China’s tech giants lost their swagger and may never get it back

China’s tech giants lost their swagger and may never get it back

(Bloomberg) — On the trading floors in New York and Hong Kong, the booming mood towards Chinese tech companies is undeniable: with stocks like Alibaba Group Holding Ltd. and Tencent Holdings Ltd. rising from multi-year lows, talk of a new bull market is getting louder.

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However, talk to executives, entrepreneurs and venture capital investors who are deeply involved in China’s technology sector and a more bleak picture emerges. Interviews with more than a dozen industry players suggest that the outlook is still far from rosy, despite signs that the Communist Party’s crackdown on big technology is softening on the fringes.

These insiders describe an ongoing sense of paranoia and paralysis, along with a disturbing realization that the skyrocketing growth rates of the past two decades are unlikely to ever return.

Alibaba and Tencent are expected to deliver single-digit revenue growth in 2022, a disappointment after years of rambunctious expansion. A prominent startup founder said he would pass on money from those companies because of the attention it would attract. Another said his company is moving forward with the assumption that it is only a matter of time before officials double down again.

A third Beijing entrepreneur recently sold his stake in a tech unicorn, saying he is reluctant to start a new venture until there is more clarity about what the government will allow.

“China’s tech crackdown has taken place. There’s no coming back from that,” said the entrepreneur, who wished to remain anonymous for fear of retaliation. “Regulatory pressure on Chinese tech companies may be on the brakes for the time being given the sluggish economy, but it’s unthinkable that regulators in the country will get their hands on it. on platform companies would ever slacken.”

Read more: China weighs in on Jack Ma’s Ant IPO revival as gig gets easier

On the face of it, China’s $1 trillion internet industry is finally coming out of a brutal reckoning. Jack Ma’s Controversial Ant Group Co. is poised to revive a long-derailed IPO. Numerous new video games have recently been green-lit for app stores. And after a thorough investigation into data security, Beijing may soon be able to launch the car-sharing company Didi Global Inc. leave the job with a fine.

During conference calls over the past few weeks, top executives announced a new era of refocusing on building products and making a profit. Take Koolearn Technology Holding Ltd., an online education operator that was nearly wiped out last summer when the government banned for-profit tutoring companies. After the push for e-commerce went viral on social media, the company’s shares doubled during a single day of frenzied trading on June 13. peak valuation in 2020 – a sign that investors have yet to quote a price for a return to the times before the crackdown. The Nasdaq Golden Dragon China Index of US-listed stocks is up 52% ​​from this year’s low, leaving the meter about 60% below its peak.

Beijing has “gradually started to release some policy signals,” Xin Lijun, retail chief of e-commerce giant Inc., told Bloomberg Television. But “a return to the past days of ‘riding without holding the reins’ is not very likely.”

Read More: Tencent, Alibaba Look Like Utilities After $1 Trillion Drubbin

Still, startup leaders have warned investors not to get too comfortable. After regulators scrapped Ant’s 2020 IPO plans and sent shockwaves across global capital markets, the change in temperature was undeniable. Startups avoid money from big investors. Industry leaders became nervous about consolidating power. Billionaires like Ma went into hiding.

Beijing has a long tradition of restraint in the run-up to important events. This year’s upcoming party congress — when Xi Jinping is expected to win an unprecedented third term — is about as important as it gets. Some worry that the government is only temporarily letting go of the leash to spare an economy devastated by the coronavirus and high global inflation.

“I really feel like signs of regulatory easing are starting to show, and frankly, we’ve seen some of this ‘barbaric growth’ in recent years,” said Guo Changchen, founder of Keeko Robot Technology, a Xiamen-based established company. artificial intelligence education startup. “As long as there are regulations and those regulations are clear, we can work on our development within this system.”

Read more about the Big Tech crackdown:

  • China weighs the revival of Jack Ma’s Ant’s IPO as a crackdown

  • Top Tech Dealmaker Warns China’s VC Winter Is Far From Over

  • China leads global contraction in venture capital deals

  • Tencent billionaire out of frustration over China’s slowdown

Founders say a maze of government regulations introduced in 2021 have made their lives difficult. The rules govern everything from the platform economy to what types of entertainment are allowed on social media. Research into practically every facet of the industry has produced a chilling effect. American money, which disappeared during the crackdown, shows no signs of returning. JPMorgan was one of the Wall Street institutions that referred to China – for a time as “uninvestable.”

Aside from this year’s stock rally, China is still weathering a decline in venture capital investment, despite once touted as a primary rival to Silicon Valley. The value of deals in the country fell about 40% from a year ago to $34 billion in the first five months of 2022, according to data from research firm Preqin. Meanwhile, venture capital and private equity funds raised $6.2 billion, a drop of more than 90% compared to the first five months of last year.

Even the apparent beneficiaries of China’s easing of rules face an uphill climb. Although regulators Baidu Inc. Giving the go-ahead to release new games from April, the company has suspended game development and gun publishing and cut staff, according to a person familiar with the matter. That means one planned game – “The Advancing Rabbit” – will probably never be released.

Of the 105 gambling companies that have acquired new licenses since April, at least 11 are no longer operating normally, according to a Bloomberg News analysis of company data available on registry tracker Qichacha. Some studios dissolved their companies. Others took their websites down or repurposed them for things like job openings and rental offers.

Creative choices are still strictly controlled. In February, the Shanghai outfit Lilith Games canceled a new mobile game after deciding that the anime-style graphics probably wouldn’t get through regulators, according to a person familiar with the matter. Chinese censors have a low tolerance for what they consider lewd imagery, such as the more sexualized or explicit iconography popular in Japanese anime.

“The licensing hiatus has led to layoffs and streamlining among game developers across the board,” said Jesse Sun, head hunter at Shanghai-based consultancy Gamehunter. “It’s a dead end for a lot of small and medium studios.”

Why China continues to focus on its tech giants: QuickTake

Even at best, China’s once boastful tech titans are now essentially utility companies hitting single-digit growth. Many are afraid to pursue moonshots in an age of knee-jerk regulation.

It is unlikely that Ant will ever make the biggest IPO in history. Didi has reversed its overseas expansion. And Tencent and Alibaba say they will focus on safer, trusted betting like social media and online commerce, while gradually relinquishing the lead in yet-to-be-disrupted arenas like fintech.

The founder of an agricultural startup said he recently asked an investor if his money counted as “disordered capital expansion.” Without specifying its scope, President Xi has used the term to explain why regulatory oversight of tech giants is necessary.

“That investor couldn’t answer,” the founder recalls. “Actually, nobody knows the answer.”

(Adds stock performance details in ninth paragraph)

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