Singapore’s state-owned investment firm Temasek will continue seeking long-term investment opportunities in China, especially in the technology sector, the company’s China head said in a keynote speech at TechNode’s Beyond Expo in Macau on Thursday.

Temasek spent more than RMB 500 billion (around $78.47 billion) on investing in the Chinese market in the fiscal year ended on March 31, or 27% of its global investment volume, said Wu Yibing, Head of China at the Singaporean state investment firm.

Wu’s remarks came amid media reports that Temasek is shying away from China’s tech sector due to the country’s regulatory climate. 

In November, Nikkei Asia reported that Temasek was “holding off on new investment in Chinese tech companies for the time being due to uncertainty over Beijing’s crackdown on the sector.”

The same month, Bloomberg reported that Temasek had sold shares of several Chinese tech companies including Alibaba and Didi Chuxing. The investor cut 16% of its stake in Alibaba and 11% of its shares in Didi, according to Bloomberg.

Wu, who joined Temasek as its China head in 2013, told the Beyond Expo that the holding firm had had a long position in China since it entered the country more than 20 years ago, and that it will continue to do so.

However, Wu said Temasek is experiencing a transitional period in its China investment from bankrolling the country’s major internet and consumer tech players such as Alibaba, to funding startups in what he called the “new tech” and “new economy” sectors. He said the focus of Temasek’s investment strategy in China would be technological innovation.

Temasek will look at digital transformation as a key trend when investing in China tech, Wu said. The company has been investing in areas such as marketing tech, artificial intelligence, cloud computing, and semiconductors as part of the trend, he added.

China’s declared aim of being carbon neutral by 2060 is creating a trillion-dollar investment opportunity in sectors like electric vehicles and low-carbon manufacturing, said Wu.

“As China pushes for carbon neutrality, it is about to usher in a huge change in the energy industry,” said Wu. “China’s decarbonization goal will also promote a series of significant changes in green energy, electric vehicles, green manufacturing and other industries.”

China’s July crackdown on Didi has had knock-on effects for the wider ride-hailing market, as investors scurry to fund competitors cranking up efforts to steal market share from the ride-hailing monopoly.

Remarkably, this time it is not seasoned venture capital funds but state-owned investors including Citic that are pouring billions of RMB into promising up-and-comers. The leading beneficiaries so far are automaker Geely’s Cao Cao and T3, a ride-hailing service backed by three other domestic automakers. The investments follow more than three months of speculation that Chinese regulators could impose heavy fines, break up the company, or even demand a complete takeover by the state. Didi was listed on the New York Stock Exchange in late June but, less than one week later, cybersecurity regulators forced the removal of Didi’s app from online stores.

Bottom line: Venture capitalists are bullish that upstarts can catch up with the longstanding leader in China’s ride-hailing industry because Didi has been losing momentum ever since its app was suspended. However, the challengers still have to tackle the same regulatory problems Didi has faced.

T3 and Cao Cao gained traction: Dominating China’s ride-hailing market with a 90% share, Didi has had no serious competitors for more than five years. But now investors believe that Beijing’s cybersecurity investigation of Didi may put some ride-hailers backed by automakers in a better position to prosper.

Founded by auto majors FAW, Dongfeng, and Changan back in 2019, T3 is being thought of as one of the most promising challengers to Didi.

• The company is near closing a $775 million funding round led by state-owned financial conglomerate Citic Group, along with a credit line of RMB 2 billion ($310 million) from local banks, according to a LatePost report (in Chinese) on Sept. 23.
• Cao Cao Mobility is another Didi rival that managed to attract investor interest, currently on track to complete a new round of fundraising in the first half of 2022, Bloomberg reported late last month, citing chief executive Gong Xin.
• A subsidiary of Chinese automaker Geely, Cao Cao made the announcement less than a month after closing a nearly $600 million funding round led by five state-owned enterprises. The local government of the eastern city of Suzhou and its associated parties, such as Suzhou Xiangcheng Financial Holding Group and Suzhou High-Speed Rail New City Group, have since had a serious claim to the company’s capital structure.

Investors bullish on fast-growing entrants

The multi-million dollar investments are the latest to follow in the Chinese ride-hailing space which is witnessing investor interest running high over the possibility that two or even more companies could thrive after being a winner-takes-all market since Uber left China in late 2016. 

• Investors were “very enthusiastic” about T3’s recent external funding round, having placed investment biddings of “more than 10 billion yuan,” LatePost reported citing people familiar with the matter.
• Even minor league entrants, mostly backed by Chinese automakers, are capturing interest from mainstream investment firms and market watchers. Notable are SAIC’s mobility service Xiangdao and OnTime, a ride-hailing service partly launched by GAC, the report said.
• Some Chinese investors are now eyeing Didi’s misfortune as an opportunity for its competitors, especially those backed by local auto giants, to knock it off the top spot in the country’s ride-hailing market. As the industry is facing more stringent scrutiny, these companies, having generally hired more licensed drivers, will be under much less pressure in compliance with new regulations, an industry executive told LatePost.

Have they solved Didi’s problems? One of the biggest regulatory hurdles Didi has faced is compliance with regulations governing operating permits and licenses for drivers. Didi acknowledged in its initial public offering (IPO) filings that many of its drivers in China had not obtained the license legally necessary to provide ride-hailing services. 

• The cities of Beijing and Shanghai, for example, require ride-hailing drivers to be local residents and their cars must be registered with local number plates. Both these requirements are extremely difficult to fulfill for ride-hailing drivers, who are mostly migrant workers from other parts of the country.
• A “large number” of cars on Didi’s platforms may not have the necessary permits to provide ride-hailing services, Didi said in the prospectus. Violators of these regulations may face fines of up to RMB 12,000, local media reported.
• Despite lagging behind Didi in number of orders, those rivals are performing better in terms of compliance with regulations. Around 68.5% of orders completed on T3’s platform were deemed as “compliant” in August, meaning that they had met all regulations, according to data from China’s transportation ministry. Cao Cao managed to get a compliance rating of 56.8% in August. By comparison, the ratio for Didi was only 41.9% in the same month.

Didi’s pain is rivals’ gain: Another competitive advantage rivals have over Didi is that they can accept new app user registrations, while Didi still can’t.

• The Cyberspace Administration of China (CAC) on July 2 ordered Didi to stop taking new user registrations “to prevent the expansion of risk” during a “cybersecurity review” into the company.
• On July 4, the CAC ordered apps stores in China to take down the Didi app as part of the cybersecurity review.
• According to a 2020 regulation on the review process, a CAC cybersecurity review should be completed within 45 days. However, it can be extended if “the situation is complicated.” It seems that Didi’s situation falls under the definition of “complicated” as the review process is still ongoing and the app was still unavailable on Chinese app stores as of Friday.
• The Chinese version of Didi’s app was downloaded about 900,000 times in June, according to SensorTower, or 30,000 times per day.
• In September, the Financial Times reported that the number of Didi’s daily users had fallen 30% since the end of June.
• “Didi has sent me a fewer amount of orders since the investigation, but the impact is not big. I still mostly rely on its platform for rides especially during off-peak times,” (our translation) a Shanghai taxi driver surnamed Lu told TechNode on Oct. 15. Alibaba’s mobility service, Amap, currently collects a 9% service fee of the fares. That fee is “slightly higher than that of Didi,” according to Lu.

Analysts’ take

The Didi saga is “a window of opportunity” for rivals, Chen Liteng, an analyst with Hangzhou-based consulting firm 100ec.cn, told TechNode. But Didi still maintains a “significant lead” in China’s ride-hailing market and up-and-comers “would be struggling in their attempts to shake Didi’s position over the short term,” Chen said.

• “If Didi goes through the crisis, the company will find itself easier to be compliant with rules, and that would turn up the heat on its challengers. Ride-hailing platforms T3 and Meituan will in turn probably face more regulatory scrutiny in the future,” said Chen.
• “Collectively, all of the smaller players together could pose a threat but they still need to raise much more capital, keep trying to grow share, and ultimately compete with Didi in the tier-one cities where their true strength lies,” Tu Le, managing director of Sino Auto Insights, told TechNode.
• Le agrees that automaker-backed ride-hailers, with a higher rate of compliant drivers and vehicles than Didi, probably are more capable of adapting quickly to the new regulatory environment as Beijing imposes stricter regulations on the industry.
• “The automakers are used to influencing and knowing how to work through new regulations and currents, so I see that as an advantage for them,” he said.

READ MORE: Didi app ban ignites race for ride-hailing market share

One of the biggest trends in China’s tech industry in recent years is that “Chinese entrepreneurs and startups are being born global,” David Aikman, former chief representative officer, Greater China, World Economic Forum, shared his thoughts on the current state of China’s tech development and innovation during TechNode’s Emerge 2021 conference held in Beijing on Sept. 19.

“Maybe 10 years ago, you had some Chinese startups that were very focused on a domestic play,” said Aikman. “And nowadays, I see a lot more companies who are saying that we’re starting in China, or maybe we’re starting in multiple locations, but the world is our market.”

Aikman also warned that the growing regulatory pressure Chinese startups face is a major challenge for them to expand overseas. “We’ve seen in recent months questions about delisting Chinese companies from the US markets. We’ve seen then responses on the Chinese side. Unfortunately, I don’t see the landscape getting better in the short term for tech companies in the space,” he told TechNode in an interview on the sideline of the event. “So I would say the biggest risk facing tech companies is this geopolitical or regulatory risk,” he said.

The biggest challenges that Chinese investors should be well prepared for when investing in startups overseas is tightened regulations around the world, said Zhu Bin, a former director of Greater China investment advisory, at Business Sweden.

Corporates and investors who are looking to do outbound investment should try to engage or at least touch base with some advisors who are familiar with these regulators and the newest developments as they are constantly changing, Zhu told TechNode’s Emerge 2021 conference in Beijing on Sept. 19.

Chinese companies’ overseas investment activities are facing increasing regulatory pressure recently, especially in high-tech industries like semiconductors and sectors concerning privacy like social media. In late June, the US government halted a Chinese investment firm’s acquisition of South Korean chipmaker Magnachip. 

In 2019, The Committee on Foreign Investment in the US (CFIUS) forced Chinese gaming company Beijing Kunlun Tech to sell gay dating app Grindr, which is popular in the US, citing privacy concerns. The sale finally went through in March 2020. 

“CFIUS is increasing scrutiny of Chinese investment in the US. European countries are also on their way to produce their own regulations of what can be done and what should not be recommended in terms of investment,” said Zhu.

“These regulations are constantly evolving,” he said. “Unless you are a real expert and you are working on these areas on a daily basis, otherwise, you will be shocked perhaps every three months by how things have changed.”

Recent changes to US laws, including the Foreign Investment Risk Review Modernization Act (FIRRMA), expanded CFIUS’s ability to block investments that it deems a threat to US national security.

READ MORE: CFIUS doesn’t mean Chinese companies can’t invest in the US

Chinese tech giants invested heavily in the US between 2010 and 2018, but quickly scaled back investments in US startups beginning in 2019, TechNode reported last year. The drop-off is partly explained by increased scrutiny in 2018 when CFIUS was given more power to review investments in US companies. 

Since then, new Chinese investments in American startups have fallen dramatically. Contributions in the first quarter of 2020 dropped to $400 million, down by more than a third compared to the same period in 2019.

READ MORE: Before the bans, China tech investment turned away from US

“You have to satisfy governments,” agrees Edison Chen, director of investment at Plum Ventures at the Emerge panel with the theme “Cross-border investment in a global context”. “Entrepreneurs have to understand how America works and how China works.”

“If you can understand both of them[the US and China], you can be very successful in entrepreneurship,” said Chen.

Philanthropy is shifting from a “nice to have” initiative to a “must have” commitment for Chinese tech giants.

Chinese internet firms ramped up their donations for the public good over the past few months, giving away billions of dollars to causes ranging from technology innovation to bridging income inequality. The move is widely viewed as an effort to placate a state that lately seems to be scrutinizing their every move.

Bottom line: Under intensifying regulatory pressure, Chinese tech companies are scrambling to show their willingness to operate and invest in compliance with the state’s broad goal of “common prosperity.” The change forced these tech titans, many already suffering selloff pressure due to tighter state reins, to seek a balance between shareholder interests and the higher operating costs due to huge donations.

Brief timeline: Tech giants such as Alibaba and Tencent are already active donors through their corporate funds. The companies’ billionaire founders are also writing large checks for charity from their personal foundations. Alibaba’s Jack Ma topped Forbes annual China charity list with nearly $500 million in donations in 2020. Tencent’s Pony Ma came in third with about $402 million, and ByteDance’s Zhang Yiming was fifth with $189 million. Pinduoduo’s Colin Huan topped the Hurun China Philanthropy List 2021 with donations totaling $1.9 billion.

Unlike previous donations that tended to be sporadic initiatives by individual companies, there’s a newfound generosity from nearly every major tech company over the past few months. 

• Tencent invested RMB 50 billion ($7.7 billion) in “sustainable societal innovation” projects in April. The gaming titan later doubled the sum, giving an additional RMB 50 billion to the company’s “common prosperity fund” in August.
• Alibaba announced in August an investment of RMB 100 billion across ten key initiatives to promote common prosperity in China. The company will establish the Alibaba Group Common Prosperity Advancement Working Committee, chaired by chief executive Daniel Zhang, as a permanent mechanism dedicated to delivering on the key initiatives by 2025. The committee will focus on technology innovation, economic development, high-quality employment creation, care for vulnerable groups, and the establishment of a common prosperity development fund.
• Pinduoduo rolled out in mid-August a RMB 10 billion agriculture initiative to address critical needs in the agricultural sector and rural areas such as food security and agricultural technology. In March, Pinduoduo founder Colin Huang stepped down as chairman after giving away 2.37% of his shares, worth $1.85 billion, to charity last year.
• Meituan’s founder and CEO Wang Xing in June donated $2.3 billion worth of Meituan shares; his company is still undergoing an antitrust probe by regulators following his controversial comments hinting of discontent with the government, wiped tens of billions of dollars off Meituan’s market value.
• Xiaomi founder and CEO Lei Jun transferred $2.2 billion worth of shares in the company to the corporate Xiaomi Foundation and the personal Lei Jun Foundation in July. This is in addition to the nearly $1 billion that Lei announced in April he would donate to charity.
• Zhang Yiming, founder of TikTok developer ByteDance, is giving RMB 500 million of his own money to establish an education fund. 

Compared with previous donations, tech firms’ burst of generosity over the past months was mainly directed towards the goal of public welfare and reducing inequality, a goal made explicit in the company’s five-year plan released this March.

The donations are mainly directed to fields like technology innovation, poverty alleviation, welfare of low-income groups, agricultural/rural development, education, basic science/research, healthcare, and small- and medium-sized enterprise (SME) support.

READ MORE: INSIGHTS | Tech in the five-year plan

A change in priorities for economic growth

When former Chinese leader Deng Xiaoping ended the country’s planned economy and embraced a free market in the 1980s, he said allowing some people and regions to get rich first would speed up economic growth and achieve the ultimate goal of common prosperity. Now, the priority seems to be shifting to the latter.

• On Aug. 17, Chinese President Xi Jinping called for the nation to achieve “common prosperity” in a speech, asking to rationally “adjust” excessive incomes and for wealthy individuals and companies to return more to society.
• Xi’s call came as Chinese authorities stepped up regulation of tech companies in multiple areas, including antitrust, data security, and privacy, ending the country’s long-standing laissez-faire regulatory approach towards the tech sector.

The changes also came as income inequality becomes an increasingly pressing problem in Chinese society.

• China’s top 1% own nearly 31% of the nation’s wealth, according to a study by Credit Suisse.
• Chinese Premier Li Keqiang said in May 2020 that 600 million people, or roughly 42.9% of China’s population, have a monthly income of RMB 1,000.
• China received a score of 0.465 on the Gini index of the World Bank, which measures economic inequality. The score ranges from zero to one, with one meaning complete income inequality. A score of 0.4 or above is considered at a “warning level.”
• “Alibaba is a beneficiary of the strong social and economic progress in China over the past 22 years. We firmly believe that if society is doing well and the economy is doing well, then Alibaba will do well,” said Daniel Zhang, chairman and chief executive of Alibaba Group, in a company statement on Sept. 3.
• Resentment toward tech companies is growing in China. Whether restaurant owners on food delivery platforms or startups in crowded verticals, small businesses feel they are squeezed by the digital behemoths.

Investor sentiments

While donating tens of billions of dollars for social initiatives out of their profits, the Chinese tech companies, mostly listed, face the double pressure of convincing investors that they are making the right decision to sacrifice short-term profits for long-term growth prospects.

• Chinese tech stocks have experienced a stunning sell-off since the beginning of this year as Beijing widened its crackdown. Intensified regulations over monopolistic behaviors, overseas listings, and data security, coupled with massive fines, wiped out hundreds of billions of dollars in market value of Chinese tech companies.
• “As platforms grapple with increased regulatory scrutiny inside and outside of China, investors will need to come to grips with the impact of regulatory burden and compliance costs on EPS (earnings per share) and ROIC (return on invested capital),” said Michael Norris, head of research and strategy at AgencyChina.

How effective philanthropic displays will be? 

But the efforts raise other questions: Will these philanthropic displays be enough to ease the wrath of regulators? Norris thinks there’s little chance internet platforms can avoid regulation through their social impact investments. 

• “However, these investments can signal internet platforms are responsible market participants. This hits the right notes with regulators who’ve been tasked with curbing exploitative practices and market irregularities,” Norris said. 
• “Think of it as stakeholder capitalism, with Chinese characteristics,” he added.

New opportunities under the disguise of donation?

The government’s attention to areas like tech innovation, agriculture, education, and basic science means opportunity for tech companies. By entering these strategic areas, they could expect returns from those donations, or investments, if they have aligned their business with the broader strategic goals properly. But the time for such returns may be long.

• Started as a social ecommerce platform, Pinduoduo has become laser-focused on “digitizing agriculture”, an initiative that aligns with the government’s drive to modernize agriculture and boost development for rural areas.
• Pinduoduo said in a statement that the company will be able to “get back” because the users “have placed their trust” in the platform.
• “I observed that both Tencent and Alibaba pledged to support SMEs. This might mean that some of the investment is applied to existing subsidies or retains discounted take rates,” said Norris. 

A lasting change?

China has lagged when it comes to charitable efforts, partly due to China’s tradition of passing fortunes through a family line. Back in 2010 when Microsoft co-founder Bill Gates and billionaire investor Warren Buffett invited Chinese moguls to a dinner to discuss philanthropy, lots of them turned down the invitation for fear of being asked to make a donation.

However, there’s been a significant change in charitable giving, especially since 2008, when donations struck a chord with larger groups due to the Sichuan earthquake. Donations for fighting the COVID-19 outbreak and helping victims of the recent flood in Henan peaked as tech firms tried to fulfill their social responsibilities, a concept specified in the country’s corporate law.

Chinese tech billionaires still have a long way to go to be on track with philanthropic models comparable to western counterparts like Gates.

Global venture capital (VC) seems to be hedging its bets on Chinese tech startups as a sweeping regulatory crackdown continues. On Aug. 10, Alibaba-backer SoftBank said it would pause investing in China until “the situation is clearer.” SoftBank funds are also major investors in Beike, Bytedance, Didi Chuxing, and Zuoyebang, among other Chinese startups.

But the latest data shows 2021 so far hasn’t been a bad year for VC investment in China. Are US dollar funds really pivoting away from the massive market?

Bottom line: There are signs that foreign VCs are adjusting their investments in China because of recent regulatory changes. But venture capitalists we talked to on the ground said they are optimistic, arguing that stricter regulations can be an “opportunity,” even as they expressed worry. 

Signs of a retreat: Multiple reports have suggested that international funds are planning to reduce their investment in China as a result of the crackdown.

• The value of venture deals in India surged to $7.9 billion (RMB 51.3 billion) in July, surpassing China on a monthly basis for the first time since 2013, according to research firm Preqin. VC investment in China the same month was $4.8 billion, it said.
• On Aug. 10, SoftBank Group Chairman Masayoshi Son said the funds would take a “wait-and-see stance” until the situation in China settled in “a year or two,” the Financial Times reported.
• In a plot twist, SoftBank China Capital, the Japanese conglomerate’s VC branch in China, said in a statement on its website on Aug. 12 that it is still “committed to investing in excellent high-tech startups in China.” But the statement was deleted soon after, Chinese media reported.
• SoftBank has continued to invest in China in 2021. On Aug. 18, autonomous vehicle startup Neolix said it had received “hundreds of millions of RMB” in a financing round led by SoftBank Ventures Asia.

Numbers show little change: VC investment this year in Greater China, which may include Taiwan and Hong Kong, totaled around $67 billion, the “highest level seen in recent years,” according to Preqin.

• In the second quarter, Chinese startups raised $30 billion, up 39% year on year from the same quarter in 2020.

Fewer unicorns: However, the creation of unicorns—startups with more than $1 billion in valuation—seems to be slowing down in China. 

• Only three Chinese companies have attained unicorn status in 2021 as of June, while 132 American companies reached billion-dollar valuations during the same period, according to Rui Ma, a China tech investor and analyst, who cited data from CB Insights. 
• By contrast, some 42 unicorns were declared in China in 2018, compared to 51 in the US.
• Unicorns are defined by their valuations given by investors. The slowdown in China likely reflects cautious investing more than a lack of good companies.

Reasons to worry: There are reasons for investors to worry. Chinese tech companies enjoyed a laissez-faire environment before regulators moved to rein in the sector last year. The firms were rarely restrained by privacy laws or antitrust laws despite repeated public outrage. Now, the situation is changing rapidly. 

• The authorities have stepped up regulations on antitrust, privacy, data security, and overseas listings.

No exit? One of the regulatory areas that could hit overseas VC funds the hardest is China’s July regulation on data security and overseas IPOs: It requires companies that control data of more than 1 million users to seek permission from regulators before filing for IPOs overseas.

• This will seriously affect US listings of Chinese firms, potentially making US dollar funds’ exits more difficult. 
• But the regulation won’t affect exits in Hong Kong, which can be an attractive destination for companies looking for a mid-point between China and the US.
• “We haven’t seen a major shift in investing by US dollar funds focused on China, because the exit path via Hong Kong remains clear,” William Bao Bean, a Shanghai-based general partner at the VC firm SOSV, told TechNode.
• Another reason for investors to be concerned is the unpredictability of China’s tech policy. The most chilling example is the nation’s sweeping regulations, issued in July, affecting its private education sector, making many edtech firms’ businesses illegal overnight.

US flows falling: This is not the first time we asked how politics affect VC investment. In August 2020, we asked venture capitalists and analysts whether the US-China tech war had affected dollars floating into Chinese tech startups. The answer we got was “no,” because money was “not political.”

• Money may not be political, but money is rational. By the end of 2020, full-year data showed a significant drop in US VC investment in China, according to the US-China Investment Project, a research initiative led by Rhodium Group and the National Committee on US-China Relations.
• The total value of US dollar-denominated VC investments in China in 2020 halved from the previous year, to $2.5 billion. That was a fraction of the nearly $20 billion recorded in 2018, said the project in a May report.

What VCs say: Venture capitalists already invested in China seem to be optimistic.

• Bean of SOSV said the regulatory shifts in China are an “opportunity.”
• “I’ve covered the China tech market since 2003 and the only thing that one can count on is regulatory changes in China. Institutional investors on the ground understand that these shifts in enforcement represent an opportunity,” he said.
• “I feel confident in the future prospects of China tech startups and we are helping them go global and taking advantage of the increased competition that will result from the market restructuring,” said Bean.
• Ron Cao, founder and partner of Chinese VC firm Sky9 Capital, told TechNode that he is “confident” about investing in Chinese tech startups. There are still huge markets to be created by the digitalization of many Chinese industries, including consumer, enterprise service, and software as a service (SaaS), he said.
• “The government regulation is certainly an important changing factor, but it is not a decisive factor,” said Cao.

Chinese chipmaker Wingtech said on Monday that it had closed a deal to buy Newport Wafer Fab (NWF), the UK’s largest chip fabrication plant. The deal was closed after the UK government initially considered blocking it. 

Why it matters: The UK government’s clearance on the deal is a breakthrough for Wingtech, which quickly established its dominant position in China’s car chip industry through overseas acquisitions since 2018. But the single approval doesn’t mean Chinese chip firms looking to buy chip plants abroad will enjoy a smoother regulatory environment.

• NWF is a manufacturer of low-end chips. The plant mainly produces 180-nanometer (nm) wafers, while the industry’s bleeding edge is the 3-nm process by Taiwan’s TSMC and South Korea’s Samsung.

Details: The UK government gave Wingtech the green light to take over NWF’s parent company on Aug. 12, according to a Wingtech filing (in Chinese) to the Shanghai Stock Exchange.

• Wingtech said its acquisition of NWF had been closed as of Monday. It now fully owns the UK firm through Nexperia, Wingtech’s Dutch chip subsidiary. 
• NWF’s operation might be affected by domestic and overseas industry policies, said Wingtech’s filing, without elaborating.

Context: The NWF deal, conducted through Nexperia, was previously subject to a national security investigation by the British government following backlash from some UK lawmakers.

• Nexperia offered GBP 63 million (around $87.2) to buy NWF on July 5. The deal met with little regulatory pressure when it was first announced, but it soon met with more official scrutiny in the UK. 
• Some UK politicians have advocated taking a hard line on the deal. Tom Tugendhat, a UK parliament member and the chairman of the parliamentary Foreign Affairs Committee, told CNBC on July 5 that he would be “very surprised” if the deal was not being reviewed under the National Security and Investment Act, a November law passed to protect key UK assets from foreign takeovers.
• On July 7, UK Prime Minister Boris Johnson said he had ordered national security advisor Stephen Lovegrove to review the acquisition. Lovegrove had 30 days to complete his review.

For China’s chip companies with money in hand, acquiring foreign chip firms has always been a shortcut to obtaining talent and technology. However, acquisitions are facing more resistance overseas, as deals to buy NWF and Magnachip are likely to be blocked. 

Around 86% of the 57 semiconductor merger and acquisition (M&A) deals by Chinese firms between 2015 and 2019 targeted foreign firms, making the country the primary buyer of international chip companies, according to Deloitte China. Now, Western countries are increasing scrutiny of those deals.

Two blocked acquisitions: On July 7, British Prime Minister Boris Johnson said his government will review an offer by Nexperia, a Dutch firm wholly owned by China’s Wingtech, to buy the UK’s largest chipmaker, Newport Wafer Fab (NWF).

• The deal met with little regulatory pressure when it was announced in early July. At the time,  the UK government said it wouldn’t intervene in the deal.
• But some politicians have lobbied to take a harder line. On July 5, Tom Tugendhat, a conservative member of parliament and the chairman of the parliamentary Foreign Affairs Committee, said he would be “very surprised” if the deal was not being reviewed under the National Security and Investment Act, a November law brought in to protect key UK assets from foreign takeover.
• Hamza Mudassir, visiting fellow in Strategy at the Cambridge Judge Business School, argued in a commentary that NWF “is neither strategically nor financially significant enough for the UK government to justify an intervention” because of its outdated technology.
• NWF mainly produces 180-nanometer (nm) wafers, while the bleeding edge of the industry is the 3 nm process by Taiwan’s TSMC and South Korea’s Samsung.

In late June, the US government halted a Chinese investment firm’s acquisition of South Korean chipmaker Magnachip. Nevertheless, Chinese regulators subsequently gave the deal a  green light.

• Wise Road Capital, a Beijing-based private equity firm, announced the acquisition of Magnachip in March for $1.4 billion. 
• Magnachip is a manufacturer of driver chips in smartphone displays, producing circuits controlling other components like organic light-emitting diode (OLED) displays.
• The Committee on Foreign Investment in the United States (CFIUS), a panel headed by the Secretary of Treasury and consisting of nine other US cabinet members, blocked the deal on June 15 through an interim order. According to a June 17 filing by Magnachip, CFIUS also blocked the company from delisting from the US stock market, which Wise Road Capital reportedly said it planned to do after the acquisition.
• On June 10, Business Korea reported that South Korea’s  Ministry of Trade, Industry and Energy had proclaimed Magnachip a “national core technology,” making the deal subject to the South Korean government’s approval.

Change of attitude: Neither the UK’s NWF nor South Korea’s Magnachip is a leading player in the semiconductor industry, and it’s likely both deals would have gone through easily a few years ago. The investigations are clear signs that Western governments are changing their view of Chinese firms buying their chipmakers.

• When Netherlands-based Nexperia was acquired by Chinese contract smartphone maker Wingtech in 2018, the transaction was completed smoothly despite being subject to review by both the US and Dutch regulators.
• Chris Miller, an assistant professor at Tufts University’s Fletcher School of Law and Diplomacy, wrote that by stopping Chinese firms from taking insignificant chip firms like Magnachip, the Biden administration had “de facto decided that all chip firms—even if small, seemingly innocuous, and barely linked to the United States—are off limits to Chinese buyers.”
• “If Magnachip isn’t allowed to couple up with a Chinese private equity fund, it is hard to imagine anyone else will be allowed to, either,” Miller wrote in a commentary in June.

Also in the news

A spree in STAR listing of chip firms: In what Chinese media called a “sprint” of chip listings, Shanghai’s STAR Market accepted a record 13 semiconductor companies in June and July out of the 34 companies it approved in the two months.

• These companies include Shanghai-based Puya Semiconductors, which makes storage chips, and Jiangsu-based Macmic, a designer and manufacturer of radio-frequency semiconductors.
• The registration-based high-tech board now has a total of 50 semiconductor shares as of Tuesday, more than 15% of its total listed companies.

China chip production hits a record high: On July 15, the South China Morning Post reported that China produced 30.8 billion wafers in June, citing government data.

• The number beat the previous single-month record of 29.9 billion units in May.
• For the first half of the year, China’s semiconductor production reached 171.2 billion units, up 48.1% from the same period last year.
• Still, the production is insufficient to meet domestic chip demand. The country imported more than 310 billion integrated circuits in the first half of the year, said the report, citing customs data.

No bailout for troubled chip champion: A major semiconductor conglomerate that owns many of China’s leading chip companies was forced into bankruptcy proceedings. On July 9, Tsinghua Unigroup, a state-backed chipmaker, said a creditor of the company has proposed bankruptcy proceedings for the company over bond defaults. It’s a sign that Beijing is willing to let national champions fail, even if they’re working on semiconductors.

• The company didn’t disclose the total amount of its unpaid debts. The Wall Street Journal reported in December that the group had defaulted on nearly $2.5 billion of international bonds.
• The bankruptcy proceedings are still subject to rulings of a Beijing court, which accepted the case on July 16, Chinese media reported. 
• Tsinghua Unigroup, backed by the prestigious Tsinghua University, is among China’s largest chip conglomerates. The company is also notable for owning China’s first 128-layer NAND and its blocked bid for Micron.
• Chinese e-commerce giant Alibaba is considering bailing out Tsinghua Unigroup. Reuters reported on July 13 that Alibaba and several Chinese state-backed firms were weighing bids for a stake in a subsidiary of Tsinghua Unigroup, potentially providing it with funds to settle the debt dispute.

China’s biggest chipmaker, Semiconductor Manufacturing International Corp (SMIC), posted strong revenue and profit growth in earnings released on Thursday.

Why it matters: SMIC posted robust growth despite being banned from importing US technology. The company attributed the growth to strong domestic demand and rising chips prices due to a global semiconductor shortage that began early this year. 

Details: SMIC’s net profit jumped 63% year on year to $405 million in the quarter ending in June, according to a Thursday earnings report (in Chinese). Revenue grew 43% year on year to $1.34 billion. On Friday, SMIC’s share price opened 8.6% higher than the previous day’s close price and soon lost most of its gain. At the time of writing, the stock was up 0.9%.

• SMIC raised its full-year growth forecast to 30%, up from “less than 10%” forecast in February.
• SMIC’s profit margin was 30% in the quarter, up from last year’s 27%. 
• Zhao Haijun, SMIC co-CEO, said in a Friday earnings call that growth in the second quarter was mainly driven by strong domestic demand for consumer electronics and electric vehicles chips.
• Zhao said being added to the US export blacklist has hurt the company’s ability to develop advanced chip-making technology. In December, the Trump administration placed SMIC on the Department of Commerce entity list, which bars the company from importing US technology without a government license.
• Zhao said SMIC has faced difficulties importing US equipment to make advanced 14-nanometer and 28-nanometer chips. He added that the company is communicating with the US government and suppliers to address the issue.

Context: Shanghai-based SMIC is backed by the Chinese government and state-owned investment firms. The company is China’s largest contract chipmaker, manufacturing chip designs for companies including Huawei and Qualcomm.

A Wednesday judicial interpretation released by China’s highest court sets boundaries on how businesses in China can use facial recognition technology. 

Why it matters: The interpretation prohibits businesses from forcing people to accept facial recognition applications on apps to access services. In public spaces, businesses could infringe personal rights if their use of facial recognition violated “related law and regulations,” said the interpretation.  

• The interpretation directs lower-level courts on facial recognition-related disputes. 

Details: On Wednesday, the Supreme People’s Court, China’s highest court, released a judicial interpretation (in Chinese) to address facial recognition technology issues in civil trials. Businesses have to acquire users’ consent before collecting their facial information. 

• Businesses could face charges of personal rights infringement if they do not give customers an alternative to face recognition to access public places or online services. However, the rules do not apply to situations regarding public safety, public health emergencies, and other crises, according to the interpretation.
• Yang Wanming, vice president of the Supreme People’s Court, said at a Wednesday press conference that the interpretation is partly a reaction to the growing phenomenon of Chinese businesses abusing facial recognition tools. Courts have seen rising cases in which companies collect facial information without consent or force customers to accept facial information collection.
• “Some retailers use ‘touchless’ face recognition technology to collect consumers’ facial information without consent, then push them to different advertising based on their gender, age, and mood,” said Yang. “These acts seriously infringed users’ rights and interests,” he added.
• The interpretation will take effect on Aug. 1.

Context: The interpretation is one part of a regulatory overhaul on privacy and personal data collection. China is finishing drafting a law on personal information protection. The Data Security Law, passed in June, will take effect in September.

Tencent’s popular super app WeChat said Tuesday it has temporarily suspended new user registrations, attributing the decision to “related laws and regulations.” 

Why it matters: This is the first time Tencent has suspended new user registration for the ubiquitous app in China, which many people rely on for communication and other life services such as paying utility bills and shopping online. 

• The action comes as China accelerates scrutiny on tech companies’ anticompetitive behavior and their data security practices.

Details: WeChat said in a Tuesday social media post (in Chinese) that the app is not accepting new individual users and public accounts to comply with “related laws and regulations.” The company calls the suspension a “technical security upgrade.”

• The company said it expects the upgrade to be completed by early August. 
• A WeChat spokesperson declined to comment when reached by TechNode. 

Context: Earlier this month, the Cyberspace Administration of China (CAC) banned ride-hailing platform Didi Chuxing from registering new users while launching a cybersecurity review into ride-hailing app Didi Chuxing. 

• The CAC in the same month announced similar cybersecurity investigations into three other companies, job recruitment platform Boss ZhiPin, transport companies Huo Chebang and Yun Manman, and asked them to stop registering new users.
• WeChat is China’s most-used instant messaging app. In 2020, the app had more than 1.2 billion monthly active users worldwide.

If you care about China tech, it’s time to get to know the country’s main tech regulators. 2021 started with the country tightening antitrust regulations on big technology players, shaving billions of dollars off their market caps. 

The crackdown reached a new high this month when the Cyberspace Administration of China (CAC) launched a security probe into ride-hailing platform Didi Global just days after its New York listing, sending shock waves among investors around the world.

These crackdowns aren’t new—for the past few years, regulators have been subjecting tech firms to stricter data and privacy rules. Understanding who they are and what they do is becoming more important than ever for investors in and watchers of China tech. Below are the top three Chinese tech regulators you should know.

Bottom line: Dozens of agencies regulate China tech, but the current crackdown is driven by three key regulators: the Cyberspace Administration of China (CAC) polices content, privacy, and cybersecurity. The State Administration for Market Regulation (SAMR) is in charge of markets and consumer protection, and has led the recent anti-monopoly campaign. The People’s Bank of China (PBoC), China’s central bank, is the key organization for financial regulation, and has been the most important player in writing new rules on lending, payments, and the “rectification” of Ant Group.

Cyberspace Administration of China (CAC)

The CAC was created in 2011 as part of the State Council Information Office but its powers have mushroomed over the past few years. The agency is in charge of areas like online content, privacy, and data security.

When it was created, the agency was only an online content moderator: The CAC’s duties included online content moderation, online news regulation, and “online propaganda work,” state newspaper Guangming Daily (in Chinese) reported in 2011 when the agency was founded.

A reshuffle made it a regulator: In 2014, the CAC joined the Office of the Central Cyberspace Affairs Commission, a body of the ruling Chinese Communist Party. 

• The two bodies share the same staff and offices under a special arrangement called “one institution with two names.” The party body is under the Central Leading Group for Cybersecurity and Informatization, which reports directly to Chinese President Xi Jinping.
• The 2014 reshuffle officially gave the CAC the authority to regulate content on China’s internet. In a document (in Chinese) published in August 2014, the State Council authorized the CAC to “take responsibility for nationwide internet information content management and for the supervision and management of law enforcement.”
• The 2014 document was the only legal basis of the CAC’s law enforcement power before the 2017 Cybersecurity Law, Liu Jinxin, an editor at a website managed by the CAC, wrote (in Chinese) in 2016 when the law was passed by China’s legislature.

Now, it’s about more than just content: Over the course of the last ten years, the CAC has expanded its reach beyond content moderation, taking on responsibility for privacy regulation and cybersecurity, among several others areas. 

• Subsequent laws since the CAC was created have given it the power to “coordinate” the regulation of online privacy and data, said Carly Ramsey, a Shanghai-based director at consultancy Control Risks.
• China’s Cybersecurity Law says the CAC is responsible for “coordinating” the nation’s cybersecurity regulations. 
• The country’s Data Security Law, which was passed in June and will take effect in September, charges the CAC with “coordinating” network data security and regulation.
• According to the cybersecurity and data security laws, said Ramsey, “the CAC always has a coordination and supervision role when it comes to the development and implementation of cybersecurity-related laws and regulations.”

It may also have a say in who can go public: Earlier this month, the CAC proposed an overhaul of China’s cybersecurity review process, requiring companies holding data on more than 1 million users to seek permission from regulators before filing for initial public offerings (IPOs) overseas.

• One key purpose for overseas IPO reviews is to control the risk of companies exporting “core” and “important” data or being “influenced, controlled, or abused” by foreign governments during the listing process, the regulator said in the draft provisions.

Related regulators: The CAC works with government agencies like the Ministry of Industry and Information Technology (MIIT) and the Ministry of Public Security (MPS) to regulate privacy and data issues.

State Administration for Market Regulation (SAMR)

SAMR is China’s top market regulator. It is the main regulator in China’s antitrust campaign against tech companies.

Until 2020, dealing with the CAC was often the top priority for Chinese tech companies’ government relations departments. But ever since the Chinese government launched an antitrust crackdown on the sector in November, SAMR has become another major regulator that has left government relations staff scratching their heads. 

China’s antitrust regulators have largely left tech companies alone. The situation changed dramatically in November, when SAMR proposed guidelines targeting anticompetitive behavior, specifically including internet companies. The new rules widen the reach of antitrust, which previously only applied to the physical economy.

Next, SAMR took direct aim at big tech players like Alibaba and Tencent, punishing them for minor violations of China’s Anti-Monopoly Law, such as unreported merger and acquisition deals from years before. In December, the agency launched an anti-monopoly investigation targeting Alibaba. The probe ended in April when SAMR issued Alibaba an RMB 18.2 billion ($2.8 billion) fine for antitrust practices including “forced exclusivity.”

Most recently, SAMR blocked a merger deal between Tencent-backed game streaming platforms Huya and Douyu.

New broom: SAMR was established in March 2018 during a structural reshuffle of the State Council, China’s cabinet. It absorbed three ministry-level government agencies and inherited antitrust authority from three other central government bodies, under a government reorganization plan (in Chinese).

• In the structural reshuffle, the State Council eliminated the State Administration for Industry and Commerce, the General Administration of Quality Supervision, Inspection and Quarantine, and the China Food and Drug Administration. All three agencies’ enforcement authorities were transferred to SAMR.
• The mega-regulator also assumed powers to enforce antitrust laws that had belonged to the National Development and Reform Commission, the Commerce Ministry, and the State Council.

Top trustbuster: China’s 2008 Anti-Monopoly Law identified an antitrust commission under the State Council as being responsible for the coordination and supervision of China’s anti-monopoly regulation. The commission, like the others, was also merged into SAMR in the 2018 reshuffle.

• SAMR also has the authority to formulate antitrust regulations and guidelines, according to the Anti-Monopoly Law.

Price regulation: Inheriting powers from the State Administration for Industry and Commerce, SAMR regulates companies’ pricing strategies, per the nation’s 1997 Price Law (in Chinese).

• As a result, online marketplaces like Taobao and Ctrip fall under SAMR’s purview.
• SAMR earlier this month proposed (in Chinese) regulations on consumer pricing practices, banning e-commerce platforms from using big data and algorithms to charge customers different prices for the same product or service by analyzing their purchasing history.

People’s Bank of China (PBoC)

The PBoC, the country’s central bank, is the major regulator for fintech. The financial regulator oversees China’s online payment sector, supervising companies like Alipay and Tencent’s WeChat Pay, which combined have more than 1 billion users.

The bank has been involved in high-profile moves against China’s tech sector, leading the investigation into fintech giant Ant Group after China halted the company’s plans for a mega IPO in November. 

Ruling online payments: The PBoC became a fintech regulator in 2015 after it issued regulations (in Chinese) governing the online payment sector, requiring companies that provide digital payment services to be subject to its oversight. Ant Group’s Alipay is China’s largest mobile payment service, followed by Tencent’s WeChat Pay.

It doesn’t like cryptocurrencies: The bank and online payment regulator is also use its power to crack down on cryptocurrencies. In June, the central bank summoned several commercial banks and Alipay, asking them not to provide financial services to cryptocurrency traders, according to state news agency Xinhua (in Chinese).

See also: Finance is also governed by two specialist regulators. The China Banking and Insurance Regulatory Commission (CBIRC) is also responsible for online banking and insurance products. 

And if you like IPOs: The China Securities Regulatory Commission (CSRC) regulates stocks, and appears to be taking an increasingly important role in approving the listings of all Chinese companies.

Beijing unveiled new rules on Saturday on the country’s private education sector, barring after-school tutoring companies, including edtech companies, from earning profits, raising capital, or going public and imposing new limits on extracurricular study.

Why it matters: The new rules will end IPO hopes for online education startups like Yuanfudao and Zuoyebang, and limit fundraising for the already listed. Companies that cannot comply with new rules could be forced out of business.

Details: Top-level party and government bodies released on Saturday a directive (in Chinese) to “reduce the burden of students enrolled in compulsory education.” The directive requires private tutoring companies to re-register as non-profit organizations, bars local authorities from approving any new companies, and orders local authorities to re-examine previously registered online education companies. 

• The directive was jointly issued by the General Office of the Central Committee, the administrative branch for the party’s top leading groups, and the General Office of the State Council, the Chinese cabinet.
• Shares of US-listed tutoring companies TAL Education, Gaotu Techedu, and New Oriental Education lost at least half of their value Friday as the document began to be widely shared.
• The new rules forbids after-school tutoring companies teaching school subjects to pursue IPOs or accept foreign investment. Listed education companies will not be allowed to issue new equities and raise money in stock markets.
• The new rule bans companies from teaching school subjects on weekends and holidays. 
• The rules also forbid companies to provide online courses to children three to six years old. Chinese children typically start primary school at the age of seven.
• Chinese authorities will also re-evaluate existing online education companies and cancel business licenses for companies that fail to meet the new requirements. 
• China’s after-school education industry has been “severely hijacked by capital,” said a Monday op-ed (in Chinese) from the state-owned newspaper China Education Daily, republished by the Ministry of Education. 

‘Worst case’ for investors: Rumors of a crackdown on after-school education had been around for months, said Ted Mo Chen, a Shanghai-based edtech entrepreneur and TechNode contributor. But the new policy is “the worst-case scenario expected by the market,” he told TechNode.

• Investors who haven’t cashed out from recently listed or would-be public edtech companies “will not get a fruitful exit,” Chen said.
• Chen advised companies to take out classes focusing on school subjects. “If they can, switch to professional or skills training, or non-test subject education such as arts, sports, and character-building,” he added.

Relief for parents? Ding Zhe, a father of a five-year-old in Shanghai, said he expects the new rule to ease financial pressures for parents. Ding pays a combined RMB 40,000 ($6,175) per year after-school courses for his daughter, including English, math, and painting. Ding said he will continue to pay for some after-school courses, but he will worry less because other children won’t be studying extracurricular programs.

Context: Investors have rushed into the online education sector since 2016, and many doubled down last year as the sector boomed during the Covid-19 outbreak. 

• In 2020, Chinese edtech companies raised a combined RMB 53.93 billion, equivalent to the total funding received over the past four years, a report from data intelligence service 100EC shows.
• Tencent-backed Spark Education, which provides online education for K-12 students, filed for a Nasdaq IPO in June. Yuanfudao and Zuoyebang, two of the country’s most valuable edtech startups, were also rumored to be planning for IPO after receiving a combined $5.9 billion funding in 2020.
• The new regulation comes two months after Beijing imposed the maximum penalty on Zuoyebang and Yuanfudao for unfair competition.

READ MORE: The Chinese gaming startup outperforming Tencent overseas

On Saturday, China’s top market regulator ordered Tencent to end exclusive music licensing deals within 30 days from Saturday, writing that the action was “the first case” of “necessary measures to restore market competition” in a Saturday statement (in Chinese).

Why it matters: The punishment may create openings for other music streamers in China. And the government says it is only the first.

Details: The State Administration for Market Regulation (SAMR) fined Tencent RMB 500,000 ($77,100) for violating market concentration rules with a 2016 acquisition of China Music Corporation. The regulator said that Tencent “illegally concentrated a market,” citing China’s Anti-Monopoly Law. 

SAMR said the deal gave Tencent control of more than 80% exclusive music libraries in “related market share,” allowing the company to “eliminate and restrict competition.” 

Tencent wrote in an online statement the same day that it will “comply with the regulator’s decision” and “contribute to healthy competition in the market.”

READ MORE: The Chinese gaming startup outperforming Tencent overseas

China’s securities regulator on Thursday approved China Telecom to list on the Shanghai Stock Exchange, two months after the state-owned telecommunications company was delisted from the New York Stock Exchange (NYSE).

Why it matters: China Telecom’s domestic listing comes as US-China rivalry spreads to the equity sector. The US has set stricter rules for Chinese firms listing on US stock markets, and China has in recent months increased scrutiny on companies seeking overseas listings.

Details: The China Securities Regulatory Commission said in a Thursday announcement (in Chinese) that it had approved China Telecom’s plan to issue shares in Shanghai, without providing a listing date. 

• The company said in its prospectus (in Chinese) that it plans to raise RMB 54.4 billion (around $8.4 billion) in the Shanghai listing.
• The funds will be used to expand its next-generation 5G networks, and for research and development, the prospectus said.
• China Telecom plans to issue up to 12.1 billion Chinese A-shares in Shanghai, or up to 13% of its total equities after the listing.
• China Telecom went public in Hong Kong in 2002, the same year of its New York listing. The company’s Hong Kong-listed shares have surged more than 49% since the beginning of this year.

Context: In May, the NYSE delisted three state-owned Chinese telecom operators, China Telecom, China Mobile, and China Unicom.

• The three operators received delisting decisions from the NYSE in January. The decision came after former US President Donald Trump signed an executive order in November that bars Americans from investing in Chinese firms that the US said aided China’s military, intelligence, and security services.

Three months after a sweeping crackdown on “forced exclusivity,” Chinese regulators are moving to take more control over Chinese e-commerce companies’ pricing. The latest target of Chinese market watchdogs is price discrimination.

China’s State Administration for Market Regulation (SAMR) indicated that it would take a tougher stance on price discrimination when it proposed regulations on consumer pricing practices on July 2. Price discrimination is a kind of personalized pricing, where companies charge customers different prices for the same product or service by analyzing purchasing habits.

An online travel agency might hike up the price of an airline ticket for a user who is a regular big spender or has a history of last-minute purchases. Platforms even appear to charge their most loyal customers higher prices, who they think would be willing to pay more.

Meituan came under fire in late December after a viral WeChat post accused the food delivery giant of charging its paid members higher delivery fees than its free users. The writer of the post said that he was charged RMB 4 ($0.6) more for a delivery fee than a free user, even though he ordered from a member account for which he paid RMB 6 to RMB 15 per month. Meituan said the extra charge was made in error. TechNode could not independently verify the writer’s claims. 

Research conducted by Fudan University shows that ride-hailing apps charge an “Apple tax” to iPhone users, a group that is generally considered as premium in China. The report shows that iPhone users are more likely to get the pricier “chauffeured rides” and receive less of a subsidy compared with Android users. 

The new regulations would also punish price fixing, price dumping, and price fraud. Included in the 12 pages of proposed rules is a section on the pricing strategies of China’s tech economies, or companies using “new business models,” to use the regulator’s term.

SAMR is seeking public comment on the draft rules through Aug. 2.  

Companies operating under these “new business models” would be subject to a fine equivalent to 0.1% to 0.5% of their sales if they are found to charge different prices for the same product or services by leveraging big data and other technological means to predict users’ willingness to pay. The draft also forbids businesses from dumping products at low prices to create a monopoly. 

Illegal gains would be confiscated and companies could be required to suspend their business operations during a  rectification process. For serious violations, they could even lose their business licenses. 

Under Chinese law, price discrimination is already illegal. But Chinese regulators have largely tolerated these practices for the past two decades. 

Chinese consumers grapple with discrimination 

Amazon first experimented with price discrimination back in 2000, when the global e-commerce titan charged different prices to individual customers for the same DVDs. The company stopped in response to swift consumer backlash and still avoids the practice two decades later.  

But Chinese online businesses are widely believed to employ the revenue-boosting tactic. Platforms deny that they charge different prices to different customers—but few consumers believe it.

User complaints about the practice flood social networks and mass media. As of the end of June, there were over 1,300 submissions about price discrimination on Sina’s Black Cat consumer platform alone. The complaints concern nearly all major tech names in China, from e-commerce giants Alibaba, JD, and Pinduoduo, to food delivery apps Meituan and Dianping, to online travel platforms Ctrip, Qunar, and Alibaba’s Fliggy, to ride-hailing apps like Didi.

While price discrimination exists across industries, it is more prevalent in areas that offer services than those that sell physical and standardized products. “Sectors like online travel and ride hailing are more vulnerable to the practice compared with e-commerce and food delivery, which offer standardized physical products at steady costs,” said Zhang Yi, consulting CEO and chief analyst at iiMedia Research.

Denials from companies haven’t boosted user trust. Most consumers still believe price discrmination is ubiquitous in China. Results from a consumer report conducted in 2019 show that an overwhelming 88% of those surveyed believed online platforms leverage user data for personalized pricing to make users pay as much as possible. Meanwhile, nearly 60% said they have experienced the phenomenon.

Ctrip and Alibaba declined to comment when reached by TechNode.

A woman surnamed  Hu, a membership user of Ctrip, sued the online travel platform for price discrimination last year. She had reserved a hotel room for RMB 2,889 a night in July 2020 but, on checking out, she discovered the price of the room was only  RMB 1,377. A court in Zhejiang province ruled in favor of Hu, requiring Ctrip to pay RMB 4,777 in compensation.

A tricky concept

Although many users believe they face price discrimination, it’s difficult to prove—and its been going on for centuries.

In some ways, companies are bringing back an old way of pricing. People haggled over prices for most of our commercial history until the Quakers invented the “fixed” retail price tag in the mid-19th century. If people pay different prices for the same products, it’s difficult to tell whether it’s a discount or an overcharge.

Users believe that a variety of user data such as birthdate, educational background, occupation, geographic location, past purchases, web visits, and social media “likes” are used to feed the pricing strategies. The fact that personal data is freely traded on Chinese black markets for tiny sums has made the problem worse.

“As a matter of economics, there are both scenarios where price discrimination benefits certain categories of consumers and promotes overall consumer welfare and efficiency and also scenarios where it does not,” Nathan Bush, a partner with multinational law firm DLA Piper, explained to TechNode. 

A platform generally applies the practice to charge higher prices to customers who it concludes will be willing to pay more, mainly targeting premium members. These companies charge their lowest prices to users about whom they have the least data, raising prices once they see evidence of loyalty. 

From a seller’s point of view, the goal is to charge each customer the highest price he or she is willing to pay. Regulators and consumers see it as an unruly, unfair practice that does not benefit consumers. 

The Chinese term for the concept, “shashu,” literally translates as “killing someone you know,” underlining the fraudulent aspect of the practice by which platforms take advantage of the customers who use or trust them the most.

Crackdown on price discrimination

While there are laws forbiding price discrimination on the books, Chinese regulators rarely examined e-commerce platforms’ pricing strategies before 2020. Things started to change late last year as regulators waged a war on anti-competitive practices in the online world.

The 1997 Price Law (in Chinese) says merchants should price their products and services based on “production and operation costs and market supply and demand conditions.” It forbids merchants from “implementing price discrimination” when providing “the same products or services.”

The country’s 2008 Anti-Monopoly Law (in Chinese) also forbids practices such as “implementing differentiated treatment in transaction conditions such as the price” for the same goods. The clause, however, only applies to companies with a “market-dominant position,” or companies that enjoy more than 50% of a “relevant market.”

“Whereas the Anti-Monopoly Law treats price discrimination and predatory pricing as potential ‘abuses’ by dominant firms, the older Price Law contains much broader rules against price discrimination and predatory pricing that are not limited to dominant firms,” said Bush.

“Perfect” price discrimination—when a business charges a different price on every sale in an effort to get the highest possible price every time—is rare in conventional markets, but e-commerce makes it possible for companies to try, Wu Weiming, senior partner at Shanghai-based Allbright Law Firm, wrote in a note (in Chinese).

“On the internet, differentiated pricing for different consumers becomes possible. It is difficult for consumers to notice from their own web pages or mobile terminals even if their prices are different from other consumers,” Wu wrote. 

Not only market-dominant players

In November, SAMR proposed a set of antitrust guidelines targeting internet platforms. The guidelines for the first time pointed out that pricing products or services differently according to customer purchasing power, consumption history, or user preference is considered monopolistic behavior.

The guidelines, formalized in February, call for stricter regulation of unfair pricing practices. But the supplement to the Anti-Monopoly Law once again only applies to companies with dominant market positions. So far, SAMR has only deemed Alibaba a dominant player in China’s e-commerce market, fining the e-commerce giant $2.8 billion for “forced exclusivity” in April.

However, SAMR’s July 2 draft provision on illegal pricing activities is a major step closer to cracking down on price discrimination by all online marketplaces, because it also applies to non-dominant marketplaces like JD.com and Pinduoduo.

More hurdles to overcome

Even though the state is issuing tough regulations to crack down on price discrimination practices, there are more hurdles to overcome when it comes to execution. 

The unpredictability and uncertainty in pricing as a result of peak or low seasons and hours, among other factors, may lead to big price fluctuations. Therefore, it’s difficult to collect evidence to prove that the companies have boosted prices based on an individual customer’s characteristics.On top of that, regulating the practice will need the companies to share, at least with monitoring authorities, their recommendation and pricing algorithms, Chen Wenming, a lawyer with Zhejiang Xiaode Law Firm, told local media. This is a prime obstacle to regulating the practice, since most companies will be reluctant to offer this critical information, Chen said.

Chinese game streaming platforms Huya and Douyu announced on Monday that they would terminate a merger agreement after antitrust regulators blocked the deal on Saturday. The decision dealt a new blow to Tencent, leader of the merger.

Why it matters: This is the first time Chinese regulators have blocked a merger in the tech sector for antitrust reasons. In other recent cases, Chinese regulators have fined companies retroactively up to RMB 500,000 (around $77,318) over unreported merger and acquisition deals. However, companies have been able to keep these closed deals. 

Details: Huya and Douyu announced Monday they would terminate the merger agreement. Both companies said they “fully respect” and would “abide by” the decision made by the Chinese State Administration of Market Regulation (SAMR). 

• SAMR said the Huya-Douyu merger would “further strengthen Tencent’s dominance in the game streaming market” and empower the company to “restrict and exclude competition,” in a Saturday statement (in Chinese). 
• Tencent, a social media giant and the largest video game company in China, owns a 37% stake in Huya and 38% in Douyu.
• Huya and Douyu account for the majority of China’s game streaming market. Huya has 40% market share and Douyu 30%, said the SAMR statement. “If Huya and Douyu merge, Tencent will solely control the merged entity,” it added.
• SAMR rejected a Tencent proposal to add restrictive conditions to the merger deal, saying the plan “cannot effectively address the competition concerns mentioned above.”
• Tencent said in a Sunday statement that it would “abide by the decision, comply with regulatory requirements, and fulfill its social responsibilities.”

Context: Tencent, Huya, and Douyu announced the merger plans in August 2020, and filed for antitrust review in November.

• Chinese antitrust regulators started to tighten the scrutiny on tech companies’ merger and acquisition deals last November. It fined a batch of companies, including Tencent and Alibaba, RMB 500,000 for failing to report M&A deals. 
• Anti-Monopoly Law in China requires companies to report investment or merger and acquisition deals that could create a single company that holds more than half of its relevant market.

READ MORE: The Chinese gaming startup outperforming Tencent overseas

Daojia, a Chinese platform offering on-demand housekeeping services, filed for an initial public offering in New York on July 2. In Chinese, Daojia means coming to homes. 

Why it matters: The IPO application comes as Chinese regulators increase scrutiny of Chinese tech companies that collect extensive data from Chinese users and seek US IPOs. 

• The platform offers a mobile app that helps people find domestic workers and book housekeeping services such as cleaning, cooking, and appliance repairs. Users can find and compare detailed information of the maids and service workers on the platform, including their age, appearance, hometown, experience, and personality.

Details: Daojia said it plans to go public on the New York Stock Exchange, but did not disclose the date of the listing and price range of its IPO, according to a prospectus filed to the US Securities and Exchange Commission (SEC).

• The company reported sustained revenue growth from 2018 to 2020. Revenue was RMB 398.7 million (around $61.7 million), RMB 611.1 million, and RMB 711.1 million, respectively. 
• Daojia has operated on widening losses, which expanded from RMB 591.2 million to RMB 614.7 million from 2018 to 2020. The company said it might see “further losses as we continue to grow our business.”
• The company has applied to list under the ticker “JIA.”

Context: The Chinese government recently announced a series of investigations to examine potential data-security risks posed by Chinese tech firms listing in the US. Since July 2, China’s cyberspace regulator has launched investigations into Chinese ride-hailing giant Didi, transport companies Huo Chebang and Yun Manman, and job recruitment platform Boss Zhiping. All went public in the US in June. 

• Daojia’s prospectus also cited China’s tightening data-security regulations as one of its risk factors. The company could face “severe penalties or be forced to relinquish our interests” in some operations should they be found violating Chinese regulations, said the filing. 
• Daojia is owned by China’s largest online classifieds marketplace 58.com and backed by e-commerce behemoth Alibaba.

China approved a Chinese firm to acquire South Korean chipmaker Magnachip in late June, a week after the US government paused the acquisition for review and the South Korean government initiated a deal review. Wise Road Capital, a Beijing-based private equity firm, received approval from Chinese regulators to acquire Magnachip on June 21.

Why it matters: Magnachip is a world-leading manufacturer of driver chips in smartphone displays, producing circuits controlling other components like organic light-emitting diode (OLED) displays. The acquisition has raised concerns in South Korea that the country may lose its chipmaking advantage to China.

• China’s approval alone won’t close the deal, which needs approvals from the US and South Korean governments.

China’s approval: The antitrust bureau of China’s State Administration for Market Regulation said in a Wednesday statement (in Chinese) that it had “unconditionally approved” the deal between Wise Road Capital and Magnachip.

• China approved the deal on June 21, but only revealed it to the public on June 30. 
• Magnachip announced in March that it would sell to Wise Road Capital for $1.4 billion. 

US and South Korean reaction: The US blocked the deal on June 15. In South Korea, the deal was met with public pushback, prompting a review from the government.

