China’s New Development: China’s Technology in the 21st Century
This article is the second part of a series of articles on the changing regulatory environment in China.
The regulatory environment for tech and education has been changing recently in China. China has been focusing on antitrust action and realigning private companies with central objectives since Jack Ma gave a speech decrying Chinese regulation for stifling innovation in October of 2020. President Xi Jinping didn’t stop with Jack Ma’s Ant Group; whose planned initial public offering was canceled only days before the listing. DiDi (ride-sharing service, analogous to Uber), Metiuan (food delivery app similar to Postmates), and Tencent (most widespread Chinese social media services, but they also do almost everything else) have all faced some degree of antitrust legislation in recent months.
The news in November about Ant Group was initially unexpected, and investors seemed to wearily continue pumping money into Chinese tech firms until February of 2021, when Chinese regulatory action on Ant Group was announced and was more severe than people expected. Since then, China’s largest tech firms have shed $800 billion of market value and investors have been left balancing the potential boon of investing in Chinese tech firms currently undervalued on the market with the added risk of each company being broken up or having their growth severely stifled through China’s decision-making.
In tech, growth is everything. Uber and Lyft are worth billions but have still-- to this date! Damn!-- not had a profitable quarter. With a market cap 6th highest on the United States stock market, Tesla only had their first quarter in the black last year! Postmates, Grubhub, and DoorDash have always been net losers. The entire business model of those companies is to grow revenue now, end current competition, and generate profitability either through decreased spending due to lack of competition or increased prices to boost revenue even higher.
The regulatory changes in China have been in the form of anti-monopoly investigations, new laws, and restructurings. Some of the most prominent announcements have been new requirements for data hoovered up by large tech firms, laws requiring food-delivery apps to pay staff a living minimum wage, banning of private education tutors, and a string of property curbs that intend to combat out-of-control housing costs.
According to some Western observers, the added regulations on capital in China, along with the new party line of “common prosperity,” appear to make China look a lot more like a socialist or communist state. For the most part, these seem not too far from the sort of legislation that might occur under any number of social democratic or liberal states. If we had President Bernie Sanders, you may at the very least have had action attempted on minimum wages for ride-sharing app drivers, appropriate data storage regulation for large tech firms, and defunding of private education. The main difference is that China is building off an authoritarian, mass-surveilled model. Its practices emphasize central planning more than you would most likely ever find in the United States.
Ride-Sharing Prices
Didi and Uber spent much of the past decades as bitter rivals in the same ride-sharing app space until 2016, when Uber took their beating from Didi and exited China entirely. Today, Uber holds about 15% of Didi due to sales of Uber equipment to their former rival. For Americans, Uber and Didi are almost literally the same things: ride-sharing apps designed to exploit labor with the same app interface (although Didi, unlike Uber, has had one-quarter of profitability). Uber has a current market valuation of close to $85 billion. Didi is worth about $70 billion after just sneaking onto the United States stock market during this current summer of antitrust action.
Didi has achieved around 90% of the ride-sharing market in China after its business strategy of attaining the lowest, unsustainable price it could muster until competition like Uber exited the scene. Like Uber and Lyft, Didi charges below the market rate of previous businesses such as taxi services by classifying drivers as contractors and saving money on labor costs. The monopolistic advantage of ride-sharing companies is entirely due to massive spending and heavy losses during their early days. That advantage can only last as long as prices remain low--which can only happen if the companies continue to spend less on labor.
Uber and Didi have faced protests from drivers over poor pay and bad labor relations centered on the tech giants’ lack of even recognition of labor status. Both Uber and Didi primarily focus on maintaining “contractor” status and excluding the companies from notorious profit liabilities such as having an employee.
The State Administration for Market Regulation commenced an action against DiDi in May of 2021 with a fine charged with anti-monopoly violations due to a lack of prior regulatory approval to recent acquisitions. A month later, the State Administration began an antitrust investigation looking into “competitive practices that squeezed out smaller rivals unfairly.” Which they did, but at the same time, everyone already knew that. It seems now a state, one less averse of straying from free-market principles, is acknowledging monopolistic rents that occurred during their more capitalistic periods. Uber, Lyft, and DiDi competing with each other over low labor costs to destroy the competition lead to a business model relying on unfair pricing. All the ride-hailing companies seem to rely on a future without drivers to drive current investment.
