Good morning,
I hope that all of you had a great July 4th weekend!
On to the update:
Didi Removed From App Stores
From Bloomberg:
China’s cyberspace regulator ordered app stores to remove Didi Chuxing, dealing a major blow to a ride-hailing giant that just days ago pulled off one of the largest U.S. initial public offerings of the past decade.
The Cyberspace Administration of China announced the ban Sunday, citing serious violations on Didi Global Inc.’s collection and usage of personal information, without elaborating. That unusually swift decision came two days after the regulator said it was starting a cybersecurity review of the company.
That effectively requires the largest app stores in China, operated by the likes of Apple Inc. and smartphone makers Huawei Technologies Co. and Xiaomi Corp., to strike Didi from their offerings. But the current half-billion or so users can continue to order up rides and other services so long as they downloaded the app before Sunday’s order.
Markets were closed yesterday due to the July 4th holiday, but as I write this Didi shares are down around 30% in pre-market trading, wiping out around $22 billion in market value.
My coverage of Didi over the years has been representative of my coverage of Chinese tech in general: I was relatively gung-ho about the idea when Stratechery first started, and back in 2015 hailed the merger of Tencent-backed Didi Dache and Alibaba-backed Kuaidi Dache as an example of admirable pragmatism. However, in a classic example of the-more-you-know, the-more-you-realize-how-little-you-know, I have scaled back my coverage to mostly issues affecting U.S. tech companies; I wrote when Apple invested in Didi:
I am often asked why I don’t write more about China; the reason, as I’ve explained in the past, is that the country, particularly anything having to do with the government — which by extension covers all big businesses, tech included — is basically unknowable to an outsider, and the more you learn about China, the more you realize this is the case. To that end, while I feel relatively confident about what I am going to write, given the Chinese angle I am unashamed to admit that I could be 100% wrong; frustratingly, we will probably never know for sure.
My position in that piece was that Apple was investing in Didi “to demonstrate its commitment to China and to curry favor with the government”; I actually think that analysis holds up as far as Apple is concerned, but what is very much in question is the extent to which the Chinese government sees its big tech companies as a proxy for its interests as opposed to a rival source of power that must be brought to heel.
China vs. Tech
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 remains its biggest revenue driver).
The more jarring intervention was the block of Ant Group’s IPO days before it was set to go off; reported reasons included retaliation again Jack Ma’s criticism of Chinese regulators, concerns about Ant’s systemic risk, and suspicions that Xi Jinping’s rivals would financially benefit. The company may still IPO, albeit with a 60% haircut in valuation.
The resignations of ByteDance CEO Zhang Yiming and Pinduoduo CEO Colin Huang made fewer waves, but were in some respects even more odd. Pinduoduo has revolutionized Chinese ecommerce by building a direct-to-consumer marketplace, while ByteDance isn’t simply a powerhouse in China, but is also the first Chinese company to have a breakthrough consumer tech service in the West (TikTok). The latter in particular seems like a massive feather in China’s cap, a testament to how the company’s tech companies can build successful businesses not simply because of the Great Firewall, but by building something truly innovative.
All of these stories have their own potential explanations, from increasing antitrust concerns to concerns about time spent playing games or viewing risqué videos to the question of big data, which has been the go-to explanation for the Didi decision; from the Wall Street Journal:
Weeks before Didi Global Inc. went public in the U.S., China’s cybersecurity watchdog suggested the Chinese ride-hailing giant delay its initial public offering and urged it to conduct a thorough self-examination of its network security, according to people with knowledge of the matter.
But for Didi, waiting would be problematic. In the absence of an outright order to halt the IPO, it went ahead. The company, facing investor pressure to list after raising billions of dollars from prominent venture capitalists, wrapped up its pre-offering “roadshow” in a matter of days in June—much shorter than typical investor pitches made by Chinese firms. The listing on the New York Stock Exchange raised about $4.4 billion, making it the biggest stock sale for a Chinese company since Alibaba Group Holding Ltd. IPO in 2014.
