We have been on vacation, trying very hard to not read the news, but even while camped out in the D2D remote Hawaiian compound we could not miss the news about the recent crackdown on apps in China. Several months ago, the Chinese regulators pulled the plug on Ant Financial’s massive IPO at the 11th hour. At the time, no one knew that this would lead to a wider crackdown, but plenty of people suspected it would So it was not entirely a surprise that days after ride-sharing app Didi’s IPO, the regulators forced the company off the Platforms (including App Store, Google Play and the WeChat super app). Then CNBC reported that TikTok parent Bytedance has quietly shelved its IPO plans. And those are just the big headlines. Companies which have received investments from any of the Big Chinese platforms, which is effectively every company in China consumer tech, have also hit the brakes on their IPO plans as well. And the pace of regulatory activity seems to have accelerated further this week. Clearly something big is happening.
Now we want to be very clear – we do not have any insight or clear understanding of high-level Chinese politics, even after 30+ years of following it. We do not think any outsider really knows how the Chinese government makes decisions. We are not sure if many of the participants in that process really understand it that well either. (And before you shake your heads and judge, please explain to us how the 2017 US Tax Cut was written.) If you want some insight, for the best analysis on how China works you should subscribe to Bill Bishop’s Sinocism. Our point here is that a lot of things are taking place at once, but there are some useful models for how to think about all this.
First, China’s government is not a monolith. Even though they only have one political party, that does not mean there is only one center of power. The Government and the Party are beset by all sorts of rivalries and vying interest groups. There is the constant struggle between the Center and the Provinces. There are ministries jockeying for power and regulatory bodies for jurisdiction. Some of that is on display here as the relatively new Cyber agency has reportedly emerged as the arbiter of which tech companies can go public (So imagine how the various Financial Regulators feel about that.)
Second, this is a busy political season. The Party is celebrating its 100th anniversary and there are some big Party meetings coming soon. Add to this the ongoing US-China Trade War and a possibility of a Xi-Biden summit soon. Finally, there is Hong Kong, which will eventually benefit from Chinese tech firms listing there rather than in New York, and Beijing is keen to be seen throwing cheap benefits to Hong Kong right now.
Also, we should keep in mind that these companies may not be entirely without sin. Those who follow China’s consumer Internet can list plenty examples of all the major players throwing their weight around and conducting some very consumer UN-friendly practices. We have heard several commentators ask “How could China ruin its best companies?”, so it is important to keep in mind that this may be as much about specific wrongdoing as it as about some grand strategy.
However, beyond all of this, the recent kerfuffle reminds us of two of the best books written about Asian politics and economics – Joe Studwell’s Asian Godfathers and How Asia Works. These books outline the economic model that Taiwan and Korea used to build their economies into powerhouses, in contrast to the models used by other countries, like the Philippines, that did not turn out so well.
His central point is that the successful governments gave a group of companies effective domestic monopolies to subsidize develop export industries and move up the value-add chain. The risk with this model is that these companies become so powerful that they only reap the benefits of domestic protection without doing the hard (expensive) work of building export power. The governments used a variety of tools to enforce compliance, generally aided by the fact that at the time these companies were dictatorships. In particular, he recounts the story of how the Korean government jailed many leading chaebol executives in the 60’s to ‘refocus’ their minds on the country’s development agenda. They were eventually released, and then went out to build massive export industries.
We have no idea if anyone in Beijing is consciously emulating these models, or is even familiar with them. That being said, the resemblance is stark and apparent. China’s tech giants have built massive, self-reinforcing platforms with monopolistic or oligopolistic power in many sectors of the key economy. The country’s payment system has essentially moved from cash to Ali Pay and WeChat Pay, to name one example. So if we use Studwell’s analysis, those companies now may need to be ‘reminded’ to conform to the national agenda in order to maintain their positions. This may or may not include building export capacity, but it is noteworthy that none of these companies have had much success in porting their apps outside China, a lack of success has long looked like a conspicuous lack of effort. Regardless, there are many other items on the national agenda not least of which is financial and technological reliance on the US.
This is just one framework for thinking about highly complex dynamics. Studwell’s books are not perfect nor lacking in critics, but we do think it is useful to keep them in mind. Viewed in this light, the current turmoil is temporary. The big platforms will be forced to make changes, some of them long overdue, and some they have already begun. This does not make them good investments – they may have to give up large value drivers, and the very structure of their ownership with all those off-shore VIE vehicles has long been problematic. But the companies themselves are not going away. They have built impressive capabilities, capabilities that China needs.