• The Committee on Foreign Investment in the United States (CFIUS), a panel headed by the Secretary of Treasury and consists of nine other US cabinet members, blocked the deal on June 15 through an interim order. According to a June 17 filing by Magnachip, CFIUS also blocked Magnachip from delisting in the US stock market, which the Chinese firm reportedly said it planned to do after the acquisition.
• Magnachip is incorporated in Delaware, and listed on the New York Stock Exchange. Despite having little presence in the US market, Magnachip is considered a “US business” by US law. According to the Code of Federal Regulations, a “US business” refers to any entity engaged in interstate commerce in the United States, regardless of the nationality of the company or the person who controls it.
• On April 8, unionized workers of Magnachip staged a sit-in at the company’s campus in Gumi, South Korea, expressing opposition to the deal, according to local media Business Korea.
• On June 10, Business Korea reported that the Ministry of Trade, Industry and Energy of South Korea had proclaimed Magnachip as a “national core technology,” making the deal subject to the South Korean government’s approval.

Context: In 2004, Magnachip was spun off from South Korean memory semiconductor company SK Hynix and purchased by US firm Citi Venture. The company went public on the New York Stock Exchange in 2011.

• Despite being listed and incorporated in the US, Magnachip is based in South Korea. Most employees are South Korean, and most factories and offices are in South Korea, according to South Korean national news agency Yonhap (in Chinese). The agency added that it has always considered Magnachip a South Korean company.

On June 21, Nuclei System Technology, a Shanghai-based RISC-V chip designer, closed a Series B of more than RMB 100 million (around $15.5 million). The financing round was the firm’s third  in the past year, according to local media reports. Backers of the company included state-owned China Electronics Technology Group and smartphone maker Xiaomi.

Founded in 2018, Nuclei System Technology is one of the largest Chinese companies designing chips using RISC-V, an open-source chip architecture that is gaining popularity among Chinese companies. While the basic RISC-V architecture is free to use, Nuclei’s designs are customized based on real-world needs and are ready to be manufactured. The company’s products are already being used by some of the country’s most popular payment systems, like Alipay and UnionPay.

Nuclei is just the latest example of a rush into the RISC-V space in China. RISC-V is an  alternative to mainstream architectures like x86 and Arm, which are proprietary.  It was long considered a “hobbyist architecture.” Now, China’s semiconductor industry is taking RISC-V seriously. Alibaba and some of the country’s largest chipmakers are joining the bandwagon, rolling out RISC-V-based processors. 

That’s because RISC-V has given Chinese chip designers an alternative to the two dominant architectures:  US chipmaker Intel owns x86, and Japan’s SoftBank owns Arm Holdings, Ltd.. An open-source architecture could free chipmakers from relying on other architecture designers and spending high licensing fees.  

For now, RISC-V remains something  of a hipster architecture. But major companies are already experimenting with it for smartphones, and experts say it could be mature within a decade.

A lightweight architecture, RISC-V is expected to appear first in devices on the internet of things (IoT). It also has potential in data centers, especially those for the purpose of machine learning (ML) and artificial intelligence (AI), because of its ability to modify source code.  Chinese e-commerce giant Alibaba has made a phone prototype based on RISC-V that can execute simple tasks, though it is still an experiment. 

But most importantly, China’s chip industry is embracing RISC-V due to fear that its access to foreign-owned architecture might be blocked in geopolitical conflicts. The move coincides with the Chinese government’s push to replace foreign-made software, operating systems, and infrastructure for the public services and key industries(notably banking) , with homemade solutions—which are often based on open-source projects.

Nuclei said in a marketing blurb on its website that one of its advantages is that it’s “homegrown and self-reliant.”

“At present, the copyrights of mainstream architectures like x86 and Arm belong to US company Intel and Japanese company SoftBank, respectively,” said Wu Di, an analyst at Changsha-based brokerage Chasing Securities. “There is a growing risk of being restricted from using the architectures as the US strengthens its grip on Chinese tech companies.”

Sanction free

Another feature that distinguishes RISC-V from Arm and x86 is its business model. RISC-V’s open-source license is called Creative Commons Attribution 4.0 International. That means anyone can put it into commercial use, modify its code, and distribute copies without cost.

By comparison, both x86 and Arm are proprietary architectures. Currently, there are only three companies licensed to manufacture x86-architecture processors: US companies Intel and AMD and Taiwanese chipmaker VIA. UK-based Arm Ltd. has adopted a looser commercial license system, giving chipmakers worldwide the ability to design processors based on the architecture. As of September 2020, Arm had issued licenses to more than 150 Chinese chipmakers, including Chinese telecommunications equipment giant Huawei, according to local media reports (in Chinese). 

Being open-source also means that RISC-V is not subject to export controls. In May 2019, Arm told staff to stop working with Huawei after the Chinese firm was hit by a US sanction. In March, Arm said it will “potentially” be able to license its latest generation of the Arm architecture to Huawei. 

Huawei’s two-year-long drama with the US government leaves Chinese companies feeling that they can’t count on access to foreign-owned proprietary ISAs. 

Major players

RISC-V is still new to China’s chip industry and most companies in the sector are startups. Here are four Chinese semiconductor companies that are working with the architecture.

Nuclei System Technology is a semiconductor design company and provider of commercial RISC-V processor IP.

• Nuclei was founded in 2018 by Synopsys and Marvell veteran Hu Zhenbo. Hu told a forum (in Chinese) in 2018 that China had realized “self-sufficiency” in chip design, and the real problem that dogged China’s semiconductor industry was “the lack of ISAs.”
• “RISC-V offers a new opportunity for China. RISC-V is likely to become a new mainstream architecture worldwide in the future and it is completely open. It will enable China to truly achieve the production of a mainstream and homegrown processor core,” he said at the time.
• Nuclei has rolled out several generations of chip designs that can be used in IoT and manufacturing, according to its website. The company said its designs have been used to build trusted execution environments (TEE) for fintech giant Ant Group’s payment platform Alipay and financial services corporation UnionPay.

GigaDevice, one of China’s largest manufacturers of nonvolatile memory (NVM), in 2019 launched a general-purpose microcontroller based on RISC-V. A microcontroller is a device that is widely used in IoT.

• The company is China’s largest maker of microcontrollers for IoT devices. It shipped (in Chinese) more than 200 million microcontrollers in 2020. Not all of the company’s microcontrollers are based on RISC-V.

Rivai, a Shenzhen-based startup, is a fabless chipmaker that designs RISC-V processors for IoT devices and artificial intelligence applications like robots and smart speakers.

• The company said on its website (in Chinese) that it is backed by Chinese search engine Baidu and Kai-Fu Lee’s Sinovation Ventures, but it didn’t specify the amount or time of the investment.
• Rivai was founded in 2018 by Tan Zhangxi. Tan is also the co-director of the RISC-V International Open Source Laboratory (RIOS Lab) at Tsinghua-Berkeley Shenzhen Institute.
• Tan told Chinese media in an interview in January that RISC-V is “not a cheap alternative to Arm” because it can do a lot of things that can’t be done by Arm. “As the demand for customization increases, RISC-V is expected to generate a market for high-end IP customization that is different from the Arm era,” he said.

E-commerce giant Alibaba’s chip unit, T-Head, in July 2019 released its first RISC-V-based processor design, Xuantie 910. The company said it can be applied to the design of chips for fifth-generation (5G) wireless networks, artificial intelligence, as well as autonomous driving.

• In May, the company announced (in Chinese) its second RISC-V-based processor, Xuantie 907. The company said at the launch that its Xuantie-series processors had cumulatively shipped more than 200 million units by the end of 2020. Most of T-Head’s Xuantie-series processors are based on architectures other than RISC-V.

State of play

Despite the promise, only a few Chinese companies have so far mass-produced processors based on RISC-V. Most of those processors are used in IoT devices, like surveillance cameras and smart refrigerators, rather than more sophisticated devices like smartphones and personal computers.

GigaDevice, a Chinese memory chipmaker, in 2019 launched its GD32V-series processors based on RISC-V. The company said the processors are mainly for devices like vehicular Global Positioning System (GPS) trackers, alarm systems, and point of sale (POS) devices, according to its website (in Chinese).

In January, T-Head, Alibaba’s chip unit, said it had  tested the Android mobile operating system on its RISC-V-based processor. However, the prototype system could only run simple apps like the clock and mail apps, but not complex operations like games.

RISC-V’s future in China

RISC-V is not coming to smartphones and laptops any time soon, but Chinese experts say RISC-V could emerge as a major ISA within the next decade.

One of the biggest problems for the 11-year-old architecture is the lack of an ecosystem, both in hardware and software. That includes systems on a chip (SoCs), developer boards, design tools, and the operating systems running on the chips.

Wu, the analyst at Chasing Securities, used the Android operating system as an analogy to argue that an ecosystem will not be a problem for RISC-V. 

“The RISC-V architecture is simple, efficient, free, and open, which also gives it a competitive advantage. In the face of the proprietary Symbian operating system, Android became one of the major OSs for mobile devices in the following decade by taking advantage of its open-source features,” he said, referring to a once-might mobile operating system on Nokia phones.

However, RISC-V is still a niche in China’s semiconductor market. Around 95% of Chinese-designed chips were based on the Arm architecture as of September 2020, according to a local media report.

Even if a RISC-V ecosystem readily arises for IoT devices, there are bigger obstacles to widespread RISC-V adoption.  “The hardest market to establish an ecosystem for is actually mobile, followed by desktop and server,” Allan He, vice chairman of China Software Industry Association’s Embedded Systems Association, told local media in 2019.

It will take a concerted effort (in Chinese) by chip designers to build up RISC-V’s ecosystem, said Hu Kangqiao, chief executive of Hexin Hulian, a Beijing-based company that designs home appliance chips based on RISC-V. “When the number of manufacturers designing RISC-V chips is in the same order of magnitude as ARM, it means that the RISC-V’s ecosystem is mature,” Hu said in 2020.

“That will take approximately five to 10 years,” he predicted. 

Chinese short-video app Kuaishou said it would end a controversial weekend work schedule starting from next month, local media reported on Thursday, in a sign that employers are reconsidering extreme schedules like 996. Kuaishou’s current work schedule, known as “big and small weeks,” requires employees to work every other Sunday. Other Chinese tech companies, including ByteDance and Alibaba, also use the schedule for many workers. 

Why it matters: Kuaishou is one of a few Chinese tech companies beginning to cut back long working hours. This ongoing shift comes amid increased scrutiny on tech companies, both from the public and the Chinese government. 

• Chinese tech firms have faced public outrage for creating a culture that compels employees to work long hours. In 2019, an online protest against the “996” schedule drove a national conversation about overwork. “996” stands for working from 9 a.m. to 9 p.m., six days a week.

Details: Kuaishou told staff in an email on Thursday that it would stop the “big and small week” schedule starting from July 1, Chinese media Time Weekly reported.

• The company said in the email that it hopes the changes would bring “more efficiency across the company” and “make staff happier.”
• The company added that it would compensate employees who work overtime without specifying the pay. Chinese labor law requires companies to pay employees twice their salaries if they work on weekends and three times on national holidays.
• A Kuaishou representative did not respond to TechNode’s request for confirmation on Wednesday.

READ MORE: Beyond 996: a beginner’s guide to China big tech culture

Context: Kuaishou asked all workers to start working every other Sunday in January, which many viewed as a final sprint for the company’s subsequent plan to go public in Hong Kong. 

• In January, Kuaishou human resources head Liu Feng told staff in a meeting that longer workweeks would allow “closer cooperation between teams.”
• Other Chinese tech companies are also cutting back overtime hours. Earlier this month, Lightspeed & Quantum Studios, a Tencent gaming unit, canceled all weekend work schedule and required employees to finish working at 6 p.m. on Wednesdays and no later than 9 p.m. on other days.

Douyin, ByteDance’s Chinese version of TikTok, launched a web version of the short video app on Monday. The mobile-focused content giant is seeking more growth on desktop.

Why it matters: Douyin is hitting the ceiling in user numbers. In September 2020, the short video app’s daily active users reached 600 million, which is more than 60% of China’s overall 986 million mobile users in the same period.

• The web version of Douyin extends the app’s reach to desktop users and potentially poses a threat to established video sites like Bilibili and Tencent Video.

Details: Douyin’s web version lacked a couple of crucial features that may have laid the groundwork for its success on mobile. For example, the mobile app starts playing videos automatically as soon as it is opened. While on the website, users need to click on the video for it to start playing.

• The homepage of Douyin’s web version features an endless video scroll. On Douyin’s mobile app, users see only one video at a time and have to swipe down to get to the next one, similar to the TikTok app.
• Like the mobile app, the website also allows users to post videos, make comments, and like videos. The website largely hosts the same content that appeared on the mobile app. The site features more horizontal versions of the video, while the mobile app shows more vertical versions.
• Douyin’s mobile app is powered by ByteDance’s flagship recommendation algorithm, partly contributing to its success. The algorithm provides users content based on their preferences and viewing history. It’s not clear if the algorithm is implemented on the web version.
• The web version was created to host better educational content, which usually runs at least 5 minutes, ByteDance said in a statement to TechNode, making it much longer than the 15-second short videos that Douyin helped popularize. 
• ByteDance said the website is still in testing phases, and it will continue “optimizing its features.”

Context: ByteDance said last week that the company booked RMB 236.6 billion ($36.8 billion) in revenue in 2020, up 111% from the previous year, Chinese media Yicai reported. 

• The total monthly active users of ByteDance apps reached 1.9 billion as of last year’s end, the company said.

China’s top legislature on Thursday passed a comprehensive data security law that stipulates how data is used, collected, protected, and developed in China. The law will affect a broad range of industries, including tech, telecommunication, transportation, finance, health, and education.

Why it matters: China is moving from one of the world’s least regulated data environments to one of its most. In the past year, China has drafted several laws to regulate tech firms’ collection and use of personal data and limit anti-competitive practices.

• The law also creates a legal basis for the state to request data held by China’s powerful tech companies.

Details: The Data Security Law of China focuses on data that is high-level and crucial to national security, calling it “core state data,” according to a full text of the law published by state news agency Xinhua (in Chinese).

• Formulating the Data Security Law is “a necessity” to safeguard national security, Xinhua wrote in a commentary (in Chinese) on Friday. “Data is a basic strategic resource of a nation. Without data security, there is no national security,” it wrote.
• The law directs central and local governments to oversee “core state data,” a category that includes data held by private firms. If companies are found to have mishandled such data, they can face fines between RMB 2 million ($313,200) and RMB 10 million or be ordered to shut down. 
• The law also directs the central government to define a category of “important data.” Companies found sending “important data” to entities overseas can be fined between RMB 100,000 and RMB 10 million, or have their business licenses revoked.
• Companies are required to “cooperate” when authorities ask to inspect their data for “national security or criminal investigation” purposes. Those data inspection requests are subject to “strict examination and approval,” the law said.
• The law prohibits Chinese companies and individuals from providing data stored onshore to overseas judicial bodies or law enforcement agencies without Chinese government approvals.
• The law takes effect on Sept 1.

Context: The new data security law is a step forward in China’s push to keep important data within its borders. The 2017 Cybersecurity Law requires firms to store data collected in China locally.

• Last October, the nation proposed a draft of the Personal Information Protection Law, which resembles the European Union’s General Data Protection Regulation (GDPR). The GDPR is a respected example for such regulation worldwide. In January 2020, China proposed an overhaul of its Anti-Monopoly law to rein in an increasingly powerful tech sector.

ByteDance, the owner of the viral video platform TikTok and Douyin, briefly attacked Chinese tech giant Tencent in a long, strident online post on Friday. The tussle between two Chinese tech heavyweights comes amid increased governmental scrutiny on anti-competitive behavior in the tech sector.

ByteDance criticized Tencent’s practice of blocking links to its products on messaging platforms WeChat and QQ in an online post, attaching a 59-page PDF file chronicling the blocking activities in the past three years. The company has since deleted the post and the file.

“More than 49 million people were stopped from sharing Douyin content to WeChat and QQ every day on average,” said ByteDance’s post. The company didn’t specify how they calculated the number.

ByteDance complained that Tencent has been blocking links to its short-formed video apps Douyin, Huoshan, and Xigua, for three years, “affecting more than 1 billion users.”

ByteDance’s high-profile complaint came as Chinese regulators crack down on tech companies’ anti-competitive behavior. ByteDance could benefit if regulators take action against Tencent’s link blocking practice. The company competes with Tencent on multiple fronts, including news aggregation and online games.

In March, Reuters reported that China’s top antitrust regulator was looking into Tencent’s WeChat for monopolistic practices, and how the popular messaging app had possibly squeezed smaller competitors.

ByteDance declined to comment on the situation when reached by TechNode. Tencent also declined to comment. Chinese media saved a copy of ByteDance’s post.

Widespread practice

Tencent is not the only company that tries to stop users from clicking into rival ecosystems. Tencent has banned links of ByteDance’s Douyin and productivity tool Feishu on WeChat. It also prohibits users from opening links to e-commerce giant Alibaba’s Taobao and Tmall online marketplaces.

Alibaba also bans (in Chinese) merchants from listing their WeChat contact information on the platform.

In August, ByteDance’s Douyin said it would ban links to third-party e-commerce sites, including Taobao and Tencent-backed JD.com, on its live-streaming channels in October. However, it also relies (in Chinese) on selling ads with links to those e-commerce sites for its short video feature.

ByteDance wrestles with Tencent

ByteDance wrote that the post was a response to a comment made by Tencent executive Sun Zhonghuai last Thursday at an industrial forum. Sun compared short-form videos to food for pigs.

Sun, a Tencent vice president and chief executive officer of the company’s online video department, said short-video apps were feeding users vulgar content. “Because the personalized recommendation [algorithms] are so powerful, if you like pigswill, all you see is pigswill, nothing else,” Sun said.

Sun is responsible for Tencent’s video-streaming platform Tencent Video and short-video app Weishi, according to Chinese media reports.

ByteDance defended short videos in the post, saying Sun’s remarks were “arrogant and unfair.” “As a new form of communication, short videos help countless ordinary people record and share their lives, allowing more people to see a larger world.”

ByteDance also hinted in the post that Tencent’s criticism of short videos was insincere, pointing out that Tencent had tried various times to make short video apps while calling them “pigswill.”

In the attached PDF file (in Chinese), ByteDance listed evidence that Tencent had blocked links to ByteDance’s short-video apps Douyin, Xigua, and Huoshan on WeChat, while allowed Tencent-backed Kuaishou and Weishi to share links on the social media platform.

The file mainly consists of annals of news coverage of Tencent and ByteDance’s conflicts from 2018 to 2021 and ByteDance’s summary of those events.

“We see this pamphlet as a standing reference to the [link] blocking and monopoly. It always reminds us that time may erase memories, but time cannot erase facts,” wrote ByteDance in the now-deleted post (our translation).

Suing companies for link blocking

ByteDance sued Tencent in February for blocking Douyin’s content on WeChat and QQ, citing China’s Anti-Monopoly Law.

Bytedance accused Tencent of violating Anti-Monopoly Law and “misusing a market-dominant position,” “excluding and restricting competition.”

The lawsuit is still awaiting a first hearing date at the Beijing Intellectual Property Court. Tencent has requested (in Chinese) the case be transferred to a court in Shenzhen, where the company is headquartered.

In 2019, a Chinese lawyer sued Tencent for blocking Alibaba’s Taobao links. He dropped the case in early 2020 for “a lack of evidence.” But since then, anti-monopoly enforcement has taken off.

Zhang Zhengxin, the lawyer who sued Tencent, told TechNode in December that his odds to win the case would “increase by a lot” if the case had gone to court then.

In December, China fined a batch of tech companies over antitrust violations for the first time. A month before that, China’s top antitrust regulator proposed new guidelines targeting anti-competitive behavior to include internet companies.

Chinese tech giants like Alibaba and Tencent have long had the reputation of being some of the most active investors in China. They are behind a host of unicorns, from ride-hailing giant Didi to edtech platform Yuanfudao.

Now, they’re looking inwards, pledging to reinvest the money they make into new ventures ranging from supply chain digitization and grocery delivery, even if it means hammering their profits.

Alibaba CEO Daniel Zhang said in an earnings call in May that the company will invest all its incremental profits into core strategic areas. These funds include the difference between the company’s current year profits and those of the previous year. 

Tencent has made a similar pledge, aiming to sharply increase investments this year. Meanwhile, Pinduoduo said it will boost investments in logistics infrastructure and agricultural science.

In some cases, these pledges represent up to 15% of these companies’ annual incomes, according to analysts.

“While we don’t expect to see significant [returns] in the short term, we believe these investments will create sustainable long term profit growth for investors,” Esme Pau, analyst at China Tonghai Securities, told TechNode. 

Bottom line: Chinese tech majors Alibaba, Tencent, and Pinduoduo have all promised to up their investments as their users change behavior in the wake of the pandemic and stricter regulations weigh on tech firms’ businesses.

Tech investment hikes

Alibaba will invest all of its “incremental profits” in 2022, after a hefty $2.8 billion antitrust fine triggered its first quarterly loss in nine years. The company didn’t specify an amount, but Bloomberg has estimated that the total amount could reach RMB 25.8 billion this year, or 15% of the company’s RMB 172 billion non-GAAP net income for 2021 fiscal year.

• Non-GAAP figures usually exclude irregular or non-cash expenses to smooth out high earnings volatility. In Alibaba’s case, this figure excludes the $2.8 billion fine, which is reflected in the company’s RMB 142.3 billion net income for 2021.
• Alibaba has promised that its investments will be “highly targeted and disciplined,” given the potential size of its spending spree.
• The company’s investment priorities include technology innovation, support programs for merchants to lower their operating costs, improving user acquisition and user experience, upgrading merchandising and supply chain capabilities, and new business initiatives, according to CEO Daniel Zhang.

Focused spending: A source with knowledge of the matter told TechNode that livestreaming, Alibaba’s Pinduoduo competitor Taobao Deal, and Cainiao Logistics will be the focus areas of these investments.

• Funding for Alibaba’s livestreaming business will be focused on training livestreamers, helping more merchants use its livestreaming services, and improving livestreaming technology, the source added.
• Livestream is an important segment for the company. Alibaba’s Taobao Live, China’s largest player (in Chinese) in e-commerce livestreaming, recorded a gross merchandise volume of RMB 500 billion in fiscal year 2021.
• Taobao Deal, which offers value-for-money products for price-conscious consumers, is working to integrate suppliers from its wholesale e-commerce platform 1688.com to boost Taobao Deal offerings.
• Investments in Alibaba’s logistics arm Cainiao will be used to improve the company’s cross-border delivery capabilities by building and upgrading its global logistics infrastructure, the source said.

Tencent will plow a larger portion of its incremental profits this year into investments, as China’s internet industry undergoes “a heavy investment phase,” the company said in its first-quarter earnings report. 

• The social media and gaming giant also announced a RMB 50 billion fund that will invest in areas such as basic science, education innovation, carbon neutrality, and food provision, the company said.
• In an earnings call with analysts in April, Tencent President Martin Lau said the company would invest up to 20% of its incremental profits. 
• It’s unclear how much Tencent’s incremental profit will be this year. The company’s profit for 2020 was RMB 127 billion, with an incremental profit of RMB 29.4 billion. That would amount to around RMB 5.9 billion in investment.
• Tencent said it would channel the funds into enterprise services, gaming, and short-form video apps, largely in line with the company’s past investment strategy.
• As of the end of May, gaming made up around 17% of Tencent’s past investments while business services totaled 13.3%, according to Itjuzi (in Chinese), which tracks China’s venture capital market.

Pinduoduo, which claims to have a larger user base than Alibaba, plans to increase spending in areas along the agriculture industrial chain, where typically digitalization remains low. At the same time, the company is narrowing in on logistics, an area requiring massive, long-term investments. 

• The company has not specified the amount it intends to invest.
• Nevertheless, Pinduoduo plans to boost spending on logistics infrastructure ranging from cold-chain transport to warehousing and delivery. 
• For a company like Pinduoduo, logistics is even more critical given its increasing focus on perishable agricultural products. 
• While continuing to fund its grocery pick-up business Duo Duo Maicai, Pinduoduo will “invest heavily” in logistics infrastructure technology, said Tony Ma, vice president of finance and the company’s de facto chief financial officer. 
• Pinduoduo recorded RMB 2.9 billion in net losses during the March quarter. The company had RMB 83.4 billion in cash, cash equivalents, and short-term investments as of March.

What about the others?

We haven’t seen the other tech majors making such a fuss about investment, but here’s what we know.

Meituan: In March, Meituan warned about losses due to heavy investment in its community group buy service Meituan Select, which CEO Wang Xing called the company’s “best opportunity in five years.” 

• Retail, especially the community group buy business, continued to be Meituan’s largest investment area, the company said after reporting a RMB 3.9 billion net loss in the first quarter of this year.

JD: The company didn’t say much in its recent filings or in response to TechNode’s queries. JD continues to invest in new opportunities in cooperation with suppliers and brands, Chief Financial Officer Sidney Huang said in the company’s first-quarter earnings call. 

The effects

Hit to profits: Huge investment promises will mean less short-term profits.

• After Alibaba announced its investment plan on May 13, Bloomberg revised its estimate for Alibaba’s non-GAAP net income growth rate to 15% from 19% year on year for the 2022 fiscal. 
• Alibaba’s Chief Financial officer Maggie Wu said it would be “stupid” to promise short-term profit to long-term investors because “there are so many competitors who are investing large amounts to gain a foothold in the market.”

Long-term vision: The investments imply that these tech giants see big post-pandemic opportunities.

“This focus on reinvestment comes as China’s leading internet companies double down on capital-intensive growth opportunities,” said Michael Norris, senior analyst at AgencyChina. 

“Whether it’s reimagining retail, facilitating same-day or next-day delivery, or building out cloud computing infrastructure, it’s not cheap,” he added.

Tightened regulation is also likely a factor, as companies align their businesses with current government priorities, such as basic science, rural revitalization, food/energy/water provision, carbon neutrality, and technology for senior citizens.

READ MORE: INSIGHTS | Tech in the five-year plan

“Tightened regulation is likely to create a healthier ecosystem and a more competitive market, which might reduce the moat of these giants and slow down their growth,” said Pau from China Tonghai Securities.

These investments reflect a change in how digital giants see their role in the economy, Norris said.

“When they first burst onto the scene, China’s digital giants tended to be a thin, interfacing layer between consumers, products, services, and attention. Now, as China’s digital giants work on digitally transforming entire industries, that layer becomes thicker and more capital intensive,” he added.

Subject to crackdowns? Tech firms’ vast investment plans may meet with regulatory roadblocks as Beijing tightens antitrust grips on their anti-competitive practices, especially with unreported mergers and acquisitions (M&A) coming under scrutiny.

• While tech majors’ investments may be focused internally, venture capital investment and acquisitions are also likely to be part of the plan.
• Before the State Administration for Market Regulation (SAMR) fined Alibaba a record RMB 18.2 billion in April, most antitrust fines imposed on tech companies were related to a clause in China’s antitrust law that requires firms to report M&A deals that could create a monopoly.
• An overhaul of the law, which is expected to take effect this year, will allow regulators to issue fines up to 10% of the company’s annual revenue over unreported deals.
• The changing regulatory climate means tech giants now have to report their investment deals that could create “dominant players” in a market to the authorities. Antitrust regulators like the powerful SAMR would have a say in those deals.

China is also cracking down on the so-called disorderly expansion of capital, vowing to prevent firms from growing their businesses into every sector of the economy and forming monopolies. 

For those tech giants seeking to grow even bigger via investment, this could be a warning sign.

READ MORE: INSIGHTS | Antitrust push in China tech

Chinese telecommunication giant Huawei announced major updates to its self-developed operating system HarmonyOS at a launch event Wednesday night. The proprietary system is now being used on phones for the first time, achieving an essential goal for the company. 

Why it matters: Huawei has long relied on the Android system, but it lost access to key services thanks to US sanctions in 2019. Huawei is aiming to build a new mobile ecosystem independent of Google’s Android and Apple’s iOS. However, the company chose to focus on promoting the system’s versatility across smartwatches, tablets, and other device at the launch event. 

• The new mobile system is unlikely to reverse plunging smartphone sales in overseas markets because the system is unlikely to support key Google applications such as YouTube and Gmail. 

Details: HarmonyOS is available on Huawei’s Mate 40 and Mate X2 smartphone models, as well as smartwatch Huawei Watch 3 and tablet MatePad Pro, the Shenzhen-based company announced Wednesday evening. 

• Huawei phone users need to fill out an application to receive an update to HarmonyOS, a Huawei phone owner told TechNode. Most Huawei phones currently run on a Huawei-customized Android system called EMUI. 
• The update process took about 10 minutes and all previously installed Android apps worked on HarmonyOS, said the user.
• Huawei told TechNode that HarmonyOS is “by no means a copy of Android or iOS.”
• “Huawei is not launching HarmonyOS to replace iOS or Android. The design logic is different, source codes are different, and use scenarios are different,” the company said in a statement to TechNode. 
• When Huawei first unveiled the system in August 2019, it said HarmonyOS would be open-source, but the system has remained closed-source. A Huawei spokesperson told Technode on Thursday that the company participates in an open-source project named OpenHarmony and contributes to it.

Context: HarmonyOS was widely seen as an alternative to Google’s Android mobile operating system, but it has taken Huawei about a little less than two years to deliver the system to phones. Huawei first deployed the system on smart televisions in August 2019 and then on smartwatches in September 2020. 

• Huawei said last month it expects more than 300 million devices (in Chinese) to run HarmonyOS by the end of the year. The company said it is talking to 200 global app developers to create apps for the platform.

In 1965, American engineer Gordon Moore predicted that the number of transistors on a microchip doubles approximately every two years. This rule of thumb has largely held, and defined the state of the art of computer technology for decades. But as increasingly microscopic transistors run into fundamental physical difficulties and increasing costs, people have started to talk about a “post-Moore” industry.

For the semiconductor world, this is a huge challenge. But senior Chinese officials see opportunities. 

Moore’s law has been a sore spot for China’s semiconductor industry. The country has plenty of good chip design and “packaging” companies. But as chips grow smaller, Chinese-owned chip fabrication plants are a consistent generation or two behind the cutting edge. 

Over the past month, the concept of the post-Moore era has been a major talking point, permeating the highest levels of China’s government and the chip industry.

“In the post-Moore era, we have a great room for innovation and catching up,” Wu Hanming, academician of the Chinese Academy of Engineering and a former vice president of Semiconductors Manufacturing International Corporation, told an industrial forum on May 12.

On May 14, a Chinese State Council technology commission led by Vice Premier Liu He discussed what it called “potential disruptive technologies in integrated circuits (IC)” in a post-Moore world, according to a statement (in Chinese) published on China’s central government website.

Beijing has bet on a wide range of technologies that it hopes will make the country a leader in some of the cutting-edge areas of semiconductors. But experts say it is an open question whether Moore’s Law is really coming to an end soon, and whether China will have any advantages in a post-Moore world.

Is Moore’s Law really ending?

Quantum limits or no, components are still getting smaller. The size of transistors in microchips has dropped as the law predicts—the most advanced chips mass-produced by TSMC now have minimum feature sizes of 5 nanometers. On May 6, American tech company IBM said it is developing 2-nanometer chip technology which would fit “up to 50 billion transistors on a chip the size of a fingernail.”

However, the process of cramming more transistors into chips is facing physical roadblocks. One of the most critical problems is electrical leakage, which makes chips less energy-efficient and generates more heat as transistors get smaller than 10 nanometers.

There are also economic limits. New processor technologies often require new machinery, and the price increases as the transistors get smaller. 

The cost of setting up a 3-nm chip production line is around $31.4 billion, which is more than twice that of a 5-nm chip production line and four times of a 14-nm one, according to a report (in Chinese) by brokerage Kaiyuan Securities.

Moore’s Law “is coming to an end for industries that do not have the necessary volumes to be able to afford the skyrocketing costs of cutting-edge chip design and manufacturing,” Jan-Peter Kleinhans, a global semiconductor value chain expert at Berlin-based Stiftung Neue Verantwortung (SNV), told TechNode.

The cost of developing a cutting-edge 5-nm chipset is “only economically viable in markets with high volumes, such as consumer electronics,” he said. 

Kleinhans expects the trajectory of scaling the number of transistors may continue for another 10 years. “But most companies will not be able to afford it if they don’t have the necessary high volumes,” he added.

What’s beyond Moore?

In the post-Moore world, semiconductor industry experts have discussed three potential routes that industry insiders call “more Moore,”  “beyond silicon,” and “more than Moore.”

More Moore suggests that the shrinking predicted Moore’s Law will continue, just slower, with fab advances continuing to drive the industry.

“Beyond silicon” seeks breakthroughs to continue the Moore’s Law trend, looking at non-silicon materials such as gallium nitride (GaN) and silicon carbide (SiC). A shift from silicon might be crucial for the chip-making industry so it can build smaller devices, Intel’s former director of technology strategy, Paolo Gargini, said back in 2006.

“With innovations on the material level, these compound semiconductors can be significantly more performant and efficient than purely Silicon-based chips—especially for power and radio frequency semiconductors,” said Kleinhans.

Finally, the “more than Moore” approach focuses on increasing the computing power of microchips by improving chip design and the performance of software running on the system.

“Chip design is increasingly important to develop application-specific processors such as artificial intelligence accelerators that are significantly more power-efficient than general-purpose processors for machine learning tasks,” said Kleinhans.

Other possible breakthroughs in a post-Moore world include novel ways to make chips at current sizes, such as stacked ICs, which stack silicon wafers so that they behave as a single device to improve performance. 

What is China doing?

China’s showiest post-Moore plan is quantum computing technology, which seeks to harness the principles of quantum mechanics to supercharge processing power. Quantum computers are made of quantum circuits that run quantum bits, or qubits, which are similar to the bits in traditional silicon-based wafers.

In October 2020, China’s top leaders held a “study session” exploring quantum technology, during which Chinese President Xi Jinping said that “developing quantum science and technology is of great scientific and strategic significance.” China is about as close to widespread use of this technology as other major countries: not close.

The government is also supporting research into closer-range technologies, such as new materials and design techniques. On Jan. 28, the National Natural Science Foundation of China, an affiliate of the State Council, published a list (in Chinese) of technologies that it would fund in the “post-Moore Era.” They include new semiconductor materials, new design techniques and architectures, and high-density stacking IC packaging.

The funding project aims to “develop revolutionary basic devices, integration methods and computing architectures … and enhance China’s independent innovation capability and international status in the semiconductor field,” the foundation said.

Is post-Moore a ‘fresh start’?

Commentators regularly predict that China’s semiconductor industry will get a “fresh start” as Moore’s Law comes to an end. 

“The Post-Moore Era is a great opportunity for China to outdo the world’s cutting edge in semiconductors,” Kaiyuan Securities analyst Liu Xiang wrote in an investment note.

China can focus on what is beyond the current trajectory of semiconductor development, rather than play catch-up in current tracks of technology, Stewart Randall, Head of Electronics and Embedded Software at consultancy Intralink, told TechNode.

Randall agrees there will be a “fresh start” in a post-Moore world, and “everyone is starting from the same start line.”

But “I don’t think there is any specific area China has an advantage,” he said.

Peng Lianmao, an academician of the Chinese Academy of Science, told Chinese media in April that China could “overtake on a bend” by developing carbon-based semiconductor materials.

Peng said that China had “basically solved challenges faced by carbon-based integrated circuits” and commanded “a full set of carbon-based IC manufacturing technologies.”

Peng, who is also a director of Peking University’s Institute of Microelectronics, led a team studying carbon-based semiconductor materials, Chinese media reported in 2020. He said then that his team was developing a 90-nm carbon-based chipset that will have the equivalent capability of a 28-nm silicon-based chipset.

But Kleinhans of SNV doesn’t reckon that it would be easier for China to make more advanced chips, because “it needs even more collaboration across the three production steps: design, fabrication, and packaging.”

“It’s all about path-dependencies, so no one has a ‘fresh start,’” he said. “‘Post-Moore simply means that all other process steps besides fabrication have to step up their game to increase the performance and efficiency of chips. The slow-down of Moore’s Law is not a silver bullet to leap-frog to the top.”

Chinese smartphone maker Xiaomi said Wednesday a US district court has ordered the Defense Department to lift a ban on American investment in the company.

Why it matters: Xiaomi has evidently shaken off a geopolitical burden that have weighed down its shares since earlier this year. It is unlikely that the Biden administration will appeal against the decision.

• Xiaomi was placed on a list of “Communist Chinese military companies (CCMC)” by the outgoing Trump administration on Jan. 15, a week before it left office.

• A similar move against China’s three major telecom companies led to their delisting from US stock markets in May.

Details: The US District Court for the District of Columbia issued a ruling ordering the US Department of Defense to remove Xiaomi from the CCMC list, said the smartphone maker in a filing (in Chinese) to the Hong Kong exchange on Wednesday.

• The order “officially revoked all restrictions on the purchase or holding of the company’s securities by US investors,” said Xiaomi.
• The company is “an open, transparent, publicly traded, independently operated and managed corporation,” it said.
• The Biden Administration has previously said it won’t challenge a ruling by a federal judge that temporarily blocked enforcement of the blacklisting.

Context: An executive order signed by US President Donald Trump in November bans American investment in companies that it deemed owned, controlled, or affiliated with China’s military.

• In February, Xiaomi filed a lawsuit against the US government over the decision to add it to the CCMC list. Xiaomi said that it believes its inclusion was “factually incorrect and has deprived the company of legal due process.”
• In March, a federal judge temporarily blocked enforcement of the ban on the company, calling the decision to blacklist Xiaomi “deeply flawed.” Xiaomi is not state-owned.
• China’s three state-owned telecom operators, China Mobile, China Unicom, and China Telecom, said on May 8 that they would be delisted by the New York Stock Exchange on May 18. The three firms were added to the CCMC list by the Trump administration last year.

ByteDance co-founder and CEO Zhang Yiming said he will step down as the chief executive officer of the TikTok owner at the end of this year, according to a statement published Thursday. Company co-founder and head of human resources Liang Rubo will take his place.

Why it matters: Zhang’s departure comes after the Chinese internet upstart dodged a threatened US ban on TikTok amid geopolitical tensions last year. 

Details: Zhang said in a letter addressed to the company’s to staff Thursday that he will focus on long-term strategy, corporate culture, and social responsibility.

• “After several months of thinking about this, I came to the conclusion that transitioning out of the role of CEO, with all of the related day-to-day responsibilities, would enable me to have greater impact on longer-term initiatives,” he wrote.
• Zhang said the success of ByteDance since its foundation in 2012 had been based on “our ability to innovate at just the right moment in the development of the industry,” including “applying machine learning to mobile and video products.”
• He said that hadn’t had time to make progress in digging into machine learning since 2017 because of his daily duties as CEO. 
• Zhang will take on a new role at ByteDance to drive innovation by “drawing on my strengths of highly-focused learning, systematic thought, and a willingness to attempt new things.” He will remain a board member.
• Liang, who will take Zhang’s place, previously held leading roles at the company as the head of research and development (R&D), and head of ByteDance’s productivity software team.

Context: ByteDance reportedly planning to send its global hit TikTok public as it named former Xiaomi chief financial officer Shou Zi Chew as the app’s CEO.

• However, ByteDance is facing increasing regulatory strain at home as China deepens crackdown on tech companies’ monopolistic practices.
• Many of ByteDance apps including TikTok and news aggregator Jinri Toutiao are driven by machine learning algorithms, which are considered the “secret sauce” of the company’s success.

Chinese internet giant ByteDance has decided to stop hosting TikTok and other overseas apps on Alibaba Cloud, Chinese financial media Caixin (in Chinese) reported. Global hit app TikTok has an estimated 700 million monthly active users worldwide.

Why it matters: The decision by ByteDance is a blow to the e-commerce giant’s cloud-computing branch. Alibaba saw a significantly slower quarterly revenue growth rate in the first quarter, which the company attributed to the loss of “a top-class customer in the internet industry.”

• ByteDance also appears to be responding to mounting regulatory pressure from the US and the European Union related to personal data concerns.

Details: ByteDance decided to move its servers for TikTok from Alibaba Cloud to Amazon Web Service and Oracle, Caixin reported last week, citing two anonymous sources. 

• The contract is worth approximately $800 million per year, said the sources.
• Alibaba has seen its cloud business grow at a slow pace in the first quarter apparently because of the loss of ByteDance’s contract. The company said last week its revenue from its cloud business grew 37% year on year to RMB 16.7 billion (around $2.6 billion) in the first quarter. The growth for its cloud business in the first quarter last year was 58%. The segment grew 50% in 2020 from the previous year.
• Maggie Wu, chief financial officer of Alibaba said last week in an earnings call with investors that the slower growth rate was “due to a change in our relationship with a top-class customer in the internet industry.”
• “This customer has a sizable presence outside of China that used our overseas cost services. They have decided to terminate their relationship with us with respect to their international business due to non-product-related requirements,” said Wu.
• While Wu didn’t mention the name of the company, two sources told Caixin that it was ByteDance. They said that TikTok had used Alibaba Cloud’s data centers in Singapore to back up user data in the US and serve the South East Asian market.
• Both companies refused to comment when contacted by TechNode on Tuesday.

Context: Alibaba is China’s largest cloud service provider, with more than 40% of the market, according to market research firm IDC (in Chinese). It is also the world’s third-larger cloud service provider after Amazon and Microsoft.

• Alibaba made its foray into the US market in 2014. It now runs two data centers in the country.
• ByteDance runs most of its domestic services on its in-house data centers in northern China’s Hebei province, according to local media reports.

Last week, China released its once-a-decade census figures. The results are largely in line with predictions: The nation saw its slowest population growth in decades, and the proportion of older people continues to grow. Some have estimated that China’s population will start to decline in 2027. What do these numbers mean to China tech? 

Bottom line: The demographic dividend that tech companies have enjoyed to fuel their growth in the past decades seems to be coming to an end. China’s population is growing older, which will pose challenges for both internet startups in Beijing and smartphone factories in Shenzhen. But there are also opportunities as the country moves to raise productivity and to upgrade its labor-intensive manufacturing sector into smart factories. Even as the overall population levels off, the urban and educated population is still growing fast.

Here are the key numbers:

• China’s population was 1.41 billion in 2020, 0.7% more than that of the year before and 5.4% more than that of 2010, when the last census was conducted.
• Average annual population growth was 0.54% over the past 10 years, down from an average rate of 0.57% between 2000 and 2010.
• The portion of Chinese over the age of 60 was 18.7% in 2020, a sharp rise from 13.3% in 2010.
• The percentage of Chinese aged between 15 and 59 was 63.35% in 2020, down from 70.1% a decade before.
• The percentage of Chinese who had received a college education or above was 15.5% in 2020, up from 8.9% in 2010.
• Around 902 million Chinese, or 63.9% of the population, now live in urban areas. The number was around 666 million in 2010, or 49.7% of the total population then.

The challenges

Internet population: For many years, tech companies’ growth has relied on the ever-growing number of internet users. 

• But China’s internet penetration is heading to a state of saturation. China’s internet users stood at 989 million by the end of 2020. That was already more than 70% of the population.
• As population growth slows and internet penetration plateau, growth will be harder for internet companies.

Population aging: “Aging has become a basic national condition of China for a period of time to come,” said Ning Jizhe, the head of China’s National Bureau of Statistics, at the release of the census data.

Higher wages:

• For decades, China’s manufacturing industry relied on an endless supply of young workers who are willing to work for low wages. It is now the world’s largest exporter of consumer electronics like smartphones and personal computers. 
• Now, workers are in shortage and labor costs are rising, prompting contract makers to shift some production lines from China to neighboring countries like Vietnam and India.
• China’s gig economy—including its booming ride-hailing and food-delivery markets—also relies on widely available cheap labor. The situation is unlikely to maintain with a lower childbirth rate and an aging population.

READ MORE: 996 and China speed—Slowing growth in the face of a changing workforce

Less innovation? Fewer young people may mean less innovation, argued Liang Jianzhang, a professor at China’s Peking University and a demographics expert. 

• Liang is also the founder of China’s largest online travel agency Ctrip. He resigned as Ctrip’s executive in 2006 to focus on demographic issues. He argues (in Chinese) that China should spend around 1% to 5% of its GDP on encouraging more childbirth.
• Liang told Chinese media after the release of the census data that population aging would keep more older workforce in the labor market, preventing young people from entering the market and thus, curb innovation.
• Decreasing demand would also hurt innovation, according to Liang. “Hotels in China are in surplus, but the entire demand for hotels is now declining,” he said. “No one will build new hotels, and new hotel technologies will have no testing ground.” (Our translation)
• A 2019 paper by Li Zipu, a professor of Zhongnan University of Economics and Law, found that population aging had a negative impact on several provinces’ science and technology innovation, after their proportions of the elderly exceeded 13.3%. Li argued that an aging population and delayed retirement age will discourage enterprises from hiring young workers and that the existing younger generation may lose opportunities for promotion in their careers. 
• Another paper by Shanghai University of Finance and Economics’s Wang Wei and Jiang Zhenmao, however, argues that population aging has positive effects on technological innovation because elderly workers may turn their experience into new methods. Their study was based on the number of patents filed by different age groups.

The opportunities

The productivity market: As the so-called demographic dividend of China ebbs and labor costs rise, demand for productivity tools is surging. Enterprise service software became one of the hottest VC investment segments in China.

• China’s software as a service (SaaS) market is still small but has been seeing impressive growth. The market was worth RMB 19.4 billion ($3 billion) in 2019, up 34.2% from the previous year.
• Automation is sounding more lucrative to enterprises than ever. Research firm IDC estimates that China’s robotic process automation (EPR) market will grow at an annual compound growth rate of 64% from 2018 to 2023. The market was worth $1 billion in 2020, said IDC.
• “Once the Lewis turning point is passed, we enter the neoclassical development stage. Labor supply shifts from surplus to shortage, and economic development no longer relies on the crude input of labor force, but on the improvement of production efficiency,” Shao Yu, chief economist at Orient Securities, wrote in a note (our translation). China reached the Lewis Turning Point in 2013, according to Standard Chartered.
• China’s latest five-year economic plan has vowed better vocational education and more investment in automation and digital infrastructure.

READ MORE: Chasing opportunity in China’s SaaS scene

Healthcare: Population aging also means investment opportunities in areas such as healthcare and elderly care, said analysts. As spending increases, both startups and big tech are rushing to digitize these industries.

• With no major incumbents, senior care may be ripe for innovation, wrote Luo Zhineng, an analyst at brokerage Yuekai Securities. “China’s senior care industry has not yet formed a mature business model, with small scale and immature profit model, and its development level lags far behind the huge number of aging population in China. As the ‘one-child generation’ becomes the backbone of society, family elderly care will gradually give way to institutional elderly care” (our translation). 
• An investment note by China Securities analysts Huang Wentao and Wang Zexuan said that an aging population will bring in a surge in demand for healthcare services. The rural population may rely especially on services enabled by remote-communication technologies.
• The Covid-19 pandemic has already fueled investment in medtech. Healthcare apps that went public in the past year include JD Health, Medlive, and Tencent-baked WeDoctor.

READ MORE: High tide for healthcare apps?

Industrial upgrading in tech: To offset the impact of the aging of the country’s workforce, China has long been pushing for a transformation and upgrading of its manufacturing sector. 

• Strategies that have been taken into place include “Smart Manufacturing,” which aims at digitizing factories.
• “More importantly, China (should) continue to sustain growth through technological development, go for high tech, go for high value-add, go for transformation of the whole supply chain, in order to support the economic growth on a sustainable basis,” Raymond Yeung, Greater China chief economist at ANZ, told CNBC this week.
• Yeung said upgrading China’s manufacturing sector is a “more realistic” approach than trying to renew population growth.

Growth in cities: Another good thing to look at China’s census data is how much the urban population has grown in the past decade—it grew more than 35% between 2010 and 2020. Most of China’s urban population growth in the past five years was in small cities, according to a report (in Chinese) by Evergrande Research.

• This means the user pool for companies seeking to tap into the “sinking market”—China’s lower-tier cities and small towns—is huge, and is in high-speed growth.
• China’s current urbanization rate is 63.9%. The goal set in China’s latest five-year plan that ends in 2025 is to raise the rate to 65%, which means an increase of roughly 15.5 million people living in towns and cities.
• Companies that have seen great success in the sinking market include e-commerce upstart Pinduoduo, video-sharing app Kuaishou, and news aggregator Qutoutiao.

Additional contributions by Julia Lu.

Editor’s note: The ‘Techlash Tracker’ stopped updating from November as tech crackdowns became recurring in China. The topic is now part of TechNode’s daily news coverage. 

Starting this week, TechNode is launching a new open resource. The “Techlash Tracker” is a database of major regulatory moves involving big tech in China, an open-source project to help make sense of a major trend defining China tech this year. 

The tracker is a regularly and openly available updated set of spreadsheets, built in Airtable, recording events. Click here to view. 

We invite anyone interested in China tech to use this resource for analysis, and to contribute to it.

Something is happening here, but we don’t know what it is

In China tech, the word of the year is “antitrust.” Alibaba was fined a record-breaking $2.8 billion for “forced exclusivity” and other anti-competitive practices, while Meituan faces a probe by market regulators over the same practices. Tencent, Didi, and Baidu—to name only a few—have been fined lesser amounts for failing to submit M&A deals for review.

Or is it “de-risking”? The IPO of fintech pioneer Ant Group, slated to be the world’s largest, was abruptly axed late last year as regulators prepared a series of changes to its operations. JD Digits, a competitor, withdrew its IPO application voluntarily in the wake of the fiasco. This week, 11 other tech majors were summoned to Beijing to discuss changes to their fintech operations.

Some say it’s all about data. Beijing has moved in the past year to recognize the strategic importance of this resource, which it has called ”the new oil,” and hopes to prevent tech companies using walled gardens to monopolize access to it.

Related to data, the list continues: consumer rights, privacy, cybersecurity.

We can see the trend: Big tech is being regulated as never before. At TechNode, we’re seeing a big trend, and we’ve been wondering how to understand it—and what to call it.

It’s tempting to see it as the local vector of a so-called global “techlash” that embraces everything from the EU’s General Data Protection Regulation (GDPR) to US Senator Elizabeth Warren.

Or maybe it’s just “Jacklash”: both Alibaba and Ant were founded by Jack Ma, a flamboyant billionaire who annoyed regulators when he dismissed banking authorities as “old men” in a speech last year, and some commentators have interpreted many recent moves as personal attacks on him. But then, how to explain the broadening scope of the investigations?

Just make a list

When we don’t know where to start with a topic, we often approach it by just making a list. In our new “Techlash Tracker,” we aim to make a database of key events in big tech regulation. We plan to include enforcement actions, fines, and announcements of new laws and regulations. We will track private antitrust lawsuits in another sheet.

We’ve chosen an intentionally vague name, “techlash,” rather than “antitrust” or “crackdown,” to indicate uncertainty about an interpretation. 

The tracker is intended as a living document: we aim to update the list at least once a week with new events, if applicable. We’ll also continue to dig through our archives to add more previous events, and plan to create some visualizations to help understand the material as the list grows.

The material here is also a bit raw. Expect to see it in more digestible forms in our reporting in the coming months as well as, we hope, in the work of our friends and colleagues.

An open resource

The Techlash Tracker is an open resource. In addition to making it free to use, we invite other analysts to use the data we’ve collected (but please do credit us if so). We’re also counting on our readers to help us catch events. Click here to submit more events for the tracker if you see something we’ve missed.

Thanks for your support, and we hope you’ll find the tracker useful!

Your techno-friends,

The TechNode team

China imported $350 billion worth of semiconductors in 2020—more than the value of the crude oil it imported the same year, according to the country’s customs data. Importing semiconductors also accounts for the country’s largest categorical trade deficit, where the difference between what China imports and exports for this particular type of goods is the widest.

China has been the world’s largest importer of chips since 2005. As a result, global chipmakers and the governments in their home countries have grown obsessed with its plan to pursue independence on semiconductors for the past few years. They fear that China is looking to build a domestic chip supply chain and decrease its reliance on imports that have proved profitable for certain economies, most notably South Korea, Taiwan, and the United States. 

It is true that China is determined to increase its domestic chip production. But the goal is not to make China a silicon locavore, entirely independent from global supply chains. Making a chip is a hugely complicated process involving hundreds of companies that specialize in different steps, and no country does it all. China is trying to bring the highest value-added steps in the process, like chip design and manufacturing, on shore, but no matter how well this goes the country will remain dependent on the industrys’ global supply chains.

The actual source of the 70% figure is hazy—in fact, it may have been invented for television. It was first mentioned by China Central Television in August. Citing “relevant data from the State Council,” the state broadcaster said that China will realize a “self-sufficiency rate of 70%” in semiconductors by 2025. But there is no support for such a claim in any Chinese official document. Media reports cite the country’s Made in China 2025 initiative, first released in 2015, as the source of the 70% goal, which is misleading. The plan did call for improving domestic chip-designing ability, but it did not set a specific timeline for self sufficiency or a figure.

Beijing certainly wants to bring more semiconductor manufacturing on shore—but its goals appear to be relatively realistic. 

Chips are China’s biggest imports

China’s semiconductor imports surged to an all-time high in March to stockpile against the threat of a global chip shortage. That month, the country imported 58.9 billion semiconductor units worth $35.9 billion, according to data released by China’s General Administration of Customs, the South China Morning Post reported.

In 2020, China spent more money on semiconductors than on crude oil, according to the data. In fact, semiconductors were China’s largest imports last year as well as the country’s largest categorical trade deficit. In 2020, China booked an overall trade surplus of $570.4 billion, while semiconductors ran at a trade deficit of $233.4 billion. By comparison, the trade deficit within crude oil was $185.6 billion in 2020.

China’s trade deficit in semiconductors is getting deeper, increasing 15.3% in 2020 from the previous year and surging nearly 150% compared with 2014.

One of the reasons for China’s push for self-reliance on semiconductors is to “develop high value-added manufacturing and service industries and help reduce the country’s largest source of trade deficit,“ wrote insurance firm Euler Hermes in a report (in Chinese) in February. 

And China is chips’ largest importer

China needs chips, but chip makers around the world also need China. The country accounts for a huge part of their revenue—56% for Qualcomm and 26% for Intel. Numbers for the industry as a whole were not available. The US-China decoupling on technology has been bad news for them and we’ve seen they have lobbied for less restrictions on chips exports to China.

The bottom of the semiconductor value chain

China is the world’s largest buyer of semiconductors, but most of what China buys isn’t consumed at home. Instead, chips are used to make other products and then exported. The chips are incorporated into end products like smartphones, personal computers, and telecommunications equipment, which are then exported to other markets.

Market research firm IC Insights estimated that 60% of semiconductors sold in China in 2020 were components for export products.Making gadgets out of imported semiconductors is a low-margin business. Semiconductor revenue earned by companies headquartered in China only accounted for 5% of global semiconductor sales in 2019, according to data from the Semiconductor Industry Association, a US-based industry body.

China has been involved in the global semiconductor supply chain for a few decades, allowing companies to nurture the talent and skills to move up the value chain and reap greater economic benefits.

China has seen Taiwan improve its standing in the semiconductor industry over the past 60 years. The island has moved steadily up the value chain since the 1960s when American companies began setting up assembly plants there. Today, the island is the world’s second-largest semiconductor manufacturer behind South Korea, and home to Taiwan Semiconductor Manufacturing Company, the world’s largest contract chipmaker. Chip manufacturing now contributes to more than 56% of Taiwan’s semiconductor industry.

For China, the push for self-reliance in semiconductors is not only about making semiconductors at home. It is about pushing the industry upstream on the value chain—making chips rather than using chips, designing chips rather than packaging chips.

While this has already been in process over the past two decades, Beijing’s call for self-reliance on semiconductors is likely to accelerate the pace. The following chart shows the decrease in low-value activities for China and an increase in activities higher up the value chain, specifically chip design.

Rational growth

China’s ambitious semiconductor autonomy plan is about improving the proportions of chip designing and chip manufacturing in the industry, the Euler Hermes report said. 

By doing so, the country has increased investment in the segment. This newsletter mentioned in March that cash flowing into China’s semiconductor firms surged more than fourfold in 2020 compared with the previous year. One of the biggest underwriters is the state. 

The country’s National Integrated Circuit Industry Investment Fund, known as the Big Fund, manages more than RMB 340 billion ($52.5 billion). Around 84% of the Big Fund’s investment went into chip manufacturing and design firms. The rest went mostly into chip packing and testing firms, lower-value inputs necessary to the ecosystem.

Meanwhile, provincial governments have set up guidance funds totaling more than RMB 300 billion to support local semiconductor industries. 

The numbers seem massive, but the state is not throwing its support behind chip firms at any cost, support that some of China’s biggest firms have enjoyed in the past. In November, the government allowed Tsinghua Unigroup, a major state-owned semiconductor manufacturer, to default on a RMB 1.3 billion bond.

“Tsinghua Unigroup is one of China’s largest and most advanced semiconductor firms,” wrote Euler Hermes. “Tsinghua Unigroup’s default sends a signal that China probably won’t provide funds to its leading companies at all costs.”

Chinese telecommunications equipment maker Huawei reported Wednesday that its revenue for the first quarter fell 16.5% year on year, in the company’s largest quarterly top-line decrease since US export restrictions took hold.

Why it matters: The decrease in revenue reflects the toll that US sanctions have taken on a company that was once the world’s largest smartphone maker.

• US sanctions imposed in 2020 and 2019 barred Huawei from access to critical semiconductors it needs to produce consumer products. The company was also banned from using Google’s Android mobile operating system, which heavily dented the appeal of its smartphone offerings in overseas markets.

Details: Huawei said in a statement Wednesday that its revenue for the first quarter of this year was RMB 152.2 billion (around $23.5 billion), a year-on-year decrease of 16.5%.

• The company said the results were “in line with forecast.”
• Net profit in the quarter was RMB 16.7 billion, up from RMB 13.3 billion in the same quarter last year.
• “2021 will be another challenging year for us, but it’s also the year that our future development strategy will begin to take shape,” said Eric Xu, Huawei’s rotating chairman.
• “No matter what challenges come our way, we will continue to maintain our business resilience. Not just to survive, but do so sustainably,” Xu said in the statement.

Context: Huawei said earlier this month that its revenue for 2020 reached RMB 891.4 billion, up 3.8% year on year, but slower than the annual growth rate of 19.1% in 2019.

• The company saw revenue growth from its consumer business—which includes smartphones, tablets, and computers—fall sharply. Growth in this segment fell to 3.3% last year from 34% in 2019. 
• Huawei’s revenue for the fourth quarter of 2020 fell 11% year on year to RMB 220.1 billion—the first time on record that its quarterly revenue contracted.

Chinese internet giant Tencent’s investment in Japanese tech firm Rakuten will be “monitored for national security implications,” Japanese government officials told their US counterparts prior to the meeting between the two nations’ leaders on Thursday, Nikkei reported.

Why it matters: Chinese tech companies’ overseas investment activity faces increasing scrutiny as the US pushes for a tech alliance with allies.

Details: Japanese officials briefed the US National Security Council on Tencent’s March investment in Rakuten, a Japanese e-commerce and telecommunications service provider, Nikkei Asia reported on Thursday. 

• Rakuten announced on March 12 that it planned to raise a total of JPY 242.3 billion (around $2.2 billion) by issuing new shares to investors including Tencent, Japan Post Holdings, and US retail giant Walmart.
• Tencent, through its Image Frame Investment subsidiary, paid JPY 65.7 billion on March 31 to acquire a 3.7% stake at Rakuten, according to Nikkei.
• Japanese officials worried that the investment might run afoul of an executive order signed by former US President Donald Trump in January which banned transactions with eight Chinese apps including Tencent’s WeChat Pay over national security concerns.
• Tokyo will “closely monitor” the tie-up to see whether Tencent has access to non-public technology, sources told Nikkei.

READ MORE: Before the bans, China tech investment turned away from US

Context: Rakuten is an online retail company founded by Japanese billionaire Hiroshi Mikitani. The company also runs a telecommunications business. It launched its 5G service in September.

• Japanese Prime Minister Yoshihide Suga is set to meet with US President Joe Biden in Washington on Thursday. 
• Biden has upheld the Trump administration’s tough policies on Chinese tech firms. Biden’s government last week imposed sanctions on seven Chinese supercomputer developers, barring them from acquiring US technology.

China’s months-long investigation of Alibaba for anti-competitive practices concluded on Saturday as the e-commerce heavyweight was slapped with a record RMB 18.2 billion ($2.8 billion) fine for violating the Anti-Monopoly Law for a variety practices, most importantly “forced exclusivity.”

The State Administration for Market Regulation (SAMR), China’s top market regulator, defined Alibaba’s dominant market position in a 24-page decision released on April 10. Alibaba’s annual revenue from e-commerce services accounted for more than 70% of the combined revenue from China’s top 10 e-retail platforms, while its overall turnover represents more than 60% of China’s online retail sales during 2015 to 2019, according to SAMR.

The regulator determined that Alibaba had been “abusing” its market dominance by imposing “forced exclusivity” on merchants, a practice in which platforms force merchants to sell their wares on only one company’s platform or services.

“It’s like the platform is collecting taxes from the merchants. There are cases when merchants are recording hundreds of millions of RMB but still can’t make money from their business. That’s unimaginable in the traditional industry,” Song added.

