China’s Clampdown On National Technology Champions: Xi’s New Industrial Statism, Triumphalist Hubris And Art Of Ju-Jitsu

The world has been baffled by China’s sudden clampdown on its very successful, and giant, companies such as e-payments firm Ant Financial, ride-hailing firm Didi Chuxing, food-delivery firm Meituan, and several online education firms. Given the opacity of the Chinese communist party, commentators can only imagine what the reasons might be.

The Economist’s current cover story is titled, “China’s attack on tech”. There is a plethora of other views on the topic, and it is worth exploring why this happened, and what we might take away, especially from an Indian point of view.

It seems to me that there are at least three plausible scenarios, and any of them may be in play, and maybe all three at once:

1. Industrial policy, directing where investment and funding will go.

2. Triumphalist hubris, because of how successful China has been lately.

Industrial Policy

It may well be that China has decided (as in the Made in China 2025 plan) that there are certain technologies that have an outsize impact on the future, and they have decided to focus their attention therein. For example, quantum computing, biotechnology, materials science, along with specific applications of artificial intelligence (AI) and machine learning or ML (a recent report suggests that China has overtaken the US in the citations of their papers in AI).

Such a direction would not be particularly surprising. A much-cited article by C K Prahalad (“The Core Competence of the Corporation”, Harvard Business Review, 1990) made a comparison between GTE and NEC, and concluded that the latter handily defeated the former by concentrating on the crucial technology of the then-future, semiconductors.

Others, for instance Scott Adams (cartoonists often have surprisingly sage perspectives), have suggested that China’s management model is engineering-driven and is thus focused, ruthless and unaffected by the legal hair-splitting that bedevils many other countries, including India.

Thus, industrial policy could well be a sensible way of dealing with the uncertainties of the future. Japan’s MITI tried to guide industry in the 1980s and 1990s with mixed results, but China’s mandarins may well believe they have a better handle on reading the tea leaves.

There is the other side of the picture, which is quite relevant to India as well. What is considered the ‘tech industry’ in the US these days consists of a number of behemoths in what is loosely referred to as Silicon Valley, although several of them, such as Microsoft and Amazon are actually in Seattle. The usual suspects include, apart from the above, Google parent Alphabet, Facebook and Apple.

Not to be dismissive, but Facebook and Google do ‘surveillance capitalism’, basically selling their users to advertisers. Amazon and Microsoft are soaring on the basis of their cloud-computing infrastructure. But one could argue that they are merely milking their innovations of a decade ago, and don’t have much of a recent product line that creates a ‘moat’ for them, or in MBA-speak, a ‘blue ocean’.

The same question can be asked of India’s lionised unicorns, of which here is a partial list as per the Economic Times a few days ago. Exactly what earth-shaking and life-changing innovations do they bring to the table? Yes, if they have managed to build big, loyal customer bases, sure, that can be of value. But just copying and indigenising business models successful elsewhere is not exactly setting the stage for world-beating companies.

To put it bluntly, the Chinese may be calculating that Silicon Valley’s best brains are now engaged in minutely tweaking algorithms to capture the attention span of customers, and are not thinking of solving the world’s problems. For instance, they have been notably less than successful in addressing climate change or even the Wuhan virus/Covid-19 pandemic.

They may have a point, and India’s policy makers should take note. There has long been disquiet about the very successful IT services companies based on the fact that they have, nevertheless, left little by way of a technology legacy the way early Silicon Valley pioneers such as Hewlett Packard and Fairchild Semiconductor did.

Triumphalist Hubris

China has good reason to believe they have won. They have, for all practical purposes, created a new world order dominated by them. Just think of what they have done lately in terms of riding roughshod over the world. Nobody would dare to demand reparations from them for what could be construed as the crime against humanity of 4 million dead from the virus that arose in their country (and could well be something they designed in a lab).

Similarly, they have captured the South China Sea, used their debt-trap diplomacy to extort their way to strategic assets, and cavalierly sent up rockets that might fall on anybody’s head. One could also make a cogent argument that they were able to harness their media and social media assets to defenestrate an American president they didn’t like. Not to mention the pandemic narrative that, for long, completely exonerated them from any blame.

Maybe they believe that they know so much about us that they, in effect, have incriminating evidence on us that they can use to intimidate us into doing their bidding.

One example is the big super-apps from China: Tencent and Ant Financial, which have evolved into efficient ways of vacuuming up data from and about consumers. Unlike the American model of stand-alone apps that know a great deal about individuals, the super-apps offer a walled garden that has everything from payment to mutual funds to loans to travel agencies. These apps know so much about Chinese people that the government, using it, is able to create the infamous social credit score for all residents.

There have been overseas ventures as well. It is rumoured that Chinese-branded smartphones and surveillance cameras may well be capturing and transmitting data to their servers back home. There is also the story of the African Union, whose building was constructed by China. It is said that every day at 5pm, all the confidential conversations in the building were transmitted back to China.

There is also the sinister story of the Chinese gene company BGI Group. According to a Reuter’s story (“China’s gene giant harvests data from millions of pregnant women”) their prenatal tests were “developed in collaboration with the country’s military” and they are using them to “collect data from millions of women for sweeping research on the traits of populations”. Perfect information, one could imagine, for well-targeted biological weapons.

It may well be that the Chinese have decided they know enough from snooping; they don’t really need the super-apps any more, and so they are cut loose. In their triumphalist fantasies, there is nothing that prevents them from reclaiming their ‘Middle Kingdom’ status.

The Art Of Ju-Jitsu

The very strengths of the West are being deployed against it by the Chinese, who also believe that their model of “capitalism with Chinese characteristics” ie, the private sector is ultimately subservient to the State, is the right model for the rest of the world, rather than the buccaneer capitalism exemplified by the US. That anyway is CCP dogma, and it appears that they are proving it too.

Consider the (erstwhile strengths of the West, especially the US, that China has usurped:

1. Manufacturing: hollowed out, and China owns the supply chain now.

2. Innovation and R&D: now confined to tweaking social media. applications. China also sends its bright students to learn at the best US universities and then bring the knowledge back home with them.

4. Finance: Wall Street has been able to crush competitors in the past (for instance, they did something to Japan, I am not sure exactly what, to bring its meteoric rise to a halt), but now they are hand in glove with China. The Wall Street Journal wrote a year ago that “China has one powerful friend left in the US: Wall Street”

5. Marketing: the narrative building that China does is world-class, and it has bought its way into media (for instance, it is alleged by national interest that the WSJ got $6 million and the Washington Post $4.6 million from China). The obvious biases in social media and in mainstream media (apparently including science and medicine journals The Lancet and Nature) support this perspective.

6. Capitalism: Investors have made much money in the tech runup in the US, but they also lost a lot when China decided to make a policy change. According to the WSJ, “Investors lost hundreds of billions in July”, which means that the very ideas of capitalism are being deprecated in plain sight by China.

A case can be made that it is not any longer a single point attack by China, but “unrestricted warfare” as in the infamous book by two Chinese colonels. They are single-mindedly on the warpath, and they intend to do anything, I mean anything, to win. The skirmish over the technology companies should be seen in that light.

From an Indian point of view, it would be foolish to surmise that China has actually won: the much better lesson would be to take the good part of industrial policy and to figure out how India can leverage the exodus of investors and funds from Chinese firms to create long-term competitive advantage.