The almost unimaginable price of defying China’s government
Good morning! President Joe Biden is selling his proposed $2.3 trillion infrastructure package as a way to compete with China, and made the point again yesterday while touring an EV factory in Dearborn, Michigan. Even with over $100 million dedicated to EVs, it's unlikely the U.S. will see the bevy of new entrants into the market that China has: The country added 30,000 new EV-related companies in Q1 of this year alone. Buckle up.
In this week's Protocol | China: mega fines for Big Tech, fake ByteDance badges for $6, and Alibaba connects with ancient texts.
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The Big Story
Chinese regulators are hitting Big Tech where it hurts: the bottom line
Much ink has been spilled about how Chinese authorities treat superstar businessmen like Alibaba founder Jack Ma (spoiler: increasingly poorly). But more significant is how Beijing's tough-on-tech posture affects another larger group: shareholders.
- Last November, Beijing issued draft amendments to the country's Anti Monopoly Law that are expected to go into effect this year. Under the new rules, violations could incur fines as high as 10% of the disciplined firm's revenue from the previous year — a potentially astronomical sum.
- Companies that have failed to report acquisitions and investments before they happen are particularly vulnerable. And Big Tech companies have made countless investments; The cap tables in Chinese IPO docs are stuffed with big names like Tencent and Baidu.
- Last Thursday, Alibaba announced it had posted its first loss since the company's 2014 NYSE debut. The company's Q4 2020 operating income decreased 2% compared to the year before — mostly because of a $2.8 billion fine by anti-monopoly regulators in April.
These fines are an order of magnitude higher than those that U.S. regulators generally issue to bad actors. And it's not just the fines themselves causing pain; the effect that news of government scrutiny can have on stock prices is also devastating.
- Pinduoduo's share price dropped more than 10%, a loss in market cap of $20 billion, after Shanghai's consumer watchdog, the Shanghai Consumer Council, ordered the company to fix problematic business practices on May 10. The consumer watchdog said Pinduoduo's offenses include the sale of bogus products, copyright infringement, forced order cancelations and pricing tricks to lure new users. Pinduoduo's share price has plummeted 39% from its peak in February.
- Meituan, which was implicated in the same consumer announcement, saw its share price drop by 7% on the news, a loss in market cap of $154 billion. The complaints against it: refund disputes following the cancellation of orders, non-performance of deliveries and misleading consumers. As of Tuesday, its share price has dropped 42% from this year's peak.
The government may be seizing power, but the public supports it. Many of the targeted behaviors are genuinely shady, and have understandably outraged consumers.
- Chinese Big Tech uses big data to target frequent customers and serve them higher prices — exactly the opposite of what you'd expect for being loyal.
- Cross-platform link blocking is a type of non-government censorship that makes it impossible to share one Big Tech link on another Big Tech platform. Imagine if you couldn't share a link to an Amazon product with a friend on Facebook Messenger.
- Exclusive partnership agreements mean consumers can often find a vendor's products on one, and only one, ecommerce platform.
Expect more big bites out of Big Tech's hide. Government regulators know they're backed by a strongman intent on putting the Party above all else, a public fed up with shady practices and new legal tools rolling off the assembly line. For the time being, Big Tech must get ready for more big fines.
On Protocol | China
- You probably adore a Chinese brand. You might not know it yet. Love yourself wearing SHEIN? Addicted to HOTO's home DIY tools? You're a China brand aficionado, even if you don't know it. Chinese companies are sick of making stuff for other global brands and are rolling out their own, using platforms like Shopify to connect directly with customers around the world. What shoppers often don't realize: they often hide their origin, wary of bad brand rep. Shen Lu has the goods.
- Streaming idol shows are a new headache, and a new propaganda opportunity, for Beijing. Time was, propaganda officials just needed to control the airwaves if they wanted to steer the culture. No more. Instead of government arms like China Central Television, the new cultural kingmakers are online streaming platforms like iQiyi. But the massive fan bases for streaming shows — particularly idol competitions — are starting to do weird things Beijing doesn't like. Zeyi unpacks how regulators are dealing with this "problem."