What impact will the penalty and the ban on forced exclusivity have on Alibaba? And what is forced exclusivity—the main violation authorities cited in their decision—and why was forced exclusivity so important that Alibaba kept going despite multiple warning signs?

Record-breaking penalty

The fine Alibaba received is the largest in the history of Chinese antitrust law, breaking a record set by a fine imposed on US chipmaker Qualcomm. In February 2015, Qualcomm agreed to pay a fine of $975 million to settle a 14-month investigation into its anti-competitive practices led by the National Development and Reform Commission of China.

The Alibaba fine is also the second-largest antitrust penalty worldwide for a single company, according to a research note by the law firm Dentons China. The largest fine in history remains the European Union’s EUR 4.34 billion (around $5.2 billion) fine on Google in 2018 for using its Android mobile operating system to illegally “cement its dominant position” in search.

While the RMB 18.2 billion penalty, 4% of the group’s 2019 revenue, is China’s largest for antitrust violations, the sum is small compared to Alibaba’s more than RMB 312 billion in cash and cash equivalents as of 2020. The 4% penalty is also well short of the maximum 10% permitted in the antitrust law.

Alibaba shares in Hong Kong and US both jumped on news of the conclusion of the investigation—regarded as a major source of uncertainty for the e-commerce platform—despite the fact that the penalty was double the rumored sum of $1 billion.

“Determination of the penalty means Alibaba’s antitrust case has come to an end. A series of negative events has dragged Alibaba’s market cap near to a historic low. As long as it is slightly favorable, the stock price will usher in a rebound,” Wang Shan, an analyst at Tiger Brokers, told TechNode (our translation).

Michael Norris, research and strategy manager of Agency China, said that immediate market response to the fine reflects “a belief the regulatory overhang over Alibaba will conclude shortly.”

“It’s highly arguable the regulatory uncertainty over anti-trust investigations has done more damage to Alibaba’s share price than the fine for ‘forced exclusivity’,” he added.

The record-breaking fine against Alibaba is a direct sign that China has become a major antitrust regulator internationally, said Deng Zhisong, a partner at Dentons China.

While pledging full compliance with the administrative decision, the company played down its impact, saying that it expected no material impact on its business from the end of forced exclusivity, according to Chairman Danial Zhang during the Monday briefing. In addition, management said Alibaba will spend billions to lower merchant costs, responding to allegations that they’ve been overcharging merchants.

Forced exclusivity and timeline

Many Chinese tech giants have been accused of different forms of ‘forced exclusivity,” also known as “choose one of two.” Alibaba’s version forces merchants to sell exclusively on its marketplaces, such as Taobao and Tmall. Changing to a multi-platform format means its merchants can now sell on rival platforms like Pinduoduo and JD.com.

Vendors already operating on multiple platforms are prohibited to join rivals’ promotional events, such as the June shopping festival known as “618” and year-end shopping spree Singles Day. Merchants who don’t comply face punishment such as reduced marketing resources, decreased search result rankings, and even bans from Alibaba’s marketplaces.

• September 2010: Fights over forced exclusivity in China’s tech world date back more than a decade ago when Qihoo 360 sued Tencent for forcing hundreds of millions of users to choose between security software offered by Qihoo and Tencent’s QQ. Known as the 3Q war, this landmark case was China’s first first major tech antitrust case and helped to establish jurisdiction for similar cases.
• November 2012: Alibaba, which popularized the annual “Singles Day” sales promotion on Nov. 11, trademarked the shopping festival in an attempt to exclude rivals from holding promotions under the same theme. JD.com and other e-commerce companies launched Singles Day sales anyway, forcing merchants to take sides in a battle between platforms.
• July 2017: JD and flash sale retailer Vipshop released a joint statement, accusing Alibaba’s Tmall marketplace of monopolizing the market by forcing merchants to sign exclusive deals with Alibaba.
• June 2019: Home electronics manufacturer Galanz accused Alibaba’s Tmall of removing its products from search results after the electronics manufacturer refused to remove listings from rival platform Pinduoduo.
• October 2019: Alibaba PR head Wang Shuai dismissed concerns over the matter, stating that “so-called forced exclusivity is a non-issue.”
• November 2019: China’s market regulator during a forum in Hangzhou reminded more than 20 e-commerce players that forcing businesses into exclusive agreements with one marketplace is illegal.
• March 2019: China’s market regulator introduced a set of e-commerce rules, including terms prohibiting practices that facilitate forced exclusivity.
• December 2021: Chinese market regulators launch an anti-monopoly investigation targeting Alibaba.

Forced exclusivity practices exist in other platform industries too. Restaurant owners are also pressured to take sides with food delivery platforms like Meituan and Ele.me. Those willing to list exclusively on one of the food delivery platforms enjoy a lower commission fee. Similarly, drivers on ride-hailing platforms benefit from lower commission rates if they only work using one app.

Why forced exclusivity

Alibaba Chairman Zhang said eliminating forced exclusivity would have no material impact on Alibaba’s business. But if the practice didn’t matter, why did the company keep it so long in the face of lawsuits and pressure from regulators?

Alibaba, China’s top e-commerce platform for decades, had faced intensifying competition from rivals like Pinduoduo, JD, and more recently, mini programs on Tencent’s WeChat and short video apps including Douyin and Kuaishou. Forcing exclusivity on its merchants helped fend off rivals, making it harder for them to offer competitive selections of goods.

“It’s a crucial measure in the early development of online marketplaces, but not so important for a business as big as Alibaba (our translation),” said an analyst who asked to stay anonymous for sensitivity of the matter.

Despite forced exclusivity, the SAMR report showed that Alibaba’s market share has been gradually declining over the years. Its annual revenue accounted for 86.0% of earnings from China’s top 10 e-retail platforms in 2015. The figure has been dropping by single-digit percentages each year ever since to 71.2% in 2019. Its overall sales volume in proportion to China’s online retail sales declined to 61.8% in 2019 from 76.1% in 2015.

In March, Pinduoduo overtook Alibaba as China’s largest online selling platform in terms of number of users. Pinduoduo reported that it reached 788.4 million annual active buyers in 2020 compared with Alibaba’s 779 million annual active buyers during the same period.

Although Alibaba’s core e-commerce business still outperforms Pinduoduo in other key metrics, including revenue, gross merchandise volume, and per-order sales, Pinduoduo’s growth in user base is a warning sign for the tech giant that has dominated China’s e-commerce for decades.

Norris said forced exclusivity may also have been a means to keep Alibaba merchants’ digital marketing spend with Alimama, Alibaba’s digital marketing arm, rather than spread across multiple platforms.

Is it a monopoly?

Before accusing Alibaba of monopolizing the e-commerce market, regulators had to answer a question: Is there any such thing as an e-commerce market? E-commerce giants from Alibaba to Amazon have argued that e-commerce is just one among many forms of retail, and that its biggest companies should be seen as reasonably sized players in a retail market that includes malls and supermarkets.

SAMR rejected this argument on Saturday, finding that e-commerce is a separate market, and for the first time laying out a definition of an online services market and a method to measure the market share of a player in such a market.

While SAMR has been pushing to revise laws and regulations to keep up with its antitrust campaign in tech, it relied on established law dating to 2009 in its Alibaba decision, suggesting that the recent tech antitrust push was possible under the old law.

SAMR’s analysis used an approach familiar from traditional antitrust cases, known as “demand-side substitution analysis.” It said that the functions of online marketplaces, such as Alibaba’s Taobao and Tmall, are “non-interchangeable with offline marketplaces,” and that online marketplaces serve different merchants than offline marketplaces because the scope and costs of their services are different. 

China’s 2008 Anti-Monopoly Law defines a player with more than 50% of a “relevant market” as a “dominant player.” In defining Alibaba as a dominant player in the online marketplace, SAMR cited data about Alibaba’s service revenue from merchants; China’s e-commerce market’s Herfindahl-Hirschman Index, a standard measure of market concentration; analysis of Alibaba’s leverage in negotiations with merchants; as well as Alibaba’s “strong abundant finance resources and advanced technological abilities.

Regulators are working on changes to antitrust law that may make it easier to prove monopoly status in future internet cases. In January 2020, SAMR proposed an amendment to China’s Anti-Monopoly Law, which will take into consideration factors such as network effects—services that rise in value as their user bases grow—as well as company size and data assets when determining whether a company is a dominant player. SAMR also in March finalized a set of guidelines helping regulators define relevant market share in the internet sector.

Going forward

Alibaba clearly seeks to move on from the antitrust investigation. Vice Chairman Joe Tsai said on Monday during the conference call with investors, media, and partners that the company has “put this matter behind us.” Tsai added that he was not aware of any other investigations involving the company relating to the Anti-Monopoly Law, although the regulators continue to conduct a broad review of Chinese tech firms’ investment transactions.

Levying a sizable fine on one of China’s largest internet sites highlighted the state’s increased scrutiny of conglomerates, sending shivers down the spines of many Chinese tech peers. 

Just two days after Alibaba’s fine, regulators announced a $180,000 penalty on Sherpa’s, a Shanghai-based English-language food delivery app targeted toward foreigners.

In the wake of the penalty, regulators summoned on Tuesday 34 of the country’s largest technology companies from various segments, including ByteDance, Baidu, JD, Pinduoduo, Ctrip, Bilibili, and Qihoo 360. The regulator warned every major internet firm in China to heed the Alibaba example.

Beijing gave Chinese online platforms a one-month window to rectify practices that were unfair to competition, such as forced exclusivity, user data leaks, and price discrimination. SAMR said those that failed to comply with regulatory requirements in follow-up checks will be “severely” punished. 

Alibaba is already moving to respond to this pressure. For years, China’s tech giants strived to construct their self-sustained ecosystems in order to lock users in. But in a surprising move since mid-March, Alibaba took a step to open up its ecosystem by bringing Taobao Deal and re-commerce service Xianyu to Tencent’s WeChat. This may be a sign that the thick walls tech companies built against one another are beginning to crack.

In the wake of a record-breaking $2.8 billion fine on Alibaba for abusing a monopoly position in e-commerce, regulators have announced a fine on a somewhat smaller Chinese tech firm: the food delivery app Sherpa’s, or as it’s known to insiders, “Big English-Language, Shanghai-based Food Delivery.” Local market regulators announced a fine of about $180,000 Monday that went lightly viral for the depth of its antitrust reasoning.

What’s a market? Antitrust cases often hinge on defining a market—in fact, until Saturday it was an open question whether there was such a thing as the Chinese e-commerce market. Now we know that there is both a Chinese e-commerce market and an English-language Shanghai food delivery market.

• The State Administration for Market Regulation (SAMR), China’s top trustbuster, argued that e-commerce is “non-interchangeable with offline marketplaces” in order to define the market Alibaba was alleged to monopolize.

Geeking out: In the Sherpa case, local antitrust regulator Shanghai Municipal Administration for Market Regulation (SMAMR) cited polls of foreign residents, app design, and the interior decorating of restaurants to prove that delivering food to foreigners in Shanghai is a discrete market, in a statement of 15,727 Chinese characters and seven charts, and jam-packed with economic formulas.

• The regulator argued that the app does not compete with Chinese food delivery leaders Meituan and Ele.me because it exists in a separate English-language market.
• Sherpa’s grabbed 99.8% daily orders in the English-language food delivery market in the first ten months in 2019, according to the statement.
• Around 76% of foreigners living in China only use food delivery platforms that provide an English user interface because of language barriers, SMAMR cited a “relevant market research report” as saying.
• The app’s user interface, SMAMR argues, had “thoroughly taken into account western culture“ with design decisions including avoiding the color red, which is “considered to be festive by Chinese users but seen as a warning color in Western countries.”

Details: Sherpa’s was fined RMB 1.2 million (around $178,500), or 3% of the company’s revenue in 2018, SMAMR said in a statement (in Chinese) on Monday. The fine was issued in December 2020, it said.

• The regulator said Sherpa’s had “utilized its position of market dominance” to charge excessive delivery fees to users and commissions to restaurants.
• Sherpa’s could not immediately be reached for comment.

Context: China’s tech antitrust spree started in November as SAMR imposed antitrust-related fines on three acquisition deals involving Alibaba, Tencent, and parcel service SF Express, a move that legal experts described as the country’s first batch of antitrust enforcements against tech firms.

• SAMR said on Saturday it had issued a $2.8 billion fine on Alibaba for antitrust practices including “forced exclusivity.” The fine is the largest antitrust penalty ever issued in China.

South African telecom company Naspers said in a statement Wednesday that its tech arm had sold up to 2% of Chinese internet giant Tencent for $14.7 billion, cutting its stake in China’s most valuable tech firm to 28.9%.

Why it matters: Naspers’s block sale repeats a March 2018 trade in which Tencent’s biggest shareholder sold 2% of the world’s largest gaming company for $9.8 billion. Tencent’s stock fell by nearly 50% over the following six months.

Details: Prosus, the Dutch-listed international arm of Naspers that holds Tencent shares, said Wednesday that it had sold 191.89 million Tencent shares for HKD 114.1 billion (around $14.7 billion), reducing its stake to 28.9%.

• Prosus remains Tencent’s largest shareholder.
• Those shares were sold at the price of HKD 595 each, slightly lower than Tencent’s Wednesday close price of HKD 629.5. 
• Tencent shares dropped by more than 2% on Wednesday morning following the announcement.
• Prosus said cash from the sale will “increase its financial flexibility to invest in growth.” The trade is “understood and supported by Tencent”, said Prosus.
• The firm also promised not to sell more of the company’s shares for three years.

Context: Tencent said last month that its profit for the fourth quarter of 2020 rose 175% year on year to RMB 59.3 billion (around $9.1 billion). The company’s revenue for the fourth quarter rose 26% year on year to RMB 133.67 billion.

• Shares of Tencent reached a historical high in January, but then started to fall as China began to tighten regulations on tech companies.

On March 12, China’s top antitrust regulator said it had issued fines to 12 Chinese companies over 10 investment deals in the internet sector that were in violation of the Anti-Monopoly Law. The State Administration for Market Regulation (SAMR) disclosed the 20 companies that were involved in those deals. 

Nearly all of the companies mentioned were Chinese companies considered “big tech,” or their subsidiaries. They include Alibaba, Tencent, Didi Chuxing, Baidu, JD.com, ByteDance, Meituan, and Suning. Those firms were fined for failing to report merger and acquisition (M&A) deals in advance, which is considered a violation of China’s antitrust law.

Bottom line: The penalties—RMB 500,000 (around $76,095) each—were trivial for companies of such size. But the regulator’s move was a warning: China’s tech antitrust campaign, which began in November, has not ended and will only grow in scope and severity.

A brief timeline

• August 2016: Chinese regulators open an investigation into the merger deal between Chinese ride-hailing platform Didi Chuxing’s merger with US rival Uber. The investigation appeared to be unofficially suspended by the time Uber filed for a public listing in April 2019.
• January 2019: SAMR launches an antitrust probe into Tencent Music Entertainment’s dealings with the world’s three largest record labels. A year later, the regulator decided to suspend the investigation.
• January 2020: SAMR proposes an overhaul of China’s 2008 Anti-Monopoly Law and introduces a set of antitrust regulations tailored for the internet industry. The revision of the law is in the pipeline to be approved by China’s legislature.
• November 2020: The Shanghai technology bourse halts an initial public offering for Alibaba’s Ant Group, citing “changes in the regulatory environment.”
• November 2020: SAMR proposes new guidelines targeting anticompetitive behavior to include internet companies. The new rules widen the reach of certain antitrust terms that previously only applied to the physical economy.
• December 2020: SAMR imposes antitrust-related fines on three acquisition deals involving Alibaba, Tencent, and SF Express, a move that legal experts described as the country’s first batch of antitrust enforcements against tech firms.
• December 2020: SAMR announces an anti-monopoly investigation targeting Alibaba.
• February 2021: SAMR’s guidelines targeting internet companies come into effect.
• February 2021: SAMR imposes a RMB 3 million penalty on the operator of Chinese flash sale online retailer Vipshop.com for unfair competition.
• March 2021: Reuters reports that SAMR is looking into Tencent’s WeChat for monopolistic practices and how the popular messaging app had possibly squeezed smaller competitors.
• March 2021: SAMR issues fines to companies including Tencent, Didi Chuxing, and Baidu over 10 investment deals in the internet sector that were in violation of the Anti-Monopoly Law.

Most fines are about unreported deals: SAMR issued three rounds of fines to tech companies over anti-competitive practices. Except for the Vipshop case, the fines were all related to a clause in the 2008 Anti-Monopoly Law that requires companies to report investment or acquisition and merger deals that could create a “market dominant player,” or one that will hold more than 50% share of its relevant market. 

• In those cases, firms were fined the maximum amount allowed by the existing legal framework, or RMB 500,000 each.
• SAMR’s overhaul of the Anti-Monopoly Law will allow regulators to issue fines up to 10% of the offending company’s annual revenue.
• Most deals in question can be traced years back. For example, Baidu’s 2014 acquisition of smart home equipment maker Ainemo was fined in the March action.
• SAMR hasn’t, so far, asked any of the companies to reverse the deals in question. But lawyers we talked to said the companies may be asked to do so as SAMR steps up enforcement.

SAMR is waiting for the law to catch up: The regulator is pushing for an overhaul of China’s Anti-Monopoly Law and other regulations—its punitive concentration on unreported M&A deals is evidence that it may lack the essential legal vehicles to rein in internet companies. It also may explain why the regulator dropped investigations into the Didi-Uber merger deal and the Tencent Music Entertainment case.

• China on Feb. 7 formalized SAMR’s internet antitrust guidelines and, on Feb. 8, the regulator used it to fine Vipshop over unfair competition behaviors identified by the new guidelines.
• The guidelines, dubbed the Antitrust Guidelines for the Platform Economy, specifically targets internet companies. It forbids internet platforms from forcing merchants into exclusivity deals, offering different prices based on user data, and using algorithms to manipulate the market.
• Vipshop was fined based on clauses about exclusivity deals, according to SAMR.
• SAMR’s proposed amendment to China’s Anti-Monopoly Law also asks authorities to consider factors such as network effects—services that rise in value as their user bases grow—as well as company size and data assets when determining whether a company is a dominant player. But the amendment—different from SAMR’s guidelines which were active starting in February—is not effective yet. China’s legislature said in March that it would review and approve the revision “this year.”

What’s next? Growing quickly by buying smaller competitors is a common practice in China’s tech industry. Giants created by merger deals include Meituan, which merged with rival Dianping in 2015; and classified advertising site 58.com, which merged with rival Ganji in the same year. 

• Didi Chuxing, China’s largest ride-hailing platform, also established its dominance in the market through the 2016 deal with Uber.
• The problem is that companies are usually not aware that they may be obligated to report those deals for antitrust review. As China steps up anti-competitive regulations in tech, M&A deals will be more and more subject to market regulator review, potentially stopping tech companies from scaling in size by merging with rivals.

The worst is yet to come: While China’s antitrust regulators have been taking relatively mild measures against tech firms, signs show that more serious moves are on the horizon.

• In September, Tencent offered to take NYSE-listed search engine Sogou private in a $3.5 billion deal as its sole owner. In December, Reuters reported that SAMR wanted to “make an example” using the deal and is “planning a thorough review that could mean the deal may miss a July 2021 completion deadline.”

However, existing monopolies may not have to worry about being broken up. “There are no such provisions for breaking up monopolies in China’s antitrust law,” Deng Zhisong, an antitrust lawyer at Dentons law firm in Beijing, told TechNode in December. What the regulator can do is issue steep penalties and veto deals that don’t pass muster. 

China’s top antitrust regulator is looking into Tencent’s WeChat for monopolistic practices and how the popular messaging app had possibly squeezed smaller competitors, Reuters reported, citing anonymous sources. 

Why it matters: The latest development in China’s antitrust campaign indicates that Tencent, the country’s largest social media and gaming company, might be the next tech behemoth to be targeted. The company had previously been sued by rivals for anti-competitive behaviors.

Details: Wu Zhenguo, the head of China’s State Administration of Market Regulation (SAMR), expressed concern about some of Tencent’s business practices, and asked the firm to comply with antitrust rules when he met with Tencent founder Pony Ma this month, Reuters reported Wednesday, citing two people with direct knowledge.

• SAMR was gathering information and looking into WeChat’s business practices, and how the super app—China’s largest instant messaging app with more than 1 billion users—may have competed unfairly against smaller rivals.
• Ma, Tencent’s low-key chief executive, was in Beijing this month for China’s annual parliamentary meeting and visited the SAMR office two weeks ago. He met with SAMR officials to discuss compliance at his company.
• Tencent did not respond to requests for comment on Wednesday.

Context: SAMR had previously targeted Tencent in its antitrust actions. It fined a Tencent affiliate in December over unreported acquisition and merger deals and punished Tencent earlier this month for the same reason.

• Tencent is also involved in a lawsuit with Douyin, ByteDance’s Chinese version of TikTok, which accused the company of violating China’s antitrust law by blocking Douyin’s content on its WeChat and QQ instant-messaging apps.
• Tencent is about to report its fourth-quarter earnings on Wednesday. The company is expected to report a 42% rise in its quarterly profit, according to Reuters, but analysts said the investor focus will be on regulatory developments.

Chinese telecommunications giant Huawei will begin charging smartphone makers royalties of up to $2.50 for each 5G-enabled handset they sell that uses its patented 5G technology, the company announced on Tuesday.

Why it matters: The plan means global smartphone makers like Apple and Samsung are likely to pay 5G-related royalties to Huawei, the owner of the world’s largest portfolio of 5G patents, potentially opening a new revenue stream for the company as its smartphone sales shrink.

• Huawei has declared ownership of 3,007 5G patent families—groups of the same or similar patents filed in different nations, according to GreyB, an intellectual property research firm.
• Around 18.3% of Huawei’s patent filings are considered “essential” to the 5G standard—protocols and technical specifications that allow connectivity between 5G devices, according to GreyB. Smartphone makers have to pay for those “standard essential patents,” or SEPs, if they want to make 5G-compatible devices.

Details: Huawei has set the royalty for its 5G SEPs to up to $2.50 for each device, said Ding Jianxin, head of Huawei’s Global Intellectual Property, at a press event on Tuesday. The royalty will be charged based on the sales price of the handset at a “reasonable rate,” Ding said.

• Other major 5G patent owners are charging more than Huawei’s planned rate. Nokia said in 2018 that it will charge EUR 3 (around $3.57) per device for its 5G SEPs. Ericsson said in 2017 that its rate would be between $2.50 and $5 per device.
• Huawei will negotiate royalty rates and possible cross-licensing of patents with Apple and Samsung, Huawei Chief Legal Officer Song Liuping said on Tuesday. 
• Huawei said in a statement that it expects to earn between $1.2 billion and $1.3 billion from its intellectual property inventory, but it didn’t say how much of it will come from its 5G patents. The company has said it has invested 10% to 15% of its revenue in research and development (R & D) every year for the past decade.

Context: Huawei is losing its status as a smartphone powerhouse following US sanctions over the past two years. The company has been cut off from the global semiconductor supply chain and now relies on stockpiles to maintain production. But it remains a major standard-setter in 5G, meaning the world’s largest handset makers will still need to cooperate with the company to make 5G phones.

• In February 2020, Huawei filed two lawsuits against Verizon, alleging that the US carrier infringed on 12 of its patents.

China on March 9 rolled out its own “vaccine passport” amid global controversy around potential equality and privacy issues of the health document.

China’s vaccine passport, the International Travel Health Certificate (ITHC), serves as an international version of China’s year-old health code system that helped the country resume domestic travel after the initial outbreak early last year. It contains information such as the holder’s coronavirus test results, vaccination records, and antibody test results, according to China’s foreign ministry (in Chinese). 

To sign up, users enter their passport number in a foreign ministry-owned mini program on Tencent’s WeChat instant-messaging platform. Verify your identity using face recognition, and the certificate is instantly available. It is currently only available for Chinese nationals. China hasn’t revealed plans to issue the certificate to foreign nationals living inside or outside of the country.

The health code system began as a patchwork of different apps rolled out by local governments to track residents’ travel history and body temperatures, often with varying standards. It has since evolved into a nationwide database network of individuals’ health information. It appears that the newly launched vaccine passport also has access to the same data.

READ MORE: We read the technical standards for China’s ‘health code.’ Here’s what we learned.

Like the health code system, China’s vaccine passport may provide the world with a new option in the quest to resume normal international travel. China is promoting its standards for post-Covid travel documents. Experts have expressed concerns that the use of such certificates may exceed the scope of containing the coronavirus and empower governments to reinforce social control.

International health code 

China joins a host of countries experimenting with vaccine-certificate systems. The EU and the G7 are developing a regional system that will allow vaccinated travelers between participating countries to cross borders without quarantines. Thailand is issuing single-country certificates to enter—a vaccine visa, if you will. Israel and Bahrain have deployed digital certificates for domestic re-opening. China, with mostly closed borders and a largely re-opened domestic economy, is deploying a one-country system to vouch for outbound citizens

Beijing hopes to persuade other countries to accept its system as proof of vaccination. Wang Yi, China’s foreign minister, said at the announcement of the ITHC last Tuesday that the document “fulfills Chinese President Xi Jinping’s proposal to inter-recognize health codes internationally” (our translation).

Xi first made the comment about a “global mechanism” of the health code system to allow international travel at an online meeting at the G-20 summit in November. “We need to further harmonize policies and standards and establish ‘fast tracks’ to facilitate the orderly flow of people,” he said at the time.

A spokesman for China’s foreign ministry Zhao Lijian told reporters (in Chinese) on Thursday that the country had promoted and introduced the ITHC to “countries and relevant international organizations.” He added that some countries and international organizations had “expressed willingness” to cooperate with China, without naming them.

Nations are scrambling to set up standards for vaccine passports. The British government said last month that it would work with other countries through the World Health Organization (WHO) and the G-7 on “a clear international framework with standards that provide consistency for passengers and industry alike.” The European Commission said earlier this month that it would put forward legislation this month that will lay out the details on the format of a common EU vaccination certificate.

But unlike the EU and G7 nations, which are discussing regional vaccine passports that will allow people to travel freely, China seems to be unilaterally pushing for recognition of its vaccine passport for its citizens, said Nicole Hassoun, a professor at Binghamton University and the author of the book Health Impact: Extending Access on Essential Medicines for the Poor.

Hassoun suggested that China will need reciprocal arrangements. “They hope that other countries will eventually recognize their citizens’ certificates and allow them to skip quarantine, but right now China does not have a plan to let visitors skip quarantine,” she told TechNode. 

Will it work?

It’s too early to say if China’s vaccine passport will be a success, but it used a similar health code system to tackle the virus and resume domestic travel. The effectiveness of the system and other key measures—including its strict mandatory lockdown in early 2020—is difficult to deny, as life within China nears normalcy while many other countries struggle to contain the virus a year later. 

The eastern city of Hangzhou was the first city in China to roll out the health code system in January 2020.

The QR code-based system allowed people to travel inside China with greater freedom. A green code usually meant that the holder was a low risk for carrying the coronavirus and could thus be freed from quarantine after traveling. Accordingly, a yellow code meant medium risk and a red code, high. 

In the early stages of the system, code colors were given based on individuals’ self-declaration of Covid-related symptoms, travel history, and body temperatures. Now, the system has become a nationwide network of databases that contains information like Covid test results and vaccination history.

For the past year, China’s domestic public transportation system, which was one of the busiest in the world, has relied on those codes to manage and track travelers.

What are the concerns?

Experts have warned that vaccine passports could deepen inequality as residents of countries with access to vaccines can now do things that others cannot, including traveling.

Michael Ryan, executive director of the World Health Organization’s Health Emergencies Programme, said on March 8 that “vaccine passports” for Covid-19 should not be used for international travel because of ethical considerations that coronavirus vaccines are not easily available globally.

“Immunity passports inherit all the inequity in vaccine distribution,” said Hassoun of Binghamton University. “Most people are not eligible because most people cannot access the vaccines.”

China’s vaccine passport also inherits the health code system’s privacy concerns. While the health code system is widely used to track the spread of the virus, it also captures data about people’s whereabouts on a vast scale. 

In Beijing, people are now required to scan and register using health code mini-apps embedded in the WeChat and Alipay smartphone apps every time they enter a shopping mall or take a taxi. But in most Chinese cities, people are only required to show their health code at checkpoints, and their location information is not logged. 

Nonetheless, governments around the world are introducing or considering such systems. Their attraction is that they “may provide validated clinical information to facilitate expanded social engagement including travel,” John Nosta, president of healthcare think tank NostaLab and a member of the WHO’s Digital Health Roster of Experts, wrote in an email. “The danger is that some assessments go beyond Covid-19 and reveal other clinical realities that the individual may not wish to reveal.” He also warned that countries may limit the entry of people with other conditions such as mental health issues.

A city in eastern China had sought to make the health code system the norm even beyond the pandemic, but was met with backlash from netizens. In May, Hangzhou revealed plans to “normalize” (in Chinese) the city’s health code, monitoring people’s medical records, physical examination results, and lifestyle. 

Behaviors such as consuming alcohol would degrade the holder’s “health score,” while physical exertion such as long-distance walking would increase the score, according to local media reports about plans for the system. The plan was widely criticized on social media and has not been mentioned ever since.

“I’m fearful that once the toothpaste of a vaccine passport is out of the tube, there’s no putting it back,” Nosta said. “Other diseases and conditions may be flagged and establish new restrictions—from mental health to other infectious diseases—that can excessively empower governments for a new level of social engineering.”

China’s top antitrust regulator said Friday it has issued fines to companies including social media giant Tencent, ride-hailing platform Didi Chuxing, and search engine Baidu over 10 investment deals in the internet sector that were in violation of the Anti-Monopoly Law.

Why it matters: China has in recent months stepped up scrutiny of tech firms over antitrust regulations. Friday’s disciplinary action involves the largest number of companies so far and the fines issued were the maximum amount allowed by China’s existing legal framework.

• A proposed overhaul to China’s Anti-Monopoly Law will allow regulators to issue fines up to 10% of the offending company’s annual revenue.

Details: The State Administration for Market Regulation (SAMR) said in a statement (in Chinese) on Friday that the deals include Tencent’s 2018 investment in edtech firm Yuanfudao, Baidu’s 2014 acquisition of smart home equipment maker Ainemo, and a joint venture set up by Didi and Japanese conglomerate SoftBank.

• Other deals include a merger deal involving a subsidiary of Alibaba, and a joint venture set up by TikTok parent ByteDance and a Shanghai newspaper group.
• Twelve companies including Tencent and Baidu were each fined RMB 500,000 (around $77,000) for their involvement in the deals. The penalty is the maximum for unreported anti-competitive deals according to China’s current antitrust law.
• China’s Anti-Monopoly Law requires companies to report investment or acquisition and merger deals that could create a “market dominant player,” or one that will hold more than 50% share of its relevant market. 

Context: In December, SAMR issued fines to Alibaba and affiliates of Tencent and logistics giant SF Express over three separate acquisition deals, a move that legal experts said was the country’s first batch of antitrust enforcements against tech firms.

• In February, China put into effect new antitrust guidelines targeting internet platforms, which bans internet platforms from forcing merchants into exclusivity deals, offering different prices based on user data, and using algorithms to manipulate the market.

China Telecom, one of China’s three biggest telecommunications operators, said Tuesday that its board had approved the decision to list its shares on the main board in Shanghai, following its suspension from trading in New York earlier this year.

Why it matters: The move comes after then-President Donald Trump in November signed off on adding China’s three state-backed telecommunication companies to a US investment ban. The New York Stock Exchange (NYSE) in January said it would delist the companies, which also include China Mobile and China Unicom.

• The other two telecom companies are likely to follow China Telecom’s move. The three Chinese state-owned firms all listed simultaneously in New York and Hong Kong. New York-listed shares of the three companies were suspended from trading starting from Jan. 11.

Details: The China Telecom board approved on Monday a proposal to apply for listing the company’s shares on the main board of the Shanghai Stock Exchange, the company said in a filing to the Hong Kong exchange.

• A Shanghai offering will help the company “establish more flexible and diversified financing channels” and utilize “both domestic and overseas capital markets, broaden sources of funds, enhance capital strengths and improve risk tolerance,” according to the filing.
• The company proposed to sell up to 12.09 billion shares in Shanghai, or 13% of its total issued share capital after the offering.
• The company separately reported on Tuesday that its revenue for 2020 grew 4.7% from the previous year to RMB 394 billion (around $60.5 billion) while its net profit grew 1.6% to RMB 20.9 billion.

Context: China Mobile went public in 1997 and was one of the first Chinese state-owned companies to go public in the US, followed by China Unicom in 2000, and China Telecom in 2002.

• The NYSE said on Jan. 6 that it would delist China Mobile, China Telecom, and China Unicom on Jan. 11, citing an executive order signed by Trump in November.
• An increasing number of US-listed Chinese firms are retreating from the American financial market or dual-listing shares on China’s A-share market or in Hong Kong amid recent US-China tensions. They include e-commerce site JD.com, gaming giant NetEase, and online media firm Sina.

As China’s legislature prepares to meet tomorrow, we’re bringing you a special edition of our Insights column: a preview of tech in the 14th Five-Year Plan. We’ve looked through the last plan, and the documents describing priorities for the new one, to give you our baseline expectations for key tech areas in the new plan.

Greetings from Beijing, where the weather is just turning to spring, the air this week feels like taking a bath in an ashtray, and, across town, about 3,000 people are getting together Friday to kick off the annual meeting of China’s national legislature.

This is one of the big meetings: This year, the National People’s Congress will approve China’s 14th Five-Year Plan, which will set out the government’s economic priorities for the next half-decade. The meeting lasts from March 5 to March 11, and in previous years the plan has come toward the end of the session.

Technology and innovation are sure to play a leading role. “Innovation-driven development” was one of the first topics addressed in the 13th Five-Year Plan, issued in 2016, and the phrase is equally prominent in previews of the new plan.

What is (likely) new is emphasis on another key phrase: “self-sufficiency.” As the US has used its control of key technologies as a weapon, China’s efforts to produce its own have a new urgency.

For people with tech projects, the start of a new plan period means opportunity. The “money spigot” for homegrown tech and innovation is likely to get even more generous, said Uny Cao, vice president at the Zhejiang University Intellectual Property Exchange Center and friend of TechNode.

What are we looking for when the new plan is published next week? What’s likely to get the most attention—and which will get less? Below, you’ll find TechNode’s roundup of key mentions of technologies we expect to see highlighted in the 14th Five-Year Plan.

Data

A new approach to data management will reverberate across tech industries. The next stage of China’s tech policy will shift from an emphasis on developing cybersecurity and big data, to building up the data economy.

Mentions in the 13th Five-Year Plan: The last five-year development plan focused on building up cybersecurity and control over data. But it also set goals to get government offices to share data with each other and industry.

• The 13th plan promised crackdowns on black markets for personal data, and strengthened privacy protection for big datasets, including government credit information systems. The government also aimed at opening up government big data to the public through a digital platform.
• The 2017 Cybersecurity Law was the first big step for reform of China’s information security. Implementation of the Multi-Level Protection Scheme, a key part of the CSL, picked up in the summer of 2020, Carly Ramsey, who leads regulatory and political risk consulting at Control Risks in Shanghai, told TechNode. 

READ MORE: Dust has yet to settle two years after China’s landmark cybersecurity law

Expectations in the 14th Five-Year Plan: In the Fifth Plenum guidelines, data has joined an impressive new crowd: “[We will] advance the marketization and reform of the economic factors of land, labor, capital, technology, and data.” When a Communist Party puts you on the same level as labor and capital, you know you’ve made it big.

The Fifth Plenum guidelines call for the development of a rules-based data economy. Or as they put it: Establish basic systems and standards for data property rights, transactions and circulation, cross-border transmission, and security protection to promote the development and utilization of data resources.

“Ensuring the fluid circulation of data is now an economic imperative,” said Kendra Schaefer, head of tech policy research at Beijing-based strategic advisory firm Trivium. “In practical terms, that means that the overarching theme of China’s data policy over the next five years will focus on allowing data to be shared, transferred, bought, sold, and utilized,” Schaefer said. The plenum’s recommendations called for “systems and standards” in data property rights, market mechanisms for data, as well as cross-border data transfers.

READ MORE: China sets the rules for its new data economy

So what? “The 14th Five-Year Plan will mark the beginning of a new era in China’s approach to data policy,” Schaefer said. China is stepping up from the securitization of data resources to developing a system in which data can be exploited as a resource. In the upcoming plan period, we can expect more support for trade in data alongside a continued crackdown on bad cybersecurity practices and insufficient privacy protections.

Environment

One of the biggest components of the 14th five-year plan deals with action to combat the environmental damage that followed years of rapid industrialization and economic growth. In the wake of a vow to set China on a path to carbon neutrality by 2060, economic planners will be under pressure to come up with big changes. China’s tech sector stands to benefit: To reach the country’s emissions goals, investment in clean technology could reach $16 trillion in the next 40 years.

In the 13th Five-Year Plan: The 2016 plan laid out targets to reduce carbon emissions by cutting the country’s carbon intensity—the amount of carbon dioxide produced for every unit of GDP. Through subsidies, state planners pushed prices in the solar industry so low that it effectively went from being a high-tech sector to a commodity business.

• The document laid out action plans to combat air, water, and soil pollution. By last year, Chinese cities were expected to meet “good” air quality standards for more than 80% of the year. 
• The plan sought to reduce the country’s reliance on coal-fired power plants, and promote environmentally friendly construction and mining. 
• Also included were “improvements in supportive policies” for renewable energy sources.

Expectations: The new plan will likely clarify how China will reach peak carbon emissions by 2030 and carbon net zero by 2060, goals laid out to the UN General Assembly by President Xi Jinping in September.

• The thrust of Xi’s speech has been factored into energy and environmental planning in the new five-year plan.
• The new plan will likely outline ambitious capacity and consumption targets for wind and solar energy production, while placing further caps on coal-fired power plants. 
• Energy storage is also expected to play an important role in the new plan, as China seeks to improve grid and power security. 
• It is unlikely that there will be a move away from carbon intensity caps to hard carbon caps, as the country attempts to balance economic growth and cutting emissions, analysts said. 
• While the last five-year plan placed emphasis on reducing emissions from energy production, the new plan will place increased focus on minimizing pollution from industry, including steel and transportation. 
• Further integration between China tech and energy industries is expected, a goal laid out in the 13th five-year plan. 

So what? The world is waiting to see how China plans to reach its emissions targets by 2060. We expect the plan to create more targets and pressure on local governments to improve carbon emissions, but details on how these will be implemented—and how cleantech investment will be affected—will likely be spelled out in lower-level plans.

Autos

A pillar of China’s economic growth, the automotive sector has long been dominated by well-established foreign brands, which hold more than 60% of the market share, while domestic automakers are concentrated in the low-end segment. But that is changing as China’s strength in electric vehicles is boosting its position on the global industry value chain, thanks to strong policy support over the past five years.

In the 13th Five-Year Plan: When China’s cabinet in 2010 initiated a development plan (in Chinese) for seven strategic emerging industries, new energy vehicles (NEVs) was one of them. In 2016, Beijing set an ambitious target of 5 million sales of NEVs in the coming five years, a number which would mark the beginning of mass adoption. This initiative became part of Beijing’s larger goal of becoming the world’s next innovation powerhouse.

• The central government carried out a series of stimuli to foster a new source of economic growth—by offering subsidies for NEV purchases, especially for all-electrics and plug-in hybrids—in both public and private transport sectors.
• China’s top policymakers also vowed to achieve major breakthroughs in battery technologies, such as a higher energy-density level, which enables a longer driving range as well as better resistance to extreme temperatures.

Expectations: NEVs were briefly mentioned as one of the strategic emerging industries in the fifth plenum guidelines, but with no detail about the growth outlook.

• However, according to a policy paper released by the State Council in November, NEV sales were projected to account for 20% of total new car sales by 2025, up from the 2020 level of just 5.4%.
• Beijing also expected “significant improvement in the competitiveness” of its homegrown players in the fields of battery safety and in-car operating systems, among others, while promoting highly autonomous vehicles for commercial use cases in pilot programs. 

So what? China’s electric vehicle market staged a strong rebound after disruptions caused by the Covid-19 pandemic last year and has remained the world’s biggest market since 2014. However, there have been bumps on the road, including electric car fires and the ongoing auto chip shortages.

China also lags the US in the vehicle autonomy competition, raising calls for more effort put toward core technology advancement. Pledging for quality growth amid rising superpower tensions in the next five years, Beijing would have to stay the course in boosting the sector, while realizing little near-term profit.

Semiconductors

Chinese leaders have long vowed to achieve “self-reliance” in strategic technologies, and semiconductors are one of the priorities. The sector is expected to get major attention as China issues its development blueprint for the next five years.

In the 13th Five-Year Plan: The five-year plan ending in 2020 saw semiconductors, along with other high-tech sectors like robotics, smart transportation, and virtual reality, as “new areas of growth” for the nation’s economy, but didn’t make production of semiconductors a strategic priority.

• Priorities certainly have changed over the past five years as Chinese leaders realized how troublesome it is to rely on foreign imports of semiconductors. Huawei is a brutal example.

Expectations: In 2015, China set a goal to make 70% of the chips it uses by 2025 as part of its “Made in China 2025” initiative. Now the question is how China will achieve that goal. The country only produced 6% of the semiconductors it consumed in 2020.

• The fifth plenum vowed to implement a series of “foresightful and strategic” technology research projects including integrated circuits, quantum information, AI, and neural science.
• Despite the industry’s importance, the National Development and Reform Commission didn’t include semiconductors on a list published last September of “strategic emerging industries.” Electric vehicles and artificial intelligence were on the list.
• The central government will increase investment in the domestic semiconductors industry through vehicles like the National Integrated Circuit Industry Investment Fund.
• More favorable policies towards domestic chip companies are likely such as tax breaks and heavier tariffs on imported electronic components.
• Bloomberg cited sources as saying that Beijing has added in a draft of the 14th five-year plan “a suite of measures to bolster research, education, and financing” for the semiconductors industry. 

E-commerce

E-commerce falls under the broader concept of the digital economy, a major theme in the plan that also covers 5G, artificial intelligence, and big data. E-commerce is expected to play a greater role in driving China’s economic growth in the next plan period.

In the 13th Five-Year Plan: The development plan that ended in 2020 set out to expand the e-commerce sector by facilitating its deep integration with traditional industries and prioritizing its governance. China sought to integrate e-commerce into various areas including education, healthcare, culture, and tourism to drive innovation.

• The 13th five-year plan set out expectations for China’s e-commerce transactions to exceed RMB 40 trillion ($6.19 trillion) in 2020, the last year of the plan—double the transaction value in 2015. The figure includes RMB 10 trillion from online retail businesses. The sector was projected to employ more than 50 million people by the end of 2020.
• The period of the 13th plan showed mixed results for e-commerce. The country missed the plan’s goal of RMB 37.21 trillion in e-commerce transactions in 2020. Online retail sales hit their target, however, totaling RMB 11.76 trillion in 2020, data from the National Bureau of Statistics showed.

Expectations: China expects online commerce to continue supporting its macro strategies, notably poverty alleviation and the One Belt One Road initiative. E-commerce has become an important means for China’s rural dwellers to sell their agricultural products. With more free trade zones on the horizon, China looks to expand its cross-border e-commerce market in the next five years.

• As a booster for both domestic and international commerce, the industry plays a central role in goals set for the “dual circulation” concept, which refers to spurring domestic as well as global demand, creating circumstances where the two boost each other’s growth. The idea featured predominantly in recent policy statements, although the term has been a policy meme for several years.
• Chinese regulators are stepping up monitoring for unfair competition and monopolistic practices.
• Consulting agency Jiuhou Zongheng has forecast that China’s e-commerce transactions will reach RMB 50 trillion by 2024.

Blockchain

Blockchain could be a new item in the 14th plan. It’s had plenty of attention at top levels in the past year.

In the 13th Five-Year Plan: Zilch. Blockchain was not on top policymakers’ agenda back in 2016.

Push from the top: The technology had its breakout moment in Chinese policy in October 2019, when President Xi Jinping praised the technology at a Politburo study session.

• Since then, local governments have embraced blockchain governance projects and tried to spur innovation in the field.
• The National Development and Reform Commission is supporting the development of the Blockchain Services Network, an “internet of blockchains.”

No crypto: Chinese regulators are not big fans of one of the technology’s most popular applications: cryptocurrencies. The past year’s clampdown on unregulated cryptocurrencies “is meant to clear a path to regulated forms of digital assets, starting first with DCEP [the central bank’s R&D project that includes the digital RMB],” said Michael Sung, co-director of the Fintech Research Center at the Fanhai International School of Finance at Fudan University, told TechNode.

Expectations: The technology was not mentioned in the 14th plan guidelines issued after the Fifth Plenum.

• The cryptocurrency mining industry might be negatively affected by financial de-risking campaigns and sustainability goals. The industry consumes vast amounts of electricity and is dependent on volatile crypto assets. 

READ MORE: Inner Mongolia may ban crypto mining: Blockheads

So what? China is already very interested in blockchain, but has not given the technology the same level of support as, say, electric vehicles. A name-check in the 14th plan would seal its status as a key technology and could pave the way for a national blockchain roadmap.

Antitrust

China has recently tightened antitrust regulations on tech companies. Regulators started at the end of last year to look at tech giants’ market dominance and to use anti-monopoly tools to limit them. The country also changed antitrust laws and rules to better rein in big tech. As top leaders of China repeatedly vow to “strengthen anti-monopoly” and “rein in disorderly capital expansion,” what has affected tech companies so far seems to be just the start of severer crackdowns.

In the 13th Five-Year Plan: The 13th development plan mentioned breaking industry monopolies and rooting out market barriers. It also intended to establish an “efficient antitrust law enforcement system,” deepen international antitrust law enforcement cooperation, and check administrative monopolies.

• In 2018, China created the State Administration for Market Regulation (SAMR), a  trustbuster that centralized antitrust power previously dispersed among  four market regulators.

Expectations: China is already on the move to rein in big tech with anti-monopoly tools. If the new plan pushes government agencies to impose stricter antitrust regulations and break monopolies, tech giants like Tencent, Alibaba, and Bytedance may feel a lot more pain.

• China’s antitrust regulator drafted an amendment to the Anti-Monopoly Law in January 2020; China may push to finalize the law during the period of the 14th five-year plan.
• The fifth plenum also called for the establishment of an “efficient antitrust law enforcement system” and to “break industry monopoly.”
• SAMR has said tightening antitrust regulations leads the 2021 agenda for the agency.
• While companies like Tencent and Alibaba are already under the spotlight, SAMR may launch more antitrust investigations into big tech companies. 
• A few antitrust lawsuits between tech companies are set for court hearings this year. Among them are the Douyin vs. WeChat, and JD.com vs. Alibaba cases. The results of cases will provide precedents for how the antitrust rules that took effect in February will be interpreted by the courts.

Rural areas and agriculture

Agriculture, the foundation for feeding China’s 1.4 billion population, is facing a new round of restructuring and modernization. The countryside is a growing focus for tech companies because it is home to a group of maturing consumers as well as being a lower-cost manufacturing hub. That makes aligning with rural developments a big goal for these internet firms.

In the 13th Five-Year Plan: The last plan placed a high priority on continuous modernization of rural areas and the agricultural sector. The plan promoted integration of agriculture and e-commerce and encouraged the application of big data and internet of things tech in agriculture.

• President Xi Jinping announced China’s “complete victory” in eliminating “absolute poverty” at a grand gathering held February 25 in Beijing. In the past eight years, nearly 100 million rural residents were lifted from poverty, Xi says.
• Tech giants including Alibaba, Pinduoduo, and Didi Chuxing were rewarded for contributions in the poverty alleviation initiative.

Expectations: China is expected to continue to focus on improving the quality, safety, and profitability of the sector, goals that require technological assistance.

• The focus of China’s agricultural development will shift from increasing production to improving quality, according to The China Agriculture Outlook (2020-2019) released this past April.

Policymakers are counting on tech in a plan to improve both farmers’ output and their incomes, said Even Pay, an associate director at Trivium:

“Policymakers are preparing for a future where there are fewer farmers. Some of them may be older, and in need of equipment to make their jobs easier. They also hope to attract some young people back into farming by making the work easier and more interesting—like operating ag machinery or flying drones.”

“Another big reason the government is supporting agtech is the “dual circulation strategy”—which looks to make domestic consumption the main driver of China’s macroeconomic growth. Right now China’s rural areas have the greatest growth potential of anywhere in the country—provided farmers’ incomes go up.”

Fintech + digital yuan

Fintech and the digital yuan might get a direct mention in the 14th plan.

In the 13th Five-Year Plan: Fintech was directly mentioned only once in the last plan. That plan called for a risk monitoring and crisis management system for all financial activity, including “internet finance.”

• “Microfinance,” “inclusive finance,” and “green finance” were included in the plan, but these categories also refer to traditional financial tools, said Jonas Short, head of the Beijing office at Everbright Sun Hung Kai.
• The plan called for microfinance to be made more “transparent” and regulated, while “Internet+inclusive finance” was to be promoted, and a green finance system was to be set up.
• The 13th plan also mentioned the development of “multilayered” and “non-cash” “payment systems,” although it didn’t mention digital payments specifically.

Fintech development: Since the release of the 2016-2020 plan, the use of fintech has skyrocketed, and an overwhelming majority of Chinese citizens now make use of some sort of digital finance, whether that’s for lending, investment, or insurance.

• The Ministry of Commerce released a fintech development plan in 2017, focused on cybersecurity, digital payments, and risk prevention.  
• As big tech came to play an increasingly important role in China’s finance, especially with regards to consumers and SMEs, authorities started laying down the rules: In 2020, Chinese regulators ramped up their efforts to regulate fintech companies, especially after Ant Group’s IPO was suspended in November 2020. Rules for microlending, antitrust, and digital payments have been released since.

Digital yuan: China’s central bank has been working on a digital form of cash, the digital yuan, since 2014. If implemented, it will be the first state-backed digital currency by a major economy. The central bank appears to have accelerated the development of the currency in 2019 after Facebook announced its Libra project. Trials for the e-CNY started in late 2020 in four Chinese cities: Chengdu, Shenzhen, Suzhou, and Xiong’an.

Expectations: The guidelines directly called for the improvement of “the level of financial technology.” They also included language similar to the previous plan’s regarding inclusive and green finance, as well as on financial risk prevention and monitoring.

• The guidelines called for continuing R&D on digital currency.

So what? China’s fintech industry will continue to grow, especially given a lift in the 14th plan. But incumbents will face more competition as a result of antitrust regulations and the opening up of payments systems that DCEP will bring. Tech companies dabbling in finance will also be increasingly brought under the fold of financial regulation.

China is vastly increasing investment in semiconductors. In 2020, cash flowing into China’s semiconductor firms amounted to RMB 227.6 billion (around $35.2 billion) through the primary and secondary markets, a stunning 407% increase from the previous year, according to TechNode’s research.

China is the world’s largest consumer of semiconductors, and the lion’s share of revenue from purchasing these chips go to foreign firms. China consumed $143.4 billion worth of wafers in 2020, and just 5.9% of them were produced by companies headquartered in China. 

China has sought to make more of its own chips for years. In 2017, Chinese vice premier Ma Kai said: “We cannot be reliant on foreign chips.” Last year, President Xi Jinping called to “make technological self-sufficiency a strategic pillar of national development.” Beijing is expected to add “a suite of measures to bolster research, education, and financing” for the semiconductor industry to a draft of this year’s 14th five-year plan, China’s top-level policy blueprint for the following half decade, Bloomberg reported.

Concern over chip dependency has grown higher over the past two years as the US used semiconductors as leverage against companies like Huawei, a Chinese “national champion” which supports the country’s mission to lead the world in the next-generation wireless technology known as 5G.

The Trump administration banned Huawei from buying components from US companies in 2019 and cut the company off from third-nation suppliers that use American technology in 2020. The moves prompted Chinese business and political leaders to resolve to never again be put into such a situation.

China has massively increased investment in semiconductors over the past two years. The central and local governments have launched hundreds of policy funds, or guidance funds, to support the industry. The private sector also jumped onto the bandwagon. Venture capital investment into the semiconductors sector more than tripled in 2020 from the previous year. China also tapped its massive private capital market by opening up its financial market to let individual investors directly support high-tech firms that are not yet profitable. In 2020, 32 chip companies went public on China’s A-share market, up from 18 in 2019.

Big funds

The National Integrated Circuit Industry Investment Fund, known as the Big Fund, is the Chinese government’s main vehicle for semiconductor investment. The fund was first set up in 2014 by China’s Ministry of Finance and China Development Bank Capital, as well as several other state-owned enterprises, which together injected RMB 138.7 billion into the fund.

The Big Fund was established to invest in chip manufacturing and design, and promote mergers and acquisitions, according to China’s Ministry of Industry and Information Technology (MIIT), which supervises the fund.

It has shown a strong preference for semiconductor manufacturing companies, as China strives to produce cutting-edge 7-nanometer chips. The RMB 138.7 billion first Big Fund closed all of its investment projects at the end of 2019. Around 67% of its total investment went to semiconductor manufacturing firms, according to a report by Eastmoney Securities, a Chinese brokerage.

The first Big Fund had backed companies like Shanghai-based Semiconductors Manufacturing International Corporation (SMIC) and Huahong Semiconductor Limited. SMIC is China’s largest contract maker of semiconductors. It was also added to a US export blacklist in 2020.

In October 2019, the Big Fund raised another RMB 204 billion in a new funding round from the finance ministry, state-owned enterprises, and local governments.

Meanwhile, provincial governments have set up guidance funds totaling more than RMB 300 billion to support local semiconductor industries.

Opened stock market

In July 2019, China opened up a Nasdaq-style board on the Shanghai Stock Exchange. The STAR Market is the first Chinese exchange to allow unprofitable companies to list., revamping China’s earlier stock market rules.

However, not every unprofitable tech company is welcome. The Shanghai bourse has said that the STAR Market prefers companies that align with the “Made in China 2025” blueprint, Beijing’s plan for self-sufficiency in strategic sectors such as semiconductors and artificial intelligence.

Of the 216 companies listed on the STAR Market, 36 are semiconductors firms, as of the end of January. They include SMIC, which debuted on the market in July 2020 and saw its shares jump more than 200% on the first day of trading.

The STAR Market’s appetite for semiconductors has spurred a rush of activity in the sector. More semiconductor companies went public in 2019 and 2020 than all of those from 2010 to 2018. In 2020, some 32 chip companies went public on China’s A-share market, raising a total of RMB 87.6 billion. 

VC money more than tripled

At the same time, private capital is quickly moving into the sector.

In 2020, the total amount of VC investment into Chinese semiconductor companies grew more than 366% from the previous year to RMB 140 billion, according to data from Itjuzi, a Chinese VC funding database. The total number of VC investment deals also nearly doubled in 2020 to 413.

Thanks to a robust stock market that gives investors more options to exit, later-stage rounds in semiconductors have seen steady growth. The percentage of investment deals after Series A had increased to 55.8% in 2020 from 33.1% in 2018.

Unlike government-led funds, VC firms prefer chip-design firms to manufacturing companies. Chip designers accounted for around 67.2% of VC investment deals in 2020.

What’s next?

Despite heavy investment from the government and private investors, experts have said that China will fall far short of its 2025 goal.

While China’s goal is to make 70% of the chips it uses by 2025, IC Insights, a market research firm, forecasted that China will produce only 20.7% of its chip consumption in 2024, growing only 3% from 2020.

The country not only needs to produce more chips, but it also needs to make sophisticated chips that can meet the demands of modern computing devices, such as high-end smartphones and supercomputers. However, experts said mainland China’s chip-making capability is “generations behind” the leading edge in Taiwan.

Though a complete value chain in five years may be a dream, China is making progress in the sector. Changxin Memory Technology, a state-backed semiconductor startup, started mass production of the country’s first locally designed dynamic random-access memory (DRAM) chip in September 2019. HiSilicon, Huawei’s chip-design branch, ranked among the world’s top 10 vendors of semiconductors in August for the first time. 

But to emerge as a world-class semiconductor maker, analysts say, that China also needs to narrow a talent gap. It faces a talent shortfall of around 300,000 people, according to the China Semiconductor Industry Association.

How many of China’s top university graduates end up working for the domestic semiconductors industry? Where do Chinese chip makers find talent? Will the talent gap narrow as China continues to invest in the sector? We will dive into that topic in the next issue of this newsletter.

A Chinese Apple user has sued the American tech giant over its higher prices for apps and services compared with Android marketplaces, citing China’s antitrust law, local media reported on Wednesday.

Why it matters: China has recently tightened regulations on tech companies’ anti-competitive practices. While those moves mainly targeting local firms, the suit may thrust Apple into the spotlight.

• Firms that have been fined or investigated in recent months include Alibaba and affiliates of Tencent and logistics giant SF Express.

Details: Jin Xin, an Apple user has accused the company of “abusing its market dominant position” for charging developers high commissions, and barring users from using payment methods other than Apple’s in-app purchase feature, local newspaper Southern Metropolis Daily reported Wednesday.

• Jin, whose gender and age were not disclosed, said in a court filing that pricing for apps and services like video-streaming app iQiyi, podcast app Himalaya, and music app NetEase Music are higher in Apple’s App Store than in Android app stores. 
• The plaintiff said that was because Apple charges app developers commissions as high as 30% of sales, which were ultimately transferred to consumers.
• Users cannot choose payment methods other than Apple’s in-app payment so that they have to accept higher prices, Jin said.
• Citing China’s Anti-Monopoly Law, the plaintiff said in the court filing that those practices were “anti-competitive behavior” and had deprived users of their rights of fair trade, according to the report.
• The Shanghai Intellectual Property Court will hear the case, said the report, but the hearing date is not finalized.
• Jin could not be reached for comment. Apple did not respond to a request for comment on Wednesday.

Context: China has recently formalized new antitrust guidelines targeting tech companies, which forbid online platforms from forcing merchants into exclusivity deals, and offering different prices based on user data.

• State Administration for Market Regulation (SAMR), China’s top antitrust watchdog, in January 2020 proposed an overhaul of the country’s Anti-Monopoly Law to include internet-based services in the scope of antitrust regulations.

Huawei on Monday unveiled its latest foldable phone as the embattled Chinese smartphone maker ramps up efforts to entice premium phone users in its home market.

Why it matters: Huawei is focusing its limited production capacity on high-end models after being cut off from the global chip supply chain. The new phone is priced starting at RMB 17,000 (around $2,785).

• The company’s last foldable phone, priced at RMB 16,999, was met with great enthusiasm from Chinese consumers. The model sold out within seconds of being made available.

Details: The Mate X2 foldable phone features an 8-inch interior display when unfolded and has an additional 6.5-inch exterior display.

• The 256GB version of the Mate X2 starts at RMB 17,999 while the 512GB version costs RMB 18,999. The model will is available for purchase in China starting Thursday. The company did not say if it will be available in overseas markets.
• Two rounds of US sanctions last year have “made our operations extremely difficult,” said Richard Yu, head of Huawei consumer business, at the launch event on Monday. “But thanks to our partners and consumers… we survived in 2020.”

Context: Huawei, once the world’s largest handset vendor, is now ranked third globally after shipping 170 million units in 2020. 

• A January report by market research firm Trendforce estimated that the company’s smartphone shipments will drop to 45 million units in 2021.
• The sharp decline is mainly because the company sold off its budget brand Honor last year. The company has been cut off from the global semiconductor supply chain and now relies on stockpiles to maintain production.
• In January 2020, Huawei told Chinese media that it sells approximately 100,000 units of its Mate X foldable device every month.

China produced a scant 5.9% of semiconductors it used in 2020, according to a report published Thursday, indicating significant reliance on foreign technology as the country pushes for independence on chips.

Why it matters: China, the world’s largest semiconductor market, is determined to increase domestic production of chips, and plans to make 70% of chips it uses by 2025.

Details: China’s integrated circuit (IC) market increased 9% to $143.4 billion in 2020 compared with a year earlier, according to a Thursday report by market research firm IC Insights. China-headquartered firms, however, only made $8.3 billion worth of ICs sold in the country in the same year, the report said.

• Around 15.9% of ICs sold in China in 2020 were made locally, but most of them were made by foreign companies with wafer fabrication plants in the country, such as Taiwan Semiconductors Manufacturing Company, SK Hynix, and Samsung. Together, such firms made around 10% of chips sold in China last year.
• IC Insights estimated in the report that 60% of semiconductors produced in China were components for exported products. The country is home to some of the largest smartphone makers in the world, including Xiaomi, Huawei, and Oppo.
• Programmable logic devices, which are used to store the logic pattern integrated onto chips during programming, was the largest segment of China’s IC market in 2020, accounting for 26% of total wafers sold.
• Strong sales of smartphones and other computing systems during the pandemic drove growth in microprocessors, which was the second-largest IC product segment in China last year, according to IC Insights. The category grew 12% last year to $32.7 billion.

