China's tech industry belts up for more turbulence

ByteDance's online video app TikTok has been downloaded about 1.45 billion times since launching. The Chinese start-up is part of a new generation of tech darlings that rose to the fore and now challenge their forebears.
ByteDance's online video app TikTok has been downloaded about 1.45 billion times since launching. The Chinese start-up is part of a new generation of tech darlings that rose to the fore and now challenge their forebears.PHOTO: REUTERS

Challenges include keeping position as tech factory, start-up and VC shakeout

BEIJING • China's tech industry enters a new year after weathering unprecedented turbulence in 2019, when giants emerged in social media and artificial intelligence (AI), only to bear the brunt of Washington's campaign to contain the world's No. 2 economy.

There is little reason to think 2020 will be much different, given the United States' efforts to hobble Chinese champions from Huawei Technologies to SenseTime Group, deemed a threat to national security.

American lawmakers went after some of the country's biggest names last year. Foremost among them were smartphone and networking titan Huawei and ByteDance, the Chinese wunderkind that in the span of a few years overturned social media entertainment and drew a billion-plus mostly younger US users to its online video app TikTok.

The heightened scrutiny came just as pressure back home intensified. Beijing sought to scrub sensitive content from ByteDance apps and Tencent Holdings' WeChat, while the economy grew at its slowest pace in decades, depressing Alibaba Group Holding's e-commerce business.

Investors cooled on the sector, with venture capital activity halving - triggering fears that the industry's heyday is over. That in turn demoralised China's already-overworked tech professionals, who rebelled for the first time against the 70 plus-hour workweeks that Alibaba founder Jack Ma labelled the norm.

Given Washington's increasing hostility, China is now even more driven to devise alternatives to foreign technology from AI chips to blockchain solutions while propping up local champions - bad news for the likes of Qualcomm and Apple that depend on China for much of their revenue.

It has started to upend a decades-old supply chain centred on China, threatening to split the old world order in two. It is not just in hardware - from Russia to South-east Asia, many governments have begun to co-opt characteristics of the Chinese Internet arena, from harsh fake-news laws to censorship and data sovereignty.

"This year was perhaps the first year we understand China tech at its most global ever. But it also showed us the spectre of it becoming more and more insular," said research and strategy manager Michael Norris of Shanghai-based consultancy AgencyChina. "This is bigger than just the US in terms of about assuaging the fears of countries like India that platforms aren't going to disseminate nude photographs or hate speech."

PLUNGE IN CAPITAL FLOW

The industry's woes may be best quantified by a plunge in capital flow.

 
 

The amount of venture money invested plummeted by more than 50 per cent to about US$50 billion (S$67 billion) from a record US$112 billion in 2018, when it topped the US, according to market research firm Preqin. Venture capital (VC) funding dropped in the US too, but only slightly.

China birthed only 15 unicorns, or start-ups worth at least US$1 billion, down from 35 the year before, according to CB Insights.

The plummeting coincided with a loss of confidence in some of the industry's marquee names, exemplified by the rocky debuts of WeWork and Uber Technologies.

While Alibaba raised US$13 billion in a milestone Hong Kong offering, smaller names like SenseTime and Full Truck Alliance struggled to raise capital.

"The power of the mobile revolution is coming to an end. Globally, we are seeking what comes next," said Sinovation Ventures founder Kai-Fu Lee.

The start-up and VC industry is likely headed for a shakeout. Many investments from the past bubbly years are not panning out, with start-ups struggling to live up to their valuations. Fund raising by China-focused venture firms fell by about 50 per cent to about US$13 billion, according to Preqin.

Beijing-based analyst and portfolio manager James Hull said there is a sense that the "easy stuff" in China's Internet start-up scene is done. He expects the next hot wave might be the enterprise sector. "But I don't think that will play out as well because B2B is difficult - the selling is difficult."

The year kicked off with Huawei chief financial officer Meng Wanzhou under home arrest in Vancouver, fighting extradition to the US. Then the Trump administration tightened its grip on China's largest tech firm in May, banning Huawei from buying some components and software from American tech giants like Intel Corp and Google.

