China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

In an earnings season tradition, Elliott and James bring on Michael Norris to discuss the quarterly earnings reports of Alibaba, JD, and Pinduoduo, and discuss what investors should be looking for from them going forward.

See supporting charts here.

Hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:

• Michael Norris– @briefnorris

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

This week, James is taking some time off with his newborn, so CTI regular Michael Norris fills in as cohost. He and Elliott discuss Alibaba, Bilibili, and Pinduoduo’s Q1 earnings, as well as what the possibility of Chinese companies delisting from US exchanges will mean for investors.

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Links:

Bilibili and the niche vs mass market dilemma– Pingwest

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx
• Michael Norris– @briefnorris

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

This week, the guys welcome Coindesk Asia Editor Wolfie Zhao to the pod to discuss the latest progress in China’s development of a digital currency, and also swap stories of the exciting and dynamic gray market in China that has built up around cryptocurrency mining and trading. James and Elliott also look into Pinduoduo’s 20-F and discuss the latest earnings reports from Tencent and JD.

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Guest:

• Wolfie Zhao – @Wolfiezhao

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

In this episode, the guys welcome back Michael Zakkour, Founder and Chief Strategist of 5 New Digital. They discuss how the demands of the COVID-19 pandemic have spurred a leap forward in e-commerce and new retail in both China and the US, and which firms are positioned to benefit. James and Elliott also look at Meituan’s earnings, as well as recent short-report allegations of iQiyi.

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Guest:

• Michael Zakkour – @michaelzakkour

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

In this episode, the guys bring on CTI regular Michael Norris to discuss Luckin Coffee’s recent admission of fraud. Michael was an early skeptic of Luckin, identifying potential red flags around the company in the spring of 2019. Michael, James, and Elliott discuss the timeline for Luckin leading up to this admission, and what the potential fallout could be.

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Guest:

• Michael Norris – @Briefnorris

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

In this episode, the guys welcome professor Jeffrey Towson to discuss the ongoing battle over the digital services sector in China, as Alibaba, Meituan, Baidu, and others fight on a rapidly-changing battlefield. James and Elliott also chat about the “COVID recession,” investment strategies, and go over the quarterly earnings of Tencent, Pinduoduo, and JD. 

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Links:

• Jeff’s Asia Tech Class podcast

Guest:

• Jeffrey Towson – Jefftowson.com

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

It appears many Chinese tech executives had the same new years resolution for 2020: Do more fundraising.

Barely a couple weeks into the new decade, quite a few of China’s most prominent tech titans are heading to global capital markets looking for funding. Huawei is reportedly seeking to raise up to $2 billion in loans and bond sales. JD has filed to raise $1 billion in a bond issuance while also planning IPOs for both its JD logistics and JD Dada arms in the US. Fast-growing Luckin Coffee has also already filed to raise funds through both a $400 million bond issuance and a secondary share offering of $378 million. Additionally, US-listed Baidashu, Netease, and CTrip are all reportedly considering secondary listings in Hong Kong.

What’s driving this all-at-once cash grab? It turns out that the new year brings with it a perfect storm of converging factors that draw firms to the capital trough. And for a community of tech entrepreneurs who have struggled to secure financing in 2019’s “capital winter,” which saw a total deal value fall to $51 billion from $112 billion the previous year, there is hope that the worst could be over.

Window of opportunity

Shares in China’s major publicly-listed tech firms have surged in recent months, renewing the interest of investors. For many of these companies, this means share prices rebounding from a tumultuous past few years. Netease has returned to heights not reached since late 2017. Tencent’s shares are pricier than at any point since mid-2018. Xiaomi’s long-suffering shareholders, who saw the stock move consistently downward since the company’s much-hyped July 2018 IPO, have been rewarded by a rise of roughly 30 percent over the span of two months.