Context: In December, the US added China’s largest chipmaker, Shanghai-based Semiconductors Manufacturing International Corp (SMIC), to an “Entity List” that effectively cut the company off from American technology.

• Huawei, the world’s largest maker of telecommunications equipment, has been been plagued by US sanctions. The company has now essentially been cut off a supply of advanced semiconductors.

China on Sunday put into effect new antitrust guidelines targeting internet platforms, subjecting the country’s tech industry to tougher rules on competition.

Why it matters: The guidelines formalize earlier draft rules announced by China’s State Administration for Market Regulation (SAMR), the nation’s top trustbuster.

• Some of the country’s top internet-based services, including Ant Group’s Alipay, food delivery app Meituan, Tencent’s instant-messaging app WeChat, and online marketplace Taobao, will be subject to the new guidelines. 

Details: The new rules forbid internet platforms from forcing merchants into exclusivity deals, offering different prices based on user data, and using algorithms to manipulate the market.

• Pricing products or services differently according to customer purchasing power, consumption history, or user preference is now considered monopolistic behavior, according to the guidelines.
• The guidelines widen the parameters for determining a firm’s “market-dominant position” to include factors such as transaction volume, user base page views, and technological barriers. 
• SAMR, which issued the rules, said the guidelines will provide a legal basis (in Chinese) for the country to tighten antitrust regulation of internet platforms.

Context: In December, SAMR issued fines to Alibaba and affiliates of Tencent and logistics giant SF Express over three separate acquisition deals, a move that legal experts described as the country’s first batch of antitrust enforcements against tech firms.

• SAMR in January 2020 proposed an overhaul of the country’s Anti-Monopoly Law to include internet firms in the scope of antitrust regulations.
• Last week, Douyin, ByteDance’s Chinese version of TikTok, said it had sued Tencent for monopolistic behavior including blocking Douyin’s content on WeChat.

Douyin, ByteDance’s Chinese version of TikTok, said on Tuesday it had sued Chinese social media giant Tencent for monopolistic behavior including blocking Douyin’s content on its WeChat and QQ instant-messaging apps.

Why it matters: The legal move comes as China tightens antitrust regulations for tech companies and refines its laws to better rein in the internet sector. While similar lawsuits had often resulted in a stalemate, it is believed that officials and judges will now be less tolerant of internet companies and anti-competitive behavior.

• The lawsuit is also seen as a tactical move as Douyin’s biggest domestic rival, Tencent-backed short video platform Kuaishou, is preparing to list in Hong Kong.

READ MORE: China’s tech giants aren’t ‘immune’ to antitrust any more

Details: ByteDance has filed a lawsuit with the Beijing Intellectual Property Court, accusing Tencent of violating China’s Anti-Monopoly Law by restricting WeChat and QQ users from sharing Douyin’s short-video content, the company said on Tuesday.

• Tencent’s practice, it said, ran afoul of the Anti-Monopoly Law’s provision of forbidding “misusing a market-dominant position, and antitrust behavior of excluding and restricting competition” (our translation).
• ByteDance asked the court to require Tencent to cease such behavior and make a public apology. The Beijing-based firm is also seeking compensation of RMB 900 million (around $13.9 million) from Tencent.
• There are no other operators that provide services that rival WeChat and QQ, ByteDance said, meaning that Tencent enjoys a “market-dominant position”—the threshold for citing the Anti-Monopoly Law in court.
• Tencent said in a statement that ByteDance’s accusations were “false” and that the company will bring a countersuit.
• Tencent said Douyin had acquired WeChat users’ personal information by “means of unfair competition” and had breached the platform’s rules.

Context: China has ramped up antitrust regulations in the tech industry in recent months. In December, the State Administration of Market Regulation (SAMR), China’s top antitrust regulator, issued fines to Alibaba and affiliates of Tencent and logistics giant SF Express over three separate acquisition deals, a move that legal experts described as the country’s first batch of antitrust enforcements against tech firms.

• SAMR had previously proposed an overhaul of the Anti-Monopoly Law in January and introduced a set of antitrust guidelines tailored for the internet industry in November.
• In March, ByteDance complained that WeChat had started blocking links to its enterprise messaging app and productivity tool Feishu.

As the Biden administration takes office in the US, there’s a bipartisan, arguably multilateral, appetite to mess with China tech. 

The new president has promised to make a U-turn on many of Trump’s policies, but China isn’t on this list. Cabinet picks have said that they support an aggressive stance on China and have made it clear that technology is a key aspect of their foreign policy, but haven’t revealed details as to how they will be tough on tech. 

“The view that the two countries are competitors is now firmly held in both Beijing and Washington. In turn, there is little prospect for a meaningful improvement in US-China relations under the Biden administration,” Agathe Demarais, global forecasting director of The Economist Intelligence Unit, told TechNode.

“Biden will need to appease China hawks in both political parties in order to get support for his more ambitious domestic programs, such as building new infrastructure and healthcare,” Alex Capri, visiting senior fellow at the National University of Singapore, told TechNode. 

Bottom line: China’s tech companies have seen big changes in their relationship with the US during the past four years, and a new US administration probably won’t undo many of those changes. The Biden administration is likely to put a pause on surprise moves like app bans, and be less unpredictable, but there’s almost certainly no going back to 2015.

Trump era policies

‘Buy American’ initiative: Trump tried to encourage US federal agencies to buy homegrown products from the very beginning of his presidency. The American federal government is likely not a big client for Chinese companies, with some exceptions.

• An LA Times investigation found that from 2016 to 2019, direct federal procurement of foreign-made goods increased by 0.1%: from 3.5% of total federal spending to 3.6%. 
• Several federal agencies stopped buying drones from Shenzhen-based DJI between 2017 and 2020. 
• The initiative turned into a “Don’t Buy Chinese” policy in August 2020, when a law barred federal agencies from buying goods or services from companies that use equipment from Huawei, Hikvision, and Dahua Technology. While the US federal government is not a big direct client for these companies, contractors like Amazon are. 

The Entity List: More serious threats to China tech began in 2016 with the short-lived addition of telecoms manufacturer ZTE to a list that limits exports of US technology, a move that temporarily cut it off from crucial supplies of semiconductors. In 2019, ZTE peer Huawei was added to this list in a move called a potential “death blow.”

• ZTE was added after accusations that the firm sold equipment to North Korea. The telecoms equipment vendor paid a $1.19 billion fine the next year and pleaded guilty to violating US sanctions, and was removed from the list. 
• Surveillance equipment manufacturers Hikvision, Dahua Technologies, and AI companies Megvii and iFlytek were added to the list in October 2019. SMIC and drone maker DJI were added in December 2020. 
• In Aug 2020, the Commerce Department expanded the scope of export restrictions on trading with Huawei. In an explicit attempt to target Huawei’s semiconductor supply, the department effectively banned any chips that include US tech to be sold to the Chinese telecoms company. 

Transaction bans: Perhaps Trump’s most confusing tech policy, if anyone is keeping score. On Aug. 6, 2020, Trump signed an executive order to bar US companies from making transactions with TikTok and WeChat over alleged privacy violations. Both bans were suspended by courts before coming into effect.

• On Jan. 5, 2021, Trump banned transactions with another eight Chinese companies: Alipay, CamScanner, QQ Wallet, SHAREit, Tencent QQ, VMate, WeChat Pay, and WPS Office. 
• The new Commerce Secretary will have to decide which transactions fall under the ban. 

Investment bans: Trump banned investments in companies designated as affiliated with the Chinese military by the Department of Defense (DoD) including China Mobile, China Telecom, and China Unicom, starting Jan. 11, 2021. Shares of the three telcos in Hong Kong fell sharply on the announcement. The list also includes Huawei and Hikvision.

• Trump later added that US investors must divest from Chinese companies by Nov. 11, 2021. 
• On Dec. 3, 2020 the DoD added chipmaker SMIC to this list, and on Jan.14, Xiaomi. 

Delisting: Not a Trump policy per se, but a potentially major hassle for US-listed Chinese tech companies. US lawmakers voted unanimously to pass the Holding Foreign Companies Accountable Act, which threatens to force Chinese companies off US stock markets within three years.

CFIUS: The Committee on Foreign Investment in the US blocked Chinese investments on several occasions, and expanded its jurisdiction in 2018. 

• The committee blocked Ant Group’s acquisition of MoneyGram in 2018. 
• In 2019, CFIUS forced Chinese gaming company Beijing Kunlun Tech to sell gay dating app Grindr, which is popular in the US, citing privacy concerns. The sale finally went through in March 2020. 

Clean Network: First launched on April 29, 2020 as “Clean Path,” and later expanded in August 2020, the initiative seeks to rid US allies’ tech networks and infrastructure from Chinese technology. 

• Various countries have reportedly signed on, although it is unclear what commitments they had to make to be part of it. 

Tariffs: Trump slapped tariffs on several Chinese tech products, starting with solar panels in January 2018, and later on electronics, including laptops and phones. 

• Apple dodged tariffs on its China-made products at the last minute, when the US and China agreed on the phase one trade deal. 
• Tariffs have not severely affected China tech companies, with US firms bearing the brunt of the duties. 

I could go on, but these are the most important. 

How China tech responded

Funding: Chinese VC activity in the US fell dramatically in 2019 and 2020, as Chris Udemans documented, when the techwar heated up. 

• Many market factors affected Chinese VC investments in US startups, but the drop is partly attributable to the changes to CFIUS rules in late 2018. 

By contrast, US funding is still flowing into China. Beijing-based VC Qiming Venture Partners closed a $1.2 billion round of financing in September, mainly led by US university endowments and pension funds. 

Semiconductors: Export controls have also inspired big efforts in China to achieve semiconductor independence, or at least limit reliance on US chipmaking technology. This is a very long road and several US companies guard key chokepoints, but there is probably no going back. 

• Stewart Randall has written about how the open-source RISC-V chip architecture is a promising avenue for Chinese chipmakers to free themselves from reliance on American companies, and is reportedly being used more frequently. 

Grand strategy

The Trump administration aimed to decouple the US and China in the tech sphere, Scott Kennedy, senior adviser at the Center for Strategic and International Studies in Washington, told TechNode.

Biden will be using similar policy tools, but his goal will likely be risk mitigation rather than complete separation, Kennedy said.

Biden’s team has begun to describe an approach that could lower the temperature without changing the basic fact of rivalry.

Kurt Campbell, Biden’s Indo-Pacific Advisor, and Jake Sullivan, Biden’s National Security Advisor, summarized an alternative approach in a 2019 Foreign Affairs article: 

Washington, for its part, will have to invest in the core sources of American economic strength, build a united front of like-minded partners to help establish reciprocity, and safeguard its technological leadership while avoiding self-inflicted wounds.

-Kurt Campbell and Jake Sullivan, “Competition Without Catastrophe,” Foreign Affairs

 Competition: Biden’s early appointees have said that his administration will continue competing with China on technology issues. However, Biden-style competition could mean more efforts to boost US innovation and fewer surprise app bans.

• Antony Blinken, Biden’s Secretary of State, said he approves of the direction of Trump’s tough China policy, but disagrees with the former president’s tactics, during his confirmation hearing. 
• Even the relatively cautious Campbell and Sullivan say the US should get comfortable with “considerable friction.”
• Biden is looking to strengthen the US’ domestically, boosting innovation and production capacity. Campbell and Sullivan wrote that this “domestic foundation” is what Washington needs to build on to deal with the China challenge. 
• Biden has promised to call up US allies trying to mend relations, so that they can exert united pressure on China at international institutions. 

Cooperation: The new administration doesn’t only want to ramp up competition with China. Cabinet picks including Antony Blinken have said they want to find ways to work with Beijing on global issues such as climate change. Biden’s Secretary of State said in September that a full decoupling is “unrealistic and ultimately counter-productive.”

• In Foreign Affairs, Campbell and Sullivan wrote that Washington should adopt a compete first, cooperate second approach. 

• Sullivan cautioned against making China an “existential threat” in the minds of American people and policymakers in a ChinaTalk podcast episode recorded in 2019.
• Other than the environment, one area of cooperation could be regulation to rein in big tech, Xue Lei, research fellow of the Institute for World Economic Studies at the Shanghai Institute of International Studies, said in an event on Jan. 20. 

Biden’s China team 

Biden’s cabinet picks have almost unanimously expressed a desire to be tough on China on issues ranging from trade to human rights. They have also stressed the rising importance of technology on geopolitics. 

President Biden and his incoming team have not detailed how they will deal with the US-China tech war. “I have not heard them whisper a word,” Kennedy said. 

Biden’s top cabinet picks have often dodged making specific comments on technology issues. Here’s some exceptions on what they have said on China tech:

• Laura Rosenberg, China senior director
  • Rosenberg is the head of the Alliance for Securing Democracy in Washington DC. She is expected to bring attention to China’s censorship and allegations of surveillance technology. 
  • In a Dec. 31, 2020 report, the advocacy group argued for an alliance of democratic countries to counter China’s influence over global internet governance. 
• Tarun Chhabra, senior director for Technology and National Security
  • Chhabra argues that American progressives should use rivalry to get Republicans to agree policies including increases in federal spending for R&D and education, as well as immigration policy changes to counter China’s Thousand Talents Program that attracts top tech talent from abroad. 
• Jessica Rosenworcel, chairwoman of the Federal Communications Committee 
  • Rosenworcel supported December 2020 decisions to revoke China Telecom’s US license and to reject an application from Huawei to review its designation as a national security threat. 
• Ely Ratner, top China advisor to the Pentagon chief 
  • A report co-authored by Ratner made several specific recommendations to the incoming administration on China tech, including expanding export controls based on end use of tech equipment, diversifying rare earth supply chains away from China, and coordinating with US allies on semiconductor export controls. 

Tactics

“Democracies must employ scalpels rather than sledgehammers,” Rosenberg said. CSIS analyst Kennedy said he expects the administration to “carry out a top-bottom review of China policy and the entire foreign policy of their tactics and strategy.”

There’s some policy areas where experts expect to see movement from the new administration, albeit further down the line. 

Made in America: Biden signed an executive order on Jan. 25 that will narrow the definition of American-made products and make it harder for federal agencies to justify buying foreign-made goods. 

Backseat for tariffs: Experts expect tariffs on imported goods to take a backseat in Biden’s administration, giving way to strategic tools that confront China’s tech companies in different ways, like sanctions. “Rather than tariffs, the Biden administration will increasingly shift to sanctions and export controls to confront China’s rise in the technological sector and to try to re-assert the US global dominance in this area,” Demarais told TechNode. 

Export controls: Campbell expressed support for “enhanced restrictions on the flow of technology investment and trade in both directions,” but not in a wholesale manner to avoid the Balkanization of the internet. 

• In the same op-ed, he identified the Huawei ban as a “cautionary tale” and called for creative policymaking, such as “establishing a multilateral lending initiative to subsidize the purchase of alternatives to Huawei’s equipment.”
• China is “too big” to be steered with “traditional” financial sanctions, said Demarais. The new White House is likely to rely more heavily on export controls, and “this trend is likely to be a long-term one that will outlive the Biden administration,” she said. 
• “Biden is not likely to walk away from chip restrictions that are fueling China’s technology ambitions. Nor is Biden likely to walk away from blacklisting Chinese tech companies that have ties with the” People’s Liberation Army, Abishur Prakash, futurist at the Center for Innovating the Future in Toronto, told TechNode.
• At the same time, Biden could finally give US firms “an audience,” a chance to “air their grievances regarding the suffering of collateral damage from Huawei restrictions,” Capri said. 
• A US semiconductor industry group wrote to the Commerce Department asking a review of the export restrictions to Huawei, Reuters reported on Jan. 26. 

Standards setting: Some Biden advisors have said that they want the US to play a stronger role in international standard settings institutions to curb China’s influence in global tech standards. 

• At her Senate Confirmation hearing, Commerce Secretary nominee Gina Raimondo said Washington should “play offense” when it comes to standards setting. 
• In a Dec. 22, 2020 op-ed Laura Rosenberg, China senior director for the Biden administration, said Huawei’s “New IP” standard proposed at the International Telecommunication Union and the company’s 6G proposals are an attempt to “redesign the underlying architecture of the Internet to allow nation-states to exert greater control over Internet traffic and access.” Democracies have been “too passive” in international institutions, and they should work together to counter states like China, she wrote. 

China tech in suspense

At this point, the broad strokes of the Biden team’s China approach are fairly clear. But tech companies and investors have a lot riding on the specifics. US policy won’t be going back to the rosier times of 2015, but China tech companies will have to wait to see how their access to US markets and stock exchanges will shape up in the next four years. 

Kennedy said that US presidents usually don’t make decisions on foreign policy until the summer after they take office. 

In the meantime, several of Trump’s policies will remain intact, chiefly entity lists. If you are Huawei or Hikvision, you will have to continue living with US export controls for the foreseeable future. If you are WeChat or Alipay, you can take a breather and expect to hear an update on whether you can operate in the US in a few months’ time.

Unfinished business: Analysts don’t expect any new moves any time soon, but the new administration has some homework due within the next two months. 

• The new Commerce Secretary has to define the scope of the Jan. 5 transaction ban on eight Chinese bans, including Alipay and WeChat Pay, by Feb. 19. 
• CFIUS has put its review of the TikTok deal on hold. Oracle and Walmart are reportedly still committed to buying the short video app, as they said four months ago.
•  “I fully expect CFIUS to continue blocking tech acquisitions in the US and to keep lobbying its allies to choose firms from America,” Capri said. 
• According to one of Trump’s last executive orders, by November 2021, US companies must have divested from 35 Chinese companies considered to have ties to the Chinese army, including chipmaker SMIC. 

Stalling: Kennedy says Biden might try to hit the pause button on these actions until he has finished his policy review. 

• On Jan. 27, the Treasury Department extended the deadline by which US investors would be barred from investing in Chinese military companies by five months.

“In terms of the larger arc in figuring out how to manage the relationship with China, I am fairly optimistic,” Kennedy said. “The Trump administration highlighted the concerns of a Xi Jinping-led China. I think Biden will show more care in the tools to get effective action,” he said.

Update: This article has been updated to include the full name and title of Abishur Prakash, futurist at the Center for Innovating the Future, Toronto.

Chinese smartphone maker Xiaomi said on Sunday it had sued the US government over a move by the Trump administration which bars American investment in the company.

Why it matters: This is the first legal challenge launched by Chinese firms on the Trump administration’s investment blacklist. The US Department of Defense (DOD) alleges that the entities are “Communist Chinese military companies,” meaning they are owned or controlled by the People’s Liberation Army.

• Chinese tech companies have won legal challenges against the US government sanctions before. In December, a district judge fully blocked the Trump administration’s attempt to ban the Chinese video-sharing app TikTok in the US.
• But Huawei, a Xiaomi rival, has found little respite pursuing legal challenges. In February, a federal judge rejected Huawei’s constitutional challenge to a US law that restricts it from doing business with US federal agencies.

Details: Xiaomi said in a statement filed with the Hong Kong exchange on Sunday that it had filed proceedings in the US District Court for the District of Columbia against the DOD and the Department of the Treasury on Friday. 

• Xiaomi said that it believes its inclusion on the blacklist was “factually incorrect and has deprived the company of legal due process.”
• The firm has asked the court to declare the decision illegal and to reverse the course, it said.
• Defendants of the suit also include the US defense secretary, Lloyd Austin, and Janet Yellen, the Treasury secretary, according to a court filing.
• The DOD didn’t “provide any explanation for its decision to designate Xiaomi as a Communist Chinese military company,” nor did it give Xiaomi any opportunity to explain, the company said in the court filing on Friday.
• Xiaomi denied any allegations that it is owned, controlled, or does business with China’s defense industry.
• The Defense and Treasury haven’t responded to the lawsuit.

Context: An executive order signed by former US President Donald Trump in November bans American investment in companies that are deemed to be linked with the Chinese military.

• American investors will be prohibited from buying Xiaomi shares and will have to divest their holdings by November, according to the executive order.

GGV Capital, an investor behind some of China’s most successful tech startups including ByteDance and Didi Chuxing, said Thursday it had closed a $2.5 billion funding round—the largest in its 20-year history.

The US- and China-based venture capital firm’s latest capital raise comes amid an uptick in inflows to VCs from domestic and international limited partners (LPs) looking to profit from China’s tech growth. On Tuesday, Qiming Venture Partners, a Beijing-based VC firm that has invested in food delivery app Meituan and smartphone maker Xiaomi, said it had closed a new RMB 2.9 billion (around $448 million) financing round, following a $1.2 billion capital raise in September.

The two deals are part of a trend: foreign investors are increasingly injecting funds into China’s growing tech sector, as the global economy slows. Investors and analysts have said that foreign LPs are optimistic about China’s tech startups following last year’s initial public offering (IPO) boom. China, meanwhile, is gradually opening its finance market, increasing its appeal to international investors, they said.

Two big fundraising deals

GGV said it had raised in this financing round $1.46 billion for its GGV Capital VIII fund, $366 million for the GGV Capital VIII Plus fund, $610 million for its Discovery III fund, and $80 million for its Entrepreneur VIII fund. The firm said it will focus on investment in sectors such as new retail, cloud-based enterprise services, and social media.

The firm said it also expects to soon close a separate financing round of RMB 3.4 billion, increasing its total assets under management to around $9.2 billion.

The company did not disclose the names of its backers in this round. It has previously raised US dollar funds from North America-based pension funds, family asset management firms, and universities. A GGV representative declined to comment.

Qiming’s latest financing round was backed by two government-led guidance funds in Shanghai and Beijing, as well as several domestic insurance companies, TechNode has learned. The firm’s $1.2 billion financing round closed in September was mainly backed by American university endowments and pension funds.

“Top domestic and international LPs are optimistic about our investment strategy to invest in China’s innovative and developing science and technology, even during the challenging global Covid-19 epidemic as well as changing global environments,” (our translation) Duane Kuang, Qiming’s founding managing partner, said in a company statement on Tuesday.

US dollar funds become more active

In 2020, Chinese US dollar funds raised 12% more money than the previous year, even though total capital flowing into the market dropped nearly 39%, according to data from PE Data, which tracks China’s VC activities.

“US dollar funds into Chinese VC firms increased in 2020 both because the Chinese government had loosened its regulations of foreign investment and because overseas LPs are a lot more confident about the Chinese market,” (our translation) Liu Xiaoqing, research director at Itjuzi, a Chinese VC activity database, told TechNode.

American LPs are finding Chinese tech firms increasingly attractive and the market is rapidly developing after some Chinese tech firms went public in 2020 and offered investors high returns, she added. Some of the largest Chinese tech IPOs last year included electric vehicle maker Xpeng and Li Auto, as well as gaming giant Netease’s dual listing in Hong Kong.

VC-backed Chinese video-sharing app Kuaishou is preparing for what is expected to be the world’s largest public listing since the pandemic. The company is seeking to raise around $5 billion on the Hong Kong stock exchange, implying a market capitalization of as much as $60.9 billion. The firm was valued at $18 billion in a funding round in January 2018, meaning early investors are expected to net returns of nearly 233%.

A clearer picture

US investor interest in Chinese tech firms was hampered last year by two Trump-era policies, but signs from the Biden administration, which has thus far indicated an aversion to over-broad and arbitrary restrictions on Chinese tech firms, are stoking optimism.

In May, the US Labor Department advised US federal pension funds—important backers of Chinese USD VC firms—against investing in Chinese companies. In November, former US President Donald Trump signed an executive order which banned starting Jan. 28 American investment in companies that are deemed related to the Chinese military. Smartphone maker Xiaomi, China’s three biggest telecommunications operators, and Chinese chipmaker SMIC are on the blacklist.

However, in a sign that it is easing Trump’s “tough-on-China” tech policies, the newly inaugurated Biden government said on Wednesday it is delaying the investment ban on certain Chinese firms to May 27.

China’s economy expanded 2.3% in 2020 according to government data (in Chinese) released last week, as economies in the rest of the world grapple with the stranglehold on business brought by the coronavirus pandemic.

China brought in $163 billion in foreign investment in 2020, surpassing the US as the world’s hottest destination of foreign direct investment, according to a report by the United Nations Conference on Trade and Development released on Sunday. In 2019, the US took $251 billion in foreign inflows and China got $140 billion.

“LPs are planning for the longer term,” said Liu of Itjuzi. “They are not only confident about China’s economy in 2021. They are at least confident about China in the next 10 years.”

Chinese tech giants typically focus on the consumer market. But their appetite for semiconductors is growing. 

These deals highlight a trend: Chinese tech giants are trying to secure their future growth by making investments in the semiconductors industry.

Funding China’s semiconductor industry also underscores tech giants’ concerns about being cut off from the global semiconductor supply chain after the US effectively banned Huawei from sourcing American-made components. 

Other active chip investors are Tencent and e-commerce behemoth Alibaba, which have focused on investing in the artificial intelligence chips and computer processors that power their cloud computing businesses. Earlier this month, Tencent participated in artificial intelligence chip maker Enflame Technology’s RMB 1.8 billion (around $278.3 million) Series C.

Tencent and Xiaomi have been targets of Trump’s actions against Chinese tech firms, but they have so far not had trouble getting chips.

Increasing investment in semiconductors is also in line with Beijing’s push for self-sufficiency in strategically important technologies. Unlike Huawei, which is locked in geopolitical disputes with the US and is barred from most high-end semiconductors that use American technology, the other companies making these investments are largely free from US sanctions.

China has vowed to produce 75% of all the chips it uses by 2025—and it is putting a lot of money behind this goal. Total VC investments into China’s semiconductor industry quadrupled (in Chinese) in 2020 to RMB 140 billion from the previous year. The country has also set up a series of government-backed funds to support semiconductors startups, including a $29 billion “Big Fund.”

In this issue of VC Roundup, we look into how Chinese tech giants are making investments in semiconductors.

Huawei: The Shenzhen-based telecoms company, which produces everything from smartphones to base stations for next-generation 5G networks, has felt the pain of a shortage of semiconductors. The company may have to stop manufacturing smartphones in the middle of this year if the US doesn’t lift sanctions.

• In April 2019, Huawei set up its Hubble investment unit, led by Bai Yi, the then president of Huawei’s global financial risks control center. The company had RMB 700 million in registered capital when it was founded. In October, Huawei increased the investment unit’s registered capital to RMB 2.7 billion. Hubble has invested in 27 companies so far, all of them in the semiconductor sector.
• In August 2019, three months after Washington added Huawei to a technology export list, Hubble made its first investment in a Hangzhou-based battery integrated circuit (IC) designer.
• In 2020, Hubble invested in 20 semiconductors companies, according to Chinese corporate information platform Tianyancha (in Chinese).
• They include NineCube, a maker of chip-designing tools; ALLSEMI, a semiconductor manufacturing equipment maker; and Onmicro, an IC designer of processors and radio frequency (RF) front-end modules used in handsets.
• Industry insiders believe that Hubble’s investments are linked to Huawei’s plan to “de-Americanize” its supply chain. “The investments are clearly replacing US companies they can no longer get access to,” a chip industry executive told the Financial Times in December.
• Some of Hubble’s investments, such as RF module designers Onmicro and Evisionics, are aimed at replacing US counterparts, like Qorvo and Skyworks, said Stewart Randall, head of electronics and embedded software at Shanghai-based consultancy Intralink. 

But chip design won’t “help too much” if they don’t have access to chip contract manufacturers like Taiwan Semiconductor Manufacturing Company (TSMC) and South Korea’s Samsung, Randall added. TSMC and Samsung are also subject to US export restrictions on Huawei because their production lines contain American technology.

Xiaomi: Xiaomi made its first foray into chips in 2014 when it launched a semiconductor division that focuses on SoC design. In 2017, the unit, called Pinecone, launched its first and only mobile processor, the Surge S1, which was featured in Xiaomi’s Mi 5C smartphone.

• In 2019, Xiaomi began rethinking its chip ambitions by pivoting to investment. In July 2019, it bought a 6% stake in Shanghai-based chip designer VeriSilicon.
• Xiaomi has since become a more active chip investor than Huawei. In 2020, the company funded some 30 early-stage semiconductor firms, most of which are designers of smartphone chips.
• There is some overlap between Xiaomi and Huawei’s portfolios. Both companies have invested in Onmicro and SmartSens Technology, a Shanghai-based digital camera image sensors maker.

Internet companies: E-commerce giant Alibaba is also China’s biggest cloud computing service provider. The company has been pouring money into making silicon for its cloud computing business to reduce reliance on foreign chipmakers such as Intel and Nvidia.

Alibaba’s semiconductor push began in 2017. The company invested in a series of artificial intelligence chip makers such as Cambricon (in Chinese) and DeePhi Technology (in Chinese).

• In April 2018, Alibaba acquired C-sky, a designer of homegrown 32-bit processors for servers. Alibaba then merged C-sky and Damo Academy, an in-house semiconductor research institution founded in 2017 to form T-head, a chip-designing unit.
• T-head’s offerings include the Xuantie processor series and the Wujian SoC Platforms series, which are mainly used to power IoT devices; and the Hanguang neural processing unit (NPU), which is used in servers in Alibaba’s data centers, according to the company’s website.

Artificial intelligence chips have also caught Tencent’s eye. The company participated in three financing rounds for chipmaker Enflame between 2019 and 2021. 

• Tencent is China’s second-largest cloud computing service provider after Alibaba, but the company is not as active in semiconductor investments as Alibaba. 
• Apart from Enflame, the only other semiconductor firm Tencent had a stake in is Shenzhen-based SDMC, a smart television chipmaker. In August, Tencent led a RMB 44 million (in Chinese) financing round in SDMC.
• Internet companies’ investment in semiconductors is a “global phenomenon,” Randall of Intralink told TechNode. “Facebook, Google, Amazon, etc. all have their own chip teams now. Alibaba and Tencent followed this trend,” he said.

A mixed picture: While the US hasn’t targeted the majority of Chinese tech giants with technology export restrictions, some companies have already found themselves in the crosshairs of US-China geopolitical disputes. It’s unclear whether their investment strategies will mitigate this risk. Huawei has demonstrated that investing in chips can be more profitable than strategic.

• “For Chinese companies at least it is also some form of protection,” said Randall. “If we get cut off from Nvidia then we at least have some in-house expertise to maybe create something to keep our services running as they grow.”
• But Huawei’s efforts to invest in the domestic semiconductors supply chain didn’t prevent it from being cut off crucial chips it needs to produce smartphones. The company had to sell its budget handset brand Honor in November. Reuters reported this week that Huawei is in early-stage talks to sell its premium smartphone brands P and Mate.
• Randall says these may just be good investments. “Sometimes you can make more profit that way. Like Qualcomm makes more off a Xiaomi phone than Xiaomi,” he said.

Big deals: semiconductors edition

• Jan. 25: Xiaomi injects RMB 200 million into Cvitek, a Beijing-based chip designer for video surveillance equipment.
• Jan 7: Beijing-based AI chip designer Horizon closes a $400 million Series C2 led by British firm Baillie Gifford and Hong Kong-based Aspex Management.
• Jan 5: Enflame closes a RMB 1.8 billion Series C led by state-owned Citic Private Equity and participated by Tencent.
• Dec 28: Huawei’s Hubble investment unit injected more than RMB 10 million into Ninecube.
• Dec 21: Senscomm, a wireless semiconductors designer based in Jiangsu province, closes a RMB 150 million Series A led by Oriza Holdings and Xiaomi.

Chinese smartphone brand Honor on Friday unveiled its first model since Huawei sold the unit in November, under pressure from US sanctions.

Why it matters: Huawei sold Honor to keep the brand free from US technology export restrictions. Friday’s launch shows that the strategy has achieved initial success, as Honor’s new phone contains technology that Huawei still finds difficult to acquire.

• The processor which powers the new model, the Honor V40, is made by Taiwanese chipmaker MediaTek, which is subject to a US export regulation imposed last year. It requires chip vendors around the world to acquire a special license from Washington to sell products with American technology to Huawei.
• V40 users in overseas markets will reportedly be able to Google apps and services. Huawei is still blocked from using those services because of a 2019 US ban.

Details: The 6.7-inch V40 smartphone lineup starts at RMB 3,599 (around $556), featuring a 50 million-pixel camera.

• The V40 is powered by MediaTek’s Dimensity 1000 Plus system-on-a-chip (SoC), which is compatible with next-generation 5G wireless technology.
• It also uses Samsung’s charging technology, according to Honor CEO Zhao Ming.
• Zhao said in a live-streamed press conference on Friday that the company now has five research centers and more than half of its staff work on research and development.
• It’s unclear whether Honor bought MediaTek’s processors before or after its split from Huawei. MediaTek told reporters (in Chinese) on Wednesday that it is still “assessing its cooperation” with the company as it launches a new series of 7-nanometer Dimensity 1000 chips.
• The model is available to order online for domestic consumers starting Friday. The company did not announce an international launch plan during the press conference. It is not yet listed on its international website.

Context: Huawei in November sold Honor to a government-backed consortium. Honor is a budget smartphone brand that Huawei established in 2013. It competes with other budget brands such as Xiaomi and Oppo while the Huawei brand sells to the high-end handset market. 

• A report released by research firm Trendforce this month said Honor will become a direct Huawei competitor.

TikTok’s Chinese owner has rolled out an e-wallet feature on its Douyin video-sharing app, a move that could pose a significant threat to the Alipay and WeChat duopoly in China’s mobile payment sector.

Why it matters: Douyin, the domestic version of TikTok, is one of China’s most used apps with 600 million monthly active users as of September.

• Bytedance’s ambition to tap into the payment sector have long been hampered by China’s strict finance regulations. The company in September inherited (in Chinese) a payment license from a small payment firm based in the central province of Hubei it acquired two years ago.
• E-commerce behemoth Alibaba’s Alipay and internet firm Tencent’s WeChat Pay, a feature inside the instant messaging app WeChat, are the two dominant players in the market. Together they hold nearly 95% of China’s online payment market, according to iResearch (in Chinese), a market research firm.

Details: Douyin recently added Douyin Pay onto its checkout page, Chinese media reported Tuesday. The payment method allows users to buy virtual gifts for livestreamers and pay for goods on the app’s e-commerce platform.

• Bytedance said in a statement to TechNode that Douyin Pay was rolled out by the company to “supplement the existing major payment options.” A Bytedance spokesperson said the feature had been available for a while and was previously in test mode.
• The app previously supported WeChat Pay and Alipay. Douyin Pay allows users to link cards from 10 banks including Bank of China and China Merchants Bank.
• Payments are processed by Ulpay, the Hubei-based firm it acquired in 2018.

Context: An in-house payment tool is essential to many of Bytedance’s offerings, including e-commerce and lending services.

• Bytedance is building an e-commerce platform on Douyin around its active livestreaming community. The business model, known as livestreaming e-commerce, has seen massive growth in China since 2019.
• The company in October 2019 launched a lending app, providing users with consumer credit, installment payments, and credit card services. Douyin had also recently launched Dou Fenqi (literally translated as Dou Installments), a feature that allows users to pay their bills in monthly installments, Chinese media reported.

The Trump administration is revoking certain licenses for some suppliers of Chinese telecommunications firm Huawei, Reuters reported Monday, and it warned it would deny more applications.

Details: The Semiconductor Industry Association, an American industry group, said on Friday that the US Department of Commerce had issued “intents to deny a significant number of license requests for exports to Huawei and a revocation of at least one previously issued license,” Reuters reported, citing people familiar with the matter.

• One of the sources in the report said eight licenses were revoked from four companies. Intel, which supplies Huawei with systems-on-a-chip (SoCs) used in smartphones and personal computers, was among the companies.
• Another affected company was Kioxia Corp, a Japanese flash memory chip maker formerly known as Toshiba. The company had at least one license revoked, said two Reuters sources.
• Some 150 licenses for $120 billion worth of goods and technology ready to ship to Huawei were pending approval before the latest action.
• Another $280 billion of license applications for goods and technology for Huawei have not been processed, according to Reuters.
• The Commerce Department has told companies that it “intends to deny” those applications.

Context: According to two US government regulations issued in 2019 and 2020, companies around the world have to seek a special license from Washington if they want to sell products that contain US technology to Huawei.

• In September, Intel received a license from the US government to sell to Huawei. In November, US chipmaker Qualcomm was approved to sell 4G chips to the Chinese company.

It has been nearly two years since Chinese tech workers took to Github, a coding collaboration platform, to protest Chinese tech firms’ overtime work culture known as “996,” a work schedule of 9 a.m. to 9 p.m., six days a week. The virtual protest drew global press attention, but things have scarcely changed since then. Today, Chinese tech workers are still plagued by 996.

The problem came under public scrutiny again this month when it was reported that a 23-year-old employee of Chinese e-commerce firm Pinduoduo collapsed and died on her way home after finishing work at midnight on Dec. 29, 2020. The tragedy prompted Chinese authorities to start a probe into Pinduoduo’s working conditions, something the 2019 protest failed to achieve.

Meanwhile, poor working conditions for blue-collar workers for China’s tech companies continue to draw public ire, triggered by similar misfortunes, including the death of a courier at food delivery platform Ele.me at work earlier this month, and the self-immolation of another Ele.me deliveryman this week.

Bottom line: 996 is still a problem in China’s tech industry. It’s brutal to employees, but it is questionable whether overtime work pays off even for companies. Tech executives have implied that 996 is one of the key ingredients for China’s tech success, but economists argue that it is a symptom of low productivity.

A brief timeline

• It’s unclear when 996 was first introduced. Online sources say it can be traced back to the early 2000s.
• January 2019: Youzan, a Chinese e-commerce software provider, announces it will adopt the 996 work schedule. Employees take to social media to protest.
• April 2019: Chinese tech workers create a repository called 996.ICU on Github. The crowd-sourced database collects allegations about Chinese companies’ overtime work schedules. Among the companies named are some of the biggest names in China’s tech sector: social media giant Tencent, e-commerce behemoth Alibaba, and Bytedance, Tiktok’s Chinese owner. The project is “starred” 255,000 times on Github. 
• April 2019: Meanwhile, tech executives jump to the defense of long work hours. Alibaba’s Jack Ma famously calls 996 “a huge blessing.” Richard Liu, CEO of e-commerce platform JD.com says people who slack at work “are not brothers of mine.” (Both links in Chinese)
• The topic soon died down without major changes made by companies. Despite condemnation from state-affiliated media, the government didn’t launch investigations into alleged violations of the labor law.
• H1 2020: Tech company workers complain that the 996 schedule followed them home as employees work from home during the pandemic.
• Jan 2020: Death of the Pinduoduo employee renews public scrutiny of tech firms’ overtime culture. In the same month, a second Pinduoduo employee dies after jumping from the 27th floor of an apartment building in Changsha, the capital of central Hunan province.
• Jan 2020: A Pinduoduo employee is fired after posting a photo of a co-worker being taken away by an ambulance from the company’s Shanghai headquarters. Pinduoduo says in a statement that he was fired for posting “radical” messages “in violation of the company’s employee guide.”

Changing demography: Shao Yu, chief economist at brokerage Orient Securities, wrote in a 2019 essay  (in Chinese) that anti-996 sentiment reflects China’s demographic shift from labor surplus to labor shortage in the past decades. 

• China reached a key demographic turning point in around 2010, wrote Shao, when the country’s unskilled labor market moved from surplus to shortage. Known as the “Lewis turning point,” this is a situation in economic development where surplus rural labor is fully absorbed into the manufacturing sector.

“Once the Lewis turning point is crossed, we enter the neoclassical development stage,  in which labor supply shifts from surplus to shortage, and economic development no longer relies on the crude input of labor force, but on the improvement of production efficiency.”

“One result of the shift is that people start to pursue a quality life instead of basic needs.” 

— Shao Yu, chief economist at Orient Securities

However, China still has surplus skilled labor, including tech workers, curbing skilled workers’ “bargaining power,” Eli Friedman, associate professor at the Cornell University School of Industrial and Labor Relations, told TechNode in an email.

“China’s higher education has expanded dramatically in recent years, creating a huge number of graduates competing for jobs, particularly in the prestigious big companies. In essence, the companies can get away with it because workers don’t have a lot of bargaining power in the marketplace. Companies of all kinds would like to extend their employees’ working hours, and the tech firms have been in a position to get away with it.”

— Eli Friedman, associate professor at the Cornell University School of Industrial and Labor Relations

How do they get people into 996? It’s not as simple as telling people to stay late at work. Tech companies try to “create consent” when forcing employees into overtime work, He Xuesong, professor at East China University of Science and Technology, wrote in a 2020 paper (in Chinese).

• He wrote that tech firms have widely adopted a project-driven work system. As a result, wrote He, “tech workers have to work overtime to catch up with the speed of projects.”
• He also mentioned that tech firms tend to create an “overtime culture” in which anyone taking time off is seen as not pulling their weight.

“The overtime culture makes it impossible for employees to choose whether to work overtime or not according to their own will. They are forced to choose to work overtime together with their supervisors and colleagues in the atmosphere of overtime.”

— He Xuesong, professor at East China University of Science and Technology

• Not every tech office in China has such a culture.  In August, employees of Microsoft China, a company whose workers usually go home at 5 p.m., called out colleagues who had formerly worked at Huawei and Alibaba to “stop the 996 work schedule,” saying that they were disturbing the company’s work culture.

Is it legal? On the front page of the 996.ICU project’s official website, organizers printed clauses found on China’s Labor Law that prohibit unpaid overtime work imposed on employees. In April 2019, online protestors called on people enraged by Jack Ma’s endorsement of 996 to send an official copy of China’s labor law to Alibaba’s headquarters.

However, China’s courts have held that forcing salaried employees to work overtime does not run afoul of China’s existing laws, according to a lecturer at Nanjing Audit University.

• Tech workers are usually paid fixed monthly wages, rather than hourly rates, writes labor law expert Li Gen. The law provides that hourly workers receive overtime pay for hours worked over 44 in a week or on weekends. However, provisions about whether salaried workers should be paid for their overtime work are “ambiguous and chaotic,” Li wrote in a 2020 paper.
• China’s Wage Payment Provisional Regulations, first released by the Ministry of Commerce in 1994, said its provisions about overtime pay “don’t apply to workers with irregular working hours.” This means that the provisions on overtime don’t apply to workers who are paid fixed monthly wages, wrote Li:
• “This provision has become the main basis for both the judiciary and scholars to hold the view that ‘workers working irregular hours are not required to be paid overtime wages’.” 

Wrong metrics: Tech firms had to adopt the 996 work schedule to make up for low productivity, but longer working hours doesn’t necessarily mean better outcomes, Zhang Yilai, an economic professor at the Business School of China University of Political Science and Law, wrote in a 2019 paper (in Chinese).

• China has a low GDP per hour worked, according to Zhang’s paper, meaning low productivity: China’s GDP per hour worked was $13.5 in 2017, while that of the United States was $72 and Germany was $69.8 in the same year.
• GDP per hour worked measures how efficiently labor input is used in the production process. Data from the Organisation for Economic Cooperation and Development (OECD) shows that efficient work is associated with more time off—countries with better per-hour productivity tend to work less hours overall.
• Zhang wrote that Chinese companies don’t tend to think in terms of output per hour worked. Instead, they tend to use the concept of “output per person,” which simply divides total output by the number of employees, neglecting hours worked. Thus, he wrote, “it’s no wonder that enterprises utilize overtime work schedules like 996 to increase their ‘output per person.’”

But it just doesn’t work: Increasing labor inputs, including increasing working hours, may lead to a rise in output, Zhang wrote, but it “follows the law of diminishing marginal returns,” a theory that predicts adding an additional factor of production will result in smaller increases in output.

“Chinese enterprises still tend to use ‘output per person’ as an indicator of management, which prompted the rampant 996 phenomena. We should switch to the management idea of how to improve ‘GDP per hour worked’ in order to maximize the innovation potential of enterprises and the society. ”

— Zhang Yilai, economics professor at the Business School of China University of Political Science and Law

Friedman of Cornell University said it’s unclear if 996 is good business, but he reckons that it’s an “ethical problem.”

“Why should people be forced to devote the overwhelming majority of their waking hours to work, even as these companies amass billions of dollars of wealth? Companies like Alibaba and Tencent can absolutely afford to have employees work the legally-mandated number of hours and still turn a profit.”

— Eli Friedman

Shares of Chinese smartphone maker Xiaomi plunged 11% on Friday morning after the Trump administration added it to a blacklist, forcing Americans to divest holdings and barring share purchases.

Why it matters: Xiaomi is the second-largest smartphone maker in the Chinese market and ranks fourth globally. The company has been caught in US-China geopolitical tensions for the first time, its troubles bearing resemblance to its main rival Huawei.

• However, Xiaomi is unlikely to face the same degree of US restrictions as Huawei, which has been essentially barred from the global high-end semiconductor supply chain. The Trump administration will end next week and there is no sign that it will place export restrictions on Xiaomi.
• A similar move against some Chinese telecom companies had led to their potential  delisting from US stock markets. Xiaomi is listed in Hong Kong, indicating that the price plunge on Friday could be shareholder panic selling.

Details: The US Department of Defense on Thursday added Xiaomi and eight other Chinese firms to a list of “Communist Chinese military companies,” according to a statement on its website. An executive order signed by US President Donald Trump in November bans American investment in such companies.

• Other companies added to the list include Commercial Aircraft Corporation of China, a state-backed aircraft maker; Gowin Semiconductor, a Guangzhou-based chip designer; and Beijing Zhongguancun Development Investment Center, a government-led venture capital firm.
• Shares of Xiaomi in Hong Kong dropped more than 11% on Friday morning.
• Xiaomi said in a statement Friday that it had confirmed that it is “not owned, controlled, or affiliated with the Chinese military,” and that the company’s products are all for “civilian and commercial use.”
• A Xiaomi representative did not immediately respond to a request for comment.
• US investors will be prohibited from buying Xiaomi shares and will have to divest their holdings by November, according to the executive order.

Context: Xiaomi shares reached a historical high of HKD 35.3 (around $4.6) on Jan. 5, driven by strong sales and a weakened Huawei. Market research firm Trendforce expects Xiaomi will be ranked the world’s third-largest smartphone vendor in 2021 while Huawei, which ranked third in last year, will fall to seventh this year.

• The Trump administration reportedly considered adding other Chinese tech giants including Alibaba, Tencent, and Baidu into the investment blacklist. All three companies are listed on US stock markets.
• On Wednesday, the Wall Street Journal reported that the US had decided to not to add them to the blacklist.

Update: This article has been updated to include a statement from Xiaomi and to correct a typographic error.

The New York Stock Exchange said Wednesday it will stick to the original plan to delist three Chinese state-owned telecommunications companies after an earlier reversal of the decision that caused much confusion.

Details: Trading in the securities of China Mobile, China Telecom, and China Unicom Hong Kong on the NYSE will be suspended at 4 p.m. on Jan. 11 local time, the bourse said in a statement Wednesday.

• The NYSE said the decision was based on new guidance received from the US Department of Treasury’s Office of Foreign Assets Control on Tuesday.
• The three Chinese companies have a right to a review of the decision, the NYSE said.

Context: The second twist of the plot came a day after the US Treasury Secretary Steve Mnuchin reportedly disagreed with the NYSE’s earlier reversal.

• The bourse on Dec. 31 said it would delist the three Chinese companies on Jan. 7, citing an executive order signed by US President Donald Trump which bans American investment in companies deemed to be owned or controlled by the Chinese military, including the three telcos.
• On Monday, the NYSE said it would not delist the three firms after “consultation with relevant regulatory authorities.”

Chinese telecommunications giant Huawei, once the world’s largest handset vendor, will fall to seventh place in global smartphone shipment rankings in 2021 according to a report published Tuesday.

Why it matters: Huawei is losing its status as a smartphone powerhouse following US sanctions over the past two years. The company has been cut off from the global semiconductor supply chain and now relies on stockpiles to maintain production. To increase its chances of survival, it sold in November its budget handset brand Honor, which is now becoming a rival. 

Details: Huawei is expected to ship 45 million smartphones in 2021, ranking seventh among global vendors, according to a Trendforce report published Tuesday. Huawei shipped 170 million units in 2020, ranking third globally, according to the report.

• The changes in Huawei’s smartphone sales owe both to the US export restrictions and the Honor spin-off, according to Trendforce.
• Honor will become a direct competitor, thus making it harder for Huawei to regain market share for smartphones, the report said.
• Samsung will remain the world’s largest smartphone vendor and Apple will retain the second slot, said the report. Chinese company Xiaomi, which ranked fourth in 2020, will become the third-largest smartphone vendor in 2021. 
• Global smartphone shipments dropped 11% year on year in 2020 to 1.25 billion units, Trendforce said. The number is expected to increase by 9% to 1.36 billion this year.

Context: Huawei was briefly ranked the world’s largest smartphone vendor in the second quarter of 2020, according to market research firm IDC. The company’s smartphone shipments then plunged 22% in the three months ended September to 51.9 million units, causing it to fall to second place on the top smartphone vendor list for the quarter.

• Huawei has also lost access to popular Google services and apps including YouTube and Gmail because of a US trade ban in May 2019, making its handsets less appealing to overseas consumers.

The New York Stock Exchange said on Monday it will not delist China’s three major telecommunication companies, an abrupt reversal of a decision made last week which sank the firms’ share prices.

Details: The NYSE said in a statement on Monday that it “no longer intends to move forward with the delisting action” involving China Telecom, China Mobile, and China Unicom Hong Kong after “consultation with relevant regulatory authorities.”

• The bourse said Thursday it would delist the three Chinese state-owned firms on Jan. 7, citing an executive order signed by US President Donald Trump in November. The order bans transactions in securities “designed to provide investment exposure to such securities, of any Communist Chinese military company” by any person in the US. The order included 31 entities that were deemed to be such companies, including the three telecommunication firms.

READ MORE: China telecom shares drop in Hong Kong on US delisting

• “At this time, the Issuers will continue to be listed and traded on the NYSE. NYSE Regulation will continue to evaluate the applicability of Executive Order 13959 to these Issuers and their continued listing status,” the exchange said on Monday.
• Shares of the three companies rallied on the news of the reversal. Hong Kong-listed shares of China Mobile surged 5.5% while China Telecom was up 5.7% and China Unicom jumped 6.7% on Tuesday morning.

Share prices in Hong Kong for China’s three major telecommunication companies dropped as much as 5% Monday on news of a likely delisting from US stock markets. The telecom firms are among a batch of Chinese companies the US government has deemed to be affiliated with the Chinese military.

Why it matters: Shares of the three state-owned telcos dropped even as Chinese regulators tried to downplay the impact of the New York Stock Exchange’s (NYSE) decision to delist them. China’s top securities regulator has said the plan was “politically motivated” and that it will have a “limited impact” on the three companies.

Details: The NYSE said Thursday it would delist China Mobile, China Telecom, and China Unicom Hong Kong on Jan. 7, citing an executive order signed by US President Donald Trump in November.

• On Monday, shares of China Telecom fell 5.6% in Hong Kong. China Mobile and China Unicom saw their shares drop 4.5% and 3.4%, respectively.
• The order bans transactions in securities “designed to provide investment exposure to such securities, of any Communist Chinese military company” by any person in the US. The order included 31 entities that were deemed to be such companies, including the three telcos.
• The NYSE said it had decided that the companies were “no longer suitable for listing,” but added that they have the right to request a review of the decision.
• All three telecom firms said in statements to their Hong Kong investors that they had not been notified by the NYSE about the delisting decision.

Context: China Mobile went public in 1997 and was one of the first Chinese state-owned companies to go public in the US, followed by China Unicom in 2000, and China Telecom in 2002. All three are also listed on the Hong Kong Stock Exchange.

• The three companies earn most of their revenue from providing telecommunication services in China and have little presence in the US.
• China Telecom was previously allowed to provide international communications service in the US. In December, the US Federal Communications Commission (FCC) decided to revoke this authorization, citing national security concerns.
• The FCC rejected an application from China Mobile to provide services in the US in May 2019.

Zhang is the founder and CEO of Balanx, a manufacturer of electrode workout suits that help burn calories, which ships to mainly Europe and North America.

“They want the company to reach revenue of RMB 100 million (around $15 million) and complete another financing round in the near future, which was not my plan,” he said. “Manufacturing is not like the internet industry, where you can create a giant by simply burning cash.” 

Zhang’s idea of tech success isn’t Google or Alibaba. During the interview, he expressed his admiration for some of his fellow Shenzhen-based founders who have never raised VC money. He mentioned as an example a company owned by an acquaintance, a dashcam manufacturer with around 40 employees and around RMB 700 million in annual revenue. 

“I think this is what a typical Shenzhen startup looks like,” he said.

Shenzhen is famous for entrepreneurship. The southern Chinese city is home to some of China’s most important tech companies like Huawei and Tencent, and is a global manufacturing hub. It is said to have the “highest density” of entrepreneurs in China with more than 10% of its population running their own businesses. 

But Shenzhen’s venture capital (VC) scene doesn’t match its importance as a tech hub. Most of the country’s leading VC firms, as well as the Chinese branches of international private equity firms, are based in other metropolises like Beijing and Shanghai. In 2019, only around 9.4% of the country’s private-equity fundraisings went to Shenzhen-based companies, according to Chinese VC activities data provider Itjuzi. The city is home to some 32 unicorns, tech startups valued at more than $1 billion. By comparison, Beijing has 101 and Shanghai has 51.

Local sources told TechNode that Shenzhen has an active VC market, but fund managers in the city are low-profile and don’t tend to make investments that have high valuations. Meanwhile, local government wants to build the city into an “international hub” for VC investment and has injected real money into the market. 

But many founders like Zhang still prefer to bootstrap their businesses rather than take money from VCs.

Shenzhen has an active, but cool-headed, VC market, said Jia Ke, founding partner at Shenzhen-based Creation Venture Partners. Most major players are low-profile and seldom catch press attention, he said. 

One reason, he said, is because Shenzhen VC firms tend to put their money in startups that are likely to bring in moderate rates of return, unlike stereotypical internet investors who look for high-risk, high-reward bets, counting on a small proportion of their portfolio companies bringing high multiple returns.

“It is not easy for Shenzhen VCs to access US dollar funds, compared to Beijing or Shanghai VCs,” said Jia. The first Shenzhen VC funds were raised “in a market-driven way” from limited partners (LPs) mainly consisting of Chinese wealthy individuals and big corporates, he said. Fund managers used to go door to door asking potential funders for money, he added.

“The first question LPs ask is always: ‘Can I break even with this investment?’” he said. “While US dollar fund managers may have nine to 11 years to exit from their investment, Shenzhen VC firms are usually given five to seven years.”

As a result, said Jia, Shenzhen VC firms may “miss startups with high rates of return.”

But Jia cautioned against over-emphasizing the differences. While VC firms in Shenzhen may have some unique characteristics compared with their Beijing counterparts, at the end of the day they all try to do the same thing, he said.

Private investors are cautious. The 2015 Chinese stock market crash was a turning point in how Shenzhen VC firms raise money, Jia said. The stock market turbulence wiped out a third of the value of shares on the Shanghai Stock Exchange in less than a month.

“Following changes in the A-share market in 2015, high-net-worth individuals, who are mainly bosses of public firms, become cautious with their money,” said Jia. 

But state-run funds will back ambitious plays. “Then the ‘national team’ entered the market,” Jia said, referring to state-backed policy and strategic funds that underwrite private-equity firms.

In 2018, the municipal government of Shenzhen set up a RMB 5 billion policy fund, dubbed the Shenzhen Angel Fund of Funds (SAFOF), to back local general partners. The fund doubled (in Chinese) its size to RMB 10 billion in August.

Shenzhen is determined to make itself an “international hub for venture capital and innovation investment,” according to a government initiative (in Chinese) announced in January 2019 that encourages fundraising. The municipal government has pledged to offer startups backed by local VCs RMB 500,000 to RMB 1 million in subsidies if they go public on domestic stock markets.

While state-backed funds in China are known for a top-down approach, the Shenzhen government fund is known for its “market-driven” approach, said Jia, whose firm is also backed by the SAFOF. “They are very efficient and make decisions very quickly.”

But it is not totally driven by the market. SAFOF said on its website that its aim is to guide “social capital,” or private money, into Shenzhen’s “strategic emerging industries” and promote “industrial transformation.” The company didn’t specify what are those “strategic emerging industries,” but the Shenzhen municipal government said in a 2018 filing that they include next-generation digital information technology, high-end equipment manufacturing, biotech, and new material. They are largely in line with the similar list made by China’s National Development and Reform Commission, which makes macroeconomic planning.

The fund has injected around a total of RMB 6.7 billion into 51 VC firms, which together raised RMB 16.7 billion, as of Dec. 11, according to TechNode’s calculations. The fund takes a 40% stake in every single deal. Shenzhen-based unicorns that have received funds from SAFOF-backed VC firms include chipmaker BYD Semiconductors, smartphone display manufacturer Royole, artificial intelligence firm 4Paradigm, and robot maker Ubtech.

Big deals: Shenzhen edition

Dec 22: Shenzhen-based Lalamove, a Uber-like platform that connects truck drivers with customers, announces a $515 million Series E led by Sequoia Capital China, valuing it at $8 billion.

Nov 31: Wangyun Wangdian, an e-commerce logistics firm, raises RMB 6 billion from investors led by Shenzhen Capital Group, a government-backed VC, valuing the company at RMB 25 billion.

Nov 14: Shenzhen-based Jmgo, a consumer projector maker, raises RMB 100 million from Yuanda Venture Capital.

Oct 28: SmartMore, a smart manufacturing firm, raises $100 million from investors led by Green Pine Capital, a SAFOF-backed VC firm.

Oct 21: Shenzhen-based Xiao’e Tech, a software-as-a-service company, raised a Series C funding round of an undisclosed amount from Tencent Investment, which valued the startup at RMB 1.5 billion.

Chinese video-sharing app Kuaishou has asked all employees to work on every other Sunday starting Jan. 10, according to media reports.

Why it matters: The changes came as Beijing-based Kuaishou prepares for a Hong Kong listing as soon as January. The company is under tremendous pressure as it struggles to compete with rivals such as Douyin, the domestic version of TikTok, and Bilibili in the online entertainment sector.

• Chinese tech firms are known for encouraging or sometimes compelling employees into overtime work schedules. One schedule known as “996”— where employees work from 9 a.m. to 9 p.m., six days a week, sparked a widespread online protest last year. 
• Kuaishou’s new work schedule, known as “big/small weeks,” also triggered backlash on Chinese social media on Wednesday. The hashtag #KuaishouStartsBigSmallWeek became a trending topic on social media site Weibo with more than 12 million views. “The labor law never fails to give way to capitalists,” wrote one user.

Details: Kuaishou human resource head Liu Feng announced the new shift will be implemented beginning Jan. 10 during a staff meeting on Tuesday, Chinese tech news outlet Tech Planet reported Wednesday.

• The South China Morning Post on Wednesday confirmed the news with two anonymous Kuaishou employees. 
• Liu told Kuaishou staff that “a week starts on Sunday in the West” and that around 70% of the company’s employees had already adopted the big/small week schedule, according to Tech Planet. “For the sake of closer cooperation between all teams, Kuaishou will fully implement the big/small week schedule,” he told employees.
• TechNode could not independently confirm Liu’s remarks. A Kuaishou representative did not respond to TechNode’s request for confirmation on Wednesday. Liu cannot be reached for comment.

Context: In November, Kuaishou was caught in the crossfire of public criticism after Chinese media reported that it had installed timers on top of toilets in its headquarters.

• In November, Kuaishou filed to go public in Hong Kong. The company said it had amassed a total of 302 million daily active users as of June 30 with users spending over 85 minutes on average on its platforms.
• Kuaishou recorded annual adjusted net profits from 2017 to 2019. However, it booked an adjusted net loss of RMB 6.3 billion (around $964 million) in the first half of this year.

The US is planning to add dozens of Chinese companies, including the country’s biggest chipmaker, SMIC, to the same trade blacklist that has cut off telecommunications equipment giant Huawei from American technology and components, Reuters reported Friday.

Details: The US is expected to add around 80 new companies to the so-called entity list, nearly all of them Chinese, according to Reuters, citing two people familiar with the matter. American firms are barred from exporting technology and key components to companies on the blacklist without government approval.

• China’s biggest chip manufacturer, Shanghai-based Semiconductors Manufacturing International Corp., and some of its affiliates are expected to be included in the entity list designation, it said.
• The blacklisting would force SMIC to seek a special license from the US Commerce Department before buying key goods from American suppliers.
• Such restrictions could potentially curb SMIC’s ability to source US-made chip-designing software, raw material, and machinery needed for the company’s semiconductor production.

Go deeper: Exclusive-U.S. to blacklist dozens of Chinese firms including SMIC, sources say – Reuters

When Zhang Zhengxin sued the internet giant Tencent for anti-competitive behavior in April 2019, it seemed like the action of a quixotic lawyer tilting at windmills.

