Why tech companies won’t easily succumb to adversity

Chinese tech companies have recently suffered a great deal because of the trade war with the US. As a result, China’s stocks and its currency, the yuan, do not show signs of recovering any time soon.

Chinese tech companies have been hit the hardest, as they have been the core benefactors of the Chinese government’s support and the target of the United States’ tariffs and regulations. However, I believe that companies represented by such tech giants as Alibaba, Baidu and Tencent will not easily fall prey to short-term adversity, for the following reasons.

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1. The sheer amount of quality data available

Many technological advancements are expected to change the way things work in the future. One of the biggest catalysts of change, many expect, will be artificial intelligence. AI is different from traditional machines in that it learns, like human beings do, through a mechanism called deep-learning. Provided that AI is given a sufficient amount of data available to learn, it has the potential to improve itself constantly, unlike traditional machines.

Therefore, the key to developing AI lies in securing a sufficiently large data set to feed it. A part of the reason that Google decided to return to the Chinese market after withdrawing in 2010 over censorship issues is not short-run profits but the fact that “China is the planet’s biggest audience of internet users.” China has the largest amount of data with its 1.5 billion population – larger than any other country – and this fact alone is a significant asset for Chinese tech companies in developing AI-related products.

Furthermore, the quality of data available is very high. According to a New York Times article, “Chinese consumers regularly use apps like WeChat to do an astonishing range of real-world things: buy groceries, book doctor’s appointments, manage their electricity and water utilities, take out micro-loans. Chinese people make up 68% of global demand for bike-sharing and ride-hailing apps. This widespread use of apps in part reflects a ‘leapfrog effect’: Chinese people never truly adopted credit cards, so they jumped directly to mobile payments.”

Having such good-quality data available, not to mention such a huge quantity, makes it easy for Chinese tech companies to experiment.

2. Under-protection of private data

Unlike the US tech companies, where there are strict data-protection policies regarding privacy, Chinese tech companies do not face similar restrictions in China.

For instance, Facebook suffered greatly from its mishandling of its users’ data, and its stock price plummeted as a result; the European Union announced a new set of regulations called GDPR (General Data Protection Regulation) in 2016. It standardizes data-protection law across all 28 European countries and imposes strict new rules on controlling and processing personally identifiable information, and came into force in May 2018.

While Western countries have strict regulations regarding data and its usage by private companies, China does not have an equivalent policy. Such loose data-protection regulations and enforcement allow Chinese tech companies to experiment with data more boldly and accelerate the innovation process.

I am not saying that all companies should strive to develop technology at the cost of rights and privacy; all I am saying is that China has different regulations and attitudes toward data protection and privacy, which is conducive to technological development.

3. State support for ‘Made in China 2025’ 

The so-called Made in China 2025 plan was set forth during the 2015 National People’s Congress and aims to foster 10 core industries, including information technology, robotics, aerospace, future automobiles and biotech, and aims to achieve the target of 70% supply of components domestically. It also gives preferential policies, subsidies to these future Chinese tech companies, and simultaneously requires technology transfers for multinational corporations operating in China.

One of the US demands is putting an end to subsidies and technology-transfer requirements and enforcing strict protection of intellectual property.

However, regardless of the outcome of the trade war, the Chinese government is likely to continue to support Chinese tech companies indirectly through various measures, such as providing attractive career opportunities for overseas IT graduates who return to China, fostering a favorable environment for startup tech companies, and encouraging “local officials to make the changes needed in their area so that private AI companies can develop products that can actually be used.”

4. R&D spending and number of patents rising

Chinese tech companies have shown significant progress in the past decade. The number of patent applications has already surpassed the US, and China has become one of the largest patent-application-filing countries in the world. Research and development spending has also grown dramatically, surpassing Japan and Germany in 2008 and falling slightly behind the EU in 2013. Although there are still issues with the quality of patent applications and how effectively R&D funding is spent, China has undoubtedly shown progress in its technology with investments.

5. Society changing in line with tech advancement

I went to Beijing’s Tsinghua University as an exchange student from 2012 to 2013. The first thing I did when I got there was buy a bicycle, because the Tsinghua campus is simply enormous. Six years have passed since then, and my Chinese friends living in Beijing have told me that they no longer need to buy a bicycle as everyone uses bicycle-sharing apps.

In addition, I remember that I had to bring cash with me every time I went to buy something on the street. Now, friends say they only need to carry their mobile phones to use Alipay and WeChat Pay to make transactions. In short, Chinese society has become completely cashless in less than five years by skipping past credit cards.

These are just a few examples of how quickly Chinese society is adapting to the changing environment. Some may say that using shared bicycles and electronic payments is not a big deal because people in other countries do as well.

What I am emphasizing here, however, is the pace at which Chinese society is evolving. Take Japan, for example. When I went to Tokyo as part of a school research trip in March, I was surprised to find that some of the shops and restaurants still do not accept credit cards and take cash only. China, on the other hand, could make big leaps as it has been late to adopt technology, and has experienced fast and dynamic economic growth.

Conclusion

The trade war with the US has critically damaged China’s economy and tech companies. Capital flew out of China and the yuan has subsequently depreciated significantly against the US dollar. There are also other downside risks, such as a slowdown in Chinese economic growth, a potential breakout of the financial crisis from debt-led growth, housing bubbles and many other inherent Chinese social problems.

However, I maintain a positive view of Chinese tech companies in the long run because they have grown fast, accumulated expertise with patent applications and massive R&D spending, have access to huge markets for high-quality data with China’s 1.5 billion population without many restrictions, and China has a dynamic society that has evolved in line with technological breakthroughs.

This article is originally from Joon’s blog.