Renewed investor confidence has led many firms to wonder if the current moment offers a rare window of opportunity. “With share prices so high, it could be a good time to add to their war chest,” explains Jimmy Lai, former CFO of US-listed China Online Education Group and a current board member for three NYSE-listed firms. “There is a fear of missing out that may come into effect, as well as a herd mentality. No one wants to miss their window, and when their competitors are raising cash as well, nobody wants to be the company that doesn’t.”

The Hong Kong secondary listing

On Nov. 26, US-listed Alibaba issued a secondary listing on Hong Kong’s stock exchange, raising over $11 billion, the largest listing on any exchange for all of 2019 save for that of Saudi Arabia’s state oil giant Saudi Aramco.  In the big picture, the Hong Kong listing gave one of China’s largest and most strategically important tech firms a hedge against the possibility of proposed US regulations which would demand further disclosure from Chinese firms listed in the US, or perhaps even ban and delist them altogether. Alibaba’s blockbuster offering also provided a much-needed economic and morale boost to a financial center that had been rocked by protests, violence, and political conflict for much of the year.

Yet for Netease, Baidu, CTrip, and other US-listed firms considering following in Alibaba’s footsteps with a secondary listing in Hong Kong, the incentive to do so may not be anything more complicated than access to cold, hard cash. “Hong Kong investors behave differently than those in the US. The US stock markets are dominated by institutional investors, while Hong Kong has a larger percentage of retail investors. Being listed in both places provides more flexibility for firms when looking to raise further capital,” explains Jimmy Lai. “Now that Alibaba has done it successfully, some of these other firms are willing to give it a try.”

Indeed, the impact of Alibaba’s Hong Kong listing seems to be part of what is fueling the overall bullishness for Chinese tech stocks. As of Jan. 14, shares of Alibaba’s US-listed shares have risen roughly 15 percent since their Hong Kong IPO date of Nov. 26, a date that seems to serve as the point of lift-off for the current share price surges of Tencent, JD, Netease, Xiaomi, and others.

(Relatively) calm geopolitical waters

The feud between the US and China appears to be amidst a slight respite. A substantive—if limited—trade deal has now been signed and Trump’s provocative tweets and unpredictable behavior do not seem to rattle markets in the same way that they once did. While this is far from a return to normalcy, fears of trade war-induced economic Armageddon appear to have subsided, at least for the time being. And when fear subsides, it’s often good for markets.

Currency balancing act

Those inclined to hold a more bearish view of the Chinese economy altogether see Chinese firms’ efforts to tap international capital markets as one downstream effect of China’s central bank and financial regulators’ attempts to manage the country’s foreign currency reserves. Despite being a net exporter, the world’s second-largest economy is heavily dependent on imports for some of its most essential goods, including oil, metals, and agricultural products. As China must pay for such goods using foreign currency, this requires not only that they have a large stockpile of foreign currency reserves, but that those reserves be liquid enough to use.

As China’s leaders have been simultaneously managing a slowing and heavily-leveraged economy, trade tensions with the US, and their own global ambitions, ensuring healthy levels of liquid foreign currency has become an increasingly complicated task. In recent years, the People’s Bank of China has taken steps to limit capital outflows and restrict conversion from RMB to USD. While a large state-run oil company or agricultural goods importer may be able to convert freely, private firms, and individuals often face more obstacles.

As Fulbright University Vietnam professor and well-known critic of China’s financial system Christopher Balding puts it, “They’ve effectively started rationing US dollars.” For China’s technology firms, many of whom require foreign currency for their overseas expansion plans, getting that currency through international capital markets may be easier than converting their RMB-denominated assets into USD. Says Balding, “by raising money from outside China, it is a win-win for both the party elite in Beijing and for the tech companies as well. The companies get cash to fuel their expansion plans, and Beijing can see their firms expand globally without having to give them dollars to do so.”

Is capital winter over?