Zhang had challenged the company’s practice of blocking links to Alibaba’s Taobao stores from its flagship WeChat messaging app. Tencent’s lawyers simply denied that there was an instant-messaging market to monopolize. The case resulted in a standoff on this basis—debating the existence of such a market and how to define Tencent’s share of it. In January, Zhang dropped the case for “lack of evidence.” He came away feeling that big tech was “immune” to antitrust law, he told TechNode at the time.

Barely a year later, powerful Chinese regulators are coming around to Zhang’s point of view. They’ve dusted off China’s 12-year-old Anti-Monopoly Law and are applying it to big tech companies for the first time. Meanwhile, revisions to the law are giving it more teeth to go after tech.

“If my case hit the courts again today, my odds to win could increase by a lot,” Zhang, a lawyer at Beijing-based Yingke Law Firm, told TechNode on Wednesday.

On Monday, the State Administration of Market Regulation (SAMR), China’s top antitrust regulator, issued fines to Alibaba and affiliates of Tencent and logistics giant SF Express over three separate acquisition deals, a move that legal experts described as the country’s first batch of antitrust enforcements against tech firms. The regulator in January and November began laying the groundwork via multiple proposal laws and rules to tackle infractions by internet companies. 

China is clearly looking to tighten its grip on some of its biggest tech companies. Its suspension of Alibaba subsidiary Ant Group’s mega public offering, expected to be the world’s largest public fundraise ever, was a clear shot across tech company bows. Regulators are also stepping up scrutiny of data security measures and online content moderation, signaling the end of the relatively lax regulatory environment tech firms once enjoyed.

Tolerant no more

The fines were issued for failing to flag merger and acquisition (M&A) deals as possible antitrust issues, a sign that regulators are gearing up to enforce the anti-monopoly law against big tech, experts said. The penalties cited the existing Anti-Monopoly Law framework, which stipulates that such behavior would be subject to a fine of up to RMB 500,000 (around $76,556) or a reversal of the deal.

Applying the law to punish internet companies is a distinct shift in attitude toward tech companies.

SAMR’s recent moves are a response to the state’s call for “strengthening scientific and effective regulations on internet platforms,” Deng Zhisong, an antitrust lawyer at Dentons law firm in Beijing, told TechNode. “[The state] has changed its previous ‘tolerant and cautious’ attitude towards internet companies,” he said.

In 2017, Chinese Premier Li Keqiang encouraged a “tolerant and cautious” approach to tech regulation in a speech (in Chinese).

Questionable acquisitions

The three deals in question are Alibaba’s 2017 acquisition of Intime, a retail firm; Tencent-backed China Literature’s acquisition of television series studio New Classics Media in 2018; and the acquisition of China Post Smart Logistics by SF Express-backed Hive Box in May. Each is being fined the maximum amount of RMB 500,000, though none of the deals are being reversed.

While investigations into tech company acquisition deals are not new, until now none have resulted in any punitive measures. When Chinese ride-hailing platform Didi Chuxing merged with US rival Uber’s China unit in 2016, regulators opened an investigation into the deal. The case appeared to be unofficially suspended when Uber filed for an IPO in April 2019, according to Bloomberg. SAMR launched in January 2019 an antitrust probe into Tencent Music Entertainment’s dealings with the world’s three largest record labels after rivals complained that Tencent paid excessive fees for the initial rights and then passed those costs along to competitors. A year later, the regulator decided to suspend the investigation.

“With this latest development, regulators are signaling that they will no longer tolerate internet giants’ [monopolistic actions],” said Zhang, the lawyer who sued Tencent. He added, “They used to be more indulgent than tolerant.”

Beijing’s shift in attitude toward tech giants coincides with a global antitrust storm in which US and EU regulators are restarting efforts to check tech giants including Google and Facebook. In the US, several states filed Wednesday a lawsuit against Google over the search firm’s alleged antitrust violations in the online advertising market. In Europe, regulators proposed this week to designate companies with EU user bases exceeding 45 million as “gatekeepers,” making them subject to stricter antitrust regulations.

Changes to the law

Prior to the fines issued Monday, SAMR had proposed an overhaul of the Anti-Monopoly Law in January and introduced a set of antitrust guidelines tailored for the internet industry in November.

While the fines are relatively trivial amounts for the three companies—the smallest of which generated RMB 1.6 billion in revenue in 2019—future offenders may pay a much higher price for similar violations, according to the draft revision of the Anti-Monopoly Law. Companies will be fined up to 10% of their annual revenue if they don’t report M&A deals that could create a monopoly, according to the draft revision.

The proposed amendment also asks authorities to consider factors such as network effects—services which rise in value as their user bases grow—as well as company size and data assets when determining whether a company is a dominant player.

The November guidelines further explain what is allowed and what is not. The draft, dubbed the Antitrust Guidelines for the Platform Economy, specifically targets tech firms that run online platforms connecting businesses and consumers such as Didi Chuxing and Taobao. 

With the new rules in place, Tencent may no longer be able to argue that it doesn’t hold a dominant position in the instant-messaging market or that such a market does not exist. A dominant player in a market under the existing Anti-Monopoly Law is a company with more than 50% of market share. According to the newly proposed guidelines, a market could be determined by how hard it is for users to switch platforms. The proposed rules also expanded the parameters for determining market share to include factors such as transaction volume, user base, and page views. 

The changes could pave the way for further probes into tech firms over possible violations such as abuse of dominance and reaching monopoly agreements.

Pruning for long-term benefit

In November, the draft antitrust regulations sent Chinese tech stocks crashing. Bloomberg estimated that the shares slump wiped out more than $200 billion of value from Chinese tech companies within two days.

Analysts, however, are optimistic about the prospects brought by tougher antitrust regulations. Liu Zejing, analyst at brokerage Huaxi Securities, wrote in an investment note (in Chinese) that the government is not aiming to clamp down on the internet industry, but rather is making the “inevitable move” to curb potential monopolistic behavior, contributing to the health of the sector.

Commenting on SAMR’s Monday fines on tech giants, Huachuang Securities analyst Jin Xiangyi wrote (in Chinese) that tech giants are bound to fall under the purview of China’s antitrust law and that it is beneficial for them to return to technological innovation, thus boosting the industry. 

Nevertheless, the merger and acquisition tactic that formed incumbents such as Didi Chuxing, online classifieds marketplace 58.com, and Meituan will meet with greater regulatory resistance, said Zhang. Tech giants may have to reverse merger deals that run afoul of the antitrust law, he said.

Cause for tech company concern

Both Zhang and Deng of Dentons agree that Chinese tech giants don’t have to worry about being broken up as they grow bigger. “There are no such provisions for breaking up monopolies in China’s antitrust law,” Deng said.

Monopolists may be forced to open up their platforms or share their data with rivals as a consequence for abusing dominance, but also as a method of remedy, according to Deng.

Antitrust lawsuits against or between tech giants will likely to see the impact of recent changes. In the past, similar lawsuits were usually mired in stalemates on technicalities like Zhang’s suit against Tencent, and court rulings were usually in favor of defendants. A suit between Tencent-backed e-commerce platform JD.com and Alibaba will enter a court hearing stage in Beijing, Chinese media reported in November, without mentioning a specific date. The case, in which JD.com alleges Alibaba abused its market-dominant position in forcing platform exclusivity, will likely provide a clearer picture of how the new rules and antitrust law amendment will be used in legal practices.

Chinese regulators imposed antitrust-related fines on three acquisition deals involving Alibaba, Tencent, and SF Express on Monday, in a sign of increasing concern about monopolistic behavior by internet giants.

Why it matters: The actions are fresh signs that Beijing is tightening its grip on internet firms, which once enjoyed a relatively lax regulatory environment. Officials have recently stepped up scrutiny on data security and content moderation. Regulators, meanwhile, have proposed stricter antitrust rules aimed at internet firms.

Details: The State Administration of Market Regulation (SAMR) said Monday it had decided to fine e-commerce giant Alibaba, Tencent-backed China Literature, and an SF Logistics-backed logistics firm for failing to report past acquisition deals properly to the regulator for antitrust reviews. Each is being fined about RMB 500,000 (around $76,410). It is not clear if regulators intend to pursue further action on these deals.

• Penalties for such behavior include reversing the deal or a fine of up to RMB 500,000, according to China’s Anti-Monopoly Law, which first took effect in 2008.
• The three deals involved were Alibaba’s 2017 acquisition of Intime, a retail firm; China Literature’s acquisition of New Classics Media, a television series studio, in 2018; and the acquisition of China Post Smart Logistics by Hive Box, a logistics firm backed by parcel giant SF Express.
• While the fines are trivial for companies involved, regulators warned that they plan to scrutinize more internet firms. “The internet industry is not a lawless domain for antitrust, and all companies should strictly comply with antitrust laws and rules,” a SAMR spokesperson said in a press conference (in Chinese) on Monday.
• Hive Box has said the company “sincerely accepts” the fine, according to local media. Both China Literature and Alibaba said they would “actively rectify and reform” to meet the regulator’s demands.

The next shoe to drop? SAMR said during the press conference that it is also looking into a merger agreement between gaming streaming platforms Huya and Douyu announced in October and planned to close in 2021. Both firms are backed by Tencent. 

• Huya said it had previously reported the merger deal to the SAMR and that the company would “give active cooperation to” the authorities (Links in Chinese).

Context: China has this year tightened antitrust oversights on internet firms. In November, SAMR proposed new rules that could pave the way for antitrust authorities to launch more such probes into internet firms.

• The new rules widened the reach of certain antitrust terms that previously only applied to the physical economy. One example was the definition of “relative market,” in which players may pose a “dominant position” if they control more than 50% of the market and thus fell under the jurisdiction of China’s Anti-Monopoly Law.
• Legal experts have long criticized the 2008 law because it was designed to regulate companies in traditional industries and in most cases did not apply to companies operating on the internet, an increasingly important segment of the country’s economy.
• The new rules expanded the parameters for determining market share to include factors such as transaction volume, user base, and page views.
• A draft revision of the Anti-Monopoly Law unveiled in January, also announced by SAMR, included similar provisions.

Read more: China’s antitrust law doesn’t seem to apply to internet giants

Apple has told developers worldwide it would remove any remaining paid games that are not approved by Chinese authorities after Dec. 31, ending a six-month-long purge of unlicensed games.

Why it matters: The move means it will be almost impossible for international mobile games makers to access the Chinese market if they don’t comply with the country’s strict content rules. Chinese Android app stores have long required game makers to obtain such licenses if their apps contain paid features.

Details: In an email to developers on Dec. 2, Apple said that games without a valid game license number will be removed by Dec. 31, according to a report shared with TechNode Wednesday by AppInChina, a mobile services company that helps foreign apps enter the country.

• “As you may know, Chinese law requires games to obtain an approval number from China’s National Press and Publication Administration,” Apple said in the email. “After Dec. 31, your game will no longer be available on the App Store in China mainland until an approval number is provided with your next submission.”
• Apple did not reply to TechNode’s request for comment on Wednesday.
• It is unknown how many titles will be affected. Apple has removed more than 90,000 games from the China App Store since July, according to AppInChina, though these may include removals for other reasons.

READ MORE: Apple purges 3,300 games from China App Store in 2 days

Context: The purge of unlicensed games kicked off in July when Apple started to act on a February warning to developers to submit a valid license number or face removal. The company removed some 1,571 and 1,805 games from its App Store in China on July 1 and July 2, respectively, versus an average of around 200 titles removed in June.

• Since 2016, Chinese regulators have required all paid games or games that offer in-app purchases to obtain a publication license before they can be uploaded to app stores.
• Foreign companies are not allowed to apply for the license. They have to partner with local companies to legally launch their paid games in China. So far, only 97 foreign games were issued game licenses this year, according to AppInChina.

The Trump administration faces further legal obstacles in its ongoing effort to ban Chinese video-sharing app Tiktok. In his final days in the White House, the US president is seeking a tough-on-China technology legacy, including blacklisting China’s largest chipmaker. Meanwhile, a bill passed by the US House of Representatives earlier this month could potentially accelerate the pace at which Chinese tech firms return home to list.

Tiktok untouched

On Monday, US District Judge Carl Nichols in Washington fully blocked the Trump administration’s move to ban Tiktok in the US, NPR reported.

• Nichols found that Trump “overstepped his authority” in using his emergency economic powers to try to block transactions between Tiktok and US companies. 
• Tiktok’s lawyers had demonstrated that Trump government officials’ “failure to adequately consider an obvious and reasonable alternative before banning TikTok” showed that the decision to ban the app was “arbitrary and capricious,” Nichols wrote in the ruling.
• The ruling blocks a Trump executive order issued on August 14 which would outlaw US transactions with Tiktok. The ban is set to take effect on Dec. 12. 
• On Oct. 30, a federal judge in Pennsylvania blocked the decision after Tiktok users challenged it in court.
• Trump administration had set a Dec. 4 deadline for Tiktok parent Bytedance to either sell or spin off the app’s business in the US. The government said that day that it would not extend or enforce the deadline. Trump said previously that he had approved “in concept” a deal in which American companies Oracle and Walmart would create a US-based company, Tiktok Global, to take over the app’s US operations. But the deal is subject to Beijing’s approval, which hasn’t yet said a word about it.

Tough-on-China tech legacy

The Trump administration on Thursday added Shanghai-based Semiconductor Manufacturing International Corp. (SMIC), China’s largest chipmaker, to a blacklist that could cut it off from American investment, Reuters reported. Foreign policy and political analysts said that Trump wants to leave a “tough-on-China” legacy that cannot be reversed by his successor, Joe Biden.

• The US Department of Defense on Thursday added SMIC and state-owned oil giant China National Offshore Oil Corp. (CNOOC) to a list of entities designated as owned or controlled by the Chinese military. 
• While the list, mandated by a 1999 law requiring the defense department to compile a list of Chinese military-controlled companies, did not trigger any penalties, a recent executive order issued by Trump will bar US investors from buying shares of the blacklisted firms starting late next year.

US bill to drive Chinese tech firms home

A bill passed by the US House of Representatives last week is likely to accelerate US-listed Chinese tech firms’ pace going home. The bill will bar Chinese companies from US exchanges if they don’t fully comply with American auditing rules, Reuters reported.

• The potential that US auditors will be able to inspect Chinese companies’ audit documents has already led some Chinese tech firms to delist from US stock exchanges or dual-list their shares in Hong Kong. 
• So far, companies like online media firm Sina and online travel agency Ctrip have decided to delist from US markets, while e-commerce firm JD.com and gaming giant Netease have debuted secondary listings in Hong Kong.
• “The Holding Foreign Companies Accountable Act” bars securities of foreign firms from being listed on any US stock exchanges if they have failed to comply with the US Public Accounting Oversight Board’s audits for three years in a row, according to Reuters.
• The act would also require US-listed companies to disclose whether they are owned or controlled by a foreign government.
• Chinese companies are likely to shrug off the bill because they have alternative capital-raising venues at home, the SCMP cited analysts as saying on Dec. 3. 
• The Hong Kong exchange, another popular destination for Chinese tech firms seeking to list overseas, is keen to attract tech firms with corporate shareholding structures allowing shares with extra voting rights, according to the SCMP.
• In mainland China, regulators are permitting companies that are not yet profitable to list, overhauling previous strict listing thresholds and potentially luring more tech firms to list at home.
• The audit bill was unanimously passed by the US Senate in May. The White House said last Wednesday that President Trump is expected to sign the bill into law.

Donald Trump’s administration on Thursday added China’s biggest chipmaker, SMIC, to a blacklist that could cut it off from American investment in the US president’s last days in the White House, Reuters reported.

Details: The Trump administration on Thursday added Shanghai-based Semiconductor Manufacturing International Corp. (SMIC) and state-owned oil giant China National Offshore Oil Corp. (CNOOC) to a list of entities designated as owned or controlled by the Chinese military, according to Reuters.

• The list, mandated by a 1999 law requiring the US Department of Defense to compile a catalog of firms “owned or controlled” by the People’s Liberation Army, did not trigger any penalties. However, a recent executive order issued by President Trump will bar US investors from buying shares of the blacklisted firms starting late next year, said the Reuters report.
• SMIC is listed in both Hong Kong and Shanghai, while CNOOC has a unit that is listed in Hong Kong. SMIC shares declined by more than 2% on Friday morning before trading for the company’s Hong Kong-listed shares was suspended.
• SMIC said in a stock market statement that it was assessing the impact of its addition to the list and said investors should be aware of the investment risks, according to Reuters.

Food technology is gaining traction in China’s VC world. It’s a huge industry—from plant-based meat to agricultural drones, foodtech encompasses everything in the food supply chain that uses technology to improve efficiency and output.

So far, grocery delivery has garnered the most attention. The sector saw a boom thanks to pandemic-induced demand for everyday items on e-commerce platforms. 

This year, tech giants like food delivery platform Meituan and e-commerce firm Pinduoduo have tapped into the market. Meanwhile, venture capitalists have injected billions of dollars into startups to compete with them.

Grocery delivery is just one part of the “downstream” link in the food technology value chain, said Matilda Ho, founder and managing director of Bits x Bites, a Shanghai-based foodtech venture capital firm. Companies in this category deal directly with customers.

China has built a vast digital economy with “impressive e-grocery and food delivery penetration,” which has been driving food and retail investment in the country, said Ho. 

But when it comes to producing food to deliver, the country could still face challenges. “Without investment in upstream innovation, we won’t see meaningful improvement in farm production efficiency to sustain the rapidly growing food demand,” she said.

China was the world’s second-largest market for foodtech investments in the first half of this year, following the US, according to a report by foodtech venture capital firm Agfunder. 

Some 24 startups raised a total of $1.2 billion from VCs during the period, according to the report. More than half of the total investment went to grocery delivery startups Missfresh and Tongcheng Life, which raised $500 million and $200 million in July and June, respectively.

“Since the start of the trade war and the African Swine Fever outbreak in China, self-sufficiency in food production has become a national priority. The Covid-19 pandemic has accelerated the timetable for investment in supply chain efficiency.”

— Matilda Ho, founder and managing director of Bits x Bites.

In the “upstream” link of the foodtech value chain, which includes categories such as farm management technology and farm automation, one of the biggest deals went to Suzhou-based farm drone company Skysys, which raised RMB 10 million (around $1.5 million).

Nevertheless, investment into the upstream link is growing. Funding for companies focused on farm management technology, including internet of things (IoT) equipment and management software for farms, reached $490 million in 2019, up 363.4% from the previous year, according to another Agfunder report. The largest deal last year went to Beijing-based Mcfly, which provides remote sensing, big data, and AI technology to digitize farming in China. The company raised $14 million in March 2019.

READ MORE: How tech is changing agriculture in China

Big deals

• April 29: Suzhou-based farm drone company Skysys raises RMB 10 million.
• June 11: Suzhou-based Tongcheng Life raises $200 million from investors including Legend Capital, Bertelsmann Asia Investment Fund, and Yilian Capital.
• July 23: Missfresh, a grocery delivery startup, raises $495 million from investors including CICC Capital and Tencent, valuing the company at $5 billion.
• Nov. 10: Jianyun Technology, a precision agriculture company, raises RMB 10 million.
• Nov. 12: Yinongyuan, an agriculture supply chain firm, raises RMB 20 million.

Investor talk

Matilda Ho, founder and managing director of Bits x Bites. (The interview has been edited for brevity and clarity.)

TechNode: How do you decide whether to invest in a foodtech startup?

Ho: We invest in companies that are advancing bioscience, data science, and processing technology to tackle challenges in China’s food supply chain, from precision agriculture to crop and animal health to protein alternatives and nutrition. 

I should add that we’re a purpose + profit fund. That means we invest in companies that can demonstrate they have a sustainable business model to achieve meaningful growth and scalable impact. We carefully select founders with purpose in their core and empower them to build great enterprises of the future. With the $30 million first close of our new fund, we look forward to working with more pre-A to B stage companies that are bringing disruptive solutions to our food system.

TN: What are your projections for the foodtech market in China? 

Ho: Since the start of the trade war and the African Swine Fever outbreak in China, self-sufficiency in food production has become a national priority. The Covid-19 pandemic has accelerated the timetable for investment in supply chain efficiency. In the past two years, we have seen tremendous investment from state-owned enterprises and other corporates to consolidate agriculture. 

Without industrial-scale operations, it is very challenging to apply technology and modernize production. So, in agriculture, we are looking at IoT and bioscience solutions that can help producers improve yields while reducing input, address soil degradation, and protect animals, crops, and farmers’ health.

Midstream, only 19% of the Chinese market has access to cold chain logistics, far below other developed countries, which exceed 95% [on average]. We are looking at how automation and data can improve food safety and cut down spoilage in storage, processing, and transportation. 

TN: Why are investors interested in food tech?

In the past few years, there has been a surge in startups that are tackling the challenges in the food system. Many of them are applying proven technology from other industries.

For example, satellites from the aerospace field are now being applied to provide farmers with environmental analytics to make better decisions to improve crop yields. Gene engineering driven by human medicine is now used to improve breeding technology for more resilient and disease-resistant crops and livestock. Automation in industrial manufacturing is now being adopted to address the labor drain in agriculture.

The food industry is the largest sector of the global economy. The World Bank estimates food production to compose 10% of all economic output. This is an opportunity that investors cannot ignore. 

TN: How do you categorize food tech startups? Which category do you think is the most promising?

Ho: One way to dissect food tech startups is by where a solution fits in the food supply chain. Downstream generally refers to innovations directed at the consumer, such as new packaged foods, personalized nutrition apps, and grocery or food delivery platforms that offer convenience. 

Bits x Bites tends to focus more on upstream and midstream opportunities. Upstream examples are farm automation, breeding technology, and crop and animal health solutions that address food security and production efficiency. We also look at midstream applications such as ingredient technology [Editor: techniques that help make new food ingredients], food processing, packaging, and food preservation that can address nutrition and safety challenges. 

TN: Will plant-based meat become the next big thing in the market? What is Bits x Bites’ projection of the market?

Ho: Chinese people consume more plant protein per capita than most countries in the world. Until two decades ago, meat was barely affordable for most consumers. In our view, China’s per capita demand for animal protein is unlikely to come down any time soon in the same way it has started happening in more meat-centric western diets. This leaves little room for plant protein consumption in China to see substantial growth. 

READ MORE: We tried Beyond Meat in China. Did anyone else?

TN: What are the exit options of food tech companies?

Ho: There are numerous initial public offering (IPO) and merger and acquisition (M&A) cases in agrifood. In China, recent acquisitions are primarily driven by the Chinese government’s push for self-sufficiency and food security. We’ll likely see more Chinese acquisitions of very few large, and likely international, targets. Globally, we see a number of multinationals highly active in M&As in the ingredient tech and agtech [agriculture technology] spaces. Most recently, Ingredion gained full ownership of legume protein company Verdient. However, I would still be more positive on IPOs when talking about exit [options] in China rather than M&A. Especially with the STAR market, biotech and data science companies in agrifood have an achievable pathway to raise public funding.

China’s preference for its own 5G equipment vendors over European suppliers has created an unfair playing field in the country’s telecommunications market, according to the EU ambassador to China in a speech given during a major telecommunications event in Guangzhou on Thursday.

Nicolas Chapuis said Chinese telecommunication operators had “massively privileged their national suppliers” and complained about a market share “free fall” for European vendors in China’s telecom infrastructure sector during a pre-recorded speech at the opening ceremony of the World 5G Convention (W5GC) held in the capital city of southern Guangdong province.

Chapuis’s speech was not included in the detailed video recording of the opening ceremony published on the W5GC website. Instead, the 130-minute video recording of the opening ceremony includes around 40 minutes of a static image with music in the background. A representative of the Beijing-based nonprofit Future Mobile Communication Forum, which co-hosted the event along with provincial government bodies, said all speeches given by high-level politicians were not “live-streamed, published in video recording, nor included in the agenda of the event.”

“The bottom line is a free fall of European market share in the telecom infrastructure sector [of China], standing today at less than 11%, while their market share in other countries stands at more than 30%,” Chapuis said according to the text of the speech sent to TechNode. “This raises major questions on fair competition.”

The EU “is urging China to ensure openness, transparency, and equal opportunities for domestic and foreign suppliers,” he said, adding that the bloc will continue to press for “meaningful market access” for both 5G infrastructure and 5G-related services in China.

China has insisted that it is not biased in choosing 5G kit suppliers. “China always sticks to equal and fair principles when purchasing 5G telecom equipment. We never preset the market shares for domestic and foreign enterprises,” Miao Wei, minister of China’s top telecom regulator, said during a keynote speech at last year’s W5GC in Beijing.

China’s three state-owned carriers in April assigned more than 80% of their 5G base station buildout contracts this year to Chinese telecom equipment makers Huawei and ZTE. A small portion of their budget went to Swedish company Ericsson, while Finland-based Nokia was not awarded any contracts.

The Finnish firm, however, said in June that it had been selected by China Unicom, one of the state-owned carriers, to supply around 10% of its 5G core network.

Chapuis’s remarks are a rare direct complaint from the EU about its access to China’s telecommunications market, aligning with the bloc’s recent stance that calls for a Europe-China relationship based on “fairness.”

“We have a robust trading relationship with China… Trade can energize our economic recovery. But we want more fairness. We want a more balanced relationship. That also means reciprocity and a level playing field,” Charles Michel, president of the European Council, said in September.

China’s Huawei, the world’s largest supplier of telecom equipment, is facing a raft of challenges in Europe. Some member nations including the UK and Sweden have decided to exclude Huawei products from their 5G networks. Several other European countries, including France and Germany, have made moves to heavily restrict its participation in their 5G buildout. Experts have said the company could be completely excluded from the continent’s 5G core networks.

READ MORE: INSIGHTS | More European countries are turning their backs on Huawei

For more than a year, the US government has continued to pressure its allies to exclude Huawei equipment. Not doing so, it said, poses the potential risk of Beijing using vulnerabilities in the company’s gear to spy on foreign 5G networks, an allegation Huawei has repeatedly denied.

Without mentioning Huawei, Chapuis said during the speech that 5G gear suppliers are subject to the same security scrutiny in Europe.

“Suppliers, be they European as well as non European, have been required to prove their compliance with a set of rules, known as the EU 5G tool box,” he said. “Chinese companies have welcomed this framework, which is based on a solid, thorough, transparent, and objective assessment of risks and applies to all players.”

About a year after China launched its first public 5G networks, it held a major telecommunications event in the southern city of Guangzhou on Nov. 26-27. The second annual World 5G Convention (W5GC) attracted top executives from the country’s three state-owned carriers (China Mobile, China Telecom, and China Unicom) and high-level officials from telecom regulators to the event. 

Representatives of several overseas carriers including Spain’s Telefonica, Singapore’s Singtel, Deutsche Telekom, and America’s AT&T also attended by video link. But W5GC was more China than world: the agenda centered on China’s deployment and applications of next-generation 5G networks, while almost all foreign speakers were allocated to a “global forum.”

Not all information from the world-level conference was new, but the message delivered by officials is important: China is counting for future economic growth on a series of cutting-edge technologies enabled by ultra-fast 5G networks, which includes electric vehicles, artificial intelligence, and big data. In the short term, 5G is seen as a remedy for the country’s virus-hit economy.

Bottom line: 

• 5G cellular service is already widely available in China—if you live in a city, you should be able to use it. But networks are far from complete, and China expects to spend hundreds of billions on base stations in the coming year.
• But 5G still isn’t essential. We haven’t seen a “killer app.” Authorities still talk about it as a future technology rather than something paying off now.
• Compared to last year’s W5GC (held in Beijing), this year focused more on the domestic market, whereas last year China tried to export its approach to 5G to the world.

Widely available:

• Liu Liehong, deputy minister of China’s Ministry of Industry and Information Technology (MIIT), said China has built more than 700,000 base stations with more than 180 million 5G subscribers as of October.
• Dong Xin, chief executive officer of China Mobile, said the world’s largest telecom carrier by subscribers had built 385,000 base stations with more than 90 million 5G end users. He said the company had provided 5G service in all Chinese prefecture-level cities.
• Wang Xiaochu, president of China Unicom, said the company is now providing standalone 5G service in more than 300 cities, meaning that its 5G network does not rely on older 4G infrastructure.

Growth forecast:

• Feng Yi, director at China Unicom’s 5G Innovation Center, said China’s 5G users could grow by 20% in the next year.
• John Hoffman, CEO of GSMA, a telecoms industry body, predicted that around 20% of global telecom users will choose 5G services by 2025, with the penetration rate reaching 50% in countries like the US, Japan, and South Korea. “China will be the world’s biggest 5G market in terms of subscribers, though its penetration rate will only be 30% by 2025.”

Message from Europe: After a year in which Huawei has lost ground in Europe, Nicolas Chapuis, European ambassador to China, argued that the bloc assesses vendors neutrally: 

“In Europe, operators and suppliers are also ready to proceed, frequencies have been allocated, but governments and security agencies want to first make sure that the impact of this new technology on industry and services is well managed and regulated. Suppliers, be they European as well as non European, have been required to prove their compliance with a set of rules, known as the EU 5G tool box. Chinese companies have welcomed this framework, which is based on a solid, thorough, transparent and objective assessment of risks and applies to all players.”

Nicolas Chapuis, European ambassador to China

READ MORE: INSIGHTS | More European countries are turning their backs on Huawei

5G spending push to continue: In June 2019, China issued 5G licenses to its three major carriers and a broadcasting company, with commercial use of the service starting last November. Though China launched the service later than countries like the US and South Korea, the country is now—according to officials speaking at this week’s event—is “taking a lead” globally in the deployment of 5G networks.

• The buildout of the country’s 5G networks is largely backed by the state. China in April kicked off a “new infrastructure” initiative, promising to spend RMB 1 trillion (around $152 billion) on seven cutting-edge technologies including 5G, artificial intelligence, and electric vehicles in 2020 alone. China Sinolink Securities, a broker, expects total investment by local governments and telecom companies into base stations to reach RMB 300 billion this year.
• The Chinese government is calling for a quick rollout of the next-generation wireless network, which prompted China Telecom and China Unicom, the smaller rivals of China Mobile, to jointly build a next-generation network. On Thursday, Wang of China Unicom said the company saved RMB 60 billion “for the state” from the partnership with China Telecom.
• Most 5G base station buildout contracts have gone to China Tower, a state-owned telecommunications tower infrastructure service provider. Tong Jilu, chairman of China Tower, said Thursday that the company had constructed more than 700,000 5G base stations for local carriers. He said 97% of those stations were built on existing 4G stations. 

5G as stimulus: Speakers tied the protocol to hopes for growth from the “digital economy.” China’s economy could have taken a much deeper hit this year without the “digital economy,” according to a former government official.

• “2020 is a year of troubles. Under this circumstance, people all looked at the digital world for economic growth,” said Li Ming, executive director of the China Institute of Digital Economy Research. “5G will be a growth engine of the digital economy,” he said.
• Xu Xianchun, director at the Tsinghua University’s China Data Center, said China’s digital economy grew 13.2% year on year in the first quarter while the country’s gross domestic product (GDP) was down 6.8% in the same period because of the Covid-19 outbreak.
• Xu, who is also the former deputy director of the National Bureau of Statistics of China, said the country’s GDP could be down more than 8% in the first quarter if the digital economy shrank as well, highlighting the importance of the sector in China’s economy.

A subdued Huawei? You can’t talk about 5G in China without talking about Huawei. But Huawei was relatively inconspicuous at this year’s W5GC. Last year, one Huawei executive appealed (in Chinese) called for the digital “Berlin Wall” to come down, and the company’s then rotating chairman vowed to build “the world’s best 5G.” This year, attendees from the company focused on products and devices.

Internal circulation: Things have changed a lot between the two W5GCs. Last year’s conference featured a session (in Chinese) that aimed at promoting China’s participation in global 5G standards; this year’s “world” conference overwhelmingly focused on developments in China. Of course, closed borders and a pandemic make international events much harder, but the changes also reflect the change in economic strategy known as “dual circulation,” which calls for the country to rely less on international markets. If China was still hoping to shape the 5G conversation around the world when it launched the conference last year, this November’s event suggests a more modest focus on the home market.

UPDATE: The quote from EU Ambassador Nicolas Chapuis has been updated based on a text provided by the EU Delegation to China. An earlier version of this article relied on a translation printed in Chinese media reports.

Xiaomi reported on Tuesday better-than-expected revenue of RMB 72.2 billion (around $11 billion) for the third quarter, the fastest growth the Chinese smartphone maker has seen since its 2018 listing.

Why it matters: The strong performance shows how the Beijing-based company has benefited following US sanctions imposed on its archrival Huawei. Xiaomi’s global smartphone shipments grew 45% year on year to 47.1 million units in the third quarter while Huawei’s fell 23% year on year to 51.7 million units, according to market research firm Canalys.

• However, Xiaomi President Wang Xiang warned of a “supply chain shortage” in the fourth quarter during an earnings call late Tuesday. Wang did not provide further details but said the difficulty could last until next year.
• Unlike Huawei, which has been essentially cut off from the global semiconductor supply chain because of US sanctions, Xiaomi is free of geopolitical tensions. 

Details: Revenue for the world’s third-biggest smartphone vendor in the September quarter grew 34.5% year on year, said the company in a filing with the Hong Kong exchange Tuesday.

• More than half of Xiaomi’s third-quarter revenue came from overseas markets, which grew 52.1% year on year to RMB 39.8 billion, the company said. Its smartphone shipments in Europe grew 90.7% year on year in the same period, seizing an 18.7% market share, said the company, citing Canalys data.
• Xiaomi’s adjusted net income for the quarter grew 18.9% year on year to RMB 4.1 billion, according to the unaudited results. Shares of the company more than doubled this year.

Context: Xiaomi beat Apple to rank the world’s third-largest smartphone vendor in the third quarter behind South Korea’s Samsung and Huawei, according to Canalys.

• The company is also expected to benefit from the sale of Honor, Huawei’s budget phone brand, just last week. Analysts suggested that the company could gain around 15 million units in additional smartphone shipments because of Honor’s exit.
• Xiaomi’s Wang said during the Tuesday earnings call that the company has no plans to change its market strategy because of the Honor sale. “We were also informed by the media that Huawei sold Honor. Anyway, our strategy is unchanged and I don’t see the necessity to change it,” he said.

Huawei is selling its budget smartphone unit Honor, the company said Tuesday, to a consortium that is majority-owned by the local Shenzhen government in a deal to keep the brand alive.

Why it matters: The sale is a direct consequence of US technology export restrictions imposed on the Shenzhen-based company over the past year and a half. The world’s second-largest smartphone maker has lost access to most high-end semiconductors as well as Google apps and services on the Android operating system crucial to its handset offerings.

• The Honor brand buyer is majority held by the Shenzhen government. Huawei has been trying to shake off its connections with the Chinese state.
• A change of ownership may help Honor regain access to semiconductors it needs. However, the company’s premium Huawei smartphone brand—more dependent on sourcing advanced chips—is still subject to US restrictions. 

Details: Newly founded Shenzhen Zhixin New Information Technology will acquire all of the business assets of the Honor brand, according to a joint statement published in a local newspaper on Tuesday.

• Shenzhen Zhixin New Information Technology is 98.6% owned by a company that is wholly owned by the State-owned Assets Supervision and Administration Commission (SASAC) of the municipal government in the southern Chinese city of Shenzhen, according to Chinese corporate information platform Tianyancha.
• A limited partner holds the remaining 1.4% of the company, which is 62.34% held by an investment firm owned by the Shenzhen SASAC and the Finance Commission of Shenzhen Municipality.
• Huawei said in its statement that more than 30 Honor agents and dealers, including retail giant Suning.com, co-founded Shenzhen Zhixin New Information Technology along with the majority owner. However, there was no public record of such entities holding stakes in the new Honor owner.
• A Huawei spokesperson declined to comment when contacted by TechNode on Tuesday.
• Huawei said in a statement Tuesday that its consumer business had been under “tremendous pressure” because of “a persistent unavailability of technical elements needed for our mobile phone business.” The US government previously imposed license requirements on global semiconductor foundries and vendors that ship to Huawei products which contain US technology.
• “This sale will help Honor’s channel sellers and suppliers make it through this difficult time,” Huawei said.
• The statement did not disclose details of the deal. Reuters previously reported that it might be an all-cash sale worth between RMB 15 billion (around $2.2 billion) and RMB 25 billion.

Context: Honor is a budget smartphone brand that Huawei established in 2013. It completes with other budget brands such as Xiaomi and Oppo while the Huawei brand sells to the high-end handset market. 

• The Honor brand now sells more than 70 million units annually, Huawei said.

China’s market regulator on Tuesday proposed new rules targeting anticompetitive behavior to include internet companies, which have largely fallen outside of the scope of existing antitrust laws.

What’s changed: The new rules widened the reach of certain antitrust terms that previously only applied to the physical economy. One example was the definition of “relative market,” in which players may pose a “dominant position” if they control more than 50% of the market and thus fell under the jurisdiction of China’s Anti-monopoly Law. The law came into effect in 2008. 

• Legal experts have long criticized (in Chinese) the law because it was designed to regulate companies in traditional industries and in most cases did not apply to companies operating on the internet, an increasingly important segment of the country’s economy.
• The new rules expanded the parameters for determining market share to include factors such as transaction volume, user base, and page views.
• The rules will subject some of China’s biggest internet companies, such as e-commerce behemoth Alibaba, social media giant Tencent, food delivery platform Meituan, and ride-hailing app Didi Chuxing, to tougher regulations. China earlier this month halted an initial public offering for fintech giant Ant Group over regulatory concerns.
• The draft (in Chinese), which is under public review until the end of November, also requires the consideration of factors such as network effect as well as market players’ scale and ability to deal with data. A draft revision of the Anti-monopoly Law unveiled in January, announced by China’s State Administration for Market Regulation (SAMR), included similar provisions. The SAMR also drafted the rules announced on Tuesday.
• The draft guidelines say that companies which force merchants to “choose one of two” online marketplaces on which to sell their products are engaging in anti-competitive behavior.
• Platforms that price their products or services differently according to customer purchasing power, consumption history, or user preference is monopolistic behavior, according to the draft rules.

READ MORE: China’s antitrust law doesn’t seem to apply to internet giants

Tech shares tumble: Share prices for Chinese tech companies tumbled Tuesday and Wednesday on news of the guidelines. Companies including Alibaba, Tencent, and Meituan saw their share prices dive at least 8% over the two days. The Hang Seng Tech Index in Hong Kong, where many Chinese tech stocks list, fell by more than 5% on Tuesday.

• Bloomberg estimated that the shares slump wiped out more than $200 billion of value from Chinese tech companies.

Context: Before China’s top antitrust regulator proposed revisions to the antitrust law in January and the draft rules on Tuesday, the SAMR was already working to curb potential antitrust violations from internet companies.

• The agency launched in January 2019 what is known as China’s first “internet antitrust investigation” into Tencent Music Entertainment’s dealings with the world’s three largest record labels after rivals complained that Tencent paid excessive fees for the initial rights and then passed those costs along to competitors.
• However, the SAMR decided to suspend the probe in January, according to Bloomberg. The regulator didn’t disclose how far the investigation went and why it was terminated, but it came after Tencent Music reached a music licensing deal with Bytedance, a Beijing-based startup that runs Tiktok, in late 2019.

The telecommunications regulator in Sweden on Monday halted a spectrum auction after a court suspended “until further notice” parts of its decision that excluded Chinese telecommunications equipment maker Huawei from the country’s 5G networks, Reuters reported.

Why it matters: The court ruling granted Huawei some relief from widespread backlash in Europe. However, the Swedish Post and Telecom Authority’s (PTS) move to suspend the auction may signal future tension between Huawei and regulators.

• The Swedish authorities have said the country must consider the Chinese state’s cyber-espionage when building its 5G networks. For more than a year, the US government has campaigned against Huawei over fears that China could use Huawei to eavesdrop on communications running through telecommunication equipment it sells across the world. Huawei has repeatedly denied the allegations.

Details: PTS was set to hold spectrum auctions for the country’s 5G networks starting on Tuesday. The regulator halted the auctions on Monday after a court in Sweden ruled that carriers using Huawei equipment could participate, Reuters reported.

• In October, PTS said in a statement that potential spectrum grantees must not use products from Huawei and ZTE, another Chinese telecom equipment maker, in new central function installations. The government body also asked telecom companies to phase out existing infrastructure for central functions containing products from Huawei and ZTE before Jan. 1, 2025. Huawei appealed the decision last week.
• The Stockholm administrative court said that certain parts of the regulator’s October decision will not apply until further notice, according to Reuters. 
• Huawei has no plan for more legal action and is waiting to have “constructive dialogue” with Swedish authorities, Kenneth Fredriksen, Huawei’s executive vice president for the region told Reuters.
• PTS said it would review the possibility of starting the auctions, which would allocate frequencies in the 3.5 GHz and 2.3 GHz bands needed for 5G communication, as soon as possible.

Chinese video-sharing app Kuaishou filed Thursday a prospectus to the Hong Kong stock exchange, paving the way for a listing in the city.

Why it matters: The Beijing-based platform, backed by Chinese internet giant Tencent, is the second most popular short-video app in the country, trailing Bytedance’s Douyin, the domestic version of global hit Tiktok.

• Kuaishou also faces fierce competition in the saturated short video market from new entrants and entertainment incumbents including Nasdaq-listed Bilibili. Kuaishou is known to be popular among users living in China’s lower-tier cities and rural areas.
• China’s online entertainment industry is heavily regulated. Kuaishou said in the prospectus filed with the Hong Kong exchange on Thursday that it may “lose licenses we need to operate our business and suffer reputational harm” if it failed to comply with China’s laws and regulations regarding content moderation.

The prospectus: The preliminary prospectus to the Hong Kong bourse did not specify a timetable or size for the offering. However, it was the first disclosure of Kuaishou’s key financial details.

• Kuaishou’s revenue for the first six months grew by nearly 48.3% year on year to RMB 25.3 billion (around $3.8 billion), according to the filing.
• The company booked RMB 39.1 billion in revenue in 2019, and RMB 20.3 billion in 2018.
• Kuaishou recorded positive annual adjusted net profits from 2017 to 2019. However, it booked an adjusted net loss of RMB 6.3 billion in the first half of this year.
• “The time it will take for us to achieve profitability hinges on our ability to effectively monetize our product and service offerings and continuously grow revenues in a cost-effective way, which we may not successfully achieve,” it said.
• Kuaishou products, including its short video apps and mini programs running on Tencent’s Wechat, amassed a total of 302 million daily active users as of June 30 with users spending over 85 minutes on average on its platforms, according to the prospectus.
• Livestreaming is a major source of Kuaishou’s revenue. The business generated RMB 17.3 billion in revenue in the first six months of 2020, accounting for 68.5% of the company’s total revenue in the same period. The company said its live-streaming business had experienced “significant growth” in recent years, but warned that growth may slow, citing a decline in user demand.
• Kuaishou’s revenue structure has been diversified in the past few years. Revenue generated from livestreaming accounted for more than 90% of its total revenue in 2018. In the first half, the company generated 28.3% of its total revenue from online marketing services.

Context: Reuters reported in September that Kuaishou aimed to raise up to $5 billion in the Hong Kong listing, citing people with direct knowledge of the matter. The company planned to list in January, according to the report.

• Founded in 2011, Kuaishou has received investment from both Tencent and Baidu, two of China’s biggest tech companies. Su Hua, Kuaishou’s co-founder and chief executive officer, used to work for Google and Baidu.

From app bans in the US and India to the Chinese government’s increased push for self-reliance in cutting-edge technologies, 2020 has been a rollercoaster year for China tech. How has China’s VC industry been faring? Last week, TechNode held its Emerge 2020 conference in Shanghai. On the sidelines of the event, we chatted with William Bao Bean, an experienced venture capital investor who has been active in China since 2007.

Bean is a general partner at investment firm SOSV. SOSV runs Chinaccelerator, a startup accelerator based in Shanghai.

We took the opportunity for an interview. We’ve printed it in full below, edited for brevity and clarity.

TechNode: What are the new trends that you see in China’s VC market this year?

William Bao Bean: There are two major trends. First is enterprise B2B (business to business), where AI is becoming more important. Traditionally, large Chinese companies did not want to pay for their software, but now, one of the biggest applications of AI is personalization. For example, it can be used to tailor the messaging and advertising you see on an e-commerce site to each consumer’s preference. It’s very difficult for startups and other companies to build their own AI systems, because AI scientists are quite expensive to hire, and the big guys like Alibaba, Tencent, and Baidu basically hired most of the experts. So there’s actual demand for AI services from companies who want to remain competitive. Since the only way to remain competitive is personalization, companies are willing to actually pay to bring in AI solutions. 

Second, there’s a huge amount of investment happening around government policy. The Chinese government is really supporting investments in semiconductors, telecoms equipment, and a lot of hardcore traditional technology. Previously, you saw Chinese companies developing their own solutions. But because of the US-China tech decoupling and the difficulty in sourcing international semiconductors, telecoms equipment, and even manufacturing equipment, you’re seeing massive investment in these areas in China. It is a huge opportunity for local companies, and a very big opportunity for Chinese investors. 

TN: Do you think putting in more money will help China catch up with the world’s leading players in semiconductors?

WBB: China’s semiconductor industry is behind. But when you dump money on a problem, generally, you get a solution faster. I still think China is still four to seven years behind, but a huge amount of capital is flowing into the industry, so I think you will see the technology innovation gap narrowing. Often in China, when you have big government backing, there’s a huge amount of opportunity in that space—we’re seeing a huge amount of activity there. 

TN: What are the impacts of recent US-China tensions? Are China-based VC firms having a hard time raising money from the US?

WBB: Not so far. In China, VC firms have raised a lot of money from US investors. Now, we don’t know whether future funds will have difficulty raising money from those same limited partners (LPs). A friend of mine just closed a new $200 million fund from big traditional US LPs, and he is focused just on deep tech in China. He successfully closed last month in the middle of the Covid-19 pandemic. So far, the early data that we see is that it’s not having an impact. Investors are after returns, they don’t care about politics.

TN: We have seen many Chinese tech companies delist from US stock exchanges and more companies choosing to dual-list their shares in Hong Kong this year. What do you think these trends mean to tech investment in China?

WBB: 2020 has been a record year for Chinese companies listing in the US. When startups are getting bigger, they go where the capital is. It’s still the case that the US is where the higher valuations and the big capital willing to invest in technology can be found. 

In China, tech companies that list face a lot of restrictions. For example, they generally need to be profitable. Most technology companies are not profitable for three years —they grow fast and they’re investing money in the future. The restrictions on listing also make it very difficult for Chinese companies to tap global capital markets, so they choose to go abroad. The second thing is that the international appetite for technology investments is much higher than in China. In China, you have a huge interest in consumer-facing companies, but not so much interest in hardcore technology. And so those two issues combine to drive continued interest in an overseas listing. 

TN: Shanghai’s STAR Market doesn’t require companies to be profitable to list. How do you think this change in listing rules has impacted investment in China? Do you see increasing competition from RMB funds against US funds?

WBB: Startups just go where the capital goes. Many US dollar funds also have RMB funds. If you’re doing something on the consumer side, RMB funds make sense. RMB investors like investing in Chinese consumer-facing players—products that they can see and feel. For some companies that are not profitable, or require huge amounts of money, and have historically raised US dollars, they have to go the international path. Sometimes you move the company from offshore to onshore, or from offshore to onshore based on where the money is. It’s just a pure market effect. One is not competing against the other. It’s just what makes sense for the company to get the best value to be able to raise the money and then to exit.

Big deals

One of the biggest investments in China’s tech sector in the third quarter went to Yuanfudao, an online education firm. On Oct. 21, the company raised $1.2 billion from investors including DST Global, CITIC PE, and Temasek, valuing it at $15.5 billion.

Ted Mo Chen, a Beijing-based edtech entrepreneur, wrote in a column published on TechNode last month that the Covid-19 pandemic ignited a “unicorns take all” game in China’s online education market—and edtech startups have attracted big checks from investors.

Here are some of the biggest deals in China tech in the third quarter.

• July 23: Meiri Youxian, a grocery delivery startup, raised $495 million from investors including CICC Capital and Tencent, valuing the company at $5 billion.
• Aug. 5: Yipin Shengxian, a grocery delivery company, raised RMB 2.5 billion ($374 million) from Tencent and Capital Today with a valuation of RMB 15 billion.
• Aug. 18: JD Health, the healthcare unit of e-commerce giant JD.com, raised $830 million from Hillhouse Capital with a valuation of $30 billion. 
• Sept. 22: Electric vehicle maker VM Motor raised a RMB 10 billion (around $1.5 billion) Series D from investors including state-backed SAIC Capital, Baidu, and SIG China, hitting a valuation of RMB 35 billion.
• Oct. 21: Edtech company Yuanfudao raised $1.2 billion from investors including DST Global, CITIC PE, and Temasek, valuing it at $15.5 billion.

The Shanghai Stock Exchange has halted an initial public offering for fintech giant Ant Group, said a statement published on the bourse’s website Tuesday, just one day after Chinese regulators summoned company co-founder Jack Ma and other executives for a meeting. The firm’s concurrent Hong Kong listing appears to have been suspended as well. At $34.5 billion, the IPO was set to be the largest of all time.

Details: The Shanghai Stock Exchange made the decision because there were “significant changes” in the regulatory environment that Ant Group faces, according to the statement (in Chinese).

• The bourse said Ant Group may not be able to meet its listing thresholds, citing the meeting with regulators.
• “Recently, the actual controller, chairman, and chief executive of your company were summoned by relevant regulators, and your company has reported that the regulatory environment has changed,” said the statement.

Context: On Monday, China’s central bank and three other top financial regulators summoned Ma, company Chairman Eric Jing, and Chief Executive Simon Hu to a meeting, but neither side has disclosed the reasons.

• Ant Group’s leadership team was told the company would face “increased scrutiny” and be subject to restrictions on capital and leverage similar to banks, Bloomberg reported Monday, citing people familiar with the matter.
• The same day, China’s banking regulator and central bank issued new rules to limit micro-lending, a key Ant business line.
• “De-risking” has been a top priority for finance regulators over the past year.

HEAR MORE: Ant Group is really big, and really confusing (podcast)

This piece has been updated to add additional context.

2020 has been a tough year for China tech companies selling to overseas markets. In India, local authorities banned 177 Chinese apps in June and September following border clashes between the two countries. In the US, the Trump administration launched an effort to ban short video app Tiktok and instant-messaging app Wechat, which are among the most successful Chinese apps in international markets. 

Even in Europe, Chinese telecommunications equipment maker Huawei is facing increasing restrictions on supplying gear for next-generation 5G networks.

It forces us to wonder if the world is still open to China tech. It’s a question that’s fundamental to what we do here at TechNode—so we made it the headline question at our Emerge 2020 conference last Thursday.

Bottom line: Going overseas has always been tough, and in this political climate, it’s even tougher. But politics isn’t everything. Speakers said it’s still possible for some Chinese tech firms to succeed in the right overseas markets. Others face long-standing market barriers that predate current tensions.

Compliance and building trust: Many firms trying to enter developed markets have a more basic problem than bans, speakers said: consumers there just don’t trust them.

“The challenge for entrepreneurs going across the border is actually trying to understand what you can do and what you cannot do,” said William Bao Bean, general partner at investment firm SOSV.

Bean said a lack of regard for privacy has earned many Chinese tech companies a bad reputation in markets like Europe and the US. “You have to adapt to the local market. You have to follow the local law. And half the time, people don’t even know that they’re breaking the law when they go across the border.”

Chinese companies have been successful in exporting hardware to overseas markets, said Kiran Patel, senior director at China-Britain Business Council, during the discussion. Patel said he is “more positive” about the future of Chinese hardware than software in the British market because hardware companies usually don’t need to deal with a huge amount of personal data.

Trust is more important when exporting software that holds personal data, Patel said.

“That is the challenge that companies like Tiktok and Wechat have to meet when moving into a new market,” Patel said. “The first challenge that must be overcome is building trust.”

China, security champion? Privacy and security have always been weaknesses for China tech. But at a workshop at the conference, we heard that this truism could be changing as China moves to enforce new laws on privacy and cybersecurity. Carly Ramsey, director at risk consultancy Control Risks, told the audience that China has written one of the world’s most extensive set of requirements to protect data, and is now moving to enforce it. These don’t resolve international concerns about surveillance—but they could help clean up China’s “idiots with a database” problems.

Disrupting barriers: Embracing disruptive technology can be a path for getting around traditional tech barriers, speakers said. The most optimistic attendees about internationalism, by far, were the blockchain-watchers. 

Asked about political barriers, Matthew Graham, founder of Sino Global Capital, a venture capital firm focusing on blockchain companies, said that the US cannot stop China in the world of blockchain the way it has hobbled Huawei on semiconductors. 

“Most of blockchain is open source. It’s not really possible to throw a bottleneck in that way,” said Graham.

As the nascent technology matures, said Michael Sung, co-director of the Fanhai Fintech Research Center at Fudan University, China is emerging as a leader in standards-setting. State-affiliated projects like the Blockchain Services Network (BSN) are creating ecosystems that attract international players.

But Sung, and Harriet Cao of Bianjie, a blockchain startup, rejected a US vs. China framing for blockchain. Instead, they said, it’s a trans-boundary technology that can mitigate mistrust.

“Blockchain is a little bit of a different beast. It’s not about choosing to use Huawei equipment or not,” said Sung. “Blockchain is about multi-party coordination, having stakeholders being able to coordinate in a trusted and secure way, where trust doesn’t exist between the parties beforehand.”

They’re just not that into your EVs: China is home to some of the world’s most exciting electric vehicle (EV) makers, such as Nio, BYD, and Xpeng. But they’ve yet to get traction with Europe’s millions of prosperous, environmentally-conscious consumers. Marketing is a major reason, said Tu Le, founder and managing director of business intelligence firm Sino Auto Insights.

“Some Chinese companies have started to sell EVs into the EU. That could be a question because they haven’t really solidified positioning in their home market,” said Le. “Europe, like Southeast Asia, is very diverse, and therefore a marketing strategy in Germany might not work in France and Italy. That level of complexity for entering an international market is a lot to chew on for Chinese EV makers.”

“The complexity ramps up significantly for them. And that could be a drain on their capital,” he said, adding that Chinese EV makers should focus on individual markets as opposed to looking at Europe as one big market.

Go southeast: The right answer for many companies with global ambitions is to look for markets that are more like China than Germany or the US. We’ve long seen that most Chinese companies do best in markets that have more in common with China a few years ago—large rural populations, first-generation mobile users, or leapfrog growth.

Chinese tech companies should focus on Southeast Asia in expansion plans, said Bean of SOSV. In addition to friendlier regulations than Europe or India, he said, it’s a good market fit.

“Southeast Asia has a lot of the same challenges, problems, or opportunities that China had 10 years ago. It’s a mobile-first market. So people’s first or only experience with the internet is on a smartphone, which is very similar to China,” he said.

All we are saying is give tech a chance: Chinese companies have their share of problems. But at times they also make good-faith efforts to mitigate concerns. Huawei offered to sign “no-spy deals” with countries and set up a cybersecurity transparency center in Brussels and now is facing spreading bans from Western countries’ core 5G networks. Tiktok vowed to localize user data in the US and appointed a blue-ribbon panel of privacy experts—and was rewarded with an app ban. 

Of course, the election in the United States is going to have a big impact on China tech. If US-China relations keep getting worse, tech will be affected. Maybe we’re biased, but at TechNode we don’t think this is a great thing for anyone. 

With contributions from David Cohen.

The world is still open to Chinese tech despite a global backlash in recent years, experts at the TechNode Emerge 2020 conference said Thursday, but firms must adapt to the changing geopolitical environment when expanding overseas.

2020 has been a tough year for Chinese tech companies selling to overseas markets. In India, local authorities banned a total of 177 Chinese apps in June and September following border clashes between the two countries. In the US, the Trump administration announced impending bans on short video app Tiktok and instant-messaging app Wechat, which are among the most successful Chinese apps in international markets. Chinese telecommunications equipment maker Huawei is facing increasing restrictions on supplying gear for Western countries’ next-generation 5G networks.

Beyond geopolitical tensions, Chinese tech companies expanding overseas also face obstacles in the form of privacy regulations, marketing, and localization, William Bao Bean, general partner at investment firm SOSV, said during the opening panel at the Shanghai event.

“The challenge for entrepreneurs going across the border is actually trying to understand what you can do and what you cannot do,” Bean said. 

The lack of regard for privacy has led to some of the problems Chinese tech companies face in markets like Europe and the US because of stricter local regulations on data security, Bean explained.

“You have to adapt to the local market. You have to follow the local law. And half the time, people [startups] don’t even know that they’re breaking the law when they go across the border,” he said.

Chinese companies have been successful in exporting hardware to overseas markets, but there are trust considerations when they are exporting software that holds personal data, Kiran Patel, senior director at China-Britain Business Council, said during the discussion.

“That is the challenge that companies like Tiktok and Wechat have to meet when moving into a new market,” Patel said. “The first challenge that must be overcome is building trust.”

Chinese venture capital (VC) funds may find it difficult to raise money from US pension funds, said Bean. But he believes that the hurdles faced by VCs are not affecting Chinese startups. “That’s a money problem, not a startup problem,” he said.

“China has got the number-two largest VC industry in the world in terms of the amount of funds put in startups and it’s actually easier for Chinese companies to raise money from China,” he said.

Bean said that Chinese tech companies should see Southeast Asia as their next destination in their global expansion plans to avoid regulatory uncertainties in Europe and India.

“Southeast Asia has a lot of the same challenges, problems, or opportunities that China had 10 years ago. It’s a mobile-first market. So people’s first or only experience with the internet is on a smartphone, which is very similar to China,” he said.

Bean said he couldn’t be sure whether or not there will be more Chinese tech companies facing global regulatory backlash like Huawei and Tiktok, but he is optimistic that this would not stop Chinese startups from going overseas.

“Innovation usually finds its away,” he said. “It’s like water. It’s always just going to find a crack.”

Every one or two months, China’s Politburo, an elite group of China’s top 25 leaders, holds a “study session,” inviting external experts to lecture on topics ranging from archaeology to finance to legal systems. But on Oct. 16, they covered a somewhat novel topic: quantum technology.

The session followed a series of lectures on emerging technology over the past few years. In December 2019, the group studied blockchain technology. A year before that, artificial intelligence (AI). 

The country’s most powerful leaders’ study of these technologies highlights their strategic importance on the national agenda. China has already ramped up efforts to support blockchain and AI development, and experts believe quantum technology will be next.

Chinese President Xi Jinping, who chaired the Oct. 16 session, said that “developing quantum science and technology is of great scientific and strategic significance,” state-run newspaper China Daily reported Monday.

Markets react

Quantum technology is an emerging field of information technology that relies on the principles of quantum mechanics. Its fields of application range from computing to cryptography and sensors.

Xi’s remarks created an uproar on China’s stock markets. Several companies on Shenzhen’s startup board that investors believe are utilizing quantum technology on Monday saw their shares jump by 20%, the board’s daily limit. 

The stocks include component maker Hongfeng Group, which said it is developing quantum-based cybersecurity software; cloud service provider Guochuang Software, which has invested (in Chinese) in a company specializing in quantum measurement instruments; and cybersecurity firm Blueton, which said it had been working on a “quantum communication terminal,” but Chinese media reports the company is mired in debt.

During his speech, Xi also said the central government should “speed up efforts to create a favorable policy environment for the development of quantum science and technology” and “ensure the investment in the field” to drive local governments and enterprises to “increase input,” according to state news agency Xinhua.

Follow the leader

Political endorsements for emerging technology are a powerful force in China’s capital markets. In October 2019, when members of the Politburo were given a lesson in blockchain, Xi made calls to promote the “deep integration” of blockchain with China’s economy and to “to increase China’s influence and rule-making power in the global arena.”

More than 85 blockchain-related stocks rose by 10% the Monday after Xi’s speech. Ten percent is the daily limit on the main boards of the Shanghai and Shenzhen stock exchanges.

Central and local governments in the country moved quickly to put money in blockchain. In December, the southern Chinese island province of Hainan announced plans to set up a so-called blockchain pilot zone and a government-backed fund of RMB 1 billion (around $150 million) to underwrite local blockchain companies.

In February, Chinese media reported that 22 of mainland China’s 31 provincial-level administrative divisions had mentioned blockchain in their 2020 government work reports—official documents that lay out governments’ work plans of the year—vowing to harness the technology to promote digital transformation and industrial upgrades.

Then, in July, Beijing’s government released a blueprint of its plan to implement a blockchain-based programmable government. The plan aims to build a unified blockchain-based framework for digital governance, facilitate data-sharing between agencies and businesses, and enable cross-departmental and cross-regional collaboration.

Xi’s blockchain speech and his quantum speech on Friday both called for comprehensive “policy support” for the two technologies, Qi Aimin, a law professor at Chongqing University, told TechNode.

