Chinese-based technology sits behind some of the world’s most powerful companies – Baidu, Alibaba, WeChat, and Tencent, the subject of a new book. That has created immense wealth for a few bold entrepreneurs, but new policies by the Chinese government aim to reduce that wealth inequality.
Beyond the “great firewall” – the figurative wall separating the internet within China from the internet outside it, which enables China’s censorship of communications within it – lies a gigantic advanced digital civilization, as large as the one in most of the rest of the world, yet almost completely unknown to it. It is composed of an ecosystem of companies both large and small, the largest of which compete in size with Apple, Microsoft, Amazon, Alphabet, and Meta. One of the largest is the enormous conglomerate known as Tencent.
Lulu Chen’s book about Tencent, Influence Empire: The Story of Tencent and China’s Tech Ambition, was among five books shortlisted by the Financial Times as the best business book of 2022. Lulu (Chinese name Yilun Chen), a long-time reporter on China for Bloomberg News and Bloomberg Businessweek, shared her insights with me via an interview recently.
The not-so-impermeable wall
Companies in China are to a Westerner very foreign, with names in characters that are inscrutable to us. And they are behind that firewall, so they have little interaction with the companies and the internet that we know.
Nevertheless, that wall – not the great firewall itself but the wall separating Chinese companies and their entrepreneurial activities from those in the West, in Silicon Valley for example – is much more permeable than we imagine.
Personnel can migrate from Silicon Valley to Chinese companies, sometimes bringing Silicon Valley financial backing, almost as easily as they would from one Silicon Valley company to another. This facilitates the copying of business models, strategies and products (as it does in Silicon Valley too) – and copies were indeed what many of the large Chinese internet-based companies originally were: Baidu of Google; Weibo of Twitter; Alibaba originally of eBay (though now it more resembles Amazon). Tencent itself, as Chen says, “merges the functions of WhatsApp, PayPal, Facebook, Uber, Deliveroo, Yahoo, TikTok into one super-app known as WeChat.”
Tencent, one of the largest of the Chinese private companies (as opposed to state-owned companies like PetroChina), received the funding that saved it from dying in the cradle after the bursting of the internet bubble in 2000, not from within China or from rich overseas Chinese, as many startups in China did, but from a South African telecommunications company with extra cash, Naspers. Naspers was introduced to Tencent by an American named David Wallerstein, who was only 21 at the time. He had taken it upon himself to help foreign companies break into the Chinese market. After a bout of negotiations, Naspers invested $32 million in Tencent in 2001 to become its largest external shareholder.
Chen says of one of Tencent’s key executives, Richard Peng, its then-head of mergers and acquisitions, “He got into Beijing’s Tsinghua University – alma mater to Xi Jinping and countless other party cadres – where he sought inspiration in the writings of Alvin Toffler and business icons Armand Hammer and Lee Iacocca.”
Inspired by the thoughts of Chairman Mao? Not exactly. By American business tycoons and popular writers.
According to Chen, in 2002, “In China, only less than 20 million computers had access to the internet.” Now, more than a billion do. Growth in the last 20 years has been spectacular. Although China had accelerating economic growth before 2000, nothing has been like its growth in the first 20 years of the 21st century.
If the content is okay, you can experiment with the business model
During the 21st century alone, China, among its many, many other eye-popping developments, has become the world leader in digital payments. I once took a tour on a small boat down the Li river, the river in Guangxi province where you pass by the spectacular karst formations that are on the Chinese paper currency. But you will not see much of that currency. Getting on the tour boat involved a long bus ride from the city of Guilin to the shore of the river, where there was very little commercial activity, but there was a woman squatting in the dirt by the shore selling delicious miniature tomatoes. The only other thing she had with her besides the tomatoes was a torn off piece of cardboard with a QR code imprinted on it. If you were Chinese, or had a Chinese WeChat Pay or Alipay account, you would pay by aiming your phone at that QR code. This is the way virtually all payments are made now in mainland China. Even beggars present you with a QR code.
