The Crackdown on an Uber Rival Casts Doubt on China’s Tech Giants

T wo days after Chinese ridesharing app Didi listed on the New York Stock Exchange — the second-largest Chinese IPO in history — regulators in Beijing announced an investigation into the company’s data-collection practices. Beijing’s cyberspace regulator ordered mobile providers to remove the app from their stores, alleging that the company violated user privacy. The news sent the stock down nearly 25 percent on Tuesday.

The latest move in a broad crackdown against the tech sector, the Didi saga underscores the precarious footing of Beijing’s tech giants. Ever since the Chinese Communist Party initiated an effort to spur “indigenous innovation” in the early 2010s, economists have debated whether a centrally planned economy could foster private-sector entrepreneurship. In the 2000s, most of China’s successful startups have mimicked Western firms, helping China catch up but failing to produce breakthroughs. As the tech sector matured, however, a handful of startups outgrew their roots and built products with no obvious parallel in the West.

Didi, an Uber copycat that now matches its Western progenitor in scale, is emblematic of China’s Internet sector. The firm bested Uber in China with a ruthless pricing strategy and strategic partnerships with other competitors, including Lyft. And while Uber has largely limited itself to ridesharing and food delivery, Didi has become a sprawling behemoth, with a vehicle-leasing arm, a network of gas stations and auto-service shops, and a massive electric-bike business.

China-based tech investor Kai-Fu Lee attributes the success of Didi and other Chinese startups both to generous government support and to the country’s culture of ruthless competition, where no dirty trick is left off the table. Indeed, Didi reportedly planted moles at Uber as the two companies sparred over the Chinese market, going as far as to spread false claims to drivers in 2014 that the Uber app had been taken down.

With little in the way of antitrust regulation or intellectual-property protection, China’s tech market over the past two decades has, in a certain sense, been “freer” than that in the U.S. In Lee’s triumphant telling, this intensely competitive ecosystem paved the way for companies such as Didi to create an “alternate internet universe,” moving virtually all transactions online. “Compared with China’s startup scene, the valley’s companies look lethargic and its engineers lazy,” Lee claimed in his 2018 book AI Superpowers.

But if the recent tech crackdown is any indication, the optimists may have spoken too soon: The Party giveth and the Party taketh away. Chinese president Xi Jinping is not content to cede the spoils of the country’s tech giants to shareholders. The crackdown is in part a flexing of the government’s muscle toward increasingly powerful entrepreneurs, but it is also a land grab: Chinese officials want access to the troves of data held by the country’s tech firms.

Those data would go a long way toward shoring up the country’s domestic-surveillance system and aiding the rollout of the digital yuan, a means of payment which will compete directly with Alipay and WeChat. Party hardliners have called for the outright nationalization of data, arguing that the government is entitled to compensation for its support of tech firms.

And they have a point: Local governments spared no expense in building tech hubs to compete with the U.S. In his book, Lee recounts raising concerns about rent prices to a local official: “No problem, he said — he would make some calls. The local government could likely cover our rent for three years if we relocated to the neighborhood of Zhongguancun.” Party officials built Zhongguancun, the country’s answer to Silicon Valley, by brute force, lavishing subsidies on any project that showed a glimmer of promise.

Lee contrasts China’s entrepreneurial efforts with “a U.S. government that deliberately takes a hands-off approach to entrepreneurship and is actively slashing funding for basic research.” For a time, government support bolstered entrepreneurs such as Alibaba founder Jack Ma and Didi founder Cheng Wei. But there is, as it turns out, no such thing as a free lunch.

As Xi has said, “North, south, east, west, and center, the Party is leader of all.” And the reservoirs of data controlled by private firms are unlikely to escape the Party’s reach. Meanwhile, Xi has made a concerted effort to develop China’s capital markets, with the de facto takeover of Hong Kong giving Beijing a foothold in a global financial center. Bloomberg recently reported that China’s financial-regulatory body would expand its authority over the IPO-approval process. Together with a Wall Street Journal report that regulators urged Didi to postpone its IPO, the string of regulatory measures suggests that authorities took issue with Didi’s choice to list in New York as opposed to Hong Kong.

The result is a major hit to the valuations of China’s national champions, and a general loss of confidence in the country’s entrepreneurial capabilities.

Beyond the big names such as Alibaba and Didi, Xi’s power-grab threatens to undermine smaller upstarts as well. The local competition that incentivized Party leaders to nurture tech ecosystems has been stamped out. As dissident Chinese professor Wu Qiang told the Financial Times, “Local officials used to have more initiative to innovate, to take risks for economic development . . . Now they follow higher level officials. Everyone is restrained, so they do nothing. The effect of all this is the same: there is no self-correction mechanism in the system.” Facing reduced government support and increased regulatory scrutiny, would-be Chinese entrepreneurs may look elsewhere.

Those firms that have succeeded in China will have to walk a tightrope between appeasing the Party and protecting their property. Considering the tech sector’s massive contributions to growth and productivity, the outcome of this standoff could shape the future of the Chinese economy.