Qi said that favorable policies towards quantum technology could be similar to those seen for blockchain, and could include setting up tailored industrial zones to incubate quantum companies, similar to Hainan’s approach to blockchain.

Quantum technology today

“China’s quantum science and technology development still has many weak links and faces multiple challenges,” said Xi during his speech. Nevertheless, China has hit several milestones in developing quantum technology ahead of the rest of the world.

In 2017, the country launched the world’s first quantum satellite and built a 2,000-kilometer quantum fiber link, which facilitates the transmission of information in the form of qubits, connecting Beijing and Shanghai. The country is also building (in Chinese) what officials claim will be the world’s largest quantum laboratory in Hefei, capital of China’s eastern Anhui province, which is set to complete by the end of 2020.

In September, a Chinese physicist claimed to have built a quantum computer that is one million times faster than Google’s Sycamore, a model which completed in around 200 seconds a calculation that would take the world’s fastest computer 10,000 years. His claims were widely reported by local official media but were later retracted by him and his team.

Quantum leapfrog

Unlike AI and blockchain, quantum technology is far from commercialization—analysts predict (in Chinese) it will take ten to 15 years. But what it has in common is the potential for leapfrog growth. 

In industries where Chinese industries lag international rivals, disruptive breakthroughs create opportunities to start a new race from scratch. China’s policymakers have already taken the approach in the automobile sector. The country, not a traditionally important car manufacturing hub, pursued an aggressive strategy to support electric vehicles (EV) starting from 2009. Now, China is the world’s largest EV market and home to some of the world’s biggest EV makers.

Semiconductors have been a pain point for China for years, more so as the US has moved to cut off equipment maker Huawei from many vital components. The world’s largest market for semiconductors, it has pledged to produce 70% of chips it uses by 2025. But industry groups have said the goal is “unrealistic.” Semiconductor market research firm IC Insights said in a May report that China will produce only 20.7% of chips it uses in 2024, up only 5% from 2019.

But if qubits replace bits, all bets are off. China is not currently a global leader in quantum technology, as Xi acknowledged. But when the new races start, China may have a head start.

Huawei said Friday its earnings for the first nine months of the year “met expectations,” though its revenue growth in the third quarter slowed sharply from the previous quarter.

Why it matters: The deceleration highlights how US restrictions on Huawei’s ability to source crucial high-end semiconductors have taken a toll on the Chinese telecommunication company’s business.

Details: Huawei said in a statement Friday that it booked income of RMB 671.1 billion (around $100.4 billion) in the first nine months of the year, growing 9.9% year on year.

• The company’s revenue for the third quarter was RMB 217.3 billion, a year-on-year increase of 3.7%, according to TechNode’s calculations of earlier data. The company’s second quarter revenue had rebounded to 22% compared with the same period a year earlier.
• The company’s net profit margin in the first three quarters was 8.0%, compared with 8.7% in the same period last year, according to the company’s statement disclosing unaudited financial data of the period.
• “Throughout the first three quarters of 2020, Huawei’s business results basically met expectations,” it said.
• The Shenzhen-based company said its supply chain was “under intense pressure” and its production activities and operations saw “increasing difficulties,” citing only the global outbreak of Covid-19. However, a series of sanctions imposed by the US government have cut the company off from the global semiconductor supply chain, and it is now relying on wafer stockpiles to maintain production.
• Analysts predict the company’s stockpiles of semiconductors will only last until June 2021.

Context: After three rounds of export restrictions, the Chinese telecommunications equipment and smartphone maker has lost nearly all access to semiconductors using US technology—specifically the high-end chips it needs for its carrier and handset businesses.

• In May 2019, the US government banned American companies from shipping components and technology to Huawei, but granted the company a series of reprieves, the last of which expired in August.
• In May and August, the US imposed similar export requirements on global semiconductor foundries that use American technology and third-party vendors that sell products to Huawei.
• In July, Huawei said its revenue during the first half of the year grew 13.1% to RMB 454 billion.

Sweden has banned Chinese telecommunications equipment makers Huawei and ZTE from participating in its 5G network rollout, the country’s top telecoms regulator said Tuesday.

Why it matters: The development shows European countries are tightening restrictions on Chinese suppliers for their 5G infrastructure, signaling the US government’s campaign to eliminate Huawei equipment from Western communications networks is gaining traction.

• Swedish company Ericsson, a key rival to Huawei, has been selected to supply parts for 5G core networks belonging to China’s three state-owned telecom companies.
• The decision may mean that Sweden could face retaliation from China. Ericsson relies on China to produce some equipment it designs and China’s Ministry of Commerce is mulling export controls that would prevent the company from sending products it makes there to other countries, the Wall Street Journal reported in July citing people familiar with the matter.

Details: Sweden’s top telecom regulator Post and Telecom Authority (PTS) is set to hold spectrum auctions on Nov. 10. The government body said in a statement Tuesday that potential license grantees must not use products from Huawei and ZTE in new central function installations.

• Existing infrastructure for central functions containing products from Huawei and ZTE must be phased out before Jan. 1, 2025, the regulator said.
• PTS said in the statement that the conditions were based on assessments made by the Swedish Armed Forces and the Swedish Security Service.
• Klas Friberg, head of the Swedish Security Service, said Tuesday that “China is one of the biggest threats to Sweden” and that the country must consider when building the 5G network what he called the Chinese state’s cyber espionage conducts.
• Huawei said in a statement to TechNode Wednesday that it is “surprised and disappointed” by the Swedish government’s decision and that “there is not any factual ground to support allegations of Huawei posing any security threat.”
• “We find the exclusion of Huawei simply based on groundless presumption unfair and unacceptable,” the company said. It also called on Sweden to “reevaluate” the decision.
• ZTE did not respond to a request for comment on Wednesday.

Huawei’s future in EU: The US government has been campaigning its allies to avoid Huawei equipment from their networks since last year. 

• So far, some US allies such as Australia and Japan have imposed de-facto bans on Huawei. Some European countries like the UK and France decided to phase out Huawei equipment over the next few years. 
• Many Western European countries, which are mostly member states of the European Union (EU), including Germany, Italy, and Spain, are on the fence.
• The EU’s stance on Huawei is relatively clear—it has released a “toolbox” and guidelines on how member states should evaluate 5G gear provider risks and trustworthiness without mentioning any specific country or company. However, its member states are taking various approaches.
• The toolbox and guidelines are not legally binding, so the results depend on how countries interpret and implement them. One example is Belgium, whose major telecom operators had chosen European vendors Ericsson and Nokia to build their 5G networks. This approach avoided enraging Beijing and largely followed Washington’s will. But the question is whether this will become the norm.
• “Huawei’s expulsion from all of Europe’s core networks seems to be a question of when, not if,” Jan Stryjak, associate director at market research firm Counterpoint, wrote in an article published in September.
• Stryjak told TechNode in a recent interview that he said as much because “more and more countries are opting to remove Huawei from their core networks in place of alternative vendors like Nokia or Ericsson.” 
• “Since no country would want to be alone in bucking the trend, solidarity seems to be the name of the game, which is bad news for Huawei,” he said.

Chinese smartphone maker Huawei is in talks with several Chinese electronics companies to sell parts of its Honor smartphone unit, Reuters reported Wednesday.

Details: Digital China, a Shenzhen-based cloud service provider, has become the frontrunner in the contest to buy Huawei’s Honor business. Other suitors include Chinese electronics maker TCL and budget smartphone maker Xiaomi, according to Reuters, citing people familiar with the matter.

• The deal could include the Honor brand, research and development capabilities, and related supply chain management business.
• The deal may be an all-cash sale and could worth somewhere between RMB 15 billion (around $2.2 billion) and RMB 25 billion, one of the sources said.
• Honor is a budget smartphone brand that Huawei established in 2013. The business mostly operates independently from Huawei, Reuters said.
• Huawei has been heavily restricted from accessing advanced semiconductors that are crucial to its smartphone production. A change of owner may help Honor circumvent the restrictions, according to Kuo Ming-chi, an analyst at TF International Securities.

Go deeper: Exclusive: Huawei in talks to sell parts of its Honor smartphone business – sources – Reuters

Software as a service (SaaS) has become a huge deal in China’s startup and venture capital world this year. Driven by demands of team collaboration amid the Covid-19 outbreak and increasing labor costs, venture capitalists and tech giants in the country are scrambling to put money behind SaaS startups.

In 2020, some 96 Chinese SaaS companies have received a total of RMB 12 billion (around $1.8 billion) from VC firms as of Sept. 30, according to VC market data provider Itjuzi. In 2019, VC firms injected a total of RMB 18.4 billion into 158 SaaS companies.

Looking at the US, it’s no surprise to see enthusiasm about the sector. Publicly listed companies like Slack, Zoom, and cloud data warehousing firm Snowflake have earned early investors substantial returns with subscription-based software targeting corporate users. 

But for Chinese investors betting on SaaS, the local equivalents of these products may not be the right answer. The market is different from the rest of the world, investors said. The country’s economy is dominated by big, state-controlled corporations, which are not so tech-savvy and prefer customized services. Meanwhile, would-be SaaS entrepreneurs have to compete with big tech offerings such as Alibaba’s Dingtalk and Tencent’s Wechat Work, which are already popular and free to use.

Read more: Where are China’s SaaS giants?

The SaaS market

The SaaS market in China is still small compared to other major markets. It was worth RMB 19.4 billion in 2019—just 0.26% of the $109.5 billion global SaaS market in the same year, according to a July report (in Chinese) by the China Academy of Information and Communications Technology (CAICT). According to the report:

• Despite its small scale, the Chinese SaaS market grew 34.2% year on year in 2019 from the previous year, faster pace than the global market’s 20.9% last year.
• Chinese SaaS companies are concentrated in areas such as customer relationship management (CRM), finance management, team collaboration, customer service, and marketing.
• SaaS companies tend to serve customers like the government, financial institutions, and schools and education firms.

Policy push 

Since 2018, multiple central and local government policies have encouraged enterprises to adopt cloud-based services. SaaS startups have benefited from policies to promote cloud computing, the natural habitat of SaaS.

• In 2018, China’s Ministry of Industry and Information Technology (MIIT) issued a set of guidelines dubbed “enterprise going to the cloud” (in Chinese) and set the goal of reaching 1 million companies that use cloud-based services by 2020.
• In March, the MIIT launched a campaign to encourage small- to medium-sized enterprises (SMEs) to leverage technologies such as cloud computing, artificial intelligence, and big data as part of their digital transformation processes.
• Also in March, the National Development and Reform Commission included cloud-based services in China’s massive “new infrastructure” investment plans.

Read more: INSIGHTS | China’s new infrastructure projects, explained

Big deals

• June 3: Jushuitan, an e-commerce enterprise resource planning SaaS company, raises $100 million Series C from investors including Goldman Sachs China and China International Capital Corporation.
• Aug. 26: Xiaoman, a Shenzhen-based startup that focuses on providing CRM services for cross-border e-commerce, raises RMB 100 million Series D from e-commerce behemoth Alibaba.
• Sept. 16: Healthcare SaaS company Kyee closes its RMB 430 million Series D led by Tencent. The company said its customers include more than 13,000 Chinese hospitals and grassroots health facilities.
• Sept. 18: Beijing-based account management service Yuannian receives more than RMB 100 million from investors including China Renaissance and Jiayu Capital. The deal values the company at RMB 500 million. 

More SaaS examples

To flesh out the picture, I chose a few more companies listed as SaaS by Itjuzi as examples: 

• Recurrent AI is a Beijing-based company that uses voice recognition and natural language processing to help banks and insurance firms manage customer service. The company’s products evaluate customer service phone calls and offer advice. The company was last valued at $100 million after closing a $12 million Series B led by Sequoia Capital China in September.
• Jushuitan is a Shanghai-based SaaS company that provides services such as order management, warehouse management, and supply chain management to e-commerce companies. According to Jushuitan’s website, it serves approximately 600,000 Chinese e-commerce companies.
• Ibeidiao is a Hangzhou-based company that offers on-demand background check services. The company’s website says that it can help human resource departments check job candidates’ legal identity, diploma, credit history, traffic offense history, and past job experience within one to four days. In May, the company raised several tens of millions of RMB from investors Legend Capital and Future Capital.

A unique market

A typical Chinese SaaS company doesn’t look much like something you’d find in Silicon Valley. American SaaS players often provide a fixed set of services—think of the regular fees you pay for access to Slack or Microsoft. Chinese companies provide more tailored solutions—so much so there isn’t a pricing page on their websites. Potential customers have to sign up via an online contact form to book a call or for a demonstration of their offerings. 

Startups have had to rethink basic assumptions to succeed in the Chinese market—even the idea that SaaS has to run in the cloud. The investor who told me about BATs competition also told me about a startup which offers database-as-a-service, but found that major state-owned enterprises (SOEs) didn’t trust a public cloud to hold their data. So they installed servers in a client’s office buildings and charged them a subscription fee to use and maintain them on-site—essentially reinventing IBM’s original business model. The client loved it—and now the company has a thriving business with SOEs.

“The environment of the Chinese enterprise service market is extremely different from that of the rest of the world, so applying the business models of foreign publicly listed SaaS companies in China doesn’t work,” Jixun Foo, managing partner at GGV Capital, wrote in an article in June.

Foo said that large enterprises in China tend to adopt tailored services and medium-sized firms are more willing to pay for SaaS products because of their flexibility. He predicts that medium-sized enterprises will be the main consumer of China’s SaaS services.

However, Zhai Jia, managing director at Sequoia Capital, warns that China doesn’t have enough mature small and midsize businesses (SMB) to support SaaS. He told Chinese tech news site Huxiu in September that only China’s largest companies are able to spend on software—SMBs’ margins are mostly just too tight. 

“As a result, SaaS companies are not able to offer standardized and fast-growing products… companies have to give up the SMB customers and serve only large clients,” he said.

• Zhai said that Chinese SaaS companies instead rely on “heavy customization,” and that Chinese players don’t necessarily have to see subscription fees as the only source of revenue: they can also earn money from sources like commissions on clients’ sales, “supply chain surpluses,” and outsourced services, he said.

For Chinese companies, the US approach to SaaS—retaining customers with standardized cloud-based service using recurring payments—“only looks good,” he said.

Shanghai-based Hurun publishing group estimated that Huawei, which it calls the most valuable consumer electronics company in China, is worth $160 billion in its first-ever report ranking the country’s consumer electronics companies published on Monday.

Why it matters: Assessing Huawei’s value is difficult because the company is not publicly traded. The report offers a glimpse of the mysterious company’s overall size and how its value has been impacted by US sanctions aiming to cut it off from the global semiconductor supply chain.

Details: Hurun said in a report (in Chinese) Monday that Huawei was valued at RMB 1.1 trillion (around $160 billion), ranking it as the most valuable consumer electronics company in mainland China.

• Rupert Hoogewerf, Hurun’s chairman and chief researcher, said in the report that Huawei’s valuation shrank from RMB 1.2 trillion last year to RMB 1.1 trillion this year because of US sanctions.
• The valuations were calculated by share prices as of market close on Sept. 30 for publicly traded entities, or estimated based on similar public companies if they were unlisted, according to Hurun.
• Trailing Huawei are Chinese smartphone makers Xiaomi, valued at RMB 434 billion; Vivo, worth RMB 175 billion; and Oppo at RMB 170 billion.
• Huawei declined to comment on the valuation.

Context: Though not listed, Huawei releases reports about its quarterly and annual earnings. In July, the company said its revenue for the first six months of the year grew 13.1% year on year to RMB 454 billion.

• Huawei maintains that it is a private company 100% owned by its employees. The company had issued virtual shares to some 104,572 employees as of end-2019, including company founder and chairman and chief executive Ren Zhengfei, who held 1.04% of Huawei’s total shares, the company said in its 2019 annual report (in Chinese).
• The South China Morning Post said in a report in September that each virtual share of Huawei was valued at RMB 7.85 in 2019.

A federal judge on Sunday temporarily blocked US President Donald Trump’s ban that would have removed Tiktok from American app stores starting from midnight Sunday, court files showed.

Why it matters: The court order grants the popular video-sharing app a reprieve amid ongoing deal negotiations to settle a US regulatory dispute. However, it doesn’t cover a broader ban to spin off Tiktok’s business in the US which will take effect in November, meaning the Chinese-owned company’s struggle in the US has not yet concluded.

Details: US District Judge Carl Nichols granted in part Tiktok and its Chinese parent Bytedance’s motion for an injunction of the Sunday ban, but he denied Tiktok’s appeal to block an executive order from Trump demanding the company to divest from its American assets, according to court documents. The order will go effect on Nov. 12.

• Tiktok said in a statement Sunday that the company is “pleased” that the court agreed with its legal arguments. “We will continue defending our rights for the benefit of our community and employees,” the company said.
• “At the same time, we will also maintain our ongoing dialogue with the government to turn our proposal, which the president gave his preliminary approval to last weekend, into an agreement,” it said in the statement.
• The US Commerce Department, one of the defendants of the case, said in a statement that it would “comply with the injunction and has taken immediate steps to do so, but intends to vigorously defend the executive order and the secretary’s implementation efforts from legal challenges,” according to The New York Times.

Context: Tiktok and Bytedance on Wednesday afternoon filed for a preliminary injunction to halt the Sunday ban. On Thursday, Judge Nichols ordered the Trump administration to postpone the ban or file court papers to defend the move by Friday afternoon.

• The executive order mentioned in the filing was first issued by Trump on Aug. 14, which gave Bytedance 90 days to either spin off or sell Tiktok’s US operations.
• The company is close to a deal with US software maker Oracle and retail giant Walmart to set up a new company called Tiktok Global in which the two American companies own a combined 20% stake to settle Trump’s demands. Trump has said he had approved the deal “in concept.”
• The deal is still subject to opposition from Beijing after the Chinese government revised a set of restrictions on technology export.

READ MORE: Bytedance to obey China tech export rule as Tiktok sale nears

A US federal judge ordered the Trump administration to postpone a ban on US downloads of Tiktok set for Sunday or file court papers to defend the move by Friday afternoon, according to court files released Thursday.

Tiktok’s Chinese parent Bytedance filed for a preliminary injunction to prevent the ban on Wednesday afternoon. The ban is set to take effect at midnight Sunday and will remove the popular video-sharing app from US app stores.

US District Judge Carl Nichols said in an order Thursday that the defendants, including US President Donald Trump, US Secretary of Commerce Wilbur Ross, and the US Department of Commerce, must respond to Tiktok’s motion for a preliminary injunction or file a notice describing the delay of the effective date of the ban.

A similar move: The Trump administration said last Friday that it would ban from US app stores Tiktok and Wechat, a Chinese instant messaging app, starting the evening of Sept. 20. The Commerce Department delayed the ban against Tiktok for one week because Bytedance is close to a deal with Oracle and Walmart to set up a new US company.

• On Saturday, a US federal court halted the ban against Wechat. The court said in an order that the plaintiffs, a group of Wechat users, had shown there are “serious questions” related to their First Amendment claim.

The mysterious deal: Oracle and Walmart said Saturday that they will set up a new company called Tiktok Global with Bytedance as part of the deal that will meet the Trump administration’s demands to divest Tiktok from its Chinese owner.

• The US software maker would hold 12.5% of the new company, and retail giant would own 7.5%. Bytedance will own the remaining 80%.
• Trump said Saturday he had approved the deal “in concept.”
• However, the deal still needs to gain approval from the Chinese government after it revised in late August a list of technologies that are restricted for export.

Analysis: At the moment, all signs are showing that Beijing will block the deal. Even though there is no direct objection from Chinese officials, state media has started delivering the message that the deal harms China’s interests and dignity.

• The policy changes on technology export gave Bytedance more bargaining chips when negotiating with potential buyers and the results turned out to be better for the company than an outright sale of Tiktok.
• But now the problem is that Beijing doesn’t seem to be satisfied. Chinese authorities said Thursday that it had received applications from Bytedance to export certain technology. If Chinese officials really see the deal as detrimental to China, they won’t approve Bytedance’s applications.
• If Beijing finally decides to block the deal, Tiktok will be removed from US app stores as planned.
• In this case, turning to the court is Bytedance’s last resort. The court order from Thursday is an initial win. But if the end result is that the ban is allowed, Tiktok will be cut off from new US users, which will cause “irreparable damage.”

China’s Ministry of Commerce spokesman Gao Feng said that the Beijing Municipal Commerce Bureau has received an application from Tiktok parent company Bytedance to export certain technology, local newspaper National Business Daily reported (in Chinese).

The company is close to a deal with Oracle and Walmart to set up a new company to operate Tiktok in the US after US President Donald Trump ordered Bytedance divest the video-sharing app. It needs Beijing’s permission to confirm the deal.

In August, China’s Ministry of Commerce and Ministry of Technology added 23 items to a list of “prohibited or restricted export technologies.” They include two types of technology that are used in Tiktok.

Bytedance said Monday that neither the algorithm nor the company’s technology will be transferred in the deal but Oracle would have the permission to review its code.

The US Commerce Department license granted to Intel allowing it to continue supplying Huawei shows that Washington wants the Chinese telecommunications company to rely on US products rather than make its own chips, according to an industry expert.

The US government has imposed license requirements on chipmakers around the world which want to sell products that contain US technology to Huawei. The new restrictions came into effect on Sept. 15.

Silicon Valley-based Intel supplies integrated circuits such as systems-on-chip (SoCs), central processing units (CPUs), and graphics processing units (GPUs), used in computers. However, the company doesn’t contract out its manufacturing capabilities to make customized chips for clients, nor does it sell chip-making tools or machinery.

The move shows the US “may be willing to grant licenses as long as it doesn’t help Huawei create its own chips,” Stewart Randall, head of electronics and embedded software at Shanghai-based consultancy Intralink, told TechNode on Thursday.

Intel’s license to continue shipping to Huawei doesn’t help Huawei make its own chips but it does help the Chinese company’s server, personal computer, and laptop product lines, Randall said, adding that this shows Washington wants Huawei to “rely on US chips.”

Intel is the first company known to have received US permission to sell chips to Huawei. Huawei suppliers around the world, including Chinese contract chipmaker Semiconductor Manufacturing International Corp., South Korean chipmaker SK Hynix, and Taiwanese chip designer Mediatek, have applied to the US government for similar licenses. None of the applications have yet been approved.

On Wednesday, Huawei rotating chairman Guo Ping told reporters that US chipmaker Qualcomm is applying for a license to sell its chips. “If Qualcomm were granted the license, we will be willing to use their chips to make phones,” said Guo.

Huawei now relies on its stockpile of semiconductors to continue making products ranging from 5G base stations to smartphones and laptops. Guo said Wednesday that the company is still verifying how many wafers they have in stock.

“We have sufficient chip stock for base stations… But as to smartphone chips, we are still looking for solutions because Huawei uses hundreds of millions of smartphone wafers every year,” Guo said.

Analysts said Huawei’s stockpile of chips may last four to 10 months. “We are confident that Huawei’s chip stock can last until the end of this year… It is possible that Huawei will still have chips to use in the first half of 2021, but, in this period the uncertainty is huge,” IDC analyst Will Wong told TechNode in an interview last week.

Huawei’s long-awaited Android replacement is here. On Sept. 10, the company announced that its in-house mobile operating system, the Harmony OS, will be available on handsets starting next year.

The announcement came just days ahead of a US Commerce Department deadline which cut the company off from all possible sources of high-end chips, critical for its smartphone and carrier businesses. Analysts said the company may have to halt hardware production starting in the middle of next year.

The company first debuted Harmony OS in August 2019, shortly after new Huawei devices lost access to Google services on the official version of Android as a result of a May 2019 US ban. Harmony was widely seen as an alternative to Google’s Android mobile operating system, but at first Huawei only deployed it on devices like smart television sets and smart watches.

Starting from scratch

A third operating system outside of Apple’s iOS and Google’s Android could be an important source of revenue for Huawei’s consumer business to offset losses in hardware sales. In 2019, income from mobile services accounted for 10.5% of Google parent company Alphabet’s revenues and 17.8% of Apple’s, according to TechNode’s calculations.

Experts say that it will be difficult for Huawei to generate material revenue from the new operating system. The company faces challenges ranging from establishing a profitable business model to attracting app developers. If Huawei can no longer make smartphones, persuading other phone makers to adopt the system will prove challenging, they said.

Both Google and Apple take a 30% cut from transactions made on their platforms, which include sales of apps and digital content, as well as in-app purchases.

But there is a difference in China which makes earning revenue more difficult, according to Rich Bishop, chief executive officer of Appinchina, a company that helps overseas developers distribute their apps in China.

“All of the [third-party Android] app stores in China only make money from games. For any non-gaming apps, they don’t charge any fee.”

“But if they are able to make Harmony OS successful, for example, they have 500 million people around the world using Harmony OS to download apps and games from the Huawei store, then potentially they could make a lot of money,” Bishop explained.

“But that really depends on whether they can persuade everybody to sign up to Harmony OS.”

Will Huawei convince developers?

It is relatively easy for a developer to convert an Android app to a Harmony OS app, Bishop said. “Huawei obviously is a massive company with a lot of resources, and they are working very hard to try to persuade as many developers as possible to set up a Harmony version of their apps,” he said.

But according to Richard Yu, president of Huawei’s consumer business, the company’s mobile service ecosystem now has around 1.8 million developers, but only 96,000 apps. Most of these developers have yet to make an app for Harmony OS.

“Most developers are basically going to wait and see because they don’t particularly want to start assigning resources to develop for a third mobile OS,” Bishop said.

“I think they are just gonna see how successful the ecosystem is and whether other companies are making good money from Harmony OS, and then they may decide to develop Harmony OS apps too.”

Weighing politics and competition

The other challenge Huawei faces in promoting the Harmony OS is attracting new users. It is now the world’s largest smartphone vendor, but its handset capacity is under huge pressure because of the semiconductor restrictions.

Rumors spread that Huawei smartphone peers Xiaomi, Oppo, and Vivo could adopt Harmony OS, with a number of articles in Chinese either predicting that they would or calling upon them to do so in support of the company. Huawei denied that it had reached a deal to put Harmony on competitors’ phones, but none of the other companies have commented.

But they would have to be very patriotic to support a competitor.

“Smartphone makers like Xiaomi, Oppo, and Vivo have been facing great pressure from Huawei in the past year after it shifted its focus on the domestic market,” Will Wong, analyst at market research firm IDC, told TechNode. 

“If they adopt Harmony OS, they are essentially helping Huawei. So I think the possibility is low.”

Bishop of Appinchina agrees. “I don’t think that other domestic manufacturers like Xiaomi and Oppo would want to use Harmony OS, because obviously, it is a much weaker ecosystem than Android. And it’s run by a competitor, Huawei,” he said.

Both Wong and Bishop reckon that the only reasons that other Chinese phone makers would use Harmony OS would be “political.”

“I don’t think Huawei’s competitors will say ‘absolutely no,’ to Harmony OS because the political risk is a very important factor in today’s market,” said Wong.

“The only way I can really see it working is if the Chinese government, because of the US-China decoupling, says: ‘all right, China needs its own mobile OS.’ And therefore, they kind of require every Chinese manufacturer to offer Harmony OS or to have it as an option,” said Bishop.

On Wednesday, Zhang Pingan, president of Huawei’s consumer cloud business unit, told reporters that the ecosystem of Harmony OS is always “open” to other smartphone makers.

“I think we will work together with all hardware makers to build a better ecosystem and help developers avoid switching back and forth between different platforms,” he said.

There was twist after twist in the Tiktok drama over the weekend. US President Donald Trump said Saturday he had approved a deal that involves software maker Oracle and retail giant Walmart, but it falls short of an outright Tiktok divestment. Chinese parent company Bytedance denied some of Trump’s claims that the new Tiktok company would have nothing to do with China. Meanwhile, Chinese officials criticized the US for lacking “internet freedom.”

The deal: Bytedance, Oracle, and Walmart will form a new company called Tiktok Global as part of the deal, CNBC reported Saturday.

• Oracle was chosen as Tiktok’s secure cloud provider and will hold a 12.5% stake of Tiktok Global.
• Walmart said it would purchase a 7.5% stake in the new company and its CEO Doug McMillon would serve as one of the directors of the five-member board.
• Bytedance will own the remaining 80% of Tiktok Global.
• Walmart and Oracle said in a joint statement that Tiktok Global will pay more than $5 billion in new taxes to the US Treasury Department.

Trump’s blessing: Trump said Saturday that he had approved the deal “in concept.” But the deal still needs formal approval from his administration. “I give the deal my blessing,” Trump told reporters.

• Trump also said the deal would involve “about a $5 billion contribution toward education.”
• “It will be a brand-new company,” said Trump, who also said that Tiktok Global would “have nothing to do with China.”
• Trump’s remarks seem to contradict the facts, but as CNBC pointed out: “Because 40% of Bytedance is owned by US venture capital firms, the Trump administration can technically claim Tiktok Global is now majority owned by US money.”

What Bytedance says: In a slightly different narrative, Bytedance said in a statement (in Chinese) Monday on its Jinri Toutiao news aggregator that it currently owns 100% of Tiktok Global, and that the company plans to launch pre-IPO fundraising which will give investors—Oracle and Walmart—a combined 20% stake.

• Neither the algorithm nor the company’s technology will be transferred in the deal, said Bytedance. Oracle would instead have the permission to review its code.
• Bytedance also said the reported “$5 billion new taxes to the US Treasury Department” is an “estimate of taxes Tiktok will pay over the next few years” and that it has nothing to do with the deal.
• Bytedance denied Trump’s statement that the deal involves a $5 billion contribution toward education. “We heard from the news as well that there would be a $5 billion education fund,” Bytedance said in the statement.
• Zhang Yiming, the CEO and founder of Bytedance, will be one of the directors on Tiktok Global’s board, the company said.

Are apps still getting banned? On Friday, Reuters first reported that the Trump administration would ban Tiktok and Wechat from US app stores starting Sunday night. However, with Trump saying he approved the Tiktok deal, the Commerce Department said it would delay the plan of barring the video-sharing app from US app stores for one week.

• A US federal court halted a ban against Chinese instant-messaging app Wechat late Saturday, the Washington Post reported. 
• The US District Court in San Francisco said in an order that the plaintiffs, a group of Wechat users, had shown there are “serious questions” related to their First Amendment claim.
• In August, TechNode reported that the group, called the US Wechat Users Alliance, filed a lawsuit against Trump’s executive order to ban transactions between US citizens and Wechat.
• “Where [Judge Laurel Beeler] came down was essentially on the side of the Chinese-speaking communities in the US, and said that the ban was too broad,” Greg Pilarowski, founder of tech advisory firm Pillar Legal, told TechNode on Tuesday.
• “I think Wechat is safe, unless Trump wins” the US presidential election in November, Pilarowski added.

Chinese media takes: On Monday, most major Chinese media outlets reprinted an article titled “Does Tiktok really harm US national security? Why did Oracle fail in the Chinese market? Chinese enterprises storms overseas” (our translation), authored by the National Supervisory Commission of China and Central Commission for Discipline Inspection of the ruling Communist Party. It was first published on a website that the two government agencies share.

• The article is a rare direct comment from Chinese government agencies on the recent Tiktok drama. 
• “As a matter of fact, the United States, which promotes ‘internet freedom,’ never neglects its regulation of the internet,” the article said. “We can say that the US has the world’s strictest regulation on the internet.”
• Chinese newspaper Securities Times reported that a number of companies listed on China’s A-share markets which investors believe stand to benefit from Bytedance’s business activities, called “Bytedance concept stock,” had risen around 3.4% on Monday morning with one of the best performers jumping nearly 12%.
• International Financial News, an arm of party mouthpiece People’s Daily, wrote Monday that the upshot of the Tiktok drama “has yet to come.”
• The newspaper pointed out that while Trump had approved the deal, it still needs to gain approval from the Chinese government, because, it said, the algorithms Tiktok use are now subject to China’s new export restrictions.
• Hu Xijin, editor-in-chief of state-run tabloid Global Times, wrote on Twitter Monday that he knows that the Chinese government won’t approve the deal. “…because the agreement would endanger China’s national security, interests, and dignity.”
• Chinese financial magazine Caixin named the three other Tiktok Global board members. They are Arthur Dantchik, founder of Susquehanna Growth Equity (SIG); William Ford, CEO of General Atlantic; and “an executive from the American operations of Sequoia Capital.” SIG, General Atlantic, and Sequoia Capital are all Bytedance investors.

I love lurking on Linkedin. A couple of weeks ago, something struck me. While Tiktok was facing the prospect of a US ban under an Aug. 7 executive order, many people in my European networks were delighted to announce that they were joining the short video company. Countless emojis were harmed in the making of these Linkedin posts. 

As its future in the US is under threat, Tiktok appears to be trying to fortify its operations in Europe. On Tiktok’s careers site, 272 jobs are posted in Europe (excluding Russia) at the time of writing. Dublin takes the lead with 117 jobs, London comes second with 78, and Germany third with a total of 34. Germany is hiring for offices in  Berlin, Munich, and Hamburg. Positions in Madrid, Paris, Stockholm, Warsaw, and Milan are also seeking candidates.

In Europe, Tiktok’s hiring patterns reflect its growing ambitions on the continent and a push to localize and clear the bloc’s data security hurdles. 

A data sweep on Twitter conducted by TechNode indicates that Tiktok has ramped up its hiring in Europe. Bytedance employees and job advertising services including the UK’s Job Centre Plus, a state-run employment platform, have mentioned jobs at Tiktok more frequently in recent months.

In August, 42 links to the Tiktok global careers website were posted on Twitter, compared to 12 in February. 

“It’s quite incredible how many people they’re bringing on board. Every week there’s new people,” a new hire who joined Tiktok’s European operations in August told TechNode.

Open positions on the company’s website include a wide variety of roles, from advertising and brand strategists to privacy specialists. Tiktok appears intent on localization, seeking fluent speakers in most European languages, such as Swedish, Hungarian, and Greek.

“Of course everybody is looking at what’s happening in the US,” the recent hire said, “but there’s no anxiety. On the contrary, everyone is very optimistic.”

Despite the ongoing row with Washington, Tiktok hasn’t taken down its job listings in the US. Currently, 465 positions are listed as available in the US on the app’s website. 

READ MORE: China tech faces double compliance challenge in Europe

Bet on Europe

Bytedance’s continued hiring for the popular video app shows it is optimistic about the European market, despite criticism over its privacy policy. Regulators have expressed concern over personal data flowing from the EU to China, the app’s handling of minors’ data and consent. But as long as Tiktok complies with local data regulations, the company should be safe in Europe, experts told TechNode.

Tiktok currently has over 1,600 employees based in Europe, roughly 1,300 of whom are based in the UK and Ireland, the company said in a statement Monday.

A Europe-wide ban is “unlikely,” said Jan Stryjak, Associate Research Director at Counterpoint Research. “Tiktok has not faced the same levels of scrutiny and political grandstanding in Europe as in the US,” he said, so it makes sense that it “looks to establish itself to build on its rapid growth in the region.” 

In Europe, regulators have tried to appear neutral. “I am not in the business of banning any company, I am in the business of explaining very clearly what are our rules,” EU Commission Internal Market Commissioner Thierry Bretton told Politico earlier this month.

“In the short-term, I wouldn’t expect any comparable moves on Tiktok in Europe to match US actions,” Andrew Small, associate senior policy fellow at think tank European Council on Foreign Relations, told TechNode.

By contrast, the situation around Huawei includes “fundamental questions” about the company’s role in Europe’s digital infrastructure and “longstanding issues about Chinese subsidies undermining European telecoms firms,” he said.

Tiktok does not provoke the same sensitivities. “The issues at stake with Tiktok relate to censorship and data use, neither of which is likely to lead to an outright ban, and there will be no inherent objection to Tiktok hiring and investing in Europe either,” said Small.

Beefing up data security

New data privacy and security rules in the European bloc are compelling Tiktok to reconfigure its global operations.

Bretton stressed that the “key subject” when it comes to Tiktok operating within the bloc is data, highlighting the rigor of Europe’s data security and privacy rules in comparison to China.

“The EU has not had to deal with this issue on a really major scale given that Chinese apps have not made many inroads with European consumers,” Small said. 

In August, the European Court of Justice ruled that personal data collected on EU citizens can only be transferred to third countries that have similar privacy regimes. The decision, known as Schrems II, could mean that personal data collected by Tiktok on European citizens can never be legally transferred to China. 

A few weeks after the ruling, Tiktok said its Irish and UK entities will be taking over data management for European users from its US operations. Shortly after, the company announced plans for a new data center in Dublin. According to company statements, the data center will form part of a “Privacy and Safety Hub” for Europe, the Middle East, and Africa.

Bytedance said it plans to spend €420 million ($500 million) on the Dublin data center. The investment will “create hundreds of jobs” in the city, said Roland Cloutier, Tiktok’s Global Chief Information Security Officer in a blog post.

Cloutier previously worked at Automatic Data Processing, a Nasdaq-listed HR systems provider, as well as US computer manufacturer Dell. 

The job listings on Tiktok’s website appear to line up with this announcement. Dublin is the city with the most job openings. 

But the Dublin data center doesn’t mean that Tiktok can put the data security issue to bed. 

The EU is known for having some of the world’s most stringent personal data protection rules, known as the General Data Protection Regulation (GDPR).

In June, the European Data Protection Board, an EU body in charge of the application of the GDPR, set up a task force to probe Tiktok’s data processing activities and privacy practices across the EU, China’s Caixin reported.

Privacy watchdogs in France and the Netherlands have also launched inquiries into Tiktok’s privacy policies, especially as they pertain to Tiktok’s underage users. 

Tiktok has not replied to a Sept. 15 email seeking comment. 

London calling, Berlin texting

Tiktok’s job listings show that politics have not dented its ambitions to be a true multinational. The company is charging ahead with establishing regional hubs and localization teams in key European cities, all answering to a CEO currently based in California.  

London ranks second among European cities in active jobs listings on Tiktok’s careers website. The short video app operator is reportedly considering moving its headquarters from Beijing to London, British media reported in August. 

“A new global headquarters in London could be a huge boon for the UK’s job market, which has suffered in recent months due to the Covid-19 pandemic,” Stryjak said. 

UK Prime Minister Boris Johnson will welcome the Tiktok headquarters with open arms, risking the wrath of US President Donald Trump, UK media has reported. 

The British government is reportedly split over the potential Tiktok move. Trade and tech officials and ministers are at odds over how to handle the Chinese tech company, the Telegraph reported citing UK government sources familiar with the matter.

Germany, which ranks third in the number of listed job openings, represents a big market with a big pool of tech talent, experts told TechNode. 

It’s also a strategic location that Tiktok can use to “buy some goodwill, given its outsized influence over the European debate,” Small said. 

Joining the whirlwind

Yet those who decide to join the company in these times are taking on a lot of uncertainty. The app’s US and EU operations were nearly sold to Microsoft after pressure from the US government. After weeks of speculation about a deal with Microsoft, the company has reportedly settled on a partnership with Oracle instead. 

TechNode found two people who have been approached by recruiters. Both said they ignored the recruiters’ messages as they were not interested in working for the short video app. “Tiktok is stupid,” one of them said.

But Linkedin job updates indicate that Tiktok’s attempts to poach top tech talent have been successful at times. 

Many of the new hires came from some of the West’s biggest companies, including big tech. The person who onboarded recently said the salary offer was “very competitive” but didn’t give any further details. But “it wasn’t like I couldn’t trust my eyes,” they said.  

Another new hire said that they were under a non-disclosure agreement that is valid for 100 days after onboarding. 

In a Linkedin search, TechNode identified one person who worked at Amazon for seven years in Germany and recently said they joined the Bytedance app in September. A UK-based professional with four years of experience at Google and three years of experience at Netflix said they took a position at Tiktok in July. Another person who was at Google for two years also said they joined the app in September. 

The European who is considering a position said that working for the Chinese company in the midst of an international storm seemed “insane” at first, but that they have come to appreciate the challenge.

The recent hire said that Tiktok is “an exciting place to work in at the moment, regardless of how safe this job is in the long term. 

“We all know that this industry is moving very fast. But it’s really interesting to be part of this and get this experience at this time,” they said.

US officials have complained many times about “loopholes” that allow Huawei to keep its chip supply chain running in the face of export controls. Now it seems that the “loopholes” are closed, and tight.

After being subjected to three rounds of export restrictions, the telecommunications equipment and smartphone maker has lost nearly all access to semiconductors using US technology—meaning the high-end chips it needs for its carrier and handset businesses.

Richard Yu, president of Huawei’s consumer business, said Aug. 7 that the company had to stop making its in-house Kirin chips, which are widely used on the company’s mobile devices, because they are made using US technology.

Despite the looming bans, Huawei has been on a roll lately. The company was ranked the world’s largest smartphone vendor for the first time in the second quarter. However, in an event last week, Yu said the growth of Huawei’s smartphone sales during this period had been “affected” by “a shortage of components.”

In other people’s eyes, however, the situation could be much worse. Analysts told Reuters that US export restrictions would threaten Huawei’s status as the world’s largest handset maker, and warned its smartphone business would “disappear entirely” if it could not source the chips it needs.

The uncertainty in Huawei’s supply chain has also taken a toll on its carrier business. The British and French governments have told domestic telecom operators to phase out Huawei equipment, citing the risks of the company’s supply chain continuity.

It looks like the end of the world for the company. But what options does Huawei still have? We asked experts, and it doesn’t look good.

What happened this week?

Huawei has faced escalating US restrictions for over a year.

May 16, 2019: The US government bans American companies from shipping components and technology to Huawei, but granted the company a series of reprieves, the last of which expired in August. 

May 15, 2020: The White House announces plans to tighten its stranglehold, cutting Huawei off from global semiconductor foundries that use American software and technology to Huawei. These news rules officially took effect on Tuesday. 

Aug. 17: US government expands licensing requirements, seeking to prevent Huawei buying US-linked chips through subsidiaries or third-party vendors

After Tuesday’s deadline, Huawei will lose access to most of the semiconductor fabrication plants in the world that can make high-end chips because they use US technologies. Huawei cannot buy ready-made chips that contain US technology from any third parties because of the August ban.

Experts said that the US will move swiftly to block any further “loopholes.” The company has stockpiles of chips, but only enough to last a few months. It has to plan out how to use these stockpiles in order for its production to continue.

Can Huawei still get chips?

Huawei has an in-house chip designer known as Hisilicon. This subsidiary designs a variety of chips used in Huawei’s products. They include the Kirin series for mobile devices and the Balong series for telecommunications gear.

Hisilicon could struggle to continue designing Kirin or Balong chipsets because it lost access to US-origin electronic design automation (EDA) tools, Jan-Peter Kleinhans, project director at Germany tech-policy think tank Stiftung Neue Verantwortung, told TechNode in an email.

EDA is a category of software tools for designing electronic systems such as integrated circuits and printed circuit boards. The EDA industry is dominated by three US, or US-linked, firms—Synopsys, Cadence, and Mentor Graphics. Together they account for 60% to 70% of the global EDA market and around 95% of sales in China.

But even if Huawei managed to design chips, it would still need an outsourced fabrication plants to manufacture them, like nearly all semiconductor companies. Taiwan Semiconductor Manufacturing Co. (TSMC), South Korea’s Samsung, and Chinese company Semiconductor Manufacturing International Corp. (SMIC) are Huawei’s existing suppliers. All three are forbidden to use US-origin manufacturing equipment to fabricate chips for Huawei, Kleinhans said.

They can apply for licenses to continue supplying Huawei—but it’s up to Washington whether to grant them. SMIC, China’s biggest chipmaker, said Tuesday it had applied to the US government for a license to continue supplying to Huawei. TSMC reportedly planned to apply for a license to continue shipping to the company. A unit of Samsung is also seeking approval from the US government to continue supplying Huawei.

“The outlook is rather grim,” Kleinhans said. “Also, even if Huawei finds ways around the current restrictions, the US government’s trajectory is pretty clear: this is now the third export ban against Huawei. There can easily be a fourth or a fifth, if they deem it necessary.”

So far, none of the applications have been approved.

How will Huawei make phones?

With Huawei’s chip stockpile, smartphone production may not need to halt immediately. But the question is: How long will Huawei’s stockpile last?

Four to 10 months, according to analyst Will Wong at market research firm IDC.

Wong told TechNode that Huawei currently has a stock of high-end chips from TSMC and medium- to low-end chips from Mediatek, a Taiwanese chip designer.

“We are confident that Huawei’s chip stock can last until the end of this year,” Wong said. “It is possible that Huawei will still have chips to use in the first half of 2021, but, in this period the uncertainty is huge.”

The company might use Mediatek chips to produce more medium- to low-end phones during the rest of the year to make up its losses in the high-end handset market, said Wong, adding that Huawei might have to save some chips for production next year.

“All Huawei has to do is to bide its time, because there might be a turnaround after the November US presidential election,” he said.

“No matter how much chip stock does Huawei have, it has to race against time,” he said. “There may be a better situation after the election, or perhaps Huawei can manage to produce chips in China, but the key is time.”

A Huawei spokesman declined to comment on questions about the company’s plans for chip sourcing. He said in a statement to TechNode that the company is “still evaluating the long term impact of the matter at hand and are actively seeking solutions to minimize the impact for everyone.”

How will Huawei’s carrier business be affected?

The US government has been pushing Western countries to avoid Huawei equipment in their next-generation 5G networks, saying that the Chinese government could use its gear for spying purposes. Huawei, the world’s largest supplier of telecom equipment, has repeatedly denied the allegations.

Eventually, some US allies announced they would begin excluding Huawei. But what made some European countries dodge Huawei products were not Washington’s security warnings, but the possibility that the company would not be able to supply them due to semiconductor export bans.

In July, the United Kingdom and France instructed telecom operators to phase out Huawei equipment from their current networks over the next few years. Both countries cited the uncertainty around the company supply chain as a reason for doing so.

“The UK government revised its 5G strategy and excluded Huawei from further 4G/5G deployments exactly because they are not confident that Huawei will be able to serve British operators in the future because of the US export control,” said Kleinhans.

“Following the UK’s analysis, I think it’s fair to say that Huawei will struggle to maintain or even upgrade customer networks in the near future,” he said.

Bytedance is planning to list Tiktok Global, a joint venture set up to operate the short-video app in the US, pending approval of the proposed deal by the US government, Reuters reported.

Details: The joint venture, dubbed Tiktok Global, will have a majority of American directors, a US chief executive, and a security expert on the board, according to Reuters, citing people familiar with the matter.

READ MORE: 8 things to know about the Chinese tech giant behind Tiktok

• Oracle has agreed to ultimately take a 20% stake in Tiktok Global.
• According to a proposed deal to settle the Trump administration’s order to divest Tiktok, Oracle and possibly Walmart would hold at least 60% of Tiktok’s US operations.
• The White House and Bytedance have agreed to a term sheet on some aspects of a deal but US President Donald Trump hasn’t yet approved it.

Go deeper: ByteDance plans TikTok IPO to win U.S. deal as deadline looms: sources – Reuters

Chinese broker Huajing Securities downgraded its rating of Shanghai-based chipmaker SMIC to “sell,” citing US-China tensions and its inability to continue supplying Huawei.

Details: Huajing Securities analyst Zhao Bing lowered his rating for Semiconductor Manufacturing International Corp. (SMIC) shares trading on Shanghai’s STAR Market to “sell” from “buy.” He also lowered its target price to RMB 47.5 (around $7) from RMB 55.23 in a research report (in Chinese) published Tuesday.

• Even though the chipmaker has seen the capacity of its 14-nanometer chips steadily increase, it will be difficult for the company to convert the increased capacity into profit because it had to stop supplying to Chinese telecommunications equipment and smartphone maker Huawei, according to Zhao’s report.
• The report also cited a Reuters story which said that the company might be added to a US Entity List, which bans American companies from shipping technology or components to blacklisted firms. “If SMIC is added to the Entity List, its clients will dial down their interests in SMIC products out of concern for the company’s shipment continuity,” Zhao wrote (our translation).
• SMIC did not respond to an emailed request for comment.

Context: The chipmaker said Tuesday that it had applied to the US government to continue supplying to Huawei. On the same day, a grace period for a US semiconductor ban against Huawei expired, meaning SMIC, which uses US technology and machinery to make chips, can no longer ship to Huawei.

China’s biggest contract chipmaker SMIC has applied to the US government to continue supplying to telecommunications equipment maker Huawei, local media reported, after the grace period for a semiconductor ban expired on Tuesday.

Details: Shanghai-based Semiconductor Manufacturing International Corp. (SMIC) told Chinese newspaper Securities Times that the company had applied to the US government to continue shipping to Huawei and vowed that it would “strictly comply with laws and regulations.”

• Shares of the company jumped 8.4% on Wednesday morning in Hong Kong on the news. 

Context: SMIC itself, however, is under threat of being added to a US technology export blacklist. The US Defense Department said earlier this month that the Trump administration is considering imposing export restrictions on the company.

• Experts told TechNode that SMIC may not have the capacity or capability to produce chips Huawei needs because its technology is “generations behind.”
• SMIC is able to make 14-nanometer (nm) chips. In May, SMIC received $2.2 billion from Chinese state-backed venture capital funds to increase the capacity of one of its 14-nm chip fabrication plants.
• However, the chips Huawei needs include 5-nm Kirin 1100 processor for servers and 7-nm Kirin 810 chip for smartphones. Taiwan’s Taiwan Semiconductor Manufacturing Co. (TSMC) is able to make more advanced 7-nm chips, but the company has reportedly halted shipment to Huawei.

Chinese company Bytedance has chosen Oracle over Microsoft for a deal involving Tiktok, Bloomberg reported Monday, which will resemble a partnership involving Oracle purchasing a stake in the company rather than an outright sale of the app’s US operations.

Why it matters: Bytedance had no intension of selling Tiktok’s key asset—the algorithm behind the popular video-sharing app. A deal with Oracle, whose executives have a close relationship with the US President Donald Trump, was viewed as a way to increase the company’s odds of winning approval from the White House.

Details: While the talks are ongoing, a deal with Oracle could, for example, take the form of a corporate restructuring rather than an outright sale. In this case, the American software company would take a stake of a newly formed US business while housing Tiktok’s data on its cloud servers, according to Bloomberg.

• The two parties valued Tiktok’s US business at around $25 billion before Beijing announced new rules on limiting technology exports, said sources cited in the report.
• Bytedance reportedly decided not to sell or transfer the algorithm powering Tiktok’s content recommendation function in any sale or divestment deal, the South China Morning Post reported Sunday.
• Microsoft, the other suitor along with Walmart, confirmed in a statement Sunday that Bytedance had turned its offer down. “Bytedance let us know today they would not be selling Tiktok’s US operations to Microsoft… We are confident our proposal would have been good for Tiktok’s users, while protecting national security interests,” the company said.

Context: In late August, officials in Beijing updated a Chinese technology export regulation to ban the export of limited technologies, potentially including those used by Tiktok. Bytedance soon pledged to comply.

• Companies must seek approval from the two ministries before exporting limited technologies, and the decision-making process can take up to 30 days, according to a set of technology export regulations the State Council issued (in Chinese) in 2001.
• Trump ordered a ban barring US companies from doing business with Bytedance after Sept. 15, and is requiring that Bytedance sell or spin off Tiktok’s US operations by Nov. 12.

Tiktok parent Bytedance is planning to invest several billion dollars in Singapore over the next three years and make the city-state its beachhead for the rest of Asia, Bloomberg reported Friday.

Details: The investment plans are part of Bytedance’s global expansion. They include the establishment of a data center and are expected to add hundreds of jobs in the country, according to the report.

• Bytedance currently has 400 employees working on technology, sales, and marketing. It has more than 200 job openings in the country.
• The company has applied for a license to operate a digital bank in Singapore. Digital wholesale banks will be allowed to take deposits from and provide banking services to small- and medium-sized companies and other non-retail customers.

Go deeper: TikTok Owner to Spend Billions in Singapore After US Ban – Bloomberg

Chinese smartphone maker Huawei announced Thursday that Harmony OS, its in-house replacement for Android, is coming to smartphones. The mobile operating system will be available to developers in December, company officials said, with consumers to see it next year.

Why it matters: This is the first time the embattled Chinese company confirmed that its HarmonyOS, known in Chinese as HongmengOS, will run on mobile devices. The new OS is a sign that Huawei is inching towards independence from American technology for its smartphone ecosystem.

• The company first announced the operating system in August 2019 after new Huawei devices lost access to Google services on the official version of Android as a result of a May 2019 US ban.
• HarmonyOS, widely regarded as an alternative to Google’s Android mobile operating system, already runs on a series of Huawei devices such as smart television sets and smartwatches.
• The company previously did not confirm that the system would be deployed to smartphones. Analysts told TechNode that this was to avoid “harming its relationship with Google.” Most current Huawei handsets still use the Android operating system.

Details: Richard Yu, head of Huawei’s consumer business group, said in an event Thursday afternoon that HarmonyOS will come to smartphones early next year, as he announced the 2.0 version of the operating system. Developers will get early access in December.

• Yu, citing market data, said that the company became the world’s largest smartphone vendor in the second quarter. “But a shortage of components has affected our growth in recent months,” he said. 
• Yu had previously said Huawei would stop making the Kirin chipsets used in high-end smartphones starting from September, citing US pressure on the company’s suppliers.
• Yu also said that a Hongmeng app ecosystem is developing. A Huawei executive said in November smartphones running the HarmonyOS was ready in technology, but the app ecosystem was “lagging behind.”
• The HarmonyOS ecosystem has around 1.8 million developers and some 95,000 apps, said Yu. He added that developers can easily convert an existing app for other devices to a smartphone app on the HarmonyOS.
• Yu also announced that the operating system will be open-sourced on Gitee.com, a Chinese homegrown alternative to American source code management platform Github, on Thursday. In July, the Chinese government chose (in Chinese) Gitee.com to build a Chinese “independent open-source code hosting platform.”

Context: Huawei sold 55.8 million smartphones in the second quarter and, for the first time, reached the top spot in global smartphone vendor ranking, according to market data provider IDC. But the US-China trade war has threatened the company’s access to critical inputs for its smartphones.

• On Aug. 18, the US Commerce Department added 38 Huawei subsidiaries into the so-called “Entity List” and imposed license requirements on any transactions involving items subject to US export controls, meaning that Huawei can’t purchase commercially available chips it needs from third-party vendors.
• The bans will tighten next week, when major chipmakers plan to end shipments to Huawei on Sept. 15.

Correction: An earlier version of this story wrote that HarmonyOS will be “deployed” to smartphones in December. In fact, it will be made available to developers in December, according to the company’s announcement, and consumers will get phones with the new operating system next year.

A government-backed semiconductor manufacturing project based in the central Chinese city of Wuhan has gone belly-up, with key operator HSMC mired in debt. The local government said the project amounts to nearly RMB 128 billion (around $18.7 billion) in investment. 

Chinese media recently reported that the construction of the Wuhan Hongxin Semiconductor Project, which was planned to house China’s first 7-nanometer (nm) chip fabrication plant in a 650,000 square meter (around 160 acre) structure, had been at a standstill since December. 

Local newspaper National Business Daily said in a report (in Chinese) on Monday that work had stopped on the project’s headquarters in Wuhan as of Thursday, with no buildings completed. The newspaper cited a contractor of the project as saying that construction had been halted because workers had not been paid. 

On Aug. 28, the Commerce Bureau of Wuhan’s Dongxihu District, where the project is located, said in response (in Chinese) to a local resident’s inquiry that the project had been suspended because of “financial difficulties.”

On July 30, the Dongxihu District government said in a semi-annual report about the local economy that “there is a huge funding gap in the Hongxin Semiconductor Project” and that it faces “risks of stagnation at any time.” The report cited the “challenge in the capital market” because of the “global outbreak of Covid-19.”

The district government deleted the report (in Chinese) from its website after wide coverage from local media.

The project’s operator is a company founded in 2017 called Wuhan Hongxin Semiconductor Manufacturing Co. (HSMC). The company said on its website (in Chinese) that it expects to be able to build a 14-nm chip production line that can produce 30,000 wafers per month and a 7-nm chip production line with the same capacity. It did not give a timetable for those goals.

The decline of the ambitious chip manufacturing project highlights risks as local governments in China rush to achieve dreams of semiconductor self-reliance. According to Made in China 2025, a government initiative announced in 2015 aimed at boosting the high-tech sector, China wants to produce 70% of chips it uses by 2025. But making cutting-edge chips is hard, and attempts to charge into the industry haven’t gone well.

Vast investment and big hires

The Hongxin Semiconductor Project had received RMB 15.3 billion in funding as of the end of 2019, according to the Wuhan Municipal Development and Reform Commission, a government body that oversees local macroeconomic planning. The project is expected to receive an additional cash infusion of around RMB 8.7 billion in 2020, it said.

It is a truth universally acknowledged—as Jane Austen would have put it, during a second career as a semiconductor market analyst—that a new chipmaker in possession of a good fortune must be in want of talent. HSMC has been courting engineers at Taiwan Semiconductor Manufacturing Co. (TSMC), the largest contract chipmaker in the world. The company, together with another local government-backed chipmaker, had hired more than 100 engineers and managers from TSMC since last year, according to a Nikkei Asian Review report in August.

In Taiwan, HSMC is known as a generous suitor. One anonymous source told Nikkei that the HSMC offers packages “as high as 2 to 2.5 times TSMC’s total annual salary and bonuses” for engineers and managers from the Taiwanese company, which supplies high-end chips to big tech firms such as Apple, Google, and Huawei.

In July 2019, HSMC hired as its chief executive Jiang Shangyi, formerly a research and development vice president at TSMC. The 75-year-old chip veteran also served as an independent director at Semiconductor Manufacturing International Corp (SMIC), a Shanghai-based state-backed chipmaker, from 2016 to 2019.

Where was the money from?

While the Wuhan municipal government said the project had received billions of RMB in funding, HSMC’s shareholding structure doesn’t reflect that. The company is 10% owned by a government-owned firm and 90% by a Beijing-based private firm, according to Chinese corporate information platform Tianyancha. The Beijing-based firm is majority-owned by company Chairwoman Li Xueyan, who holds a 54% stake. Mo Sen, one of the company directors, holds the balance.

On Monday, Chinese media The Cover reported that the Beijing-based company never put real money in the project.

Public information shows Li has no experience in semiconductors and data from Tianyancha shows she also has stakes in a baijiu retailer, a few catering companies, and several medical firms.

Li cannot be reached for comment. HSMC didn’t respond to an emailed request for comment.

“The strange thing about HSMC is that it’s unclear where its money is from… It seems that the company didn’t actually receive as much money as it claimed to have,” Gu Wenjun, chief analyst at Shanghai-based semiconductor research company ICwise, told TechNode (our translation).

Chen Rang, a semiconductor investor cited by the National Business Daily, hinted that the Wuhan municipal government may have leveraged land resources to attract private capital to back the project. “But the semiconductor industry has a high standard on investment and it is far from enough to just utilize land resources [to raise money],” Chen said.

Phantom mask aligner

HSMC’s goal was to make China’s first 7-nanometer chips. All it has to show for it is a few uncompleted buildings. It did buy a high-end machine needed for bleeding-edge semiconductor production, but it was put up as collateral for a loan.

The semi-annual report by the Dongxihu District government also said that HSMC had bought “China’s only mask aligner that can produce 7-nm chips” from Dutch company ASML, referring to an instrument that enables photolithography in the fabrication process.

If true, it would be quite a coup—the US government has been campaigning since 2018 to prevent ASML from selling the most advanced machine required to make high-end chips to Chinese companies, according to Reuters.

Chinese media Caixin tried to find the unique 7-nm machine, and it does seem to exist. But they found that it was under mortgage; is good only for 14-nm chips, not 7-nm; and, citing an anonymous semiconductor industry insider, that SMIC has around 10 units of the same model.

Court files show that the machine had never been used when it was held as security for the RMB 582 million loan in January.

“You will need at least two mask aligners and nearly 100 pieces of other machinery to make chips,” said Gu of ICwise. He added that no Chinese chipmaker has realized the mass production of 7 nm chips.

READ MORE: SILICON | Can China make chips?

Fool me once

The Hongxin project was widely questioned in the semiconductor industry, said Gu. “No one believed that it would be a success,” he said.

There are similar stories from other parts of China. In July, Dekema, a Nanjing-based chipmaker backed by the local government, announced it was bankrupt because of “financial difficulties” in raising additional funds from investors. 

The Nanjing company previously received $3 billion from investors including the Nanjing municipal government. Founded in 2016, the company said it would “fill the blank in China’s contact image sensor (CIS) chip production.” CIS chips are a key component widely used in portable scanners and bar code readers. After the bankruptcy announcement, local media found that the company’s headquarters consisted of two unfinished buildings and that it had not produced a single wafer.

“Building [semiconductor] production lines needs long-term and consistent investment and it usually takes three to five years to see the initial results,” Gu said. “Production lines backed by local governments face the risk that the support is not consistent because of rotations in officials.”