But this is a very recent development. The first payment through Alipay occurred in 2003, when, according to Chen, “Private companies were not allowed to venture into finance. Technically, online payments could be deemed illegal by the government, so Jack [Ma, founder of Alibaba] and his team were walking a fine line.”
This was an example of how at the time, China was allowing a wild west of business entrepreneurship. It might seem to us in the United States a strange authoritarian dictatorship – given that U.S. newspapers and other media and politicians routinely refer to how “the Communist Party crushes freedom in China” – but freedom turns out to have been something that businesses had a wide latitude to exercise, as long as that freedom didn’t involve saying anything bad about Xi Jinping or the Communist Party or enabling anyone else to say something bad on your platform.
Sometimes exercising the freedom to be a bold entrepreneur meant choosing the right place in China to operate. Shenzhen was a good location, because it was known to be friendly toward entrepreneurs and startups. And the main criterion for provincial bureaucrats to advance was that their province had high economic growth, so they were incentivized to give entrepreneurs free reign.
As Chen told me in our interview,
A lot of internet companies arose from testing the gray areas of government oversight; Didi for example, ride sharing. They just kept testing and seeing where the boundaries were. The philosophy was you just do your thing until the government says no you can’t do that.
Testing in the finance area resulted in it getting so big that it kind of forced the government hand.
Of course, something like what happened with Didi happened too with Uber and Airbnb in the United States and elsewhere. Airbnb ran up against lodging rules in places like New York City, and Uber had problems competing with government-approved taxis. They also tested the gray areas of government oversight, but this was no less true in China than in the United States – more so, in fact, perhaps because rules in China were less codified and rigid.
Chinese companies were able to outcompete American companies that tried to set up similar businesses in China, like Microsoft and eBay, because those American companies couldn’t place their servers in China owing to data security rules, and they had to pass decision-making up the chain to the United States, which made their reaction times too slow.
But within China, competition was at least as cutthroat as it is among competing companies in the United States. When Didi was about to launch its service in 2012, about 30 other competing companies arose at the same time. “Influence Empire” tells the story of how some of those competing companies, for ride-hailing, food delivery, and so forth won their battles – often because they were backed by Tencent or its equally large and sprawling competitor Alibaba.
Tencent: as much like a venture capital company as a corporation
Around 2013, Tencent decided not to do everything itself but to back other companies by investing in them. Tencent has now invested in about 800 companies, including a large investment in Tesla. The strategy has made Pony Ma, Tencent’s founder, one of the richest people in China, fourth on the Forbes list, just ahead of Alibaba founder Jack Ma. Chen compares Tencent to venture capital and private equity funds, saying it is now “one of China’s biggest investment powerhouses on par with global funds including KKR and Sequoia.”
It has two core businesses: WeChat, its omnibus messaging and communication app with a payment app attached; and computer gaming. Though WeChat might be compared to Facebook and WhatsApp, Tencent gets little advertising revenue. It made the choice not to inundate its users with advertising on principle. WeChat’s founder, Allen Zhang, was given free reign by Ma to develop WeChat. Zhang said that “If we chose to conduct analysis (on user conversations) it could bring advertisement revenue for the company, but we haven’t done any.” This may seem incredible to American users of Facebook, YouTube, Google, or Twitter. But a Tencent employee told Chen, “When you have a billion users, the last thing you should be thinking about is how do I sell them a ton of ads. What you should be thinking of instead is how to ensure you keep these users happy, so you don’t drive them away because you’re annoying the hell out of them.”
The first rule is not to annoy users, even taking precedence over advertising revenue.
But that meant the revenue had to come from somewhere else. And it came mainly from computer gaming. At one point 70% of Tencent’s revenue came from gaming. More than 30% of the company’s revenue still did in 2021, though it is trying to cut back on it to manage risk (more on that later).
