Philippa Kaur

CHINA’S TECH tycoons have not been themselves lately. In early March, at the annual session of China’s rubber-stamp parliament, Pony Ma called for stricter regulation of Tencent, the $700bn online empire he founded. Days later a rising star, Simon Hu, left his post as chief executive of Ant Group, a huge financial-technology firm affiliated with Alibaba, an e-commerce titan. Shortly after that Colin Huang stepped down as chairman of Pinduoduo, rattling investors still celebrating his upstart e-emporium’s recent announcement that it had overtaken Alibaba measured by the number of shoppers. Jack Ma, Alibaba’s outspoken co-founder and China’s most recognisable entrepreneur, has not been seen in public for months, with the exception of a video where he discusses the country’s education system.Their companies’ stocks have also been behaving out of character. Having added as much as $1.2trn to their combined market capitalisation since 2016, Alibaba, Pinduoduo and Tencent have seen their share prices tumble in recent weeks (see chart 1). The unlisted Ant is thought to be worth $200bn, down from more than $300bn in October. Throw in a few dozen other big Chinese tech groups and some $700bn in shareholder value has been wiped out since mid-February.The share price of Xiaomi, a big smartphone-maker, is down by more than 20% this year. Despite being one of the year’s most anticipated flotations, shares in Bilibili, a video-streaming service with 200m users, fell by 6% on its first day of trading in Hong Kong on March 29th. Baidu, a search giant which had regained some of its sparkle in the past year, has seen half of those gains snuffed out since mid-February. Shares in Meituan, a ride-hailing and food-delivery giant, have lost more than a quarter of their value in the same period, despite a doubling of profits last year. After this drop Chinese headlines asked of Meituan’s founder and boss, Wang Xing: “Is he not frightened at all?”.Mr Wang and his fellow tech moguls indeed have plenty to fear. Investors have cooled on frothy tech stocks in America, where many Chinese giants, including Alibaba, Baidu, Bilibili and Pinduoduo, have listings. But China’s firms have been hit harder than their American counterparts. They and their shareholders, who include plenty of Western funds, are grappling with three poorly understood developments. After years of tolerating big tech’s unbridled expansion, the central government is rewriting the rules, some tacit and some explicit, for how billionaires can behave, the degree of overt state control over data, and who owns the firms’ other assets, including stakes in other businesses. This new master plan for Chinese big tech will transform one of the world’s most innovative and valuable industries.Start with the tycoons. Unlike their counterparts in America, tarnished by accusations that their corporate creations harm users’ privacy, spread disinformation, mistreat workers and abuse their market power, Chinese tech moguls enjoy a glittering reputation among ordinary Chinese, who see them as embodying the “Chinese Dream” of growing prosperity that propagandists tout on posters across the country. Too glittering, it now seems, for the Communist Party, which under President Xi Jinping increasingly bridles at anything that might challenge its authority. That includes being upstaged by superstar bosses.The initial spark that led to the tech crackdown was Jack Ma’s comparison, at a public event in October, of Chinese state lenders to pawn shops. A month later China’s stockmarket regulator suspended the $37bn initial public offering of Ant, which would have been the world’s biggest ever, in Hong Kong. Since then the authorities have forced Ant to become a financial holding company, which undermines its lucrative, asset-light business model of matching consumers with lenders.The message, says a broker in Hong Kong, is that tech leaders should “stay in their own lane, focus on their core businesses and avoid commenting on politics or economics”. It has been heard loud and clear. Pony Ma’s parliamentary performance, in which he called for strict regulation of areas that he has invested in, from e-commerce to ride-hailing, has been seen as a signal to the Chinese government that he will not get out of line. One interpretation of Mr Huang’s departure from Pinduoduo—ostensibly to explore new opportunities in areas such as food science—is that he is wary of leading what might become China’s biggest e-commerce company. He has also recently eclipsed Jack Ma in wealth, which further increased his stature. One person who knows Mr Huang says that as a diligent student of Chinese philosophy he “understands very well that it is not safe to be at the top or at an extreme”. “He saw what was going on next door and decided to leave,” says an industry watcher.This de-tycoonification matters, for the firms’ fates are bound up in investors’ eyes with their visionary founders. Although Mr Ma quit as boss of Alibaba in 2013, and stepped down as chairman a year ago, he has continued to exert control over the direction of both the e-emporium and Ant. Where the company will end up shorn of Mr Ma’s acumen is anyone’s guess. The share price of Pinduoduo fell by 8% on news of Mr Huang’s abrupt departure, possibly for similar reasons.A second set of questions concerns the government’s designs