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China’s Startups Hope Tech Crackdown Creates New Opportunities

China’s Startups Hope Tech Crackdown Creates New Opportunities

The Chinese government’s crackdown on the country’s largest technology companies has raised fears that the industry could be paralyzed or cast into disarray as the economy enters a delicate moment. But there’s one contingent within the tech sector privately cheering on a broad set of anti-monopoly edicts: startups and their investors.

“The introduction of antitrust rules will indeed create more space for startups to grow,” says Zhou Xiang, a managing director at China Renaissance Group who oversees its early-stage investments. “Previously we had witnessed venture capitalists dropping a deal just because of concerns that the tech giants may one day step into the same area in which the startup operates. The antitrust law has eased such concerns moving forward.”

China has been experiencing a massive tech boom, led by Alibaba Group Holding Ltd. and Tencent Holdings Ltd.—which are worth roughly $1.6 trillion. combined—and their various offshoots. The era of unfettered expansion hit a snag, though, when Beijing went after Alibaba co-founder Jack Ma, the industry’s ambassador, and his internet empire. Affiliate Ant Group Co. called off its $35 billion initial public offering in November. That same month, Beijing proposed an antitrust regime that would give the government sweeping powers to rein in the most powerful corporations. In December, it launched an investigation into Alibaba.

The new approach could lead to significant fines or even a move to split up the largest companies. More immediately, it could chill the acquisitions the biggest Chinese tech companies have relied on to buy their way into leading positions in emerging aspects of the industry. Many startups rely on Alibaba and Tencent for investment capital—or angle to be bought outright.

China’s Startups Hope Tech Crackdown Creates New Opportunities

The Chinese giants control the industry through a labyrinthine network of investment that encompasses the vast majority of the country’s most successful startups in artificial intelligence (SenseTime, Megvii), digital finance (Ant), and other arenas. Their patronage has also groomed a new generation of titans, including food and travel giant Meituan and Didi Chuxing Technology Co., China’s version of Uber.

There have been some notable independent tech startups, such as TikTok owner ByteDance, the dronemaker SZ DJI Technology, and gaming company NetEase. Beijing’s shifting approach could inspire global investors to bet on more independent companies, knowing they won’t be crushed or swallowed by dominant firms.

China’s Startups Hope Tech Crackdown Creates New Opportunities

The Communist Party seems interested in ushering in a generation of challengers and galvanizing startups in the deep sciences, which take longer to develop. Chinese leader Xi Jinping has made clear he wants the country to prioritize supercomputing and semiconductors over smartphone games and grocery deliveries.

“China will continue to push mightily on the high-tech front and is gaining in many important sectors, such as AI, robotics, 5G,” says Rebecca Fannin, founder of Silicon Dragon Ventures. Many developments “come from the emerging companies, not from the tech titans,” she says.

Startups hoping to benefit from Beijing’s interventions may find themselves imperiled too, says Angela Zhang, director of the Centre for Chinese Law at the University of Hong Kong. The government’s enthusiasm for control could soon extend to smaller firms as well. But startups have been consigned to one of two fates up to this point, Zhang says. “Either a company can’t survive, or if they did well, they would be bought by Alibaba or Tencent. This crackdown does give them a third route.”

©2021 Bloomberg L.P.