The ”internet security police room”
As might be expected, surveillance and censorship by government of online communications is very active. The Chinese Communist Party is very concerned about the ability of negative, dangerous, and sometimes highly inaccurate information to go viral over the internet – as the United States understands very well, having seen what can happen. Consequently, there is close monitoring of businesses, not of the business itself, but of the communications it spawns, and there is both government censorship of it and self-censorship.
WeChat may be like Facebook-plus, and Facebook makes you give up a substantial amount of your privacy, but not on the level that WeChat does, said Chen. With WeChat, she says, you have to upload your real ID with facial recognition to use a lot of the functions, and the data on WeChat is more comprehensive, especially if on Facebook you don’t use a phone.
At Meituan, the big food-delivery company in which Tencent had invested, there was an office with a placard on the door reading ”internet security police room.” This was a setup allowing Chinese public security forces to “intervene in company operations whenever the government wanted to roll out a political directive, scrap a message or track certain users.” These government surveillance activities have come out in the open more since 2015. Chen said, “While these rooms often run empty with no one on duty, the power they evince isn’t taken lightly.”
We might think in the West where communication online of almost anything and everything is free that this curtailing of freedom would make entrepreneurs more skittish and less bold, but because of the separation of content that is sensitive from all other aspects of business, these entrepreneurs were no less bold than in the US, and possibly more so because the regulation was more flexible and friendly to business.
But this changed about two years ago.
When Deng Xiaoping launched the Chinese era of economic reform, he warned that “some will get rich first.” This most certainly happened, but the rising tide lifted all boats mightily. In the end, though, it lifted the boats very unevenly. China now has a high level of wealth inequality.
Even if the original move toward capitalism seemed out of line with basic Communist thinking, this level of wealth inequality is particularly out of line. The dissonance may have led the current leadership of China, headed by Xi Jinping, to declare a new era in which the goal is “common prosperity.”
Common prosperity calls for a need to “regulate excessively high incomes and encourage high-income groups and enterprises to return more to society.”
This has meant a clampdown on business activities in the last two years that has reduced the freedom for entrepreneurs to test the system and get rich. It has also meant a clampdown on certain perceived excesses of unchecked capitalism, like the violence in computer games and the naked profiteering of after-school tutoring enterprises.
Specifically, Chen told me, for companies operating in fintech like Ant Group, an affiliate of Alibaba, “now every new initiative needs to be pre-registered and documented with the government before they can enter into it; that tiny change that people are unaware of will change the whole mentality in the industry now. We’re in a period where people are very scared about the crackdowns that happened in the last two years, whether it’s from investors or entrepreneurs they’re all on the side of caution right now so that kind of mentality has really changed.”
Chinese industry has demonstrated an ability to roll with the punches, however. For example, in response to the crackdown on the obsession with and violence in computer gaming, especially among young people, Tencent started limiting the time children could spend on its biggest mobile game, Honour of Kings, and began using the police database to verify the ages of its players. And “With typical Chinese ingenuity, Tencent scrubbed the game of violence, swapping green liquid for blood, inserting banners that proclaimed nationalistic slogans, and portraying game victims blithely waving upon their departure rather than expiring in sensationalistic fashion.”
The crackdown appears to be starting to ease a bit now. It remains to be seen where this new trend in policy will lead. Will it lead to a slowdown in China’s economic growth, or just a more-equitable distribution of the wealth, and perhaps even a cooling of the economic wild beasts that China aims to cool?
Like the outcome of the new level of competition of the West with China, indeed antipathy, the future is difficult to predict; we will have to watch and wait.
Economist and mathematician Michael Edesess is adjunct associate professor and visiting faculty at the Hong Kong University of Science and Technology, managing partner and special advisor at M1K LLC. In 2007, he authored a book about the investment services industry titled The Big Investment Lie, published by Berrett-Koehler. His new book, The Three Simple Rules of Investing, co-authored with Kwok L. Tsui, Carol Fabbri and George Peacock, was published by Berrett-Koehler in June 2014.
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