The US tech sector has enormous influence around the world. It churns out recognizable products and services, gives people innovative leaders to idolize, and lures founders and employees with lofty company valuations and generous compensation.
This isn’t new. What’s interesting, though, is realizing that other countries take a different approach. I wrote about how the EU is pushing back on tech gatekeepers like Apple and Google (and how the US tried but failed to follow) in a recent article (Apple's Cyber-Pirate Beetles).
This week, I’ll check-out the tech sector of another massive country and see how it compares to the US. Maybe each tech power can even learn some lessons from the other, moving towards the best of both worlds.
But first things first – let’s meet this other tech power. Any guesses?
Yep, that’s Beijing’s skyline. And the #2 tech power is China.
In 2021, China’s tech sector reached $7.1 trillion. It was second only to the US, which reached $15.3 trillion. And China’s leading tech companies look pretty similar to US tech giants, albeit more concentrated. Here are three of them:
Alibaba – this is the Amazon of China. People can buy anything they need from the online store (Taobao). They also have cloud services (matching Amazon’s AWS), and even a Venmo-like app in Alipay.
Huawei – this is the Apple of China, focused on making smartphones and networking equipment. It’s actually the 2nd largest smartphone seller in the world behind Samsung. And because Apple doesn’t do networking equipment, it’s like they’ve added Cisco to the mix.
Tencent – combines several different services together. Its WeChat service matches WhatsApp, its Weibo matches Twitter, Tencent Music matches Spotify, and it’s also the world’s largest video game maker.
So we know China’s tech industry is huge compared to other countries, and that even compared to the US, it’s super concentrated.
With that background, let’s look at:
Founding – where some of these companies came from
Growth – how the industry has been protected and fueled
News – what’s happening to the industry now
Founding
As far as origin stories go, China’s tech giants seem to be split between old-fashioned entrepreneurship and state-sponsored enterprise. Among those who followed the entrepreneur’s path, Jack Ma (founder of Alibaba) represents the pinnacle.
He grew up in China and started his career as a teacher. In 1994 he founded his first company, a translation service. Fast-forward to 2013, when he’s now the founder and CEO of a sprawling Alibaba empire, and he gets named as the Financial Times Person of the Year. As of 2023, he’s among the richest in China, with a net worth of almost $35B. His status feels similar to US founders that have inspired so many other entrepreneurs like Bezos, Jobs, and Gates. Along the way, they’ve all bumped up against norms and had to challenge the way things get done. Not just with their teams, or their industry, but even with the government…. More on that later.
And then, you have the other group of companies, not founded by dynamic founders but by state sponsored planning, that have closer ties to government and resemble a more traditional corporate entity. As one example, take China Mobile. They are state-sponsored, narrowly focused on wireless service, and at a scale that is hard to fathom. They have ~950 million customers. For reference, the US population is only 336 million…
As another example of a close-to-government tech titan, take Huawei. Their website has a long explanation of the fact that they aren’t state-controlled or sponsored, but it’s tricky. Their founder’s prior role? He (Ren Zhengfei) was a Chinese Military Officer for 11 years. And the US certainly considers Huawei and the Chinese military to still be close. As I wrote about in AR Without Borders, they banned Huawei’s networking equipment and encouraged allies to do the same, citing national security concerns.
So already, we see some contradictions in China’s approach to tech. Even with the founders, there is a push-pull relationship between wanting to assert control and wanting to encourage entrepreneurship.
Growth
The biggest thing China has done to encourage growth is to protect its tech companies. That protection shows up in a few different ways.
First, they are cautious about letting foreign investors and foreign companies in. Instead of free entry, they push international companies towards joint ventures, no matter the industry. All the major car companies have JV’s to sell to China – this goes for VW, Mercedes, and even GM.
China also bans foreign companies outright, like Meta’s Facebook. Or they set restrictions about how they operate. Google left China to avoid caving to censorship demands in 2014.
These all have the effect of letting homegrown companies grow like crazy, without serious international competition. Compare that to TikTok’s viral spread in the US, which is crushing Snap, Pinterest, and even Instagram/Facebook…
So as a result of this protection, China’s tech sector has been booming. Tech was ~21% of GDP in 2012, and by 2021 it had nearly doubled to 40%. And here’s how that translated to GDP growth:
News
With that context, let’s look at some recent news and tie it together.
Founder Drama – In 2021, Jack Ma’s Ant Group (subsidiary of Alibaba that owns Alipay, the Venmo-like service) was going to IPO in 2020, but Chinese regulators held it up. Then, after complaining in a public forum about the government getting in the way, Ma literally disappeared for 3 months. He re-emerged and has since kept a very low profile, supposedly dedicating himself to philanthropic efforts. Ant still has no firm plans for an IPO, and this month they announced that Ma’s stake was being reduced from 50% down to 6% (see this article from Reuters for more). Yikes! Maybe China has seen some of the founder worship in the US and decided to cut it off early, stopping them from getting too much power.
COVID Chills – The coronavirus has put a major chill on China’s economy, since they have persisted longer than most major economies with lockdowns and quarantining. It’s having several different knock-on effects. After 20+ years of averaging 9% growth in GDP, it was 2.2% in 2020, 8% in 2021, and expected to be reported as 2.7% for 2022. During that time, China’s population growth slowed, and it has actually started to decrease. Here’s an article from the Financial Times covering the decline.
Reopening – Coupled with slowing GDP and a declining population, the protests in China against lockdowns created a lot of pressure on the government to reopen. So they did. I think the economic factors played the biggest role here. Alongside a reopening plan, export controls were apparently revisited at a recent meeting between the US and Chinese presidents during meetings in Bali. And according to CNN, representatives from the People’s Bank of China have been quoted as saying in January that the crackdown on tech companies (aka the silencing of Jack Ma and intimidation of tech founders) “is basically over”.
We should watch closely to see how China’s tech sector responds to reopening. If it booms, US companies might get stronger too (and we might feel some upward inflation pressure).
In the meantime, let’s think about high-level strategy. What could these two powerhouses learn from each other?
For China – allowing free markets to run their course can drive more sustainable growth. It might even eventually remove the need for so much protectionist intervention. If lions from the zoo get released into the wild, they struggle to hunt and survive. Similarly, China’s tech sector would benefit from a ramp-up in competition.
For the US – maybe there’s a middle ground between China’s cutting down of high-flying founders, and Americas continuous deference to them. The US has benefitted from founders being motivated by nearly unlimited upside… but in a world where (some of) its most notorious tech CEOs act like they’re above the law (Elon, SBF, etc.)… it’s probably time to recalibrate.