Throughout 2019, Washington pushed allies to pass up purchasing Huawei-made 5G telecoms gear, accusing the firm of aiding Chinese espionage. Huawei disputed such claims but that did not stop Japan, Australia and New Zealand from blocking Huawei from 5G projects.

The most immediate repercussions lie with its smartphone business. New Huawei models introduced in overseas markets will be devoid of must-have Android apps like Google Maps and Gmail.

In response, Huawei stepped up efforts to become more self-reliant, mobilising its 190,000 employees to develop in-house alternatives and unveiling a potential Android surrogate dubbed Harmony OS.

The tumult forced reclusive Huawei billionaire founder Ren Zhengfei into the media spotlight to defend his firm, lash out at the US and expound on his firm's efforts to lead the coming 5G revolution.

Huawei may have survived the first wave but it is likely that the real pain will come this year.

NEW GENERATION

China's tech boom over the past decade birthed twin giants Alibaba and Tencent, a duo that effectively control almost every aspect of the country's Internet through their sprawling business empires and vast investment portfolios. But from last year, a new generation of tech darlings rose to the fore and now challenge their forebears.

 
 

Foremost among them is ByteDance, the world's most valuable start-up. After its first breakout hit, news app Toutiao, the Chinese company is rocking youth the world over with TikTok, an app known for everything from teenage twerking to singing gummy bears.

It has been downloaded about 1.45 billion times since launching, but has become a lightning rod for criticism as tensions rise between the US and China. From Facebook chief Mark Zuckerberg to a growing coterie of lawmakers, prominent Americans warn that user data may wind up in Chinese government hands. ByteDance has repeatedly denied that could happen.

The year will see ByteDance try to extend its tentacles into a panoply of fields. It is testing a paid music app in emerging markets to challenge the likes of Apple Music and Spotify. It is looking to make video games to tackle Tencent on its home turf. Other rising contenders include Tencent-backed super app Meituan and AI leader SenseTime.

Meituan, China's third most valuable tech firm last year, will continue to battle Alibaba in nascent areas from food delivery to online travel. For SenseTime and fellow domestic AI pioneers like Megvii Technology, the challenge will be grappling with US sanctions that threaten to crimp their fledgling businesses.

"China tech is going global, going mainstream and shaking things up more than ever," said tech consultancy Silicon Dragon's founder Rebecca Fannin. "More US start-ups will follow China business models."

China's position as factory for the world of technology is in jeopardy.

The (mainly Taiwanese) assemblers of the world's electronics are exploring options beyond China to varying degrees. From Inventec Corp to Foxconn Technology Group to Quanta Computer, the makers of everything from iPhones to Dell laptops have either moved production back to Taiwan or to farther-flung regions around Asia, seeking to escape US tariffs.

The idea is that, even if Washington and Beijing strike a trade deal, diversification is essential in the longer term, given tensions are unlikely to subside and labour costs will rise.

Even leading Chinese hardware suppliers recognise the risks. Luxshare Precision Industry has invested in Vietnam and established a unit in India, while Goertek has begun making Apple's popular AirPods earbuds in Vietnam. Taken together, the collective exodus spells the start of the end of a system that has served the world's leading electronics brands well since the 1980s.

Last year forced Chinese tech workers to come to terms with the new reality. Many had taken jobs with start-ups in the hope of cashing in when they debut or get bought. But as that deal-making streak cooled, the prospect of working long hours lost much of its appeal.

In March, Chinese programmers on GitHub put together a list of firms known for short-changing staff on overtime. That spurred a greater awareness of the human cost of China's tech boom.

One thing is clear: The Chinese tech arena, long regarded as an alternate reality to a US app-dominated world, will draw further away from its American counterpart. And some of its biggest players will seek to extend their influence overseas, as they have done from Africa to South-east Asia.

"What's changed is the trade war, the talk of decoupling," said Mr Paul Triolo, head of global technology policy at Eurasia Group. "This has really galvanised the authorities. It doesn't necessarily mean that they will be more successful. But they're determined."

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on January 07, 2020, with the headline 'China's tech industry belts up for more turbulence'. Print Edition | Subscribe