The year’s big question for global tech investors: What is going on in China? Over the last 20 years, that answer was easy. Growth, scale and investor profits. Anyone who could help was invited. That is why major international VC firms, such as Silicon Valley’s Sequoia Capital and Japan’s SoftBank, greatly expanded their Chinese portfolios.
However, a closer look reveals that U.S.-based venture capital in China actually peaked in 2018. The two-way capital flow between the U.S. and China was already waning before Covid, before China regulators suspended the IPO of Alibaba financial services arm Ant Group in late 2020, and before last month’s curious wealth-destroying regulations aimed at online education firms and ride-share superstar Didi.
How much money was lost due to government actions? Plenty. Ant was on track to be the largest tech company IPO in world history, with $37 billion raised for a post-IPO valuation of $300 billion. Observers now peg Ant’s IPO, if it happens, to raise only 40% of what was projected last year.
Didi was luckier. It did manage to get its IPO out the door, raising $4.4 billion and reaching an intraday peak valuation of $87 billion on the day it listed. But the day after its IPO, China suspended the company from registering new users and removed its ride-sharing app from app stores there. Four weeks later, Didi had lost $38 billion in market value from its June 30 peak.
As Forbes contributor George Calhoun wrote in early July, “The immediate damage was not limited to Didi’s shares. The Nasdaq Golden Dragon Index of 98 Chinese companies traded in New York fell in lockstep, down 14% in a week, losing $130 billion in value.” A selloff worth nearly $1 trillion is now the total being reported by media outlets in early August.
There are many theories about why China is doing this—most revolve around the government’s supposed reluctance to let outside investors have access to Chinese company data. But there are no clear answers. What is certain is that these actions raise major questions about the future role of international tech investors in the world’s second-largest economy.
Let me offer one more idea: President Xi wants to achieve technology superiority by 2025. But Ant and Didi, however popular and successful, are not about core technology. While Didi employs ride-sharing technologies, those aren’t as strategically important as others—quantum computers, semiconductors and satellites—core technologies that many believe will determine China’s future.
A similar view is shared by an American entrepreneur and investor Peter Thiel, who is the cofounder of PayPal and Palantir Technologies and an early investor in Facebook.
Thiel, whom I’ve known for 30 years, complains that U.S. technological progress has slowed down, not sped up, over the last 50 years. That would be since 1971, ironically when chipmaker Intel introduced the very core of all digital technologies, the microprocessor. He worries that most bright tech minds no longer take on hard projects such as energy, transportation and healthcare. They would rather develop games and launch e-commerce websites, since those can be done quickly by assembling existing technology. Such companies also scale rapidly and escape onerous regulation. Investors love them.
Tech observer Ben Thompson, who writes a newsletter called Stratechery from his base in Taipei, sees the same core versus peripheral motives. “The move against Didi isn’t entirely out of the blue, at least as far as conflict between the Chinese government and its biggest tech companies are concerned. Start with Tencent. Back in 2018 the company’s revenue and profits took a big hit when China froze approvals for new games; while game approvals eventually restarted, Tencent took the hint and reorganized itself to increase its focus on the enterprise market (although games remain its biggest revenue driver).”
Does China believe its Ants and Didis distract from the larger goal of global core technology supremacy? Tech investors might want to think about that.