China Goes Global
- Tencent Cloud gets a Seoul. On Wednesday, Tencent Cloud announced its signing of a Memorandum of Understanding with the Tourism and Sports Bureau of Seoul. Tencent Cloud will create a Seoul travel app for Chinese tourists as well as a WeChat mini program. The goal is to attract more Chinese visitors to the South Korean capital as the COVID-19 lockdown starts to lift.
- Xiaomi 1, Pentagon 0. The Chinese smartphone (and smart-everything) giant Xiaomi has agreed with the Pentagon that it can be removed from a U.S. investment blacklist for Chinese military-linked companies, court documents show. In March, Reuters reported that a federal judge had called the process leading to Xiaomi's inclusion on the list "deeply flawed." The successful challenge of the ban could set a precedent for many other Chinese companies, analysts told the South China Morning Post.
A MESSAGE FROM DATASTAX
Protocol sat down with DataStax CEO Chet Kapoor to discuss how a modern, open data stack can help companies drive high growth and the role open-source Apache Cassandra plays in reliably delivering data at scale.
Big Brother Beijing
- The son of Xi's right-hand man has invested a ton of money in Tencent and JD.com. According to a Financial Times investigation published Tuesday, the son of Liu He, China's vice premier and head of China's Financial Stability and Development Committee, used to be chairman of Skycus Capital, a firm heavily invested in several big Chinese tech companies that the elder Liu helps to regulate. The son relinquished his chairmanship before his father was promoted to the Politburo in 2017, but has continued to work at Skycus and has "played a central role in lucrative transactions involving Tencent and JD.com [business] units."
- Protections for Chinese delivery workers. As the plight of food delivery workers receives nationwide attention, local Chinese governments are rolling out piecemeal measures to protect the rights of couriers, often called "riders" (骑手). Starting May 1, the eastern Chinese metropolis of Nanjing will require third-party contractors servicing delivery platforms like Meituan to sign formal labor dispatch agreements with their riders. They also recommend contractors provide certain benefits like insurance and time off.
Straight From China's Web
- China's new status symbol: a Big Tech employee badge. It started with occasional social media remarks asking why ByteDance employees wear their badges outside business hours and turned into a roast, with commenters comparing Big Tech employee badges to other status symbols like designer handbags and sneakers. Surprising no one, Taobao vendors were quick to start selling fake badges. They start at $6 each.
- Cashing in on rural chic. With over 15 million subscribers, the rural lifestyle vlogger and cook extraordinare Li Ziqi is the biggest YouTube star from China. She's also immensely popular at home, where she's converted her earthy influence into a consumer food brand, according to Tracy Ji, a founding partner of Meridian Capital and early investor in Li's company. "We are comparing Li Ziqi's brand to Coco Chanel — from a [key opinion leader] to a cultural symbol, and eventually a sustainable brand," Ji told Chinese media.
- Tesla's tough year gets tougher. On Monday afternoon, a Tesla car hit two traffic cops in Zhejiang, China, causing one to die from the injuries, according to Chinese outlet National Business Daily. Despite Elon Musk's personal appeal among Chinese fans, the company has found itself at the center of several firestorms this year, ranging from concerns over data privacy to design issues with the brake system. Chinese social media is asking whether a defective brake caused this latest accident.
One More Thing
Alibaba meets the UC Berkeley library
Over the past two years, researchers at Alibaba's Damo Academy have been hard at work training AI models to parse ancient Chinese texts housed at the University of California, Berkeley. They recently released their first tranche of results, comprising over 200,000 pages of searchable books. Alibaba used optical character recognition, which is notoriously unreliable as old texts are written by hand and vary widely. But Alibaba achieved accuracy levels exceeding 96%, helping to advance machine learning models for Chinese character recognition and making the musings of the ancients easier to access.