies govern, manage and engage with customers and employees.
For a while, Chinese tech founders enjoyed cult celebrity status, not unlike Tesla’s Elon Musk. One by one, they have since laid low following Ant Group’s failed US$37 billion ($50.15) IPO in Shanghai and Hong Kong last November. ByteDance founder Zhang Yiming stepped down as chairman of the company on Nov 3, six months after resigning as CEO of ByteDance, which owns TikTok.
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This came a week after Su Hua, co-founder of TikTok rival Kuaishou Technology, stepped down as CEO while staying on as chairman.
In September, Richard Liu, founder of e-commerce giant JD.com, stepped back from day-to-day operations although he remains chairman and CEO.
The most famous of them all was Jack Ma, who had stepped down from his official posts at Alibaba Group Holdings back in 2019 but remained a domineering presence until his outspoken criticism of the banking system ahead of Ant’s IPO last year incurred Beijing’s wrath.
Winds of change from Beijing
These high-profile resignations are but the most obvious sign of companies and investors adjusting to the new regulatory regime. Many of these enforcement actions were long overdue, says associate professor Angela Zhang, director of the Centre for Chinese law at the University of Hong Kong. But why has it taken so long?
“Ninety-nine per cent of the law is about enforcement and enforcement is never black and white,” says Zhang.
Speaking at Credit Suisse’s Asia Pacific ESG Conference 2021 on Oct 20, Zhang points to the “very centralised” nature of China’s regulators.
“This comes with advantages and disadvantages,” she says. “The advantages are that when regulators realised that there was a problem with the tech sector, they were able to act very quickly and mobilise. But this centralisation is also a disadvantage; the people at the top are far from the information sources.”
“This is not a problem unique to the Xi administration — it goes back thousands of years,” adds Zhang.
For decades, Beijing was supportive of the tech sector. So, the bureaucracy exercised very lax controls, particularly with growing antitrust problems, says Zhang. “Now, the top has changed its mind and said we need to deal with this problem. That explains why you see a very sudden shift from very lax to very strict.”
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Zhang says the tensions between China and the US are playing a role. “If we go back to the US trade war in 2018 and regulatory attacks on Chinese Big Tech like Huawei, these actions by the US have deeply troubled Chinese policymakers. They realised they needed to do something to boost self-sufficiency.”
The government is counting on its Big Tech players to help foster innovation. “It is really China’s weakest link in its competition with the US right now,” says Zhang.
Patchwork of regulators
China’s regulatory actions are not that different from those in Europe and the US, says Zhang. But while the rest of the world is targeting US Big Tech such as Facebook, China is targeting its own giants.
Compared to the US, the Chinese tech sector is more concentrated, with Alibaba and Tencent Holdings effectively operating as a duopoly. Here, regulators are grappling with the sheer size of these players while trying not to stifle innovation.
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Zhang points to Europe and the “drastic impact” on how international businesses conduct data compliance in line with General Data Protection Regulation (GDPR) protection. “It is adding to the cost,” she says.
The GDPR regulation outlines data protection and privacy in the European Union (EU) and the European Economic Area (EEA). It also addresses the transfer of personal data outside these areas.
Zhang points to the patchwork of regulators in Europe. Ireland, for example, is a preferred jurisdiction for Big Tech names to set up shop, thanks to a favourable tax regime.
“There are a lot of problems with enforcement,” she says. “The Irish authorities have been criticised all the time for not properly enforcing data protection laws against the big tech companies whereas you see the French data regulator has been extremely active. So, it’s not just about the law, it’s also about how an agency enforces the law.”
A similar pattern exists in China, adds Zhang. “We also have a patchwork of regulators; it makes it extremely complicated and difficult to predict.”
“China’s Personal Information Protection Law, expected to come into effect later this year, is closely modelled on the GDPR. The question is: How is China going to enforce the law?” she asks.
Regulatory competition is also a risk as agencies compete to expand their authority. This means there is likely to be further legal actions, says Zhang.
Beijing recently upgraded the rank of the anti-monopoly regulator, which provides it with more staff. The State Administration for Market Regulation plans to hire 33 personnel in 2022, 18 designated for its anti-monopoly bureau, reported Global Times on Oct 18. The regulator’s staff size will number more than 100.
That is a huge deal, says Zhang. “They have significantly expanded the enforcement capacity of the antitrust bureau, and this will have a long-lasting impact.”
Anti-trust enforcement will continue to be a theme for China over the coming years. The risk is that smaller companies are having a harder time with data compliance and this may entrench bigger companies, says Zhang. “The bigger players are better able to absorb the cost so the regulation may turn out to benefit the largest companies in the end.”
ByteDance, which owns TikTok, has been able to use customer data to fuel growth by accurately predicting what users want to see. “But if people can opt out of this data usage, how will similar companies grow? Research shows the possession of data is a barrier to entry to new forms in many industries,” says Zhang.
In the face of regulatory pressure, however, the big platforms are starting to open up. “Interoperability is the key to resolving some of the monopoly issues in the tech sector,” she says.
“But how do you enforce interoperability? Are you going to regulate like a telecom company? How do you determine the pricing? Who should determine the pricing? What kind of regulatory model are we going to use?”
Above all, Zhang says China’s leaders have always had a complicated relationship with the private sector. “We need to look at the 100-year history of the Chinese Communist Party (CCP) and see the relationship with the private sector. I don’t think the CCP will completely turn against the private sector because the private sectors do contribute 90% of employment and 60% of GDP.”