“We appeal to local governments to make decisions on semiconductors after necessary analyses,” he said. “Whether a semiconductor industry can be built doesn’t depend on how much subsidy the government gives, but on how capable the participants are.”

The owner of PlayerUnknown’s Battlegrounds (PUBG) has cut ties with Chinese tech giant Tencent in India after the country banned 118 Chinese apps, including international hit PUBG Mobile.

Why it matters: While most of the apps banned last week don’t have a huge user base in India, PUBG Mobile had more than 50 million players in India as of April 2019. PUBG Corporation, which develops and publishes the original PC/console game, is a South Korean company, but it partnered with Tencent to bring the game to mobile. The move to cut ties with Tencent is an attempt to lift the ban on the game.

Details: PUBG Corporation said in a statement Tuesday that it would no longer license the PUBG Mobile franchise to Tencent Games in India, CNBC reported.

• The company said it would take on all publishing responsibilities within India.
• “As the company explores ways to provide its own PUBG experience for India in the near future, it is committed to doing so by sustaining a localized and healthy gameplay environment for its fans,” said the PUBG Corporation.

Context: Last week’s ban followed a standoff between Indian and Chinese troops in the same week. In June, India banned 59 Chinese apps, including Bytedance’s Tiktok and Tencent’s Wechat, on national security concerns following a deadly border clash with China.

• PUBG Corporation is owned by South Korean video game studio Bluehole. In 2018, Tencent acquired a 10% stake in Bluehole, becoming its second-largest shareholder.

India on Wednesday banned another 118 Chinese-made apps, including Tencent’s popular video game PlayerUnknown’s Battlegrounds, as border tensions between the two nations continue to escalate.

Details: The Indian Ministry of Electronics and Information Technology announced it had decided to block 118 apps that it said were prejudicial to India’s sovereignty, integrity, and national security, the ministry said Wednesday in a statement.

• The newly banned apps include Chinese search engine giant Baidu’s two mobile search apps, smartphone maker Xiaomi’s Sharesave, Ant Group’s mobile payment apps Alipay and Alipay HK, as well as Tencent’s cloud-storage app Weiyuan and Wechat Work. Tencent’s Wechat was banned in a similar crackdown on Chinese apps in June.
• Tencent’s PlayerUnknown’s Battlegrounds had more than 50 million players in India as of April 2019, local media reported.
• The ministry said it had received many complaints about these apps for “stealing and surreptitiously transmitting users’ data in an unauthorized manner to servers which have locations outside India.”
• “This move will safeguard the interests of [tens of millions] of Indian mobile and internet users. This decision is a targeted move to ensure safety, security and sovereignty of Indian cyberspace,” the ministry said in the statement.

Context: The ban follows a standoff between Indian and Chinese troops earlier this week and media reports that a Chinese land mine killed an Indian soldier during the confrontation.

• In June, India banned 59 Chinese apps on national security concerns following a deadly border clash with China.

Tiktok owner Bytedance said Sunday it will “strictly comply with” a Chinese technology export regulation, which was updated last week to ban the export of limited technologies, potentially including those used by the popular video-sharing app.

Why it matters: The development adds a new twist to Bytedance’s negotiations with the American companies that want to buy Tiktok’s US operations, including Microsoft, Oracle, and Walmart.

• The deal will have to be reviewed by China’s commerce and technology ministries if any technology used by Tiktok is deemed to be limited.

Details: Bytedance said Sunday on its social media account that it will strictly adhere to (in Chinese) the revised Catalog of Prohibited or Restricted Export Technologies when handling technology export-related businesses.

• On Friday, China’s Ministry of Commerce and Ministry of Technology added (in Chinese) 23 items to the Catalog of Prohibited or Restricted Export Technologies. 
• Two significant additions include items which directly translate into “personalized information push service based on data analysis” and “artificial intelligence interactive user interface,” both of which bear resemblance to proprietary technologies used on the Tiktok platform.
• Tiktok, which was ordered by the US President Donald Trump to sell its US operations by mid-September, is known for its artificial intelligence and deep-learning algorithms (in Chinese) that deliver personalized content to its users.

Between the lines: At present, it is unclear if the Tiktok sale in the US is subject to review by the two ministries. However, the catalog has not been revised for 12 years, signaling that the Chinese government could be looking to interfere with Tiktok’s forced sale.

• Companies must seek approval from the two ministries before exporting limited technologies and the decision-making process can take up to 30 days, according to a set of technology export regulations the State Council issued (in Chinese) in 2001.
• Cui Fan, a professor specializing in international trade compliance at the University of International Business and Economics in Beijing, told state-owned news agency Xinhua on Saturday that the changes could apply to Tiktok.
• “Bytedance should apply for licenses if it wants to export related technologies,” Cui said, adding that whomever the new owner of Tiktok will be, it will have to import the technologies used in Tiktok.
• “We are studying the new regulations that were released Friday. As with any cross-border transaction, we will follow the applicable laws, which in this case include those of the US and China,” Erich Andersen, Bytedance’s general counsel, said in a statement sent to TechNode on Monday.

READ MORE: 8 things to know about the Chinese tech giant behind Tiktok

Context: Trump signed an executive order on Aug. 6 banning “any transaction” between any person or company under US jurisdiction and Bytedance starting Sept. 15. On Aug. 14, he updated the order to require Bytedance to either sell or spin off Tiktok’s US operations within 90 days.

• Current suitors of Tiktok’s US operations include Microsoft, which teamed up with retail giant Walmart, as well as software maker Oracle. CNBC reported that the deal could range from $20 billion to $30 billion.
• The Wall Street Journal reported Sunday that talks between Bytedance and suitors for Tiktok’s US operations slowed over the weekend because of the new changes in Chinese regulation.

Chief executive officer of Bytedance’s video-sharing app Tiktok, Kevin Mayer, said Wednesday that he was resigning, following an executive order from US President Donald Trump requiring the company to sell its US operations.

Details: Mayer said in a note to employees that he had decided to leave the company and that Vanessa Pappas, the general manager of Tikok US, will take over as interim global head of the company, The New York Times reported Thursday.

• “In recent weeks, as the political environment has sharply changed, I have done significant reflection on what the corporate structural changes will require, and what it means for the global role I signed up for,” Mayer wrote in the note.
• “Against this backdrop, and as we expect to reach a resolution very soon, it is with a heavy heart that I wanted to let you all know that I have decided to leave the company,” he said.
• Tiktok said in a statement sent to TechNode that “the political dynamics of the last few months have significantly changed what the scope of Kevin’s role would be going forward” and that the company fully respects Mayer’s decision.

READ MORE: Kevin Mayer might be exactly what Bytedance needs right now

Context: In May, Bytedance appointed Mayer, formerly the top executive for The Walt Disney Company’s streaming business, as its chief operating officer and Tiktok’s chief executive officer.

• Mayer was assigned to lead Bytedance’s global expansion as well as corporate development, sales, marketing, public affairs, security, and content moderation.
• “As one of the world’s most accomplished entertainment executives, Kevin is incredibly well placed to take Bytedance’s portfolio of products to the next level,” Zhang Yiming, Bytedance founder and CEO said at the time.
• Trump signed an executive order on Aug. 6 banning “any transaction” between any person or company under US jurisdiction and Bytedance starting Sept. 15.
• On Aug. 14, he issued another executive order requiring Bytedance to either sell or spin off Tiktok’s US operations within 90 days.
• On Monday, Bytedance filed a lawsuit challenging the Aug. 6 executive order, arguing that it was issued without evidence or due process, and that the company’s previously provided documentation was “sufficient to address any conceivable US government privacy or national security concerns.”

Lawmakers in Shenzhen, a high-tech manufacturing hub in southeast China, passed a rule Wednesday allowing companies to incorporate with a dual-class share structure as the city seeks to attract more tech companies to its economy and stock exchange.

Why it matters: The move followed just days after the Chinext startup board on the Shenzhen Stock Exchange welcomed its first batch of companies subject to a new, Nasdaq-style initial public offering process—part of China’s efforts to lure tech companies to list at home.

Details: The Shenzhen Municipal People’s Congress passed Wednesday a rule aimed at promoting technology innovation, according to its website (in Chinese). The new rule allows companies to set up weighted voting rights (WVR) share structures when registering a new company in the city. It also allows companies with WVR to go public on the Shenzhen Stock Exchange.

• Shareholders with extra voting rights must be company founders or those who have made significant contributions to the company’s technology and business development, according to the new rule.
• China’s current corporate law requires companies to give shareholders voting rights based on their holdings. Companies usually have to bypass the requirement by setting up variable interest entity (VIE) structures overseas or by drawing up extra agreements between shareholders.

Context: Technology companies tend to list with a two-pronged share structure, with founders and management granted WVR in order to maintain control over the company after it goes public. Tech companies including Facebook, Google parent Alphabet, and China’s JD.com, and Xiaomi have all adopted dual-class share structures for their listings in the US and Hong Kong.

• In January, Chinese cloud service provider Ucloud was the first company to list onshore in China with WVR, raising RMB 1.9 billion (around $276 million) on the Nasdaq-style STAR Market tech board in Shanghai.
• The Hong Kong stock exchange changed its rules in April 2018 permitting companies to list with shares carrying WVR held by individuals. Chinese smartphone maker Xiaomi was the first company to list under this provision.
• China’s efforts to broaden IPO reforms seem to be paying off as the country’s tech unicorns—tech startups with a market value exceeding $1 billion—such as fintech giant Ant Group are in the pipeline to list on mainland stock exchanges. It also comes at a time when Chinese tech firms face increasing scrutiny in the US and risk of delisting from US markets.

Recent developments in the escalating US-China tech war signal that a full technology “decoupling” between the world’s two largest economies might be inevitable. So far, new measures have stifled sectors ranging from telecommunications equipment to social media. But is it chilling US VC activity in China? 

Two weeks ago, TechNode reporter Chris Udemans wrote that Chinese investments in US startups have fallen dramatically since 2018, the same year the US began to scruitizine Huawei and ZTE, two of China’s largest telecom manufacturers.

Overall US investment in Chinese startups—including deals made directly by US institutions or China-based venture capital (VC) firms investing in US dollars—has fallen since 2018, but this is in line with a broader cooldown in Chinese tech investment due to a slowing economy and growing financial headwinds.

But it could be that the slow-moving field is still processing the changed environment. Some investors and analysts told TechNode that politics is going to catch up with investments. Chinese VC firms that raise funds in US dollars, which have played a big role in China’s decade-long technology boom, are having a hard time raising money from their limited partners in America. Growing hostility from regulators and lawmakers toward US-listed Chinese companies may make it more challenging for Chinese firms to float shares in American financial markets, which is where most US dollar-based venture investors seek to exit.

US VC investment shrank amid ‘capital winter’

 American VC firms first entered the Chinese market in the early 2000s. Many credit these early  American investors with helping establish modern VC investing in China. Among them were firms like Sequoia Capital, IDG Capital, and Matrix Partners.

US-China Investment Project, a research initiative led by Rhodium Group and the National Committee on US-China Relations, estimates that US VC firms invested in nearly one-third of all venture capital-backed Chinese companies from 2000 to the first half of 2019. It also estimates that US investors channeled around $47 billion into Chinese startups over the period, accounting for 16% of the roughly $300 billion in total investments.

Investment into Chinese startups by US venture firms took off after 2014, peaking at $19.6 billion in 2018, according to a US-China Investment Project report. The findings attributed this spike to a few massive late-stage fundraising rounds for prominent Chinese technology companies like Ant Financial, Pinduoduo, and Bytedance.

Venture funding, however, fell dramatically to $5 billion in 2019, the lowest level since 2015, according to the report. The drop was in line with a broader slowdown in Chinese tech and venture capital markets. Investors were becoming “more selective in the face of increasing economic uncertainty and a growing perception that parts of China’s tech ecosystem had become overheated after years of rapid growth,” the report said.

Total VC investment into Chinese startups fell by almost half from $204 billion in 2018 to $119.7 billion in 2019, according to Itjuzi, a Chinese venture capital data provider.

US backers, Chinese funds

 US-owned VC firms only represent a small portion of the American capital that flows into Chinese startups. The majority of US dollar investments are made through Chinese VC firms that raise funds from American limited partners. These US dollar funds often include high-profile Chinese general partners such as Source Code Capital, which backed Chinese super-app Meituan Dianping; Lightspeed China Partners, which invested in social e-commerce upstart Pinduoduo; and Zhenfund, whose portfolio firms include social media app Xiaohongshu and the artificial intelligence unicorn Yitu.

Foreign backers in these Chinese US dollar funds include sovereign wealth funds, retirement funds, and big corporates, according to Liu Xiaoqing, analyst at Itjuzi. Liu told TechNode that while such funds raise money in countries like Japan and Singapore, the majority of their funding comes from the US.

Compared to RMB funds, US dollar funds participate in far fewer deals but tend to make substantially greater investments in each. The average investment made by RMB funds was $28.1 million in the first quarter, compared to an average of $103 million per deal by US dollar funds, according to a report (in Chinese) by financial advisory firm China Renaissance.

Investments by US dollar funds into Chinese startups peaked in the second quarter of 2018, with  $42.8 billion invested into 217 venture funding rounds. In 2019, Chinese venture capital dropped by more than half, though this is still in line with the overall performance of the Chinese tech VC market. The transaction volume of financing rounds made by US dollar funds in 2019 also halved compared to the year before, according to China Renaissance.

Money is ‘not political’

 In the second quarter, even as the US government tightened restrictions on Chinese tech companies, US dollar funds were still playing an important role in startups’ fundraising. US dollar funds accounted for 54% of VC transaction volume with Chinese tech startups in the quarter, according to Itjuzi (in Chinese).

Adam Lysenko, associate director at Rhodium Group, said there have also been tailwinds for increased investment over the last couple of years, such as Beijing’s embrace of foreign investment in the automobile and financial sectors, despite escalating US-China tensions. “Due to these factors, we haven’t seen a massive drop-off in US investment in China yet,” said  Lysenko, who co-authored the US-China investment report.

But experts warn that investment data moves slowly. If investors are getting cold feet now, the effects may not appear in the data for years. In the VC market, the time horizon may stretch longer. “There is a delay in market data considering that the lifecycle of VC funds could be three to eight years,” Liu told TechNode.

Xu Miaocheng of Unity Ventures, a Beijing-based early-stage VC firm, told TechNode that some Chinese US dollar fund managers are already having a hard time raising money from their American limited partners. Reasons include the Covid-19 crisis which has hampered business trips, as well as escalating conflicts between the Trump administration and Chinese tech companies.

Liu, however, insists the impact will be minimal because money is “not political.”

“The US government will not regulate US investment in China in the same way it scrutinizes Chinese investment in the US technology sector,” she said. Beyond a number of select Chinese firms currently sanctioned by US regulators, “they [the US government] don’t care which countries American limited partners invest in, as long as they are making money.”

Not everyone believes the calculus is so clear-cut. “The future trajectory of US investment in China will depend on whether political concerns outweigh the powerful commercial motives that still exist to deploy capital there[China],” said Lysenko. He added that US venture capitalists continue to see China as a crucial market for growth in a world with slower economic growth.

Given the interdependence between the two countries’ corporate sectors, he continued, “I expect that only a dramatic decoupling path—with sustained US government pressure on US firms—will result in a meaningful reduction in US investment in China.”

Additional contributions by Chris Udemans.

Alibaba’s fintech affiliate Ant Group filed draft IPO prospectuses for a dual listing on the Shanghai and Hong Kong stock exchanges on Tuesday, the first simultaneous listing for a Chinese tech company. 

Ant Group is reportedly eyeing a $200 billion valuation, which would make it the world’s most valuable fintech company. Such a valuation would top those of some of the world’s biggest banks, including China’s big four. It could be one of the biggest IPOs in recent years, potentially topping Saudi Arabian state-owned oil producer Aramco’s $29 billion listing. 

READ MORE: Ant Group’s dual listing will be one of the biggest IPOs of 2020

Ant Group’s 674-page Hong Kong prospectus reveals the extent of its empire, risk factors related to geopolitical tensions, and financial regulations. Here are five key takeaways. 

1. Impressive profits and growth potential 

In the first half of 2020, the company earned RMB 72.5 billion in revenue, a year-on-year increase of 38%. Digital finance services drove growth, growing 56% year on year to RMB 46 billion in the period.

The company booked a net profit of RMB 21.9 billion in the first half, outstripping its RMB 18.1 net profit for all of 2019, according to the prospectus. 

Monthly active users of mobile payment app Alipay, Ant Group’s key asset, reached 711 million as of end-June, while transaction volume for the app reached RMB 118 trillion during the 12 months ended June 30.

The bulk of Ant Group’s revenue comes from its “Credittech” business, which operates a range of loan services targeting individuals and merchants. Credittech revenue grew 59.5% year on year in the first six months of the year to RMB 28.6 billion, accounting for 39.4% of its total revenue in the period.

Credittech’s key products include Huabei, a virtual credit card service; Jiebei, a micro-lending service targeting individuals; and Mybank Loan, which lends money to small and medium-sized businesses (SMB). The company said in the prospectus that the consumer credit balance of its loan businesses was RMB 1.7 trillion and the SMB credit balance was RMB 400 billion as of the end of June.

2. Looming #techwar

Ant Group warned investors that rising geopolitical tensions could seriously impede its business. It emphasized rising risks of sanctions and trade restrictions on Chinese tech firms from the US government. 

READ MORE:  Techwar: Trump to end transactions with Tencent and Bytedance in 45 days

Such restrictions have the potential not only to banish Ant Group from US markets, but also disrupt its ability to participate in the US dollar-led global financial system, the company said. 

The company singled out its cross-border payments business as exposed to such actions, adding that cross-border payments will be a key area of investment for Ant Group in the future. 

Some analysts have said that new listing restrictions in the US are the very reason that Ant Group didn’t list in the US, as Alibaba did with massive success in 2014. 

In June and July, four Chinese companies, including China’s US IPO pioneer Sina and online travel agency Ctrip, announced plans to delist from the US stock market. Big Chinese tech companies listed in the US have also started dual listing their shares in Hong Kong, signaling a retreat from US financial markets.

3. Jack Ma remains at the helm 

The fintech company has tried to distance itself from Alibaba founder Jack Ma and Alibaba in the past, insisting that it is an independent company. Yet Alibaba shares in New York jumped 3.6% Tuesday on the back of Ant Group’s IPO news. 

The prospectus said the billionaire entrepreneur is Ant Group’s “ultimate controller,” holding a 50.52% stake in the company. Information about Ma’s stake after the IPO is redacted in the draft prospectus. 

The Alibaba and Ant Group founder helms a limited liability partnership, which controls two other partnerships that are Ant Group’s biggest shareholders. 

According to the prospectus, Ma transferred 66% of the controlling entity’s equity shares to Ant Group’s leadership on Aug. 18. He divided it equally between Eric Jing, the company’s executive chairman, Simon Hu, the CEO, and Fang Jiang, a non-executive director. 

Ant Group also recognized that its success is closely linked to Alibaba. The prospectus says Alibaba, mentioned 650 times in the document, is a “major shareholder,” and the prospectus reports that the two have a data sharing agreement. It lists conflicts of interest between the two giant companies as a risk factor, highlighting the fact they have “overlapping” user bases. 

There are “no assurances,” the prospectus says, that Alibaba won’t try to compete with  its fintech twin. 

4. Mounting regulations 

The prospectus warns of tightening regulations in key business segments for Ant Group, both globally and in China: payments, investment, insurance, and credit, among others. 

It makes special reference to China’s tightening anti-monopoly laws: Authorities have in recent years “strengthened enforcement,” it said. 

China’s central bank is reportedly not happy about Ant Group and Tencent’s hold over the domestic digital payments market through Alipay and Wechat. In late July, Reuters reported that Chinese regulators are preparing for an antitrust investigation in the two apps. 

READ MORE: INSIGHTS | China’s digital currency has a long way to go

The digital yuan’s e-wallet is expected to compete with the effective duopoly, possibly breaking Ant Group and Tencent’s chokehold on the market. 

“If we fail to adapt to these new initiatives in a timely manner, our business, financial condition, and results of operations may be materially and adversely affected,” the company said in reference to the digital yuan. 

5. [REDACTED]

Ant Group’s IPO filings are not final, and many pieces of crucial information were redacted, including the number and price of shares, and the company’s total valuation. 

“The A Share [REDACTED] comprises an [REDACTED] of initially [REDACTED] A Shares for subscription, representing approximately [REDACTED]% of our total outstanding Shares following the completion of the H Share [REDACTED] and the A Share [REDACTED], assuming that the [REDACTED] are not exercised.” 

Ant Group in its draft IPO prospectus filed at the Hong Kong Stock Exchange

UPDATE (Aug. 25): Bytedance filed a lawsuit early Monday challenging an Aug. 6 executive order forbidden transactions with popular social media app Tiktok. We’re updating the story with new details of the legal argument from the complaint. Bytedance argues that the executive order was issued without evidence or due process, and that the company’s previously provided documentation was “sufficient to address any conceivable US government privacy or national security concerns.”

• Tiktok maintains that they have taken extraordinary measures to protect US user data and have fully complied with a 2019 investigation by the Committee on Foreign Investment in the United States.
• The complaint further argues the executive order violates the fifth amendment, misuses the International Emergency Economic Powers Act, and jeopardizes up to 10,000 planned US jobs. 
• “We do not take suing the government lightly, however we feel we have no choice but to take action to protect our rights, and the rights of our community and employees,” Tiktok said in their Monday press release. 

Chinese Foreign Ministry spokesperson Zhao Lijian criticized the Wechat and Tiktok restrictions at a Monday press conference (Chinese), saying China supports companies “taking up legal weapons to safeguard their legitimate rights and interests” and that the American politicians pursuing the bans were “full of lies and slander.”

Tiktok parent Bytedance said Sunday said it would file a lawsuit as early as Monday against the US government over an executive order banning transactions with the popular Chinese-owned video-sharing app.

Why it matters: The lawsuit does not address forcing the sale of Tiktok to an American buyer because it doesn’t target the executive order signed by the US President Donald Trump on Aug. 14 ordering the divestiture. However, it may become a bargaining chip for the company in talks with potential buyers such as Microsoft and Oracle.

• The executive order gives Bytedance 90 days to either sell or spin off its US operation of Tiktok. The order is not subject to legal judicial review, according to Reuters.

Details: Bytedance said in a statement (in Chinese) issued on Sunday that it would sue the US government on Monday to “make sure the company and its users are fairly treated.”

• The company said in the statement that the Trump administration had “dismissed reality” (our translation) and failed to adhere to the due process of law, but it didn’t elaborate.
• “Even though we strongly disagree with the administration’s concerns, for nearly a year we have sought to engage in good faith to provide a constructive solution,” the company said.
• Reuters first reported on Bytedance’s plan to file the lawsuit on Saturday, citing anonymous sources as saying that the legal challenge pertains to an executive order which Trump issued on Aug. 6.

Context: Trump signed two executive orders on Aug. 6 banning “any transaction” between any person or company under US jurisdiction and Bytedance as well as Chinese instant messaging app Wechat starting Sept. 15.

• The orders faced its first legal challenge when a group of Chinese American lawyers announced on Aug. 8 that it would file lawsuits against Trump’s executive order involving Wechat. Some of the lawyers formed a non-profit organization, US Wechat Users Alliance, to assist fundraising efforts to file suits in multiple locations. 
• The group said Friday it will file a federal action against Trump and Wilbur Ross, the US Secretary of Commerce, in the US District Court for the Northern District of California, seeking to prevent the Aug. 6 executive order from banning the use of Wechat in the country by individual users and businesses.

This piece was updated Aug. 25 with details of Bytedance’s complaint.

Chinese telecommunications equipment makers Huawei and ZTE have slowed their 5G base station installation in the country amid increasing uncertainty in its key component supply chain, Nikkei Asian Review reported Wednesday.

Why it matters: The two companies grabbed more than 80% of 5G base station contracts from China’s three main telecom carriers. The throttling of their 5G base station construction signals that US export controls are taking hold, curbing their ability to source key components.

• The slowdown is also a result of Chinese carriers’ prudent investment strategy for the next-generation wireless technology.

Details: Huawei and ZTE are working on re-designing some of their 5G products to remove as many US parts as possible, Nikkei reported. They told some suppliers to slow down shipments of certain 5G base station-related products in June.

• A ZTE component and part supplier executive said the company was told to slow shipments in June, and July shipments came to a near standstill. The executive said the company had to go through product verification tests again as ZTE has changed many of its designs.
• A Huawei supplier also told Nikkei that Huawei had changed some designs and replaced equipment used in the manufacturing process, which led to a slowdown in the installation of 5G base stations.
• Torrential rains and floods in southern China in the past few months have also contributed to delays in 5G base station installations, the report said.

Cautious stance: China’s three state-owned carriers—China Mobile, China Unicom, and China Telecom—have maintained prudent 5G budgets despite Beijing’s push to build more 5G cell towers, part of the so-called “new infrastructure” initiative in the post-virus stimulus measures.

• China Mobile kept its annual capital expenditure plan unchanged at RMB 179.8 billion (around $26 billion). Yang Jie, chairman of China Mobile, told reporters last Thursday that the company’s overall capital expenditure on 5G would not “increase drastically” in the next three years.
• China Unicom and China Telecom are jointly building a 5G network in the country. China Unicom Chairman Wang Xiaochu said last Wednesday that the alliance has saved the pair more than 40 billion yuan in capital expenditures over the year, according to the Nikkei report.
• However, the two carriers have kept their annual capital expenditure plan, totaling RMB 155 billion, unchanged for this year.
• The three carriers’ combined budget for 5G buildout in 2020 is RMB 180.3 billion, according to state-run China News Service.

Context: On Monday, the US Commerce Department expanded restrictions on Huawei, forcing non-US companies to apply for a license to sell chips made using American technology to Huawei.

• The Trump administration has already banned US companies from shipping components and technology to Huawei, and cut it off from overseas semiconductor manufacturers that use American software and technology.

The US Commerce Department issued Monday new rules expanding restrictions on Huawei, in a move that will further narrow the Chinese telecommunications equipment maker’s access to crucial chips.

Why it matters: The move could further close what some US officials call “loopholes” in Huawei’s chip supply chain, forcing non-US companies to apply for a license to sell chips made using American technology to Huawei.

• The Trump administration has already banned US companies from shipping components and technology to Huawei, and cut it off from overseas semiconductor manufacturers that use American software and technology.
• Monday’s new rules mean Huawei can’t circumvent the ban by purchasing commercially available chips it needs from third-party vendors.

Details: The US Commerce Department added another 38 Huawei subsidiaries into the so-called “Entity List” and imposed license requirements on any transactions involving items subject to US export controls, it said in a statement on Monday.

• This means vendors of chips made with US technology will have to apply for a license in transactions where Huawei or other companies on the Entity List act as a “purchaser, intermediate, or end user,” according to the statement.
• “These actions, effective immediately, prevent Huawei’s attempts to circumvent US export controls to obtain electronic components developed or produced using US technology,” the Commerce Department said in the statement.
• The US President Donald Trump reinforced his concern that Huawei equipment could be used to spy on Americans. During an interview on Monday on “Fox & Friends,” Trump called the Chinese company “Spy-Wei.”
• A representative of Huawei declined to comment to a request from TechNode on Tuesday.

Context: A series of US restrictions on critical chips has taken a toll on Huawei’s business, especially in the smartphone segment.

• Chinese media Caixin reported earlier this month that Huawei will stop making its flagship Kirin chipsets after Sept. 15 due to US pressure on suppliers. 
• Huawei’s high-end Mate 40 handsets, which will debut this fall, will be the last smartphones featuring the Kirin 9000 processor, company’s most advanced processor, said Yu Chengdong, head of Huawei’s consumer business, who called it a “huge loss” to the company, according to Caixin.
• Huawei’s in-house chip designer Hisilicon relies on software from US companies such as Cadence Design Systems and Synopsys to design its chips. It outsources the production of its chip designs to Taiwan Semiconductor Manufacturing Company, but the collaboration is under pressure because of new US export regulations announced in May.
• Mediatek, a Taiwanese chip designer, is widely seen as a possible alternative to Huawei’s Hisilicon. The company told Chinese business media Yicai Tuesday that it is evaluating the US export rule changes to make sure it complies with relative regulations.

Last week, US President Donald Trump took aim at two of the most internationally successful apps ever made by Chinese companies. After preaching about the national security risks posed by Chinese-made apps for months, he signed two executive orders on Aug. 7 that ban transactions with the owner of Tiktok and Wechat starting from Sept. 20. It looks like the US is now in the app bans game.

No one knows how the ban will be interpreted. It’s not clear if users who have already downloaded the apps would be prevented from using them, or if the bans will have effects beyond the borders of the US. But as the US continues to pursue its “clean network” policy, more bans may be coming soon.

The executive orders: The orders ban “any transaction”with Bytedance by a person or company under US jurisdiction, and any transactions with Tencent that relate to Wechat. The Secretary of Commerce will be tasked with identifying these transactions when the bans come into effect on Sept. 20.

What’s banned? Critics say the orders are “incredibly broad and vague” with little clarity on the  “transactions” that are banned until Sept. 20. But lawyers told TechNode that it’s possible to guess based on the law behind the order. 

• The key policy precedents are the 1977 International Emergency Economic Powers Act (IEEPA) and a May 15, 2019 executive order declaring a “national emergency” (the precondition for trading bans under IEEPA). 
• Clay Zhu, an attorney at Deheng Law Offices in California, told TechNode in an interview that the May 15 order, viewed broadly as targeting Chinese telecommunications equipment maker Huawei, defined transactions as “acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service.” If this definition is applied to Wechat, Zhu said, it would effectively be a total ban of the app. 
• A White House document, reported by Reuters, lists as banned “transactions” actions that include putting Tiktok on an app store, buying an ad on Tiktok, or accepting the app’s terms of service as a user.
• “We should assume companies have 45 days, and any further dealing with Wechat or Tiktok will require a license, which presumably will be denied,” Alex Capri, visiting senior fellow at the National University of Singapore Business School, told TechNode.

Best case: Greg Pilarowski, founder of tech-focused boutique law firm Pillar Legal, told TechNode that IEEPA may limit the president to blocking financial transactions—so it could be that Wechat Pay and perhaps Tiktok ads are blocked, while the apps survive.

More likely: The White House is aiming for a total ban on the apps in the US, Pilarowski said. Even if the law is disputable, the Commerce Department will likely order the apps removed from app stores, which would put pressure on Apple and Google to comply.

Jump the wall? In the event that apps stores are forced to de-list the apps, would users be blocked from using them? The US probably can’t block the apps the way China blocks many foreign apps—but the apps could block themselves.

• Tiktok already blocks users in Hong Kong, China, and India based on SIM card nationality as well as IP address, meaning a VPN alone doesn’t allow users to access the app. 
• Wechat has also begun blocking users in India in response to that country’s app ban.

Worst case: The US tries to enforce these app bans beyond its borders, as it is doing with the ban on exports to Huawei. In such a scenario, the ban could prevent Starbucks from accepting Wechat Pay in China—or force the Apple App Store and Google Play to de-list globally.

• Experts think these scenarios are unlikely, as they would hurt US businesses more than they hurt China.
• Pilarowski wrote in an Aug. 12 paper that a ban on US retailers accepting Wechat is very unlikely. The Wall Street Journal reports that major US retailers are lobbying the president against such a ban.
• If forced to de-list the apps globally, Apple would have no future in the Chinese market. Apple is a beloved brand in China—but Wechat is as essential as oxygen for digital life. Analysts argue this makes de-listing in China very unlikely.
• Since Google Play is already blocked in the country in favor of domestic app stores, this scenario would have much less effect on Google phones.

What options do Tiktok and Tencent have?

1. Sell: Bytedance is in talks with American companies to sell Tiktok. This would save the company from more losses, though it might not be a good deal for the company. There is no sign that Tencent is going to sell any part of Wechat. The company may just give up the US market, where it has roughly 19 million daily active users.
   
   Bytedance has until Sep. 15  to make a deal with an American company. Microsoft already confirmed that it had held talks with Bytedance to buy the American, Canadian, Australian and New Zealand operations of Tiktok. CNBC reported that the deal could costspend Microsoft between $10 billion and $30 billion.
    
2. Sue: Bytedance is also seeking to challenge the executive order in court. The company said it would argue that the executive order is unconstitutional because it did not give the company a chance to respond. Tencent hasn’t yet taken legal action, but a group of American Chinese Wechat users said they would file lawsuits against Trump’s executive order involving Wechat, arguing that the executive order goes against provisions of the US Constitution and the Administrative Procedure Act.

But the courts move slowly, and the chance of rulings before the Nov. 3 election are close to nil. Even if the companies eventually win, Pilarowski said, the bans will accomplish their political goals for the president. “It doesn’t matter if he has the authority to do this, or he doesn’t have the authority to do it, he’s got what he wanted. It’s one more data point in this administration being tougher on China than any previous administration in the United States.”

For Bytedance, the executive order means more than just losing Tiktok.

• Hiving off part of Tiktok’s regional operations means there will be two independent versions of the same social media app. In that case, if Microsoft wants American teenagers to be able to view videos uploaded by Japanese or British ones, it would have to seek approval from Bytedance, which may run into conflict with Trump’s executive order, as The Economist noted.
• For Bytedance, if it has to sell the Anglo-Saxon part of Tiktok, it still owns the European, Japanese, and Southeast Asian markets. India just banned Tiktok, and Bytedance is in talks with Indian conglomerate Reliance for a potential investment to save the app’s operation in the country, TechCrunch reported Wednesday. 
• Bytedance also operates Douyin, which is often seen as the domestic version of Tiktok, in China. The app has more than 400 million daily active users.
• Tiktok’s break-up will also put a dent in Bytedance’s valuation, which reached $140 billion earlier this year. Several investors said the company’s price tag is under “tremendous pressure” as it set to lose part of Tiktok.

Tencent, however, seems sanguine. The company publicly downplayed the importance of the US market to its global businesses in an earnings call Wednesday, as it reported robust second-quarter results.

• “The US represents less than 2% of our global revenue. Within that, advertising in the US should be less than 1% of our total advertising revenue,” James Mitchell, Tencent’s Chief Strategy Officer, said during the earnings call. 
• The executive order only covers US jurisdiction, meaning US companies selling to Chinese markets will still be able to advertise on Tencent’s platforms in China, making it even less likely that the ban will weigh on ad revenue, according to Mitchell.
• The company said its operating profit in the second quarter increased 38% year on year to RMB 37.63 billion ($5.32 billion).
• Industrial observers seem to agree with Tencent’s argument. Shenzhen-based broker Guosen Securities on Monday maintained a buy rating on the Tencent stock. A full exit of Wechat from the US market will have little impact on the company’s revenue and social media ecosystem, said Wang Xueheng, analyst at Guosen Securities.
• But nevertheless, shares of the company have dropped by 8.2% since the announcement of the order last Thursday.

A silicon curtain? The executive orders came a day after the US Secretary of State Mike Pompeo escalated the tech war with a new initiative. He promised to purge US networks from Chinese technology under the “Clean Network” program.

• The US will work to stop Chinese cloud providers like China Mobile, China Telecom, Alibaba, Tencent, and Baidu from storing and processing vast amounts of data from US citizens and companies, according to Pompeo. The State Department aims to keep sensitive personal information and key intellectual property, such as Covid-19 vaccine research, away from Chinese companies, he said.
• Capri also warned that the administration’s “Clean Network” program could target cloud computing next. “The big question is, how far is the administration going to go, and is Alibaba next?” he said. 

The setbacks faced by Bytedance and Tencent also came as Chinese President Xi Jinping is promoting a new strategy to speed up China’s shift toward more reliance on its domestic economy. The initiative, translated as “domestic circulation,” encourages companies to prioritize domestic consumption and markets. Chinese officials said the strategy is gaining urgency as Chinese companies such as Huawei and Bytedance face increasing resistance in overseas markets, according to the Wall Street Journal.

• TechNode reporter Chris Udemans wrote that Chinese corporate investors including Alibaba, Baidu, and Tencent already started to retreat from the US even before the August orders.

But experts say this will not be the end of Chinese tech companies’ global expansion, nor does it mean Chinese companies will have to focus only on the domestic market.

• “The recent developments are forcing Chinese tech companies to change directions when expanding into overseas markets. They may go to Southeast Asia, Africa, and Europe,” said TechNode founder and CEO Lu Gang. 
• Lu suggests that companies with apps that can influence users’ thinking, or collect personal or business data, may face more difficulties in the overseas markets. He says that’s why the US targeted companies like social media app Tiktok and telecoms company Huawei and artificial intelligence firm Iflytek.  He added that people in overseas markets may have more concern for Chinese AI firms because of non-technical factors.

The hostility Chinese tech companies are facing in the US may also have an immediate impact on how startups and venture capital firms raise money, said some VC investors.

• “In the short term, Chinese VC might be more skeptical about startups that tend to expand to US or European markets because of tense international situations,” Xu Miaocheng, investment vice president at Beijing-based VC firm Unity Venture, told TechNode.
• US dollar funds have more pressure, and it’s a difficult time for them to raise money from their backers at the moment, said Xu.

A future of ‘splinternets’? The executive orders against Tiktok and Wechat don’t mean the end of Chinese tech companies’ global expansion, but further restrictions are expected to come. With China’s long-standing Great Firewall, and the addition of the US’ new “Clean Network” program, we are now closer than ever to a world with two different internets.

Read more:

• Understand the law: “POTUS bans Wechat” (Pillar Legal)
• The view from the boardroom: “Corporate America worries Wechat ban could be bad for business” (Wall Street Journal)
• Where is this ‘Clean Networks’ stuff going? “The strategic vision behind the Tiktok, Wechat bans” (Lawfare)

Additional contributions by David Cohen

Chinese video-streaming platform Iqiyi said Thursday that it is under investigation by US authorities over a short report released in April which accused the company of inflating 2019 revenue by up to 40%.

Why it matters: US regulators are more actively investigating allegations against Chinese companies for financial fraud after beverage chain Luckin Coffee admitted in April it had fabricated transactions in 2019 totaling around RMB 2.2 billion (around $317 million).

• The US is increasingly scrutinizing Chinese companies as lawmakers call for stricter audit requirements. US President Donald Trump has also recently threatened to delist from American stock exchanges Chinese companies that do not comply with US accounting standards.

Details: Baidu-backed Iqiyi said in a statement announcing its second-quarter earnings on Thursday that it is cooperating with the Securities and Exchange Commission (SEC) probe, which is seeking financial and operating records dating from January 2018.

• The top US financial market regulator is also seeking “documents related to certain acquisitions and investments that were identified in a report issued by short-seller firm Wolfpack Research in April 2020,” the company said.
• Iqiyi said it had hired advisers to conduct an internal review of the key allegations in the Wolfpack report “shortly” after it was released.
• Shares of the company tumbled as much as 19% on Thursday on the disclosure.

READ MORE: INSIGHTS | Short seller huffs and puffs, but it doesn’t blow Iqiyi down

Context: In April, Muddy Waters Research tweeted a link to a Wolfpack Research report, alleging that Iqiyi had inflated its 2019 revenue by 27% to 44% and overstated user numbers by 42% to 60%.

• At the time, Iqiyi said in a statement that the report “contains numerous errors, unsubstantiated statements and misleading conclusions and interpretations.”
• On May 20, CNBC reported that the US Senate unanimously passed legislation prohibiting foreign companies which do not adhere to the country’s regulatory and audit standards from listing on its exchanges or raising money from American investors.
• Earlier this month, the Trump administration issued its recommendations to ban Chinese companies from US stock exchanges if they don’t comply with American accounting standards, according to the Financial Times.

Everyone’s talking about Tiktok, the hot short video app that has been thrust into the global spotlight on the back of an emerging US-China cold war. But outside China, few people know about Bytedance, the elusive tech unicorn behind one of the world’s biggest social media smash hits.

The company has always been reclusive. When employees run into journalists, they joke about being seen with dangerous contacts. Zhang Yiming, the company founder and CEO, rarely speaks to media directly. The mystery surrounding the world’s most valuable tech startup spurred TechNode to take a deep dive into the company last year, the results of which we published monthly in the form of our first In Focus newsletter series. Many of these articles were written by Bailey Hu, who left TechNode in May 2019. We are offering up our research in this story, with some updates.

While most international users know Bytedance as the company behind Tiktok, it isn’t just the maker of a single successful platform. In fact, the company has a lineup of virally popular apps in China, its home market. These include news aggregator Jinri Toutiao; Douyin, the domestic version of Tiktok; and Xigua Video, another video-sharing platform. In overseas markets, it operated Vigo and Topbuzz, the international versions of Xigua Video and Jinri Toutiao, respectively, both of which Bytedance shut down because of poor performance.

These stumbles have done little to slow the Beijing-based company. It is considered the world’s most valuable tech startup, according to CB Insights. The company was valued at as much as $140 billion earlier this year when state-owned carrier China Mobile, one of its shareholders, sold a small stake in a private deal, according to Reuters.

Here are eight things to know about Bytedance:

1. It’s huge

In March, Bytedance founder Zhang Yiming revealed in an internal letter to employees that the company’s global headcount had exceeded 60,000, and the number is expected to reach 100,000 this year.

Ad sales and content monitoring staff each make up a quarter of Bytedance’s workforce, according to a report by The Information in April 2019.

Bytedance now employs more people than Facebook, analyst Liu Jiehao of research group Iimedia pointed out, but average productivity still lags well behind the US titan. Facebook booked $71 billion in earnings in 2019, while Bytedance reportedly made $17 billion in revenue in the same period.

Tencent, which employed 54,000 people as of December 2018, fell between the two in terms of 2019 revenue. The company reported a total annual revenue of RMB 377 billion (around $48.5 billion) in 2019.

2. It’s all about an algorithm

Providing online news and content for millions of users in China, Bytedance’s flagship app Jinri Toutiao (which translates into “Today’s Headlines”) doesn’t require an editor-in-chief to lead its content strategy like other news platforms do, according to company founder and CEO Zhang Yiming.

The app’s editorial staff is a set of artificial intelligence and deep-learning algorithms that deliver personalized content to its users.

Like other flagship Bytedance apps, Jinri Toutiao shows users an endless feed of posts and videos recommended by its algorithms, all based on the user’s age, sex, location, and personal preferences.

As you read posts recommended by the platform, it learns what you like and don’t like by tracking your behavior: what you click to read, what you choose to dismiss, how long you spend on an article, which stories you comment on, and which stories you choose to share. The behavior recorded by the system then spits out recommendations to populate your feed. The more time you spend in the app, the more it learns about you—and the more it learns about you, the more time it can get you to spend in the app.

The company has replicated the recommendation system with other products such as Douyin and Tiktok. Its success speaks for itself.

According to a person who is familiar with Bytedance’s recommendation system, it was initially based on Google’s Wide & Deep Learning, open-source models that combine the strengths of the wide linear model and the deep neural network, two types of artificial neural networks that can perform tasks usually carried out by a human brain.

The Wide & Deep Learning system is used for recommendations on Google Play, the search engine’s popular Android mobile app store with more than 1 billion active users, and has led to “significant improvement” in app downloads, according to a paper by a group of Google researchers.

“The recommendation system is now Bytedance’s core technology that underpins everything from its news app to its short-video apps,” said the source.

In January 2018, Bytedance held a meeting to disclose how the algorithms work. The move was in response to pressure from internet watchdogs and state media, which had criticized the Jinri Toutiao app for spreading pornography and allowing machines to make content decisions (in Chinese).

At the meeting, Bytedance’s algorithm architect Cao Huanhuan explained the principles of the recommendation system used by Jinri Toutiao and many of the company’s other apps. The full text of his speech can be found here (in Chinese).

The company has moved to open up access to its recommendation algorithm to external companies in recent years after the success of Douyin and Jinri Toutiao. In September, Bytedance started to package its recommendation algorithm as a solution, known as Byteair, to its different lines of products and external partners.

3. It runs a lot of apps besides Tiktok

On its English-language website, Bytedance lists a modest ecosystem seven apps worldwide. The reality is more like a jungle, populated with hybrids, close cousins, and the occasional evolutionary dead end.

Tiktok and Douyin are the international and Chinese versions, respectively, of Bytedance’s hottest app. They don’t share any content, their features vary, and each app has different privacy policies in accordance with local regulations. Huoshan and the now-shuttered Vigo, similarly, had been the global and domestic versions of another short-video offering.

Many of Bytedance’s apps are free, and most have options for in-app purchases on Apple’s China App Store. In addition to those listed, relatively new launches like Tomato Novel are not only entirely free to use, but also offer cash incentives in return for user activity, as TechNode previously reported.

4. Tiktok vs. Douyin—the same, but different

Douyin and Tiktok are unquestionably Bytedance’s biggest successes. The two apps are often referred to as versions of one another—Douyin is the domestic Chinese version; Tiktok is the global version.

Bytedance once presented Tiktok and Douyin as two versions of the same product, at least until Tiktok began attracting scrutiny overseas because of its Chinese ties. The two apps share the same logo, layout, and even some stickers and filters, but they are strictly segregated in accounts and content. This means it’s impossible for a Tiktok user to log in to the Douyin app using their Tiktok credentials, and vice versa.

Now, Bytedance is trying hard to shake off Tiktok’s ties to China. It named an American CEO in May and reportedly cut off Chinese employee access to Tiktok in June. But the efforts didn’t pay off. India banned the app in June after a border clash with China in the same month and Japan is seeking to restrict Chinese-made apps including Tiktok. This month, the Trump administration signed an executive order that would effectively ban the app in the US on Sept. 15.

Content recommendations are not always entirely dependent on algorithms, at least in regards to the Douyin app. Douyin has promoted a fair amount of content produced by state-run media and government agencies for propaganda purposes. This content features recent news or stories with “positive energy,” a phrase that describes topics that align with government policies.

Conversely, on the Tiktok platform, recommended content featuring news or politics is minimal. Everything in the app is designed to be fun. A commentary published in The New York Times said that Tiktok might be “the only truly pleasant social network in existence.”

Bytedance’s account segregation of Tiktok and Douyin differs from the way that tech titan Tencent has constructed the domestic and international versions of its mega messaging app Weixin (known as Wechat abroad). 

By comparison, Tiktok and Douyin users exist in different worlds, meaning that content cannot be accessed across platforms. For example, one of Tiktok’s most popular accounts is Jacob Sartorius, an American singer who has 20.9 million followers on the platform. However, the “Jacob Sartorius” found on Douyin is an “unofficial” account with 36 followers.

Under pressure from authorities, Bytedance has completely segregated the Tiktok and Douyin platforms, freeing the company from any potential breach of China’s internet controls while providing its international users with a relatively censorship-free platform.

5. It’s also an experienced VC investor

Bytedance was founded in 2013, but it started to make investments as early as 2014. It kicked off its VC activity by investing in a series of blogs and media companies such as artificial intelligence-focused blog Xinzhiyuan, and Caixin Globus, an international news site founded by Chinese finance news outlet Caixin.

Bytedance started to expand its investment portfolio outside of China in 2017 as overseas markets became more and more important to the company, but it tended to make acquisitions rather than simply investing.

By far the most successful example of Bytedance’s global expansion was its acquisition of lip-syncing app Musical.ly in 2017, which was later rebranded to Tiktok and became a global hit.

In recent years, Bytedance pivoted to invest in enterprise services and online education companies such as edtech company Fclassroom in 2019 and online word processor Shimo in 2018. In April, Bytedance co-led a Series B of nearly $14 million into Chinese cleaning robot maker Narwal Robotics.

Based on disclosed figures, Bytedance tends to favor certain tech sectors over others.

Here are some of Bytedance’s biggest investment deals from 2015 to 2019.

6. Bytedance has got big plans for gaming

In June 2018, we reported that longstanding Bytedance app Jinri Toutiao had launched “Jinri Games,” its own version of Wechat mini games, or lightweight apps which run on a large platform without requiring users to leave the app.

Within Toutiao’s selection of in-app mini programs—another adaptation of a Wechat innovation—Android users could for the first time choose from a variety of casual games.

Since then, mini games have become available in Bytedance’s humor app Pipixia and most recently, Douyin. The additions allow independent gamemakers to adapt or develop 10-megabyte programs for each platform.

In March, the Bytedance obtained its first mobile games license from Chinese regulators, allowing it to publish a game legally to China’s multi-billion-dollar gaming market. Bloomberg reported in January that the company is also building a gaming division that will hire more than 1,000 employees, and there were already two games in the pipeline. The company’s casual mobile game “Combat of Hero” became the most-downloaded free iOS title in Japan for four consecutive days beginning March 7, the South China Morning Post reported.

7. Edtech is a sector it just can’t quit

Bytedance may have made its name with short-video and news aggregator apps, but it seems unusually determined to break into the online education sector.

Over the past two years, the company has made several attempts to gain a foothold in online education through the launch of new apps, acquisitions, and investments. Underperforming apps are abandoned as new ones keep appearing, fresh off the production line.

• In March 2018, Bytedance acquired Open Language, an online English course provider.
• In May 2018, it launched Gogokid, a one-to-one tutoring platform for Chinese children to learn English online with foreign teachers.
• In July 2018, it launched Haohao Xuexi, a knowledge-sharing app that features content covering career advice, parenting, culture, and wealth management.
• In August 2018, Bytedance led a $49.5 million Series C funding round in San Francisco-based education technology company, Minerva Project.
• In December 2018, it launched AiKID, a foreign teacher live-streaming platform.
• Bytedance licensed some patents in January 2019 from now-defunct smartphone maker Smartisan, which the company indicated was to expand and develop its online education business.
• In May 2019, it launched a K-12 online education platform Dali Ketang, which offers courses from primary school to high school. Chinese tech news outlet 36Kr reported that Bytedance acquired another online teaching platform named Qingbei Wangxiao to help with the development of Dali Ketang.
• In July 2019, it was reported that Bytedance was testing a short-video-based English-learning app named “Tangyuan English.”

Bytedance’s education apps:

8. If it loses Tiktok, it’ll still scare Tencent

In a lot of ways, Bytedance is something totally new. It’s the first Chinese tech company that’s really based on a new algorithm, and the first Chinese company ever to get a big hit in the global app space. It often terrifies its Chinese competitors as much as it seems to terrify American policy-makers.

If it’s forced to sell Tiktok, it could lose one of those strengths: the global hit. But it’ll remain a huge, disruptive force in Chinese tech.

Analysts are optimistic about Chinese tech and gaming giant Tencent despite a Huawei-like sanction from the US government imposed last week, with one saying that it may instead end up hurting Apple’s Iphone sales in China.

Why it matters: The lack of detail in the Trump administration’s sudden ban on Thursday of transactions involving Tencent’s mega messaging app Wechat has sowed widespread confusion. But analysts are optimistic about the company’s future performance even considering a worst-case scenario.

• Tencent said it was still “reviewing the potential consequences” of the executive order on Friday. A company representative declined to provide further comment on Monday.

Details: Shenzhen-based broker Guosen Securities on Monday maintained a buy rating on the Tencent stock because it said that the Trump administration’s ban on Wechat will have little impact on revenues from Tencent’s social media business.

• Tencent’s non-gaming revenue in the US only accounted for 0.4% of the company’s total revenue in 2019 and Wechat’s full exit from the US market will have little impact on the company’s revenue and social media ecosystem, said Wang Xueheng, analyst at Guosen Securities.
• The executive order means American companies will be banned from advertising on Wechat and individuals in the country will not be allowed to make payments via Wechat, the analyst wrote in a note (in Chinese) on Monday.
• There is little possibility that Apple will be ordered to remove Wechat from the China App Store, he added.
• Iphone analyst Ming-Chi Kuo of Hong Kong-based TFI Securities said Sunday that the popular Apple Iphone will be hit the hardest as a result of the US ban on Wechat.
• Wechat’s popularity in China is so established that Kuo expects that Apple will see its Iphone shipments decline by 25% to 30% year on year if it is required to remove Wechat from the global App Store. The decline, he added, will primarily be driven by a potential dropoff Iphone sales in China.

Context: The Trump administration said Thursday it would bar individuals and companies within US jurisdictions from making transactions with Tencent and Bytedance, the owner of Tiktok, in 45 days.

• The executive orders come a day after the US Secretary of State Mike Pompeo escalated the tech war with a new initiative. He promised to purge US networks from Chinese technology under the “Clean Network” program.

How tech giants build ecosystems

On July 21, scooter maker Ninebot, a company backed by Chinese smartphone maker Xiaomi, won final approval from the Shanghai Stock Exchange to register on its Nasdaq-style STAR Market tech board. If the registration is approved by the China Securities Regulatory Commission, the country’s top securities watchdog, Ninebot will become the fourth company within the so-called “Xiaomi ecosystem” to go public.

The Xiaomi ecosystem is a group of startups the smartphone maker has invested in, who are allowed to leverage its sales channels to distribute their products. Joining the group also means startups, which are often makers of smartphone accessories such as headphones, power banks, and cameras, can utilize Xiaomi resources like brands, supply chain management, and design.

The clique has incubated three publicly traded companies, including smart home appliance maker Yunmi, cleaning robot maker Roborock, and smart wearable devices maker Huami. Meanwhile, three more companies are in the pipeline to go public on the high-tech STAR board. 

The Xiaomi ecosystem is one example of how big Chinese tech companies expand their empires through investments. During the past decade, corporate venture capital has thrived under the wings of big tech firms like Xiaomi, Tencent, Alibaba, as well as rising stars like Bytedance and Didi Chuxing. 

While, like all VCs, corporate VCs hope to invest in promising startups that generate returns for their parent companies, they’re also pursuing strategic objectives for their companies that shape their priorities.

In the first six months of this year, corporate VCs participated in 15% of venture capital investments in China, according to Chinese venture market research firm Jingdata.

Big deals

• In July, grocery delivery startup Missfresh raised $485 million from investors including Tencent and China Capital Investment Group.
• In May, Tencent participated in Chinese social fitness app Keep’s $80 million Series E led by Jeneration Capital Management. 
• In April, Tencent injected $17 million into a unit of Chinese navigation software provider Navinfo that specializes in high-precision positioning technology development and services.
• In June, BYD Semiconductors, the semiconductor unit of electric car giant BYD, raised $114 million from investors including South Korean conglomerate SK Group and Xiaomi.
• In March, Chinese podcast platform Qingting FM raised several hundred million RMB from Xiaomi.
• In April, Bytedance co-led a Series B of nearly $14 million into Chinese cleaning robot maker Narwal Robotics.
• In March, Chinese big data company Mingninglamp raised $300 million in a funding round backed by Singapore’s state investor Temasek Holdings and Tencent.

Big tech investment strategies

Like Xiaomi, all Chinese tech giants use their investments as a way to build their ecosystems, and they are usually incompatible with those of their rivals’. For example, users of Tencent-backed JD.com cannot pay with Alibaba’s Alipay on the e-commerce platform.

Tencent

Social media and online gaming giant Tencent is one of the most active corporate VCs in China. The company has invested in 741 companies around the world as of July 24, according to venture capital data provider Itjuzi (in Chinese).

• Tencent’s investment arm favors companies in the gaming, entertainment, e-commerce, and fintech sectors. The company has invested in some 165 companies that fall into the culture and media category, accounting for 22% of its total portfolio companies. It has also started investing into enterprise service and artificial intelligence (AI) companies in recent years.
• Some of the company’s biggest investment successes are social e-commerce platform Pinduoduo, electric vehicle maker Nio, ride-hailing app Didi Chuxing, and online literature platform China Literature.

Alibaba

Apart from online market place Taobao and Tmall, the e-commerce titan also operates cloud computing platform Aliyun Cloud and Cainiao, a logistics platform. Alibaba’s investments also focus on these areas: e-commerce, enterprise services, and logistics.

• Alibaba has invested in 528 companies as of July 24 with 87 companies belonging to the enterprise service category, according to Itjuzi. 
• The company has stakes in food delivery platform Eleme, video-streaming platform Youku, Didi Chuxing, and Southeast Asian e-commerce company Lazada.

Bytedance

Bytedance was founded in 2013, but it started to make investments in 2014. The owner of short video app Tiktok and news aggregator Jinri Toutiao started its VC activity by investing in a series of blogs and media companies such as AI-focused blog Xinzhiyuan, and Caixin Globus, an international news site founded by Chinese finance news outlet Caixin.

Bytedance started to expand its investment portfolio outside of China in 2017 as overseas markets became more and more important to the company, but it tended to make acquisitions rather than simply investing. 

One of the most successful examples of Bytedance’s global expansion was the acquisition of lip-syncing app Musical.ly in 2017, which was later rebranded to Tiktok and became a global hit.

In recent years, Bytedance pivoted to invest in enterprise services and online education companies such as edtech company Fclassroom in 2019 and online word processor Shimo in 2018.

Few intersections

Chinese tech giants’ investment strategies show a strong tendency toward exclusiveness, as they deploy capital to build out ecosystems. This means that when a startup gets money from Tencent, Alibaba’s door slams shut.

• Most startups have to choose a side when they raise money from tech giants. Deciding on one tech giant’s ecosystem means that, besides cash, a startup will likely gain access to its backer’s existing user base, data, and tools, while being blocked from rival companies’ networks.
• Zhu Xiaohu, managing director of venture capital firm GSR Ventures, which focuses on early-stage technology companies, said in May 2019 that it was “extremely difficult” (in Chinese) for startups to avoid choosing a camp among tech giants when raising funds because the combined market value of BAT (Baidu, Alibaba, and Tencent), and companies they invested in “account for more than 90% of the market cap of all Chinese internet companies.”
• One of the exceptions is ride-hailing platform Didi Chuxing, which is a result of a merger between Tencent-backed Didi Dache and Alibaba-backed Kuaidi Dache in 2015. Didi appears to have avoided taking a side, accepting both Alipay and Wechat.

Pick a side

Even though Chinese unicorns only accounted for 15% of deals in the first half of the year, nearly all startups have to align with a tech giant as they scale.

There are a few unicorns, such as drone maker DJI and Tiktok owner Bytedance, that have managed to succeed without joining any of the BAT camps. But 80% of Chinese tech startups have taken a form of investment from BAT by the time they reach $5 billion in valuation, according to a report by The Economist.

And sometimes, trying to please more than one giant can be dangerous. One example is failed bike-sharing platform Ofo, another intersection of Tencent and Alibaba’s investments.

The company received money both from Tencent, via Didi Chuxing, and Alibaba. A 2019 article by Chinese magazine GQ Report argued that the resulting clashes between the two giants in the startup’s boardroom ultimately led to Ofo’s failure.

“Experienced entrepreneurs know: Under normal circumstances, do not accept investments from two (or more) of Tencent, Alibaba, or Baidu at the same time,” GQ Reports wrote. “It is dangerous to violate common sense.”

Chinese online travel company Ctrip is considering delisting from Nasdaq and is in talks with potential investors to fund the plan, Reuters reported on Tuesday citing unnamed sources.

Why it matters: China’s largest online travel firm is the fourth Chinese tech company in the past month to consider delisting from the US financial markets. Intensifying tensions between the world’s two largest economies are scaring Chinese tech companies from New York exchanges, once a sought-after market to raise funds.

• The move follows increasing scrutiny of Chinese companies in the US and calls from lawmakers for stricter audit requirements following Chinese beverage chain Luckin’s admission of financial fraud in April.

Details: The management of Baidu-backed Ctrip has asked several financial and strategic investors including venture capital firms and tech companies to fund its privatization plans, according to the Reuters report, citing four people familiar with the matter.

• The company has held preliminary talks with banks about a potential secondary listing in Hong Kong, Reuters reported in January. The company later decided to delist as the coronavirus outbreak has badly hit its travel business and weighed heavily on its market cap, said the Tuesday report.
• A Ctrip representative declined to comment when reached by TechNode on Tuesday.

Context: Ctrip, founded in 1999, went public on Nasdaq in 2003. The company acquired British flight search engine Skyscanner in 2016 and US online travel agency Trip.com in 2017.

• The company’s net revenue dropped 42% year on year to RMB 4.7 billion (around $670 million) in the first quarter. It also booked a net loss of RMB 5.4 billion in the same time period.
• In May, the company forecasted its net revenue would decrease around 67% to 77% year on year in the second quarter, citing “the continued negative impact due to Covid-19.”
• On Monday, Chinese search engine Sogou said it received a buyout offer from Tencent that could lead to the company’s delisting from the New York Stock Exchange (NYSE).
• On July 6, Chinese online news and social media company Sina said it had received an acquisition proposal which would take the company private after 20 years of trading on the Nasdaq.
• Chinese online classifieds marketplace 58.com entered a deal to delist from the NYSE in June.

Chinese tech giant Tencent proposed buying out Chinese search engine Sogou, said its parent company Sohu on Monday, a move that would mean the subsidiary would delist in New York.

