China’s Tech giants brace for a new era of slower growth

In China, 2022 was the year Big Tech changed. Succumbing to a government crackdown and a pandemic that refused to go away, the country’s leading internet conglomerates, Alibaba Group Holding Ltd. and Tencent Holdings Ltd., experienced their first-ever quarterly revenue drops and cut jobs by the thousands.

The humbling turn resulted from an explicit strategy by the Chinese government and marked the start of a new era in the way China’s tech industry operates. President Xi Jinping has proved willing to sacrifice economic growth and other priorities in exchange for control. For two years, his government squeezed tech giants it once celebrated, while leaving them uncertain about what to expect next.

Now Xi and China’s huge tech sector seem to have struck an uncomfortable truce. The Communist Party has let go of its campaign of sudden, severe crackdowns in favor of an effort to inject more clarity about what it considers to be good corporate citizenship. In exchange for this predictability, Alibaba, Tencent and other companies have made peace with sedate growth, aligning themselves with Xi’s agenda to curtail tech monopolies and promote what he describes as common prosperity. The decade-long internet gold rush is over.

“Xi Jinping has tamed the wild horses of the private sector,” says Ming Xia, a political science professor at the City University of New York. “But the problem is that he did such big damage with his policy that the confidence of some entrepreneurs and foreign investors is already destroyed.”

Xi Has Realized He Needs Chinese Tech Giants.

China’s largest internet companies once looked like analogues of such US heavyweights as Apple Inc. and Amazon.com Inc. Much of their mojo came from their ability to outspend, copy or acquire rivals to gain supremacy in every digital sphere, whether e-commerce, car-sharing or gaming.

In the US, government officials could never quite agree on how to rein in such giants. But China snapped into action when the products its biggest tech companies offered became pervasive in every aspect of the country’s online life. The first and most visible subject of the crackdown was Jack Ma, the billionaire behind Alibaba and Ant Group Co., who wasn’t shy about blasting the government. In November 2020 the Chinese government quashed Ma’s plan to take Ant public; the next spring it fined Alibaba a record $2.8 billion for monopolistic behaviors. It later ordered a security review of ride-hailing giant Didi Global Inc. after its US-based initial public offering that culminated last year in a $1.2 billion fine. Beijing also stopped approving video game releases and forced a large portion of the $100 billion private education sector to convert to nonprofit status.

As these measures kicked in, a range of difficult economic conditions weighed on tech companies large and small, in China and elsewhere. China-focused venture fundraising fell 81% in the first 11 months of 2022, contributing to the biggest global drop in investment in startups in two decades, according to data company Preqin Ltd. Investors ditched once high-flying consumer internet businesses for companies in areas that were more in line with Xi’s policy priorities, such as artificial intelligence and semiconductors. “The game plan in China has always been very straightforward,” says Chibo Tang, managing partner of Gobi Partners. “Put your money where the government is pointing.”

Ma’s successor at Alibaba, Daniel Zhang, has appeared to signal that he’ll follow that direction, too. “We believe in the prospects of China’s economic and social development,” he said in a post-earnings call with investors in November. “We believe Alibaba’s development goals are highly aligned with China’s long-term goals.” Alibaba and Tencent didn’t respond to requests for comment.

China has responded to such signs of submission, which have also included billions of dollars of corporate donations to social causes, by loosening up. Authorities are almost at the final stages of issuing Ant the long-awaited license it needs to clear a path for an IPO, while regulating the company more like a bank. After industry observers speculated that Didi’s top executives could end up in prison, the government let them off with fines for breaching data security rules.

A little more than a year ago, the state press accused companies such as Tencent and NetEase Inc. of peddling “spiritual opium.” But in April 2022, censors began approving new video game releases after an eight-month halt. The latest batch of major approvals in late December included foreign blockbusters like Riot Games’ and , both slated to be published by Tencent.

That same month, in his first economy-planning meeting after securing an historic third term, Xi vowed to support platform companies—such as Alibaba, Tencent and food delivery giant Meituan—in playing leading roles in “development, job creation and international competition.” Two days later the local party boss of Zhejiang, Alibaba’s hometown province, paid a visit to the company’s headquarters to give Xi’s spiel. It was a clear sign of a change of fortune for the Chinese company hardest hit by its government’s tough policies.

Adjusting to the government’s wishes has made Chinese tech companies more risk-averse and less ambitious, even as the pandemic keeps hammering growth.

For now, tech executives and investors are focusing on cost-cutting. The big spenders of past years, including the Netflix-style IQiyi Inc. and TikTok rival Kuaishou Technology, are trying to remain profitable by resisting the temptation to splurge on new content or users. Powerhouses Alibaba and ByteDance Ltd. are shutting down businesses that can hurt the bottom line while forgoing venture investments that don’t promise an immediate payoff. “We need to spend money where it’s the most worthwhile and avoid squandering it,” ByteDance Chief Executive Officer Rubo Liang told employees at a December town hall, according to a transcript that Bloomberg News viewed. Revenue growth at TikTok’s Chinese owner has slowed, and user growth has also been less than expected, he says. A company spokesperson declined to comment.

Chinese tech companies are increasingly turning outward for growth. Foremost among them are TikTok and fast-fashion retailer Shein, both of which specialize in a speedy, cookie-cutter approach to delivering viral goods and content to global Gen Z customers. Having established themselves as formidable threats to US companies such as Amazon and Meta Platforms Inc., they’re also lightning rods for criticism as tensions rise between the US and China. TikTok is seeking a security agreement with the Biden administration to spare itself from a US ban floated by the previous president, Donald Trump, and Shein is reworking its image as an unsustainable business. Neither of their IPOs will likely come through until these issues are resolved.

For Chinese companies, long-term financial success “will require them to build trust with regulators and government officials, which will not be easy given the fraught US-China relationship,” says Caitlin Chin, a tech research fellow at the Center for Strategic and International Studies in Washington.

Also on the line are workers who are still trying to adjust to the tech slump. Almost 11 million college graduates are estimated to have flooded the labor market in 2022, a record number. Many had been preparing to enter a booming tech industry, only to find that the sector was no longer offering the big payouts they had expected.

Zhang Hao, a 22-year-old who studied automotive technology in college, applied for more than 100 tech jobs last summer. He got only one interview, with a Shein-inspired e-commerce startup. The founder asked him if he could accept frequent overtime, which had been a norm in tech. But the country’s young people are embracing the “lying flat” lifestyle as a response to a worsening economy and Covid-19 restrictions. Zhang ended up becoming an instructor in car maintenance, earning half what the startup would have paid. “This is more stable,” he says. “I don’t want to be burnt out for just a job.” Bloomberg