The Freidman free-market dream looks a little wonkier when a few companies compete over unsustainable price models. Sure, while introductory pricing stays in effect you have a period of amazingly low prices and an abundance of customers that flock to your service; they become regular users of the ride-sharing service and may even change their lifestyle a bit to either ditch the car or at least use the service more often during their commutes. Unfortunately, the water for unprofitable companies dries up when they no longer can pacify investor discontent over heavy losses indefinitely while staring down future possibilities of either labor unrest that could kill their business models and/or technological advances in autonomous driving that could save them.
Due to that business model, China has 70 million gig workers with lower labor rights than employees. And, not to mention, most of the gig-based companies are still unprofitable even while having an advantage in the market against traditional ride-hail services such as taxis that may not be able to hire contractors.
Addressing the exploitation of gig workers is a potentially positive course for China to move towards. I would not be surprised to see the future of ride-hailing services like Uber and Lyft facing similar repercussions in the United States. Just last year, California voters passed Prop 22, which exempted app-based drivers from the California Assembly Bill 5 (2019) that had recently granted other workers in California protection as employees.
Big Data
ByteDance, the owner of TikTok, had been planning a U.S. listing for this year until government officials intervened and required the company to address data security concerns. The social media company was valued at $180 billion in December 2020 but decided to delay its listing by March 2021. We probably know now what would have happened if ByteDance moved ahead with its IPO, as that is exactly what happened in the case of Didi when it was subsequently delisted from mobile app stores after China ordered them to comply with data security regulations.
China has banned hundreds of apps in the past several months, citing privacy concerns abroad and domestic – although only domestic like addressing privacy concerns from companies and certainly not from the state itself. Additional “good” regulation is built off the authoritarian structure of China. Mass surveillance by the state is already rampant in the form of internet spying, camera surveillance, and facial recognition, which can all be used as data collection devices for China’s social credit system.
Undoubtedly, the United States has its problems with mass surveillance in all the same areas as China. For example, while the United States does have less camera surveillance than China, it still ranks high enough in the number of cameras per person to be #2 to China’s #1. However, China’s surveillance goes beyond the United States in both magnitude and scope and ultimately serves a broader purpose with a clear technocratic goal of a social credit system. Still, the United States should take similar lessons from some of these moves and explore options further to protect citizen privacy from corporations and foreign states.
China tightening regulatory control of offshore listings over privacy concerns of citizens’ data collected through various social media apps is not a negative. Didi had not yet satisfied the state on issues related to protecting consumer data. If Didi collects anywhere near the amount of data as Uber, you would expect similar concern from United States officials. Trump took similar steps against TikTok and WeChat in 2019, banning the social media platform from App Stores before being overruled by courts citing concerns over the data risks of users from the Chinese companies. If any country realizes the importance of securing consumer tech data from other countries, it seems like the United States should be it.
Data has long been undervalued in the realm of power between companies and states. The most powerful and valuable companies like Facebook, Google, and Amazon generally have an incredible amount of data on everyone who uses their platforms. At some point, those three tech companies and many others almost completely shifted gears from prior roles as social media, search engines, and online shops into data centers designed for advertising.
There has been some recent activity in the United States attempting to protect consumer tech data. California had the California Consumer Privacy Act go into effect in 2020 that gave consumers some minimal rights over their data. Virginia had a similar weak bill signed into law, but the statutes served as critical first steps even as soft as they were. There have been some feeble attempts at bipartisan legislation over consumer data protection at the federal level, such as the Consumer Data Privacy and Security Act (2020), but any joint reigning in of data collection by the Democrats and Republicans seems unlikely without a filibuster. I’ll believe it when I see Republicans vote for a bill that targets capital, regardless of their posturing against the big tech firms for the past few years.
Americans seem to agree that we have some concerns over both corporations and the state scrounging up every record of their consumers and citizens as they can. The time is right for additional data privacy regulation in the form of a baseline federal privacy law. Better yet, if the United States wants to continue its trend of out-democratizing China, its officials could even adopt legislation protecting both consumers and citizens.
I plan to continue discussing some of China’s recent developments, with part three focusing on China’s new private education regulations and the state of private education in the United States. For additional reading, consider checking out this post from Chinese Characteristics.
