Can you plan your way to tech dominance?
The current China, US technology struggle as a question mark
Welcome to The Late-Stage Review, a relaxed writing project from Alex, a finance and technology journalist. It’s free, comes out when it does, and is made just for you!
You can get it in your inbox, or follow along on Twitter.
Several years ago it wasn’t rare to think that the Chinese technology industry would surpass the United States’ own.
America’s tech and startup market was viewed by some participants as the past — a place where workers were too coddled, businesses too woke, and government too regulatorily busy. While in China the argument went, those issues were either smaller, or not to be found.
It isn’t hard to see why some domestic tech luminaries thought that the United States was in danger of losing preeminence. Major platform companies in China were busy using their in-market influence to bully their way to power, while working their employees 12 hours a day, six days per week — the infamous ‘996’ model. For American investors visiting Beijing, it was a place where money could be made even faster than at home.
And yet if you asked a venture capitalist today to choose a single market to invest in for the next ten years, I doubt many would choose China. Some would pick their home markets in Africa, Europe, Latin America or elsewhere in Asia, but most I think would still settle on the United States. Why? Because America still gives birth to arguably the largest technology successes, both nurtured inside of its borders and taken public on its domestic bourses.
In contrast, China’s government has moved to curtail its technology industry as part of a wider push to limit free enterprise, and better control what it citizens see, hear, and think. And the results of the multi-year regulatory push are starting to become clear, at least in corporate-technology terms.
It may be a surprise, but the start of the current rift between the Chinese tech market and the country’s autocratic government is now in its third calendar year. Barely, but the forced-scuttling of Ant’s then-planned fintech IPO came as 2020 was coming to a close. It’s now the start of 2022. How time flies.
Today Alibaba is worth around half of what it was at its peak in 2020, just before the Ant fiasco. In contrast, the American tech giant Apple just touched the $3 trillion market cap threshold, a first for any corporation.
It’s easy to lean on a few, broad data points to paint a picture, but I think those two do a fair job at describing the last few years’ change to the Chinese and American technology industries.
What changed?
What changed in China? A host of things that sum to a revision of the relationship between the Chinese state, and its economy.
At this point it’s useful for me to admit my biases. I am, deep in my DNA, a believer in democracy, liberalism, and market-based economies. As such, I am opposed, prima facie, to autocratic states, illiberalism, and overactive central planning. If you want an analogy, I intellectually reside somewhere between California and Sweden, by way of Wall Street.
Given that perspective, I expected China’s regulatory fusillade to induce private-market investors to pull back from putting capital to work in the country’s upstart companies. After all, as China cut back on maneuvering room for its domestic technology industry, the space available for entrepreneurs to test, experiment, and try new business models would decline; the very space that creative destruction needs to work its magic was being erased, it seemed.
And yet, venture capital activity at least through Q3 2021 was just fine in China. We’re waiting on Q4 data, but I was surprised at how durable things were in the country. More recently, however, we’re staring to see the results of heavy-handed regulatory actions as they relate to China’s technology industry.
The New York Times put together a piece a few days back, describing what looks like a downturn in Chinese tech companies. A few short quotes for flavor:
The ranks of the unemployed technology workers are swelling, as China’s once vibrant internet industry is hit by a harsh and capricious regulatory crackdown. […]
The crackdown is killing the innovation, creativity and entrepreneurial spirit that made China a tech power in the past decade. It is destroying companies, profits and jobs that used to attract China’s best and brightest. […]
The damage has been done. Some internet companies have been forced to shut down, while others are suffering from huge losses or disappointing earnings. Many publicly listed companies have seen their share prices fall by half, if not more.
This was no easy feat to pull off. It took lots of effort to take an industry, rich off its own success, and reverse its momentum.
To mange the achievement, Chinese central authorities have dug deeply into personal lives, limiting how much time kids spend on screens, what sort of films its people can see, even what sort of video games they can play. In business terms, entire industries have been leveled. Throw in a host of anti-monopoly dictates — not all of which were in bad faith, I must admit — and new rules regarding algorithms and more, and you get the feel that China is whole-cloth rebalancing its economy.
Towards what end? Towards more control.
Most, if not all economic changes that we’ve seen in China have been centered around a locus of control. Celebrity culture taking people’s attention away from the state? Crack down. Kids spending too much time prepping for exams? Crack down. Certain tech companies were changing the financial landscape through innovative lending methods? Crack down. Domestic companies are accreting foreign investors who might demand different audit standards and more? Crack down. Major tech companies have too much power? Crack down.
The Chinese government wouldn’t be spiritually razing Hong Kong if it wasn’t in the mood for more control; Hong Kong had a free press, by definition outside of state control, so that had to go. And so forth.
We don’t have space today to get into the weeds of the why of the crack down, but I think it’s fair to say that the Chinese state believes it has the correct view of the past, the present, and the future, so guiding its population towards what’s to come is reasonable from its perspective. My perspective is that that confidence is horseshit, but it does set up an interesting moment in time for us to consider.
Who is going to win?
There’s plenty to fret about, if you want more open societies to win the current political debate between, on one side, Russia, China, North Korea, and other autocratic states, and, on the other, the United States, the EU, and other societies where individual liberty is held in higher regard.
It’s easy to find concern that the United States, for example, is losing the AI battle with China. However, I am long-term not worried. Fundamentally, I think that markets which allow for the creation of new business methods and models will best those that prefer a state-led approach. And that means in time I expect more open societies to win out over those that are more closed.
I do not think that it is a coincidence that Coinbase is an American company. Or Slack. Or Databricks. For different reasons, each: Coinbase is proof that for all the complaints, the United States is still a market where you can innovate in the grey spaces of the law — a compliment, mind. Slack is evidence of how quickly you can scale new businesses in the United States, given its best-in-class revenue history. And DataBricks, built by a collection of folks that happened to meet in more academic settings, shows that mega-companies can still form from humble roots in a country willing to attract talent and let them loose.
Whereas in China, crypto is banned, DingTalk is hardly taking the world by storm, and I can’t really name a Chinese data-focused company similar to DataBricks in its international reach.
But we do get to watch and see. China’s government has laid its chips out, betting that it can steer its domestic tech industry in a more positive direction. In contrast America remains — for all its warts and issues — a delightfully decentralized business environment, lush with new companies and capital and the belief in rapid wealth accumulation
In the race for the future, where we’re seeing major world powers align as we have in the past — albeit with less nuclear brinksmanship — I know where I would place my own wagers. Let’s see who comes out on top.