Why it matters: In considering the proposal, Sogou joins Chinese media firm Sina in mulling over delisting from US stock exchanges amid new investor-protection legislation and US-China trade uncertainties.

Details: Long-time investor Tencent proposed acquiring all of the outstanding ordinary shares of Sogou at $9 a share, according to the Sohu statement. Tencent’s initial proposal is not binding and has not yet been reviewed by the Sohu board. 

• Neither Sohu nor Sogou have made any decisions with respect to Tencent’s offer, the companies have said. But if the tentative transaction is finalized, Sogou will delist from the New York Stock Exchange (NYSE) to become a privately held subsidiary of Tencent, Sohu said.
• Tencent and Sogou have a long relationship. When Sogou listed on the NYSE in 2017, Tencent was its largest shareholder and promoted Sogou’s search engine in its own products. 
• Sogou is the second-largest search engine in China behind Baidu and its Sogou Pinyin Method, a popular Chinese language input software, had 503 million monthly active users (in Chinese) as of December 2019. 
• Tencent currently owns approximately 39.2% of the total issued and outstanding shares and holds 52.3% of Sogou’s total voting power. 
• Sogou’s share prices on the NYSE surged more than 47% on Monday.
• A Tencent representative declined to comment late Monday, and Sohu did not respond to an emailed request from TechNode.

Context: Growing distrust between US and Chinese lawmakers is spreading throughout financial markets. On May 20, CNBC reported that the US Senate unanimously passed legislation prohibiting foreign companies from listing on US exchanges or raising money from American investors unless they can prove “they are not owned or controlled by a foreign government.”

• Alibaba’s shares dropped 2% in response to the news and several high-profile Chinese tech firms are reconsidering their place in US markets, according to the report. 
• The Chinese online marketplace 58.com delisted in June, and Sina is also considering delisting following an acquisition proposal in July from New Wave, a company owned by Sina chairman and CEO Charles Chao. 
• China’s largest chipmaker Semiconductor Manufacturing International Corporation (SMIC) ended a 15-year listing on the NYSE in June 2019, citing low trading volumes and the high cost of listing in New York and complying with local laws. 
• 58.com has not revealed where they planned to relist, but it could follow SMIC’s footsteps by listing on the Shanghai Stock Exchange, continuing the trend of Chinese companies turning away from the US to Shanghai or Hong Kong markets.
• US regulators are unable to access Chinese companies’ audit records, a legal requirement for listing on US exchanges. 
• Though the legislation doesn’t specifically call out Chinese companies, US-China trade tensions pushed issues of investor safety and financial accountability to the fore. The law’s authors have also called out China for not “playing by the rules.”

The French government has told telecoms operators to avoid equipment made by Huawei, warning that licenses granted for the Chinese company’s gear will not be renewed once they expire, Reuters reported Wednesday, citing three sources.

Why it matters: France will effectively phase out the Shenzhen-based company’s equipment out from its next-generation 5G networks by 2028, following a similar decision by the United Kingdom this month.

Details: The French National Cybersecurity Authority (ANSSI) told a French newspaper this month it was urging telecoms operators not currently using Huawei equipment to avoid switching to it, though it would give licenses that could be valid for three to eight years.

• Operators were told by French authorities during informal conversations in recent months that licenses granted for Huawei gear would not be renewed after they expire, Reuters reports.
• The bulk of approvals for Huawei equipment were for three to five years, while most of those for equipment from Swedish company Ericsson and Finnish company Nokia received eight-year licenses, the story’s sources said.
• The restrictions would amount to a de facto phase-out of the Chinese company’s equipment within France’s 5G networks by 2028, said the sources.

Context: Following years of pressure from the United States, more European governments are moving to exclude Huawei from 5G networks.

• The British government ordered telecom operators last week to remove existing Huawei equipment from their 5G networks by 2027, and banned Huawei gear from the country’s 5G network rollout.

READ MORE: “Five eyes” look in different directions on Huawei

Chinese scooter maker Ninebot on Tuesday gained final approval from the Shanghai Stock Exchange to register on the bourse’s Nasdaq-style STAR Market, according to a notice on the board’s website.

Why it matters: The Beijing-based company, incorporated in the Cayman Islands, is expected to become the first foreign-registered company with a variable-interest entity (VIE) structure to list on a stock exchange in Mainland China.

• The STAR Market, which opened for trading a year ago, has allowed VIEs and unprofitable companies to list, in a bid to lure Chinese tech companies home from New York.
• The effort started to pay off: Alibaba’s fintech affiliate Ant Group on Monday announced a dual-listing plan to IPO on the STAR Market and the Hong Kong Exchange.

Details: Ninebot has been allowed to submit registration filings to the China Securities Regulatory Commission, the country’s top securities watchdog, for a final review, the STAR Market’s website shows (in Chinese).

• Ninebot plans to issue around 7 billion Chinese Depository Receipts (CDRs) through its custodian bank, raising more than RMB 2 billion (around $287 million) from the domestic market. CDRs are shares of non-Chinese companies that are allowed to trade on China’s financial markets, functioning similarly to American Depositary Receipts.

Context: Founded in 2014, Ninebot is now the world’s largest vendor of electric scooters. The company snapped up failing American personal-transport manufacturer Segway in 2015.

• Chinese smartphone maker Xiaomi owns around 22% of Ninebot. The scooter maker is also one of the so-called “Xiaomi ecosystem enterprises”—companies that leverage Xiaomi’s retail channels to sell their products.
• Ninebot lists Xiaomi as an important customer with related-party sales to Xiaomi accounting for 52.3% of its total revenue in 2019, according to its prospectus.
• The company booked revenue of RMB 4.6 billion and a net loss of RMB 459 million in 2019.

Shares of Chinese heavyweight chipmaker SMIC jumped more than 200% during its Thursday debut on the Shanghai tech bourse while those listed on the Hong Kong exchange fell 17%, signaling skepticism from global investors.

Why it matters: The contrast shows that international investors are cool on the prospects of China’s biggest contract semiconductor manufacturer despite strong support from the state.

• Shanghai-based Semiconductor Manufacturing International Corp. (SMIC) is expected to play an important role in China’s ambitious plan of making 70% of chips it uses by 2025 under the Made in China 2025 initiative, a government scheme announced in 2015 with the aim to boost the high-tech sector.
• However, experts have said SMIC is “generations behind” the world’s edge-cutting chip-making technology. The company mainly produces 14-nanometer wafers while companies such as Taiwan Semiconductor Manufacturing Co. have started mass-producing 5-nanometer ones.

Details: Shares of SMIC surged 245% to RMB 95 at the open on its first day of trading on Shanghai’s Nasdaq-style STAR Market. The shares were priced at RMB 87.1 (around $12.5) by the end of the morning trading session.

• The company issued 1.7 billion shares at RMB 27.5 each on its secondary listing in Shanghai.
• Meanwhile, shares of the company listed in Hong Kong were down 17% to HKD 31.9 (around $4.11) during Thursday morning’s trading session.
• “Some investors have switched their money from the HKSE-listed entity to the STAR-listed entity, on the expectation the IPO would ‘pop,’” said Michael Norris, research and strategy lead at AgencyChina.

Context: SMIC’s secondary listing on the Shanghai bourse is the biggest stock sale in mainland stock markets in a decade since Agricultural Bank of China’s RMB 68.5 billion initial public offering in 2010.

• SMIC’s shares were up more than 200% in Hong Kong this year.
• In May, China’s National Integrated Circuit Industry Investment Fund, a state-backed industry fund, injected more than $2 billion into a SMIC chip fabrication plant. 

Huawei said Tuesday the UK’s decision to ban the Chinese telecommunications equipment maker from its 5G networks was “disappointing” and urged the country to “reconsider.”

Why it matters: The British government said that banning Huawei gear was due to “uncertainty” around the company supply chain. The company argued that it was a “politicized” decision.

Details: Huawei urged the British government to reconsider the ban announced Monday on the company’s equipment from the country’s 5G network rollout, said Huawei in a statement to TechNode on Tuesday.

• “It threatens to move Britain into the digital slow lane, push up bills and deepen the digital divide,” the company said.
• The UK government also ordered telecom operators to remove existing Huawei equipment from their 5G networks by 2027, citing a US ban on Huawei in May that could bar the company from the global semiconductor supply chain.
• “Given the uncertainty this creates around Huawei’s supply chain, the UK can no longer be confident it will be able to guarantee the security of future Huawei 5G equipment,” Digital and Culture Minister Oliver Dowden said on Tuesday.
• Huawei, however, said the UK’s decision was “about US trade policy and not security.”
• “We remain confident that the new US restrictions would not have affected the resilience or security of the products we supply to the UK,” the company said.

Context: A new US regulation announced by the Department of Commerce in May requires companies around the world to obtain licenses for sales to Huawei of semiconductors made with US technology, potentially cutting the company off from global chip manufacturing. 

• The company sources critical chips for its smartphones, 5G base stations, and other devices from global semiconductor makers such as Taiwan’s TSMC and Win Semiconductors, and South Korea’s Samsung Electronics.

Huawei said Monday its revenue during the first half of the year grew 13.1%, a significant slowdown from the same period last year as the company faces stricter sanctions from the United States.

Why it matters: The Shenzhen-based telecommunications gear maker’s business in the first six months of the year was hit by a double whammy—a new round of US sanctions imposed in May and the Covid-19 pandemic that has disrupted the global economy.

• “The complex external environment makes open collaboration and trust in global value chains more important than ever,” Huawei said in a statement Monday.

Details: Huawei booked RMB 454 billion (around $64.9 billion) in revenue in the first six months of the year with a net profit margin of 9.2%, the company said in the statement.

• Huawei’s consumer business earned RMB 255.8 billion, while its carrier and enterprise units reaped a respective RMB 159.6 billion and RMB 36.3 billion, the company said.
• Second quarter revenue rose 22.7% year on year, according to TechNode’s calculations based on stated data.

Context: The same period a year earlier, the company reported 23.2% year-on-year revenue growth, before the impact of a May 2019 US blacklisting that sought to cut the company off from American technology. Huawei touted the growth as proof that US sanctions had a limited impact on its business.

• The ban took effect in May after several reprieves. Before that, some of Huawei’s important American partners such as Google—which provides commercial licenses to millions of Huawei’s Android-powered smartphones—had already terminated cooperation with the company, dealing a blow to its consumer business, its biggest source of revenue.
• In May, the US Department of Commerce announced a new regulation requiring companies around the world to obtain licenses for sales to Huawei of semiconductors made with US technology, an upgraded version of a May 2019 ban that applied only to American companies.
• The new regulation could potentially cut Huawei off from the global semiconductor supply chain. Affected Huawei suppliers include Taiwan Semiconductor Manufacturing Co., the world’s largest contract chipmaker which produces high-end chip designs for Huawei; Taiwan’s Win Semiconductors, which makes Huawei’s radio frequency chip designs; and South Korea’s Samsung Electronics, which ships memory and storage to Huawei.
• Huawei had reportedly started shifting some production of its chip designs from overseas contract makers to domestic ones such as Shanghai-based Semiconductor Manufacturing International Corp., but experts believe the homegrown alternative is too backward in technology to supply the cutting-edge chips that Huawei needs.

China is set for its biggest stock sale in a decade when homegrown chipmaker Semiconductor Manufacturing International (SMIC) debuts on Shanghai’s Nasdaq-style STAR Market at the end of this month.

Backed by heavy subscriptions by mainland investors, the Hong Kong-listed company could raise as much as RMB 53.2 billion (around $7.6 billion) in a secondary listing on the Shanghai bourse, potentially the biggest in mainland stock markets since Agricultural Bank of China’s RMB 68.5 billion initial public offering in 2010.

SMIC is just the latest example of China’s chip funding fever. A report by Nikkei Asian Review says Chinese chipmakers have raised around RMB 144 billion this year from equity markets, already twice the amount of money they raised in the whole of 2019.

Shanghai-based SMIC is China’s largest contract chipmaker. It’s a solid division II team, manufacturing reliable midrange chips mostly for domestic customers. It lags a few years behind the cutting edge: SMIC is still inching towards 7-nanometer chip production while Taiwan Semiconductor Manufacturing Co. (TSMC) has been producing them since 2018. But the company’s 14-nanometer chips are not good enough to supply many domestic needs, such as Huawei’s most advanced Kirin chips. 

The on-going race between China and the United States for technology supremacy has given SMIC its chance at the major league: US sanctions on Huawei could force the world’s largest telecommunications gear maker and second-largest smartphone maker to move all its chip production from TSMC to SMIC. The state is ready to pour billions into the company’s effort to master cutting-edge production. Shares in SMIC have gone up 215% from the beginning of this year, driven by increasing domestic demand, favorable policies, and the dual listing plan itself. It’s a huge opportunity—but a daunting challenge.

The company said it plans to spend 40% of the proceeds of the Shanghai stock offering to help produce 14-nanometer or higher-end chips, and 20% will be put into research and development.

But to become a global leader, experts suggest, SMIC will need more than money. 

Money from the state—and more from the market

Since it was founded in 2010, SMIC has enjoyed generous support from the state. In the same month it announced the secondary listing plan on the Shanghai bourse, a state-backed industry fund injected more than $2 billion into a SMIC chip fabrication plant. 

Years of state support have put China in the fourth spot on global wafer capacity ranking in 2019, according to semiconductor market research firm IC Insights. 

China is known for its lavish investments to boost industries deemed strategically important. In the semiconductor sector, the well-known National Integrated Circuit Industry Investment Fund, or the “Big Fund,” underwrites chipmakers. The fund has gathered a total of RMB 342.7 billion from the finance ministry, state-owned enterprises, and local governments. 

Read more: VC roundup: State-backed ‘big funds’ manage 60% of China’s VC/PE money

In addition to its official goal (in Chinese) of “investing in chip manufacturing, designing, and promoting mergers and acquisitions,” the fund is also expected to provide “guidance” to get private capital into key sectors.

To raise really big money, SMIC and the Big Fund count on the markets. In 2019, investable assets held by Chinese residents that can be put into the equity market were RMB 29 trillion, according to the China Chief Economist Forum (in Chinese), a Shanghai-based think tank, while the entire national budget (in Chinese) for guidance funds was RMB 2 trillion in 2019.

The STAR Market on the Shanghai Stock Exchange also shows a strong preference for semiconductor firms. Of the 122 stocks listed on the board, around 20 are from the semiconductor sector. The board, known for a meticulous pre-listing review process that can take up to six months, took only 29 days to go through SMIC’s application.

“The Big Fund has definitely achieved its goal to guide private capital into the semiconductor sector, and I think the effect is significant,” Fang Jing, chief analyst at Cinda Securities, told TechNode.

“Thanks to the push of the Big Fund, the proportion of total capitalization of semiconductor firms in the A-share market’s electronics sector grew to approximately 30% from just more than 10% a few years ago,” he added. “It is no exaggeration to say that the past two years have been a feast for semiconductor investments.”

Money may not be enough

Beijing’s expectations are very high for SMIC. According to the Made in China 2025 plan, a government initiative announced in 2015 aiming to boost the high-tech sector, China wants to produce 70% of chips it uses by 2025.  With 18% of the domestic market (in Chinese), SMIC is the only company that’s even on the road to this target.

The target seems more urgent now in the context of escalating US-China economic conflicts. The Trump administration has already blocked Huawei’s access to its technology and machinery and would potentially cut the company off from the global semiconductor supply chain.

But despite heavy investments from the government and private investors, experts predict China will fall far short of the goal of semiconductor self-sufficiency by 2025.

A May report by IC Insights predicts that China will produce only 20.7% of chips it uses in 2024, growing only 5% from 2019.

China not only needs more chips—it needs better ones. SMIC is “generations behind” TSMC, Alex Capri, visiting senior fellow at the National University of Singapore Business School, told TechNode in an interview in May.  SMIC, one of the country’s most sophisticated chipmakers, mainly produces 14-nanometer wafers, while the most edge-cutting chip fabrication technology is now 5-nanometer. For Huawei, this means there is nowhere to buy cutting-edge chips in the domestic market.

In addition to closing a capital gap, China also needs to narrow the talent gap in the semiconductor industry to catch up with the bleeding edge of chip designs, said Fang of Cinda Securities.

China faces a talent shortfall of around 300,000 people in the semiconductor industry, Yu Xiekang, vice president of the China Semiconductor Industry Association, told local media in 2019.

“It should start with education because you can’t always poach talents from overseas. We need not only technology self-sufficiency, but also education self-sufficiency,” Fang said.

Clarification: This post has been updated to clarify the attribution of a quote in the last paragraph.

Two US federal government agencies are investigating whether Tiktok, a Chinese short video app popular with American teens, breached a 2019 deal designed to protect children’s privacy.

Why it matters: The probe is Tiktok’s latest setback in overseas markets following a ban on the app in India last month and its retreat from Hong Kong this week.

Details: The US Federal Trade Commission (FTC) and Department of Justice are investigating whether Tiktok complied with an agreement it reached with the FTC in January 2019, Reuters reported Wednesday, citing David Monahan, a campaign manager with the Campaign for a Commercial-Free Childhood.

• Campaign for a Commercial-Free Childhood, the Center for Digital Democracy, and other advocacy groups in May complained to the FTC that Tiktok failed to live up to the agreement that it would remove videos and personal information about users under the age of 13, said the report.
• “I got the sense from our conversation that they are looking into the assertions that we raised in our complaint,” the report cited Monahan as saying.
• Tiktok told Reuters that the app takes “safety seriously for all our users” and that it in the US, they “accommodate users under 13 in a limited app experience that introduces additional safety and privacy protections designed specifically for a younger audience.”

Context: Pressure on Tiktok is mounting in the US after it was shut out of India, which used to be its biggest overseas market.

• In an interview on Fox News on Monday, the US Secretary of State Mike Pompeo seemed to agree with anchor Laura Ingraham’s suggestion that the US should ban Chinese social media apps, especially Tiktok.
• In October, two US senators requested American intelligence officials investigate Tiktok for potential national security threats.
• In May, a Dutch privacy regulator said it would investigate how short video app Tiktok handles data collected from minors on the platform.

Chinese online news and social media company Sina said Monday it had received an acquisition proposal which would take the company private after 20 years of trading on the Nasdaq.

Why it matters: Sina is the second Chinese tech company in a month to mull a delisting from US stock exchanges. Chinese online classifieds marketplace 58.com entered a deal to delist from the New York Stock Exchange in June.

Details: New Wave, a British Virgin Islands-based company owned by Sina chairman and CEO Charles Chao, has proposed to acquire all of Sina’s outstanding shares at a price of $41 per share, the company said in a statement on Monday.

• The offer valued the 22-year-old Chinese company at $2.7 billion. Its shares jumped to $40.5 by market close on Monday after closing at $36.7 on Thursday.
• Sina’s board has formed a special committee consisting of three independent directors to evaluate the proposal. 
• “The board cautions the company’s shareholders and others considering trading in its securities that the board just received the non-binding proposal letter from New Wave and no decisions have been made with respect to the company’s response to the proposed transaction,” the company said in the statement.

Context: Founded in 1998, Sina started as a news portal that aggregated articles from print-based media. It went public on Nasdaq in 2000, becoming one of the first Chinese tech companies to list in the US.

• In 2009, Sina launched Weibo, a Twitter-like social media platform. The company spun off Weibo and listed its shares on Nasdaq in 2014.
• Revenue for the first quarter of 2020 declined 8% year on year to $435 million while net profits rose to $82.4 million from $33.1 million in the same period last year, according to company filings.
• The privatization trend is just part of a wave of US-listed Chinese tech companies looking beyond listings in the US. In June, gaming giant Netease and e-commerce company JD.com debuted secondary listings on the Hong Kong stock exchange.
• Chinese companies are under increasing scrutiny in the US after beverage chain Luckin’s admission of financial fraud.
• The Trump administration has also threatened to order US markets to delist Chinese firms. The US Senate passed a bill in May that could force foreign companies listed in the US to hand over their audit records, potentially scaring away some Chinese companies.

More than 3,000 games have been removed from Apple’s China App Store in the first two days of July, a move the company has warned developers about as it closes a loophole which allowed unlicensed paid games to list on the platform.

Why it matters: This is one of the biggest game purges on Apple’s App Store. It comes after the American technology giant moved to comply with China’s strict gaming regulations, requiring game developers worldwide to gain approval from Chinese regulators before being published in the Chinese store.

• Foreign companies are not permitted to directly apply for the license. They have to partner with local companies to legally launch their paid games in China. It can take months for game makers to have their titles approved.

“We are seeing unprecedented numbers of games dropping off the Apple App Store China daily since Apple implemented this new policy on July 1. Sadly, because China only approves about 1,500 game licenses a year, and the process itself takes six to 12 months, most of these apps will be waiting a long time before they are allowed back on the store.”

— Todd Kuhns, marketing manager at AppInChina, to TechNode

Details: Some 1,571 and 1,805 games were removed from Apple’s App Store in China on July 1 and July 2, respectively, in a sharp surge compared with the end of June, when an average of around 200 titles were removed daily, according to figures from Appinchina.

• Apple has started to ask game developers to provide a gaming license number from Chinese regulators before they file updates of their games, according to screenshots provided by Appinchina. Games lacking a number or with invalid numbers will be removed from the Chinese store after the update.
• Games that don’t attempt to make an update will not be actively removed from the Chinese App Store for the time being, according to Kuhns. 
• Kuhns expects the daily number of removed games will “rise and plateau for a while” because the titles won’t be taken down until the unlicensed game is updated.
• Titles removed on Friday already topped 700 as of the time of publication.
• He estimates at least 21,000 titles will be affected in total.

Context: Since 2016, Chinese regulations have required all paid games or games that offer in-app purchases to obtain a publication license before they can be uploaded to app stores.

• Before Apple took action in February, developers were able to list unlicensed games by submitting a random number instead of an official license number.
• In a notice sent to game developers in February, Apple required license numbers for paid games or games offering in-app purchases before June 30 if they want to distribute in mainland China.
• “Chinese law requires games to secure an approval number from the General Administration of Press and Publication of China,” Apple said in the notice.

China’s biggest server maker, Inspur, said Friday that Intel has resumed shipments to it. The American chipmaker briefly suspended shipment after Inspur was added to a US list of Chinese companies it deems military-controlled.

Why it matters: The list, announced by the US Department of Defense, paves the way for US President Donald Trump to impose sanctions on 20 Chinese companies, including Inspur and Chinese telecommunications equipment maker Huawei. However, Intel’s twist indicates the list has not been turned into an export control list.

• Inspur has around 37.6% of China’s server market in the first quarter of this year, according to market research firm Gartner (in Chinese). The company is an important provider of hardware used by many of China’s leading cloud-computing firms like Aliyun and Tencent Cloud.
• Inspur spent some RMB 17.9 billion (around $2.5 billion) on sourcing components from Intel in 2019, accounting for 37.5% of its total expenses, according to its 2019 annual report (in Chinese).

Details: Inspur has received notice from Intel that the US company has resumed shipment to the Chinese server maker, Chinese media Caixin reported Friday. Intel also confirmed the information to Caixin.

• Intel said Wednesday it had suspended shipments to Inspur because it needed to “adjust its supply chain to comply with relative US laws,” Caixin has reported.
• Shares of the company, where are listed on the Shenzhen Stock Exchange, surged 4% Friday morning on the news.
• The interruption to shipments came after the Pentagon compiled a list of 20 Chinese companies with ties to the Chinese military last month. President Trump can use the International Emergency Economic Powers Act’s authorities against entities on the list, Axios reports, citing Larry Wortzel, a commissioner of the US-China Economic and Security Review Commission.

Context: Chinese manufacturing companies are increasingly subject to supply chain disruption when sanctioned by the US as a result of intensifying geopolitical conflicts between the world’s two largest economies.

• In 2018, ZTE, a smaller rival of Huawei, saw its market value tank by billions of dollars after the US banned American companies from exporting components and technology to it for seven years. The ban was later lifted in July 2018.
• In May 2019, the US imposed similar sanctions against Huawei. The company expected the ban could reduce its production output by $30 billion over 2019 and 2020.

Apple has frozen updates of mobile games that didn’t provide gaming licenses from Chinese regulators. The move came after a “loophole” used by foreign game makers to bypass China’s strict gaming regulations was closed by Apple at the end of June.

Details: The American tech giant said developers would not be able to update their games without a valid license issued by the Chinese government, Financial Times reported Thursday.

• Games will not be removed from Apple’s App Store, and the company will allow games to be downloaded, said the report.
• TechNode reported in February that Apple sent a notice to developers requiring them to submit valid license numbers for paid games or games offering in-app purchases before June 30 in order to distribute in mainland China. 
• In a notice sent to game makers that have titles listed on the Chinese App Store, Apple said: “Chinese law requires games to secure an approval number from the General Administration of Press and Publication of China.”

Context: The Chinese National Radio and Television Administration, China’s top content regulator, issued a notice in 2016 requiring mobile games to obtain approval before publishing.

• Apple previously required developers to submit a license number to upload games to the store, but a report by The Information suggested in 2018 that Apple didn’t actually check the license numbers.
• At the time of the report, developers were able to list unlicensed games by submitting a random number instead of an official license number.

JD Digits, the fintech subsidiary of Chinese online marketplace JD.com, is preparing for an initial public offering at China’s Nasdaq-style STAR Market in Shanghai, according to a filing by several securities firms.

Why it matters: The move is part of JD.com’s broader plan to take its affiliates public over the next two years. TechNode reported in May that the e-commerce giant will focus on floating shares of JD Digits and JD Logistics, the company’s courier business, after JD.com’s own secondary listing in Hong Kong in June.

• JD Digits’ STAR Market listing plan means the new tech board, which opened on the Shanghai Stock Exchange in July 2019, has started to attract internet-based tech companies backed by likes of JD.com and Alibaba. The board has stated a preference for companies from the semiconductor and manufacturing sectors.

Details: Four Chinese securities firms have signed “pre-listing tutoring agreements” with JD Digits on June 28 to help the company file an IPO on the STAR Market, according to a filing to the China Securities Regulatory Commission (CSRC), the country’s top securities watchdog. 

• The CSRC requires companies to be tutored by qualified brokers before they go public in China’s stock markets. 
• A JD.com representative declined to comment.

Context: Spun off from JD.com in August 2017, JD Digits is currently valued at RMB 133 billion (around $18.8 billion) after raising RMB 13 billion in 2018.

• Formerly JD Finance, the affiliate operates a series of loan businesses and provides artificial intelligence and blockchain-based services targeting city governance and agriculture, according to its website.
• Nasdaq-listed JD.com debuted on the Hong Kong stock exchange on June 18, becoming the third Chinese tech firm to launch a secondary listing in the city following rival Alibaba in September and gaming giant Netease earlier in June.

Understanding China’s tech sector means knowing the biggest players in the venture capital space. They are not the big tech companies like Tencent or Alibaba, nor international consortiums backed by Softbank. They are onshore funds that raise money from the Chinese state.

For years, China has adopted the so-called “Temasek model” of managing state wealth—setting up state-backed investment firms to manage hundreds of billions of dollars like the Singaporean sovereign wealth fund.

Those funds, accounting for only 26.6% of total Chinese VC firms, managed more than 60% of the money in China’s private equity market in 2019, according to a June report (in Chinese) by the Chinese investment research firm Zero2ipo.

They raise money from China’s finance ministry, state-owned enterprises, and local governments’ fiscal reserves, but some local funds also raise private money as well.

Unlike Temasek, which issues detailed reports to the public about its portfolio value and returns to shareholders every quarter, Chinese state funds often operate mysteriously and are sometimes criticized (in Chinese) by local media for a “lack of transparency.”

The outside world has very limited access to state-backed funds’ investment activities. Local media and research institutes often find out what these funds have invested in only after their portfolio companies have gone public and disclosed their shareholding structures. Other information, such as their backers and management, can be gleaned from corporate registration databases maintained by market regulators.

We don’t know about the returns they yield and how they make investment decisions. Critics say state-backed funds usually make decisions following economic plans rather than market incentives.

A brief history of state-backed funds

Back in the Stone Age (aka the 1980s), state funds were the only players in China’s private equity market. The country’s first PE firm was set up in 1985 by the State Science and Technology Commission (succeeded in 1998 by the Ministry of Science and Technology) to “provide funds for the industrialization of technology achievements.”

• 1992: Boston-based International Data Group (IDG) becomes the first foreign VC firm to invest in China.
• 1998: The first state fund, China New Technology Venture Capital Co., is shut down by the central bank with debts of around RMB 6 billion. Local media said in 2004 the firm had never made any venture capital investments but rather operated a loan business.
•  2004: The Shenzhen Stock Exchange (SZSE) opens a board for small- and medium-sized enterprises, providing more exit channels for VC firms.
• 2005: The National Development and Reform Commission, China’s top macroeconomic planning body, issues a guideline to advise central and local governments in setting up “venture capital guidance funds” to help out small- to medium-sized tech firms.
• 2007: A new company law allows limited partnership, a popular partnership for VC firms to hold their investment in companies.
• 2009: The SZSE opens the Chinext startup board.
• 2015: Chinese Premier Li Keqiang announces a plan to set up national-level guidance funds to support innovation and industrial upgrading.
• 2015-2018: A series of guidance funds are set up by central and local governments, targeting sectors such as high-tech, manufacturing, and aviation.

Big money

According to the Zero2ipo report, by the end of 2019 China had around 14,000 private equity and venture capital firms, 26.6% of them state-backed. Together, those funds managed 60.5% of all the money raised in the market.

Many more private firms have entered the market recently, but in dollar terms it has hardly changed. In 2014, around 70% of newly founded Chinese VC firms were state-backed, altogether managing around 59% of new funds raised in the market.

The report attributed the increasing share of state-backed funds to the foundation of a series of “guidance funds” founded between 2015 and 2018. “Their size usually ranges from several billion RMB to several tens of billions RMB, sharply increasing the scale of capital managed by state-backed funds,” said the report.

Key players

China’s so-called guidance funds use state money to invest in companies in industries that the government considers strategically important. There is no official list of those strategically important industries, but “Made in China 2025,” a government-led industrial subsidies scheme (as well as a focus of the US-China trade war), has outlined some “prioritized sectors” that include semiconductors, new materials, and next-generation information technology.

Not all guidance funds are relevant to tech. Other major funds have missions such as supporting the country’s small- and medium-sized enterprises.

The chip fund: The China National Integrated Circuit Industry Investment Fund, dedicated to investing in semiconductor firms, is dubbed the “big fund.” It was set up in 2014 and raised RMB 138.7 billion from the Ministry of Finance and China Development Bank Capital, as well as several other state-backed enterprises.

The chip fund was set up to invest in semiconductor manufacturing and designing, and to promote mergers and acquisitions, according to China’s Ministry of Industry and Information Technology (MIIT), which supervises the fund. In October 2019, the fund closed another financing round, raising RMB 204 billion.

The internet fund: In 2015, the Cyberspace Administration of China, together with the Ministry of Finance and some state-owned enterprises, formed the China Internet Investment Fund. The fund focuses on investing in Internet-based services and promoting the development of “Internet innovation,” according to Xinhua. It raised RMB 30 billion in its first financing round and will have a total scale of RMB 100 billion. Portfolio companies of the fund include cloud computing company Kingsoft Cloud and voice recognition technology firm Unisound.

The manufacturing fund: In 2019, China’s finance ministry and several state-owned enterprises set up a RMB 147.2 billion National Manufacturing Transformation and Upgrading Fund. The fund will invest in companies working on areas including new materials, next-generation information technology, and electrical equipment, according to a filing by one of its investors.

The big funds’ biggest deals

• In October 2019, China State-owned Capital VC Fund led a RMB 1 billion Series A in Qianxun Spatial Intelligence, a company that uses China’s homegrown Beidou Navigation Satellite System for location and data analysis services.
• On May 13, the China Internet Investment Fund led a RMB 1.8 billion financing round in Cloudwalk, a facial recognition firm.
• In May, Chinese media reported that semiconductor maker Unisoc had raised RMB 5 billion from the China National Integrated Circuit Industry Investment Fund.
• On May 15, the chip fund injected more than $2 billion into domestic chip maker Semiconductor Manufacturing International Corp (SMIC).
• On June 1, the National Small and Medium-Sized Enterprise Development Fund participated in a RMB 180 million Series B in I-Kingtec, a Beijing-based commercial drone maker.

A vote of confidence

State-backed funds are seen by experts as a tool to execute economic plans while making a profit. But the idea is that they will “guide” private capital to strategic sectors rather than replace it.

Another report from Zero2ipo in January said the total scale of China guidance funds reached RMB 10 trillion and a total of 1,686 guidance funds have raised a combined RMB 4.7 trillion as of the end of 2019.

On top of making money for the state, these funds also aim to leverage China’s massive private capital to invest in sectors considered strategically important by the government.

State-backed funds targeting specific sectors are important because they are seen by the market as a vote of confidence, and thus help lure private capital to invest in those sectors, as Dong Dengxin, director of the Financial Securities Institute at the Wuhan University of Science and Technology, told TechNode in an interview last year.

Who are the decision-makers?

While the state-backed funds are born with political tasks, their decision-making processes are not market-oriented, according to a 2015 paper by Chen Zhihai, the general manager of Chengding Fund, a Shanghai-based venture capital firm backed by a state-owned enterprise.

State funds, especially those backed by local governments, are very cautious about their investments, said Guo Libo, research head of investment research and consulting firm Chinaventure, when he spoke to Chinese media outlet Caixin last year.

From 2015 to 2018, many state-backed funds preferred investing in pre-IPO companies because they wanted to avoid risks and pursue a quick return, said Guo.

In the paper, Chen wrote, the management of state-backed funds, especially investment decision-makers, was composed mostly of cadres allocated from central or local governments rather than professional investors selected from the market.

“[The cadres] may have done some research on the country’s macroeconomics or some specific industries, but in the long term, they won’t be able to put enough effort into the research of investments, sometimes resulting in inaction because they would rather avoid mistakes than make decisions,” wrote Chen.

Huge, but sluggish

State-backed funds have incubated some successful companies in key areas such as semiconductors and artificial intelligence. SMIC, a Shanghai-based contract chip maker backed by state money, has started to take over some chip production of Huawei’s chip designs from Taiwan Semiconductor Manufacturing Co. (TSMC) amid US sanctions. The Hong Kong-listed firm is expected to dual-list its share on Shanghai’s Nasdaq-style STAR board in July. 

Despite the massive amount of cash injections, state investors, especially those backed by local governments, have sometimes failed to mobilize private capital into targeted sectors.

In October 2019, auditors of three provinces reported that their guidance funds yielded low returns and had not “sufficiently” mustered private capital, according to Chinese business newspaper 21 Caijing (in Chinese).

In central China’s Henan province, some 43 guidance funds were set up as of the end of 2018, with a planned target of raising RMB 38 billion from fiscal money and private investors. However, they only raised RMB 19 billion and fiscal money accounted for 92%, according to the report. In north China’s Hebei province, auditors said only 14.7% of RMB 6.3 billion raised by 13 guidance funds were used for investments by the end of 2018.

These setbacks are signs that while these state-backed funds have a huge share of the market, they hold big disadvantages in terms of inefficiency. Encumbered by their politicized nature and bureaucratic decision-making processes, their efficacy and results are still far from certain.

The top telecommunications regulator in India has asked telecom operators and internet service providers to block local user access to the 59 Chinese apps banned on Monday, local newspaper Telangana Today reported Wednesday.

Why it matters: The move means users who have downloaded the banned apps before may be barred from using them. Affected apps include Bytedance’s popular short video app Tiktok and Tencent’s instant messaging app Wechat, as well as mobile games Mobile Legends Bang Bang and Clash of Kings.

Details: India’s Department of Telecommunications has asked all internet service providers (ISPs) and telecommunication companies to comply with the order immediately and submit compliance reports, according to Telangana Today, citing anonymous sources.

• Some major Indian ISPs, including Airtel, Reliance Jio, ACT Fibernet, and Hathway, have seemingly stopped providing Tiktok access to their users since Tuesday, according to India Today.
• Some users of Reliance Jio and Airtel, two of India’s biggest telecom operators, said on social media that they were unable to access to Tiktok on their networks, said the India Today report.
• All 59 Chinese apps were deemed threats to national security and were pulled from the country’s Google’s Play Store and Apple’s App Store on Tuesday, according to DNA India, a local news site.
• Tiktok seems to have blocked Indian user access to its service before it is banned by ISPs. Users in India trying to access Tiktok’s website are redirected to a webpage that states that the app is “ in the process of complying with the Government of India’s directive,” according to TechNode’s sources in India.
• The app said it is “also working with the government to better understand the issue and explore a course of action.”
• “Ensuring the privacy and security of all our users in India remains our utmost priority,” said the notice signed by the “Tiktok India Team.”
• Sources in India also said they could use Wechat but they couldn’t load the Club Factory app without virtual private networks (VPNs) as of Wednesday.

Data security probe: Representatives from the 59 banned Chinese apps can appear before a government panel within 48 hours of the announcement to prove that they do not transfer Indian user data to servers in China, according to the Indian newspaper Economic Times, citing government officials.

• The panel, which is likely to meet on Wednesday, consists of officials from India’s home affairs, electronics, information, and law ministries, along with internet security experts, according to the report.
• The committee will conduct a detailed inquiry into the data-sharing practices of these apps. Executives of Tiktok, livestreaming platform Bigo Live, and video-sharing app Likee told the Economic Times that they will cooperate with the government in the probe and they had begun the process.

Read more: Tiktok pulled from India stores in ban on 59 Chinese apps

Context: The Monday ban on 59 Chinese apps came two weeks after a border clash with China left 20 Indian soldiers dead.

• Companies affected by the ban, including Tiktok parent Bytedance and e-commerce site Club Factory, have said they were willing to comply with the Indian government’s privacy standards.
• Tiktok said in a statement Tuesday that it “continues to comply with all data privacy and security requirements under Indian law” and that it had never shared any information of its Indian users with any foreign government, including the Chinese government.

Bytedance’s mega app Tiktok has been removed from Android and Apple app stores in India, its second-largest market, following a Monday ban on 59 Chinese apps on national security concerns. The ban comes two weeks after a border clash with China left 20 Indian soldiers dead. 

Among those blacklisted are popular Chinese apps like Tiktok, Wechat, Baidu Maps, Baidu Translate, Sina Corp’s microblogging platform Weibo, as well as mobile games Mobile Legends Bang Bang and Clash of Kings. Other banned apps popular in India include Chinese-owned e-commerce platforms Shein and Club Factory, Bytedance’s social media app Helo, and Alibaba’s UC Browser. 

A door slammed shut: Losing access to India’s market is a blow for Chinese companies like Bytedance, which aim to ride India’s rapid growth in mobile internet penetration.

• India’s mobile app market is still developing, and rapidly. Smartphone users in India are projected to double to 1.25 billion by 2024 from 610 million in 2018, according to India-based think tank Gateway House. Between 2016 and 2018, the number of app downloads increased by 165%.
• Some companies have made big bets on the Indian market: Alibaba’s fintech arm Ant Financial has invested close to $2.7 billion in seven companies, while Tencent has spread $2 billion across 15 firms.
• A big loser from this decision will be Bytedance, the owner of Tiktok. According to Sensor Tower, 30% of Tiktok’s more than 2 billion global downloads come from India.

The companies react: Bytedance told TechNode that its team of 2,000 employees in India “is committed to working with the government to demonstrate our dedication to user security and our commitment to the country overall.”

• Club Factory, which has more than 100 million monthly active users in the country, told TechNode that it was compliant with privacy practices and had “provided direct employment to hundreds of people in India.”
• “We have always been willing and continue to remain committed to working with the Government to resolve any concerns,” the company added.
• Spokespersons from Tencent, Xiaomi, and Baidu declined to comment. Alibaba had not responded to requests for comment as of publication.

Collateral damage: Many analysts see this decision as a direct reaction to the border clash, bolstered by other factors like protectionism.

• “I would say that it’s more of a nationalist response,” said Hamsini Hariharan, host of the States of Anarchy podcast, which focuses on global affairs and Indian foreign policy.
• She continued, “I think the government wanted to just send a message that they weren’t taking the border lying down, and they figured the Chinese apps were a good way to do it.”
• Deep K. Datta-Ray, visiting senior fellow at the Singapore-based S. Rajaratnam School of International Studies, concurred that the ban was “in the first instance a tit-for-tat response to Chinese actions along the border.”

Protecting our own: However, Datta-Ray added that “these actions are in keeping with a generally isolationist and nativist approach” on India’s part, as seen in moves such as its withdrawal from the mega free trade agreement known as the Regional Comprehensive Economic Partnership in late 2019.

Nationalist tide: The app ban follows a China-India border clash in the Himalayas that left 20 Indian soldiers dead, the first time in nearly 50 years that Indian soldiers had been killed on the border.

• That clash stoked anti-China sentiment in India, with a former Indian ambassador to China calling it a “turning point,” although not a “breaking point,” in Sino-Indian relations.
• In May, an app called “Remove China Apps” rose to the top of India’s Android store amid growing China-India tensions. That app was itself removed from the Google Play store on June 3.
• On June 17, national intelligence agencies in India asked the government to block 52 mobile apps by Chinese developers, informing the current ban.
• People in India “have already been talking about boycotting goods from China,” Hariharan told TechNode, and so “this current ban of the apps is just part of that nationalist wave.”

Swing state, swung: In the context of US-China tech tensions, some analysts have interpreted this ban as a loss for China.

• For China, India “was almost a tech ‘swing state,’” Rush Doshi, director of the China Strategy Initiative at the Brookings Institution, said on Twitter. “But with bans on these apps and new restrictions on Huawei, that strategy is seriously imperiled.”
• In April 2020, Chicago-based think tank Macro Polo compared the top 10 apps from different countries in 2015 and 2019, and concluded that “Chinese apps have taken the lead in by far the largest emerging market: India.”
• In 2015, three of the top 10 apps in India were from China. By 2019, that had risen to six: Tiktok, video-based social media platform Likee, Bytedance’s Helo, file sharing app Shareit, and Alibaba’s UC Browser and video sharing app Vmate.
• Though some of those names may not be familiar, they totaled 982 million downloads combined during the year.
• However, India has swung back and forth on China, and this may not be the closing act. In April 2019, Tiktok was banned in India for two weeks for allegedly spreading pornography, but made a swift comeback upon its return to the app store.

Firewall goes up: It isn’t entirely clear how the ban will be implemented. Some apps have already been taken down from app stores, but actively restricting their use would require additional steps.

• Tiktok appears to have been removed from the Apple and Google stores in India, TechNode sources in India have confirmed.
• However, that won’t stop people who have already downloaded the apps from continuing to use them. Some reports say to expect restrictions from internet service providers that will require virtual private networks (VPNs) to get around. 
• The Indian Express states that this notice “is expected to be followed by instructions to Internet service providers to block these apps,” but it’s unclear when that will be implemented. 
• As of now, TechNode sources in India are able to use apps like Wechat and Cam Scanner without a VPN, and can still access e-commerce websites like Shein from desktop browsers.
• According to Datta-Ray, “India has chosen a low-denomination item, apps, and a masked response… because China is by far, in a stronger position.” At the end of the day, that means despite an intensification “in name,” “business might very well continue as usual.”

The board of Chinese smartphone maker Xiaomi passed Tuesday a resolution on share buybacks, paving the way for the company to repurchase up to $4.3 billion in shares.

Why it matters: Tuesday’s announcement is part of the company’s broader efforts to boost investor confidence.

• The company’s share prices have lost nearly a third of their value since debuting on the Hong Kong stock exchange in July 2018, hurt by a slowing smartphone market and low margins in its hardware business—the company’s biggest source of revenue.
• Xiaomi share prices surged 8.7% during Wednesday’s morning trading session.

Details: Xiaomi’s board of directors has approved a resolution allowing the company to repurchase up to 10% of its issued shares, according to a statement filed with the Hong Kong stock exchange on Tuesday.

• Xiaomi has issued 24.1 billion shares, according to the filing, meaning the company could buy back up to 2.4 billion shares. The value of that 10% of shares as of Wednesday was HK$33.1 billion (around $4.3 billion).
• The resolution allows the company to repurchase shares, but it has not yet announced a plan. A Xiaomi representative declined to comment.

Context: The Beijing-based company is looking to roll out a more aggressive share buyback initiative following an earlier plan announced in September to repurchase up to HK$12 billion (around $1.6 billion) worth of stock in an effort to halt its decline in value.

• The company has executed nearly 20 buybacks since the September announcement. In April, it spent nearly HK$500 million on two buybacks on two consecutive days.
• Shares have climbed 65% since the announcement. However, they remain at two-thirds the value of the initial public offering price.
• The company said in March its revenue for the fourth quarter rose 27.1% year on year to RMB 56.5 billion (around $8 billion), with RMB 66 billion in cash reserves as of end-2019.

Apple will start removing unlicensed games from its China app store as a deadline given by the American technology giant passes on June 30. The company’s move to enforce Chinese game licensing regulations is expect to affect thousands of mobile games that have relied on a loophole to list on the Chinese app store.

Why it matters: Apple’s move will make it much harder for international mobile games developers to access the Chinese market, requiring them to find a Chinese partner to apply for a license from regulators.

• Since 2016, Chinese regulations have required all paid games or games that offer in-app purchases to obtain a publication license before they can be uploaded to app stores.
• Apple required developers to submit a license number to upload games to the store, but a report by The Information suggests that Apple doesn’t actually check the license numbers.
• Developers were able to list unlicensed games by submitting a random number instead of an official license numbers.

Details: TechNode reported in February that Apple sent a notice to developers requiring them to submit valid license numbers for paid games or games offering in-app purchases before June 30 if they want to distribute in mainland China. 

• Apple is ready to take action next month as this deadline approaches, Bloomberg reported Tuesday, citing “people familiar with the matter.” Bloomberg reports that the company will start removing thousands of games from its App Store in China next month.
• “Chinese law requires games to secure an approval number from the General Administration of Press and Publication of China,” Apple said in the notice sent to developers in February.

Context: The Chinese National Radio and Television Administration, China’s top content regulator, issued a notice in 2016 requiring mobile games to obtain approval from the administration before publishing.

• Only Chinese companies can apply for licenses, meaning that international developers must find a domestic partner to apply.
• It can take months for game makers to have their titles approved. Titles are often rejected for indistinct reasons. Chinese media has identified (in Chinese) some possible grounds for rejection, including erotic content, gambling, or traditional Chinese characters.
• China froze mobile game approvals for nine months in 2018, causing the country’s gaming industry to record its slowest growth in at least a decade.

In the past few months, a series of power struggles have rocked Chinese tech companies, including e-commerce company Dangdang, bitcoin mining rig maker Bitmain, and UK chip designer Arm’s Chinese branch.

The disputes at the three companies were over different versions of the same issue: removed company executives trying to regain power. But their approaches varied, as well as the results. Some tried to grab company seals, some tried to restore a key position at a company with the support of the authorities, and some just ignored decisions made by the board.

Bottom line:  The power struggles in the three companies are, at their core, battles between management and shareholders. But some peculiarities of Chinese corporate governance makes it easier for executives to seize control and harder to resolve such standoffs.

Three coups

Grabbing seals: A former executive tried to take control of e-commerce marketplace Dangdang by forcibly seizing the company’s official seals from its office in a daylight raid.

• In February 2019, Li Guoqing announced in an open letter that he had left the company, indicating a peaceful handover.
• But on April 26, Li broke into the company’s Beijing headquarters with six others and took control of nearly 50 of the company’s official stamps and financial seals.
• In a letter to employees distributed during the visit, Li says he would take over the company’s operations, while Yu Yu, his wife and co-founder, would no longer be executive director, legal representative, nor general manager.
• On July 13, local police said Li’s takeover of the stamps “didn’t break the law.” 
• On the same day, Dangdang said the police’s decision was “shocking” and that the company had filed for administrative reconsideration.
• Li claims that he was authorized to take control of the company at a temporary session of the general meeting of shareholders. However, rival Yu owns 64.2% of Dangdang, according to its corporate registration information.
• Seals? Company seals are considered a company’s legal signature. Documents affixed with a company seal are usually seen legally binding upon that company.
• It seems that Li didn’t take control of the company as he planned. Chinese media still recognizes statements by Yu as representing the company.

Defying the board: On June 10, Arm China, a subsidiary of British chipmaker Arm, rejected a decision by its own parent company to fire China chief Allan Wu.

• The day before, Arm said the board of Arm China, a joint venture set up by the British firm and a Chinese investment consortium in 2018, voted to remove Wu from his position as chairman and CEO.
• The Chinese subsidiary fired back with a statement saying the board’s decision was invalid and that Wu remains in his positions. Arm’s UK headquarters responded that they stood by their original statement firing Wu.
• The statement by Arm’s UK headquarters said Wu had been fired “after an investigation uncovered undisclosed conflicts of interest and violations of employee rules.”
• The Arm China board voted 7-1 to dismiss Wu, Bloomberg reported Saturday.
• All signs show that Wu is still in charge of Arm China. In an open letter signed by a number of Arm China employees, Wu’s supporters said they were “shocked by the allegations against Wu.”

Whatever this is? Bitmain’s co-founder Zhan Ketuan’s coup attempt started with reappointing himself as the legal representative of the company with the help of Beijing’s market regulator.

• Context: In October 2019, Bitmain co-founder Wu Jihan ousted Zhan from company positions as co-CEO and legal representative.
• On May 8, the Market Administration of Beijing’s Haidian district convened a meeting to hand over Bitmain’s business license to Zhan after the market regulator backed Zhan’s claim that the change of the company’s legal representative was invalid. Zhan claimed a document submitted by Wu to change the legal representative did not follow proper procedures.
• A physical brawl broke out at the government office after Bitmain management tried to take the license from Zhan by force.
• Corporate registration information shows Wu replaced Zhan as the company’s legal representative on October 28, 2019.
• Zhan has partially controlled Bitmain since he was re-granted the position as the company’s legal representative. In June, Zhan re-took the control of Bitmain headquarters in Beijing and ordered employees to halt product deliveries. 

Why is it so hard to know who’s in charge?

The power of legal representatives: Chinese corporate law requires every company to have one legal representative, an executive position on par with the CEO in importance. Leadership turnovers in a Chinese firm almost always involve the company’s legal representative in some capacity.  

The representative is practically the company incarnate: they have the power to act on behalf of the company and are answerable for the company’s mistakes—they can even go to jail on the company’s behalf. It’s a high-risk, high-reward position.  

• The board of directors has the power to remove a legal representative, but until the papers are filed—and stick—the officeholder’s power can outweigh that of their supervisors.

The Chinese-style insider-ownership problem: Experts have attributed the frequent power struggles that happen within Chinese companies partially to a so-called “insider ownership” problem. 

When American CEOs get away with ignoring their shareholders, it’s usually because they own company stocks or that the company’s equity ownerships are highly dispersed, Zheng Zhigang, professor at Renmin University’s School of Finance, wrote in an article in 2017.

In China, executives rely more on informal personal relationships to control their companies—so much so they can sideline the board, according to Zheng.

Chinese company founders usually own their companies and hold executive positions, forming “strong social connections” with employees in the process. When leadership challenges arise, this “de-facto control” is often unassailable, even overriding the board of directors, said the article.

• In the Dangdang case, when Li broke into Dangdang’s office in Beijing, employees working there “didn’t dare” to stop him because he was an “ex-boss,” according to Chinese media reports.
• Bitmain’s Zhan tried to buy support from workers. He offered RMB 10,000 ($1,400) to any employee who returned to their desks the day he marched into Bitmain’s headquarters.
• Wu of Arm China, despite being removed by the board, stays in power as employees show their loyalty. “Wu has been leading our way until today after he joined Arm in 2004, started to lead Arm’s Chinese branch in 2007, and became Arm China’s chairman [in 2018],” said the open letter by employees.

A lawyer’s view: Cheng Jun, a lawyer at Beijing Yanshang Law firm, argues that the power struggles happening in Chinese tech companies may be a result of poorly conceived corporate structures.

China’s current company law doesn’t provide comprehensive provisions on how to balance power inside an enterprise, he said, but company founders can formulate clauses in the company constitution to prevent ambiguous power structures.

“I estimate 99% of Chinese companies simply adopted templates of company constitution provided by market regulators instead of drafting their own,” he said.

Trust the court: In the long run, Cheng said, China’s courts can be trusted to resolve the problems at three companies. “Eventually, the decision-makers are company owners, or the shareholders, who exercise their power through the board of directors,” he said.

But “eventually” is a long time. According to Bloomberg’s reporting on Saturday, Wu will remain the legal representative of Arm China until he hands over the company seals he holds. The problem is he refuses to do so.

Shareholders could go through the courts, the article said, “but the process could take years.”

Chinese short video app Zynn on Monday halted its practice of paying users to watch videos and invite friends to use the app, just days after it was removed from both Google’s Play store and the Apple App Store.

Why it matters: Zynn, developed by Chinese tech company Kuaishou, is part of the company’s efforts to challenge Bytedance’s Tiktok in overseas markets. However, Zynn has experienced a series of setbacks after launching in May.

• The pay-to-watch approach quickly sent Zynn to the top of download charts in the US earlier this month. New users earned $1 for signing up and more for watching videos. They also could earn up to $20 for every five friends who downloaded the app and watched, according to the Financial Times.
• Kuaishou, with 300 million daily active users (DAU), is China’s second-largest short video app behind Douyin, the domestic version of Tiktok, which has 400 million DAU.

Details: Zynn has replaced the payment feature with a new rewards system called Zynncheers, which gives users points, instead of cash, for signing up and watching videos, according to The Verge.

• Zynn says users will get “benefits and rewards” for collecting those points, but it didn’t offer details. 
• The changes came days after the app was taken down by both the Google Play Store and Apple’s App Store.

Context: Launched in May, Zynn became the most downloaded app on the US App Store in the first week of June, according to app data provider Sensor Tower. The app notched more than 2 million installs worldwide in May.

• Google removed the app from its Play Store last week after finding one video was “plagiarized,” the company told the Financial Times.
• Before that, a number of social media influencers complained to Wired that they found videos they had originally uploaded to Instagram, Youtube, and Tiktok were reposted to Zynn without their consent.

New Zealand and Canada face a dilemma as the US pushes them to ban Huawei from telecoms networks, national security experts from Five Eyes countries said in an online discussion held by Canadian research organization Conference of Defence Associations Institute on June 9. 

Smaller countries in the US-led intelligence alliance are trying to avoid being entrapped in the conflicts between the two superpowers while keeping their relations with the US, said Joe Burton, senior lecturer at the University of Waikato’s Institute of Security and Crime Science, during the online panel. Representatives of four out of the five countries participated in the panel, with a UK expert canceling.

The Trump administration has waged a years-long campaign against the Chinese hardware giant, asking allies to ban its telecoms equipment and attempting to cut off its access to key technology. Most recently, the White House moved to cut the Chinese telecommunications equipment and handset maker off from global chip manufacturing. 

The United States has long warned of national security risks associated with Huawei’s equipment. The Shenzhen-based telecoms giant could spy on other countries’ telecommunications at Beijing’s behest, Washington has argued.

Around the world, some US allies, like Japan, have responded with restrictions of varying degrees on Huawei equipment.

The UK has sided with the US and plans to phase out Huawei products in the next three years. Australia excluded Huawei equipment from its 5G networks in 2018.

But Five Eyes members New Zealand and Canada have yet to come up with comprehensive policies on Huawei.

‘The door has been left ajar’

New Zealand placed restrictions on Huawei equipment in its 5G rollout, but “the door has been left ajar for [the company’s] involvement in the future,” said Burton.

The Pacific country doesn’t have an official ban targeting Huawei equipment in its 5G network. However, in 2018, the country’s intelligence agency rejected telecoms company Spark New Zealand’s request to use 5G gear provided by Huawei, citing concerns about national security.

In November, Spark named again Huawei as one of its preferred 5G vendors and Wellington has yet to decide whether to approve the new plans.

As a small state with considerable dependence on Chinese goods and markets, New Zealand doesn’t have “the capacity necessary to absorb economic shocks like other countries do,” said Burton.

Burton said that New Zealand’s current policy on Huawei shows they don’t want to get involved, and even entrapped, in US-China conflicts. Burton used entrapment, a term describing countries dragged into wars they don’t want to fight, to refer to the scenario that New Zealand is avoiding.

“We are afraid of entrapment…I think there is a new form of technological entrapment which we should be aware of, and the tensions in the China-US relationship over technology and industrial policy have adverse effects on us which we are keen to avoid,” said Burton.

Canada balances security and diplomacy

Canada hasn’t made a decision on whether Huawei’s involvement should be allowed in its 5G networks, despite warnings from its own military against Huawei equipment, said Richard Fadden, a former director of the Canadian Security Intelligence Service, during the online discussion.

The US-China ongoing diplomatic dispute over the arrest and possible extradition of Huawei executive Meng Wangzhou makes things even more complicated for Canada. Wanzhou was arrested by Canadian authorities in Vancouver in 2018 over alleged sanction violations, at Washington’s request. British Columbia courts have yet to decide whether she will be extradited to the US.

Meng’s arrest plunged Canada’s relations with China into their darkest period in decades. Within a month of Meng’s arrest, China detained, and then formally arrested, two Canadians and halted key agricultural imports from the country. Beijing has threatened further retaliation if Canada bans Huawei from its 5G networks.

But this tit-for-tat diplomacy might not do much to sway Canada. The amount of harm that China can do to Canada is “limited,” said Fadden.

“Our country would not be materially hurt in the medium to long term if we said no to Huawei,” said Fadden, who is also a former Canadian national security advisor. 

But Canada could also see reprisals coming from its neighbor and largest trading partner. The US is prepared to reassess its intelligence-sharing arrangement with Canada if Huawei is allowed to participate in Canada’s 5G rollout, the Canadian State Department said earlier this month.

However, the country has long insisted on an independent approach towards Huawei. The country’s industry minister Navdeep Bains told local media in March that Canada would not be “strong-armed into a decision” on the Chinese company’s access to its 5G networks.

“We will make sure that we proceed in a manner that’s in our national interest. We won’t get bullied by any other jurisdictions,” said Bains.

Five eyes, five views

The Huawei dilemma is not going away in the near future. Whatever the result of the US presidential election, the country’s policy towards Huawei will not change, according to Timothy Heath, senior international defense researcher at American policy think tank Rand Corporation.

During the online discussion, Heath said the US approach towards China and Huawei is “bipartisan.”

Even within the Five Eyes, security concerns seem to be universal. Patrick Walsh, associate professor of intelligence & security studies at Australia’s Charles Sturt University said the country has been lobbying Washington to ban Huawei equipment even before Trump placed a series of restrictions on the company.

“We’ve seen things like the intelligence law that have come up, which essentially states that even if you’re a private sector company, if the state calls you to help with an intelligence operation, you’re compelled to participate in that,” said Walsh, referring to China’s 2017 National Intelligence Law which requires organizations and citizens to “support, assist and cooperate with the state intelligence work.”

“Huawei is operating in a sector considered strategic by the state and it is clearly subject to direction by the Chinese state,” said Fadden.

A Huawei spokesperson refused to comment on the discussion but cited company founder and CEO Ren Zhengfei as saying the company is willing to sign non-backdoor agreements with carriers around the world to address concerns over its equipment’s potential security risks. 

The company has set up a series of cybersecurity centers around the world, including in the UK, Germany, and Belgium, the spokesperson said.

Bytedance is taking down its video-sharing app Vigo in India, the Tiktok owner said Monday, the second overseas app the company has closed in a month.

Why it matters: With Vigo’s closure just a few days after the company announced that it is phasing out news aggregator Topbuzz, Bytedance is actively narrowing its product line overseas to focus on hugely successful short video app Tiktok.

• Vigo is a video-sharing app that allows users to create lip-syncing clips and interact with other video makers. The app had around 5.5 million monthly active users in India, their biggest market, as of May, according to Techcrunch.
• Meanwhile, Tiktok, the company’s flagship video app, has around 200 million monthly active users in India.

Details: Vigo has already ceased operations in Brazil and the Middle East and will shut down in India by October 31, according to a company statement on Monday.

• A Bytedance spokesperson said the app will eventually stop operations in all countries.
• Current users of Vigo can export their content to Tiktok, which the company said will provide “a seamless experience.” Users can also choose to download their personal data or delete their accounts permanently, said the statement.
• The company said it is shutting down Vigo in order to “focus energy and resources on other businesses.”
• The app was still available on Google’s Play Store and Apple’s App Store as of Monday.

Context: Vigo was rebranded from Flipagram, a US video-sharing app Bytedance acquired in early 2017.

• Bytedance rolled out a China version of Vigo, called Huoshan, shortly after acquiring Flipagram. It remains one of the most popular video apps in China.
• Bytedance is known for a shotgun approach to product development. It’s comfortable with experiments, and unsentimental about trimming underperforming apps.
• On June 5, Bytedance said it is halting updates to news aggregator app Topbuzz and will gradually stop operations of the app.

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