Back in Beijing, officials, especially those at the Cyberspace Administration of China, remained wary of the ride-hailing company’s troves of data potentially falling into foreign hands as a result of greater public disclosure associated with a U.S. listing, the people said…The sudden regulatory actions, which surprised investors in coming just days after the company’s IPO, suggested that protecting national security trumps Beijing’s ambitions for Chinese corporations to go global. One upshot: Beijing is unlikely to hold fire even if its regulatory moves risk the ability of Chinese firms to court international investors.
I suspect — again, with all of the caveats that this is China, and no one knows for sure — that that upshot is the most important takeaway from not just this Didi story but all of these stories. A decade ago it was reasonable to assume that private Chinese companies were operating not just domestically but increasingly internationally with the support of the Chinese government; under Xi, though, there is much more of a priority on establishing the central government as the sole power center in the country, no matter what that means for said companies’ international ambitions, or even their domestic prospects.
CAID and Chinese Privacy
From the Financial Times:
A co-ordinated attempt by Chinese tech companies to circumvent Apple’s privacy policies has been forestalled, a significant victory for the iPhone-maker in what was seen as a threat to its global privacy push.
Tech groups led by Baidu, Tencent and TikTok parent ByteDance had worked with two Beijing-affiliated groups to create a new way of tracking iPhones for advertising, called CAID, that would let them identify users even if they refused to let apps use Apple’s official ID, called IDFA.
CAID was developed last year and had been openly tested for months before a planned release in late March. After the Financial Times reported on its existence, advertising technology experts said the project marked a grave risk to Apple’s global privacy rules and its $50bn business in China…
Apple made its position clear shortly afterwards by blocking updates to several Chinese apps that it had caught enlisting CAID in their software updates from its App Store. Several people in China and Hong Kong said that, following Apple’s retaliation, CAID lost support and the whole project failed to gain traction.
I was skeptical that CAID was a grave risk to Apple when I wrote about it in March, but my reasoning was that Apple could and would treat the China market differently; I was half-right and half-wrong. The wrong part is obvious: I assumed that this seemingly coordinated approach by Chinese companies would have the backing of China’s government. It didn’t, and Apple, via its control of the App Store, prevailed.
What is right is that Apple does treat the Chinese market differently; the New York Times wrote about the company’s compromises with regards to user data in March:
On the outskirts of this city in a poor, mountainous province in southwestern China, men in hard hats recently put the finishing touches on a white building a quarter-mile long with few windows and a tall surrounding wall. There was little sign of its purpose, apart from the flags of Apple and China flying out front, side by side. Inside, Apple was preparing to store the personal data of its Chinese customers on computer servers run by a state-owned Chinese firm.
Tim Cook, Apple’s chief executive, has said the data is safe. But at the data center in Guiyang, which Apple hoped would be completed by next month, and another in the Inner Mongolia region, Apple has largely ceded control to the Chinese government. Chinese state employees physically manage the computers. Apple abandoned the encryption technology it used elsewhere after China would not allow it. And the digital keys that unlock information on those computers are stored in the data centers they’re meant to secure.
Data protection and user privacy in China does not mean that no one can access your data or that you cannot be tracked; it means that the government has a monopoly on your data and the ability to track you. Moreover, this doesn’t just apply to domestic companies, but foreign companies too, including Apple. More broadly, 43 years after Deng Xiaoping announced the Open Door Policy, launching China down the path to market reforms and the empowerment of private business, it is unambiguously clear that Chinese government control and interference, motivated not by business outcomes but by cementing control and eliminating rival power bases, is not simply a risk factor for investors to consider, but an unavoidable reality.
This Daily Update will be available as a podcast later today. To receive it in your podcast player, visit Stratechery.
The Daily Update is intended for a single recipient, but occasional forwarding is totally fine! If you would like to order multiple subscriptions for your team with a group discount (minimum 5), please contact me directly.
Thanks for being a supporter, and have a great day!