for the firms’ most valuable resource—data. Its objective is to pool data and impose more state ownership and control, which could eventually amount to a kind of nationalisation. The digital firms have built some of the world’s largest and most advanced databases, which assess everything from users’ loan repayments to their friend networks, travel histories and spending habits. Ant alone is said to hold data on more than a billion people, on a par with Facebook and Google, and because of the breadth of services that many Chinese “super-apps” encompass they have a richer picture of users.Credit-scoring is the front line of the battle with the government over who controls data. Over the years the People’s Bank of China (PBOC) has made feeble attempts to create a centralised scoring system. Now the central bank appears to have decided to grab more control over those of the tech firms. It has approved two personal-credit companies, most recently in December, in which the technology groups and state-controlled entities hold stakes. The state has so far refrained from explicitly commanding the companies to share data. In China personal data belong to the individual, not companies, so laws would need to change in order for such data to be shared with the government. But that is hardly an insurmountable obstacle for an authoritarian regime.The tech companies have resisted, with reason. The scheme would, in the words of an asset manager in Hong Kong, erode the “information edge” that especially Alibaba and Tencent, which control the bulk of relevant data, currently enjoy. The uncertainty over what types of data would be shared, how and with whom, has weighed on Chinese tech shares, says Robin Zhu of Bernstein, a broker.The final source of uncertainty relates to the government’s plans for the giants’ other assets. The big firms are conglomerates that straddle many services and products. Over the past decade companies such as Alibaba and Tencent have also become some of China’s biggest venture capitalists (see chart 2), giving them influence over the digital economy that extends far beyond their operating businesses. Under Mr Ma, Alibaba and Ant Group have accrued assets in media, finance, logistics and health care. Tencent is a big shareholder in jd.com, another e-commerce giant, as well as in Meituan and Pinduoduo. Both Alibaba and Tencent hold stakes in Didi Chuxing, a ride-hailing firm which hopes to go public this year at a valuation of $100bn. In total the combined investment portfolios of Alibaba and Tencent are worth some $300bn, making them among the largest tech investors in the world—as well as two of the largest tech firms.Holding patternsThe decision to force Ant to become a holding company, with different activities held in different subsidiaries, suggests the authorities may want to change the structure of the tech empires. Tencent recently confirmed that it is working with regulators and reviewing past investments. Its credit operation, which is similar to Ant’s but smaller, may likewise be separated into a holding company under the PBOC’s jurisdiction. News reports have suggested that the government has asked Alibaba to sell its media holdings. Alibaba has not confirmed or denied the rumours. Legal experts say that if true, this would be concerning because the government measures would reach beyond antitrust law towards something more expansive and punitive.Shifts in the relationship between the state and big tech can scar foreign investors, who dominate the Chinese companies’ shareholder registers. Yahoo, an American tech group, and SoftBank, a Japanese one, learned this the hard way in 2011, when they had to accept that their large stakes in Alibaba no longer included Alipay, which Mr Ma had quietly spun off owing to regulatory concerns.Should something similar happen again, big foreign shareholders like SoftBank, which still holds a 24.9% stake in Alibaba, and Naspers, a South African tech conglomerate which owns 30.9% of Tencent via an Amsterdam-listed holding company called Prosus, could suffer another hit to their investments, on top of the recent drop in share prices. On April 7th Prosus said it would sell a 2% stake in Tencent to raise money for other ventures.An unspoken objective of the government is to ensure that foreigners exercise no control over Chinese tech firms, even if they own shares in them. That does not suggest their property rights are top of mind. And Chinese firms are no strangers to abrupt changes of fortune. A handful of traditional conglomerates such as Anbang and HNA, which had splurged billions on accruing assets at home and abroad, were forced to shed some of those holdings in the past few years.The fate of the tycoons behind them has been mixed. Several are in jail; others have been disgraced; a few have continued to do business quietly. Their companies are often shadows of their former selves. China’s digital darlings, as well as their founders and investors, will probably avoid a similar fate, because the firms are a source of dynamism and prestige and have succeeded through innovation rather than financial engineering. But such a bleak fate is no longer unthinkable. More

