Unique Research – The State of Chinese Big Tech
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Six years ago, we had the great fortune to meet an investment manager based in mainland China. During multiple research calls, we learned an interesting perspective about the future of Chinese business. This investor stated, “to be really successful the company needs to be local to mainland China and have complete government support. It is just the way it is.” From our vantagepoint, the NS Capital Investment Committee felt that the big technology companies…Alibaba, Tencent, Baidu…were among those anointed companies. So, it has come as a bit of a surprise to see several of these in the crosshairs of the Communist leadership. To get a better understanding of the current environment, we are fortunate to have Nels Wangensteen, Founder of MayTech Global (Alpha Ring manager since September 2019), in our research network. Nels has been investing in Chinese technology companies since 2002 so his perspective is both experienced and informed. Below are key highlights from Todd Peters, Chair of our Investment Committee, conversation with Nels conducted on June 21st.
How has the internet evolved in China?
In the early 2000s, the internet was not understood. It was not a major part of the Chinese economy, and the state-owned enterprises had no incentive to digitize. Yet, there was a huge wealth gap. Communist leadership realized that entertainment had to be both accessible and affordable. So, the concept on cheap mobile games and digital platforms was of interest. The government allowed these scrappy entrepreneurs to create, develop, and test many concepts without any significant oversight, which was quite wise. And, because there was no entrenched digital infrastructure, the now big technology companies were able to grow rapidly.
What triggered this current government intervention?
I think it started with Alibaba. Ecommerce platforms have become so huge that Jack Ma (Alibaba’s Founder) was becoming an international figure drawing more interest than President Xi Jinping. Whether it was jealousy or Jack Ma’s arrogance, the leadership decided to reign him in.
Why has the crackdown expanded beyond Alibaba?
There are two issues happening at the same time. First, the internet platforms allow large groups to congregate. These big, robust platforms have the potential of spreading information that is not government approved. This is of concern to leadership. And second, like most of the world, the Communist government wants to combat monopolistic behavior. In fact, 34 internet firms have pledged to conduct internal inspections as part of this antitrust crackdown.
Have you been surprised by the philanthropic announcements from the Big Tech leaders?
No, not really. The leaders of these companies have become colossally rich. Being super wealthy in China can incite jealously so they need to be careful. And, the Communist Party can sway people’s opinions quickly, as they did with Jack Ma. It is important for them not to appear boastful. Pony Ma (Tencent), Wang Xing (Meituan), and Zhang Yiming (ByteDance) have made significant contributions to educational programs over the last three months. Giving back to social causes and stepping up philanthropic efforts is a wise move, particularly currently.
Will Tencent and Alibaba continue to become global leaders?
Prior to Xi Jinping becoming “President for Life”, I would have said yes. But now I am not as sure. The Communist Party has its own agenda, and it is not necessarily for Tencent and Alibaba to become global leaders. There is a chance that they will be limited to China and the Chinese sphere of influence but that is still a compelling market opportunity.
Will Big Tech leadership ever control the narrative?
For the foreseeable future, the Communist Party will be the dominant force.
In 2002, I came to the realization that Chinese internet will out compete the USA, that Chinese internet users will be greater than the entire USA population, and that the emerging Chinese middle class would force the transition of services to digital platforms. I believe this remains intact today. The Communist leadership wants to continue the thoughtful build-out of digital consumer platforms, become a major player in super high-end semiconductors, and to make significant leaps in healthcare and drug development. This will require collaborative coordination between the Party and the business community. The business leaders know they need to play within the rules to be successful.