Looking for reasons behind China’s tech crackdown (part 1)

Original images by Voice of America, Marleen Kuiper, and Arek Socha.

To better understand the crackdown on Chinese tech companies from a Chinese perspective we need to take a look at what is being said inside China. In this first article in a series we’ll look at the four problems of the consumer internet according to a government official.

‘‘Is this being done because these companies were getting too powerful?’ is a question I have frequently been asked when being interviewed about the crackdown on China’s big tech companies in the past nine months. It’s a question which I normally respond to with my own question: ‘Powerful in what way?’.

Indeed, a lot of the new regulations, the fines and the blocking of IPOs have been done because the concerned tech companies have become too powerful. But I mean that in the context of market monopolies. When some media ask me if Chinese tech companies were getting too powerful, journalists normally seem to refer to them being a threat to the rule of the Communist Party of China. And although I don’t have proof that completely rules that possibility out as a factor at play, I don’t think it is a major reason for what’s been happening.

As I explained in a series of Dutch articles earlier this year, China is quickly catching up with previously lacking regulations in fields like data security, privacy and antitrust. In the west we often that the Chinese government has unlimited control over anything that happens in the country. This is a misconception since their actions must be grounded in legislation. And although you could argue that the CCP is the one that creates that legislation, it does need to be in place first. 

A good example of the limitations the CCP was facing in the past decade is the way the government has struggled to enforce antitrust in China’s internet sector. The anti-trust law that was implemented in 2008 immediately was hopelessly lacking for this industry. To prove a monopoly, regulators had to be able to compare a company’s business to a ‘relevant market’, but for the internet industry there was no clear way to define either the numerator or denominator in the calculation of market share. A clear example of how this tied the hands of the government can be found in the case it tried to build against Didi Chuxing when it acquired Uber China in 2016. Although the government announced several times that it had started an antitrust investigation into the merger it never came to a verdict. 

The new additions to the antitrust law that were announced in January 2020 (note: months before Alibaba was investigated for monopolistic abuse of power) and implemented this year is seeking to fill many of the gaps. Multiple fines have already been handed out to big internet companies for cases in which they did not request authorization for mergers and acquisitions from the market regulators. The maximum fine currently is 500.000 RMB ($77.000). Mere pocket change for the companies concerned, but the continuous stream of these fines has made it clear that the regulators are serious. On top of this, regulators blocked the merger of game streaming companies Huya and Douyu under the umbrella of Tencent. It would have created a monopoly with 70% market share under a company that already has a leading position in the video gaming sector.

Huang Qifan’s four problems of consumer internet

In the Tech Buzz China Insider community, tech analist Rui Ma pointed out that many clues for the government’s motivation for the crackdown can be found in a recent speech by Huang Qifan. Huang is Vice-Chair of the National People’s Congress Financial and Economic Affairs Committee and an adviser to the China Finance 40 Forum (CF40). No small potato I would say. Mid July, Huang pointed out 4 problems with China’s consumer internet.

  • Problem 1: China’s competing internet companies are often playing a ‘zero-sum game’ in which the winner gains a monopoly. To get there, they get funded by investros and burn-up cash to win customers and scale up. And once they have achieved a monopoly, they apply high fees for consumers and merchants. This doesn’t just result in inefficient allocation of resources but also a lack of value creation for society.

What Huang describes has constantly happened over the past decade. Alibaba used to have 80% market share and still has about 50-60%. Its market power has allowed it to demand exclusivity from merchants that were asked not to sell their products on platforms of competitors like JD.com. The regulator, State Administration for Market Regulation (SAMR) punished Alibaba with a $2,8 billion fine in April this year.

And Alibaba isn’t the only monopoly. Didi has an estimated 90% market share in ride-hailing, Tencent’s WeChat Pay and Ant Group’s Alipay have a duopoly in mobile payments with a combined market share of more than 90% and Meituan and Ele.me have something comparable in the meal delivery sector.

Every new sector started off with a tens, or in the case of group-buying thousands of competitors. Those who could get the most funding, give the highest discounts to consumers and sometimes play the dirtiest would eventually win the market in a monopoly or duopoly. Often these would be Alibaba or Tencent or companies that these giants had invested in.

  • Problem 2: China’s internet companies play on human weaknesses in their product design to acquire traffic. They disregarded long-term interests of consumers and healthy development of the market. 

This refers to the use of suggestive or downright pornographic content, click-bait, and other tricks to attract users. Many examples can be found in the past 10 years. Didi’s Hitch carpooling service was promoted with promises of hook-ups and ads were often filled with sexual innuendo.

In 2016 Ant Group attempted to launch a social network called Circles within their AliPay app. Based on available data, young ladies were invited to post pictures, while young men with Sesame Credit scores of 750 or higher were invited to comment on these pictures and give these ladies virtual gifts. Before long scantily clad women were earning some extra cash through Circles. In People’s Daily and on CCTV Ant Group was reprimanded for “vulgar membership rules and violation of moral standards”. Circles was removed within days after its launch.

And then there’s WeChat, whose ‘People Nearby’ functionality, which shows other WeChat users that are sharing their location, was used by prostitutes to find customers.

  • Problem 3: China’s internet companies collect unnecessary large quantities of data about users and infringe on their privacy. The collected data and required authorisations for access to functions of your mobile phone, such as the device’s microphone, are unwarranted.

Although hard to prove, there have been cases of people complaining about being served adverts on e-commerce platforms for products they had very recently discussed in conversations.

  • Problem 4: China’s internet companies apply price discrimination; based on available data they determine how much customers would be willing to pay for a product. As a result different users pay different prices for identical products or services. This violates the principles of fairness and transparency in the market.

Companies like Meituan and Didi have been accused of price discrimination, but it is often hard to prove. 

In Huang’s opinion the consumer internet was not built on a profit model that benefits all parties. Huang also argued that the industrial internet, using digital and internet technologies to improve efficiency for industrial use cases, does not have these problems and thereby benefits multiple parties. “If the digital transformation of each industry on average can result in a 5% increase in efficiency, then China’s approximately 100 trillion yuan of industrial output value will increase by 5 trillion yuan, and approximately 150 trillion yuan of service industry output value will increase by 7.5 trillion yuan.” According to Huang, “any enterprise that can develop around focus areas of the national economy, such as new infrastructure, carbon neutrality, “One Belt One Road”, manufacturing power and rural revitalization can take advantage of the situation.” A clear advice to look into different business models that add value for society.

To summarize, in the past decade the situation in China’s consumer internet sector has resulted in destroying efficiency gains in the sector and not creating sustainable long-term benefits for the economym unlike what Huang expects industrial internet to do. This is a clear example of something the government has been calling the ‘disorderly expansion of capital’ since late 2020. 

More about ‘disorderly expansion of capital’ in a next article in this series…