HON HAI PRECISION INDUSTRY is as obscure as its main client is famous. On March 30th the firm, also known as Foxconn, reported record sales of $182bn in 2020, thanks to demand for the Apple gadgets it assembles. Its market value has doubled in a year, to $63bn. It is now eyeing smartphones on wheels. Analysts think it could be making 1m electric cars by 2025. If so, it may overtake Apple, whose iCar plans look less advanced.■Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

THE HISTORY of the flying car is almost as old as that of powered flight itself. It started with the Curtiss Autoplane of 1917, an awkward-looking contraption with detachable wings. It never left the ground. Later machines made it into the skies but failed to take off commercially. Money is now pouring into flying taxis. On March 30th Lilium, a German company that develops them, announced a reverse merger with a special-purpose acquisition company (SPAC) that values it at $3.3bn—a sign that investors think the business will fly.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

GARY MARX and David Jackson, two veteran investigative reporters at the Chicago Tribune, spent most of last year seeking potential buyers who might save their newspaper from Alden Global Capital, a New York hedge fund. “We need a civic-minded local owner or group of owners,” they wrote in January 2020 in an opinion article in the New York Times. The alternative was a ghost version of the paper, they warned. “Illinois’s most vulnerable people would lose a powerful guardian, its corrupt politicians would be freer to exploit and plunder, and this prairie metropolis would lose the common forum that binds together and lifts its citizens.”Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

PEOPLE’S RELATIONSHIP with work is complex. For all the complaining about the tedium and bureaucracy, the power-crazed bosses and recalcitrant colleagues, individuals need the security of a job. A century of research has shown that unemployment is bad for mental health, leading to depression, anxiety and reduced self-esteem. On average, it has an even greater effect than divorce.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

IT IS HARD to imagine such shockingly different financial documents. Two years ago a startup in New York that boosters claimed was worth $47bn issued a flowery prospectus in advance of its initial public offering (IPO). The firm’s mission, it declared, was to “elevate the world’s consciousness”. Such was the backlash against its puffery that it was forced to scrap its flotation. On March 26th a New York firm unveiled a 50-page investor presentation that was rather less effusive, filled with talk of cost savings, efficiency and productivity gains for clients. This humbler company secured a backdoor listing, through a special-purpose acquisition company (SPAC), that would value it at around $9bn.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

DATA MAY be the new oil, but it is semiconductors—the brains of the data economy—that these days vie with hydrocarbons as the business world’s biggest economic flashpoint. Like crude, the $500bn computer-chip industry is essential to industrial economies. It is regularly buffeted, as are oilmen, by excesses of supply and demand. And it is at the vortex of intense geopolitical rivalries. Its main wellspring, though, is not in the Persian Gulf, but on an island about 175km (110 miles) across the water from China. What is more, the Communist Party in Beijing claims the island in question, Taiwan, as part of its territory. That puts the semiconductor industry at the heart of the Sino-American power struggle—a uniquely uncomfortable place to be. It is in this context that the recent $20bn commitment by Intel, America’s biggest chipmaker, to revitalise semiconductor production in America should be seen. With some fanfare, its new boss, Pat Gelsinger, is placing a flag on his home turf, hoping to help reclaim the dynamism that the country which invented semiconductors has lost to chip factories in Taiwan and South Korea. It comes amid a surge of “chip nationalism”, in which governments from East to West are offering lavish subsidies for such “fabs”. It coincides with a severe chip shortage that—though it mostly affects microprocessors used in cars, which Intel does not sell—has brought home the danger of supply disruptions. And it follows America’s kneecapping of Huawei, a Chinese maker of networking gear, by restricting its access to American technology, including semiconductors.No one could accuse Intel of squandering a geopolitical tailwind. But Mr Gelsinger’s plan to build two new fabs in Arizona is also a gamble. It extends Intel’s traditional business of making its own chips to making those blueprinted by other American companies, including Amazon, which designs the processors used in its cloud-computing data centres, and Qualcomm, which specialises in semiconductors for mobile telephony. The decision to become part contract manufacturer rather than designing chips and outsourcing production, which rivals such as AMD have done successfully, requires a huge outlay that investors may find hard to stomach. Intel already spends about $28bn a year on capital investments, research and development.Intel’s move also marks the start of a new era of public funding for chipmaking in America that could dangerously distort the market. The industry is lobbying for $50bn of federal support over the next decade, which it says is necessary to spur construction of 19 new fabs, requiring $280bn of private investment. Mr Gelsinger’s bet puts Intel in the vanguard of America’s mission to strengthen its position as a semiconductor superpower. But if it does not play its cards carefully, it could be the first Silicon Valley firm to suffer the curse of being a national champion.It is already one of the first in line for public largesse. American politicians loudly grumble about how dependent the country has become on two firms in China’s backyard, Taiwan Semiconductor Manufacturing Company (TSMC), and Samsung, a South Korean conglomerate. Although American firms lead the world in developing and designing chips, they manufacture just 12% of them at home, down from 37% in 1990. They blame the Asian countries’ subsidies, which help defray the huge cost of fabs, which these days can exceed $10bn apiece. That may be so, but TSMC and Samsung have also outdone Intel in recent years in their ability to produce state-of-the-art chips. When he was president, Donald Trump pressed the two Asian companies to expand production on American soil. Both say they will. Intel, though, is a more obvious recruit for the home team. Heeding the call, Mr Gelsinger has vowed to get the firm back into the game, displaying a chutzpah not seen since his mentor, Andy Grove, stepped down as chief executive in 1998. The government is squarely behind him. Intel is likely to be an early recipient of part of the $37bn Mr Trump’s successor, Joe Biden, has earmarked to support America’s chipmakers. It also plans to expand in Europe, where countries hope to lure as much as €50bn ($59bn) in semiconductor investments, partly with state support.In economic terms all this is a mixed blessing. Free money is always nice. If America’s government insists that American companies buy more American-made chips, Intel stands to benefit. But government backing can encourage over-expansion; building factories takes years, while demand for chips changes quickly, fuelling regular boom-and-bust cycles. Support can also unexpectedly be snatched away. Investors, already nervous about the sliding profitability of Intel’s core business, may fret about the impact of over-investment on margins. And there is no guarantee customers will flock to the company as a contract manufacturer. It has dabbled in this business before with little success, chiefly because it had put its own chipmaking interests over its customers’. Mr Gelsinger now talks of “co-opetition” rather than competition, and promises to keep contract manufacturing at arm’s length from Intel’s own chipmaking. Clients may still prefer TSMC, unburdened by any such conflict. The silicon curtainThe trickiest task for Intel will be to balance a state-backed expansion in America and Europe with cordial relations with China, its biggest market, accounting for 26% of last year’s sales. For now China probably needs Intel as much as Intel needs China. But if Mr Biden pursues his predecessor’s policy of restricting chip exports to Chinese firms, the risk is not just lower sales, but retaliation. As geopolitical tensions mount, so does the pressure to renationalise supply chains, or turn them into competing webs of Chinese and American allies. Intel should discourage this at all costs. It would be disastrous for one of the world’s most globally integrated industries. It would be no picnic for Intel, either. ■This article appeared in the Business section of the print edition under the headline “Poker chips” More

BOYCOTTS OF FOREIGN brands are so common in China that managers have a ready-made playbook when caught in a storm of nationalist outrage. Start with an apology. Then stay mostly quiet, perhaps expressing respect for Chinese culture. Wait for the anger to subside. Over the past week the list of companies consulting the manual has grown. Chinese consumers, egged on by the ruling Communist Party, vowed to shun some of the world’s biggest clothing companies, from Adidas to Zara.In the eyes of the boycotters, the firms erred by declaring concern over allegations that China’s cotton industry includes the forced labour of Uyghurs, a mostly Muslim ethnic minority in the north-western region of Xinjiang. Their bosses hope that the controversy will fizzle out. But they and other Western executives in China cannot shake an unsettling fear that this time is different. Their lucrative Chinese operations are at rising risk of tumbling into the political chasm that has opened between the West and China.H&M, a Swedish fast-fashion retailer, faces the most immediate trouble. As of March 30th, a week after it was attacked online, its garments were still unavailable on China’s most popular e-commerce apps. Its stores have disappeared from smartphone maps. Landlords in several shopping malls have terminated its leases. Its Chinese business, worth $1bn in revenues, representing 5% of its global sales in 2020, is in jeopardy.For other companies the Xinjiang rage has not been as devastating. Even as celebrities in China cancelled endorsement deals with Nike, some 350,000 Chinese signed up for an online sale of a limited-edition pair of its swooshy shoes on March 26th. Little by little the social-media mob has dwindled amid signs that government censors were reining it in, perhaps to lower the heat. The share prices of foreign firms entangled in the boycotts have clawed back most of their initial losses.Foreign executives, however, remain on edge. The issue at the heart of their current problems—China’s human-rights violations in Xinjiang, and the West’s newfound willingness to punish them—is one for which the tried and tested playbook is ill-suited. It may also be more expansive, seeping into other corners of their business dealings in the world’s second-biggest economy.The boycotts were apparently triggered by the co-ordinated announcements on March 22nd by America, Britain, Canada and the European Union of sanctions against Chinese officials for abuses in Xinjiang. China responded with sanctions of its own. The Communist Youth League, a party affiliate, then dug up a months’-old statement by H&M expressing concern about reports of Uyghur forced labour. Hua Chunying, a foreign-ministry spokeswoman, made the message clear. “The Chinese people will not allow some foreign companies to eat Chinese food and smash Chinese bowls,” she said.The commercial conflagration over cotton illustrates the difficulty of even limited economic decoupling between China and the West. China’s cotton industry is worth about $12bn a year, less than 0.1% of GDP. About 90% of China’s cotton comes from Xinjiang, and the government says 70% of that is harvested mechanically. In theory it should be possible to remove hand-picked fibres from supply chains. In practice that would require audits of how the cotton is produced. China will not allow free travel around Xinjiang, let alone unmonitored conversations with Uyghur workers. American clothing-industry groups last year described the situation as “of a scale, scope and complexity that is unprecedented during the modern era of global supply chains”.In January Donald Trump cut through the complexity with a full ban on cotton imports from Xinjiang. His successor as president, Joe Biden, who is less China-baiting but more concerned about human rights, has not reversed it. The trouble is that yarn from Xinjiang ends up in factories around China, making it hard to stop the taint from spreading to all Chinese cotton products, which make up a large slice of global supply, since China accounts for about 40% of all global textile exports. “There is no way we can declare the full supply chain is clean,” says a consultant in Shanghai.Mei Xinyu, a researcher with the Ministry of Commerce, has written that cotton is the “entry point” for America’s strategy of using the Xinjiang allegations to suppress China, which denies any forced labour is taking place. China’s only choice, he says, is to fight back forcefully. The Communist Party is confident of its abilities to do so, thanks to what it calls the “powerful gravitational field” of its market. American-listed firms which regularly report their revenues from China or Asia, and can thus be assumed to have larger exposure to the country, have outperformed those that do not in recent years (see chart).Yet even gravity has its limits. An apology, the first step in mending fences, is untenable this time. Many people inside foreign companies “recognise the moral gravity of what’s happening in Xinjiang”, says Scott Nova of the Worker Rights Consortium, a labour monitoring organisation. Those that do not must still comply with the American ban on cotton imports if shipping to America. This earns them little sympathy in China. Foreign firms have found it virtually impossible to get audiences with Chinese officials to explain their legal obligations in America, says a government-relations expert.Those obligations may soon multiply. The Uyghur Forced Labour Prevention Act, currently wending its way through Congress with bipartisan support, assumes that all Xinjiang products are made with forced labour. Companies will have to prove otherwise if they want to export to America. “It’s like having to prove a negative,” sighs one representative of American industry. The consequences could be dramatic. Nearly half of the polysilicon in solar panels globally comes from Xinjiang. China’s largest wind-turbine maker, Goldwind, is based there. Xinjiang’s oil and gas power factories around China.Europe has so far refrained from banning products from Xinjiang. China’s decision to focus its ire on H&M rather than on an American firm may be a warning to EU officials to keep it that way. But the aggression poses a risk. In December the EU and China signed an investment deal which would give European industrial and financial firms greater access to the Chinese market. The European Parliament may now refuse to ratify it. “After seven years of negotiations, we hoped for seven years of wellness. Now it looks like it might be seven years of drought,” says Joerg Wuttke, who is president of the EU Chamber of Commerce in China.China still wants some foreign firms to feel welcome. On March 26th Li Keqiang, the prime minister, visited a plant part-owned by BASF, a German chemicals giant. Such comity will almost certainly become rarer as the authorities promote home-grown business, from chipmaking to battery minerals. China’s newest five-year plan, unveiled in March, is focused above all else on the pursuit of self-sufficiency in the face of “hostile external environment”, as party leaders describe it. Western bosses had hoped that the fissures between China and the West would start to close under Mr Biden’s administration. Instead they are getting deeper and wider. More