For the likes of Alibaba, Huawei, JD, and Netease, this may be an opportune time to raise funds on preferable terms. Yet for firms that have struggled lately, investors’ recent enthusiasm opens a door for a much-needed lifeline.

High-profile EV-maker Nio has struggled to stay solvent since its 2018 IPO and has seen its share price fall accordingly, yet a better-than expected quarterly earnings report and strong financial market tailwinds appear to be pushing them closer to another funding round. For viral media platform Qutoutiao, their resurgent share price could potentially allow them to do the same.

Yet for startups, who endured a difficult 2019 as capital winter went into full swing, it is unclear if the gains we are currently seeing will trickle down to them.  A thaw seems to be underway, but only time will tell if it is a true sign of spring.

Editor’s note: This post about Tencent investments originally appeared in our members’ only weekly newsletter, accompanied by a graphical take on Tencent’s global investments published here. Sign up and read it first.

This China-based company is one of the most valuable technology firms in the world. They control massive amounts of personal data for billions of the world’s internet users. They also have a widespread global presence in nearly every major corner of the digital economy, and it seems unlikely that a user of the mobile internet anywhere in the world could go through a week—or even a day—without using a product or service backed by this company.

This company is not Huawei, not Alibaba, but Tencent. And in a world where geopolitical tripwires seem to be everywhere for Chinese tech firms, their approach to global expansion may be one that others will emulate.

Tencent flies under the radar, but it’s quietly succeeded in establishing a nearly-unparalleled global business footprint. Crunchbase lists about 150 investments made by the Shenzhen-based gaming and media company outside of mainland China, not including acquisitions. They’ve taken stakes in household names such as Tesla, Uber, Lyft, and Snapchat, as well as Spotify, Reddit, Ubisoft, Activision Blizzard, and 100 percent of Riot Games. They back southeast Asia delivery and mobility giant Gojek and Singapore gaming and e-commerce giant Sea. In India, they own a minority piece of Walmart’s Flipkart, as well as ride-hailing company Ola, among others. Tencent is one of China’s most globally expansive firms and has become so while experiencing very few of the headaches of its peers.   

Risky acquisitions

Over the past few years, global Chinese tech firms have found themselves in the minefield of international affairs. While Huawei’s high-profile battle with the US government has drawn the most headlines, it is simply the highest-profile case. 

Nations are completely changing their views of the relationship between telecommunications, the digital economy, and their own sovereignty and security. In May of 2019, the Committee on Foreign Investment in the United States (CFIUS) “requested” Chinese gaming company Beijing Kunlun Tech Co Ltd to divest the popular gay dating app Grindr, citing concerns over sensitive personal data of US users. In early 2018, the US government blocked a $1.2 billion acquisition of payments provider Moneygram by Alibaba’s Ant Financial. In 2020, the fortunes of Bytedance’s likely IPO will hinge heavily on how skillfully it manages scrutiny from US authorities and the public, a task it appears to have bungled thus far. 

US regulators aren’t the only ones skeptical of Chinese tech firms. As India seeks to create room for its own tech giants to grow, the administrative playing field may be tilting against both US and Chinese firms in a number of ways, limiting their potential for success in what will soon be the world’s most populous nation. As if Bytedance’s hands weren’t already full with its troubles in the US, it spent much of 2019 dealing with Indian courts and regulators in an attempt to prevent its super-popular Tiktok app from being banned throughout the country.

Loose grasp

Perhaps the most striking contrast between Tencent’s overseas strategy and those of its domestic peers is the same thing that has set it apart in China’s domestic market: it appears comfortable with decentralized ambiguity, and limited direct control of its own technology ecosystem and financial holdings. Broadly speaking, Tencent prefers to invest and advise, rather than acquire and control.

This approach is a sharp contrast to Alibaba, which is known to take over firms in their entirety and impose its culture and management from the top down. Compare Ele.me, which Alibaba acquired outright in 2018, with rival Meituan-Dianping, in which Tencent held a 20% stake before investing $400 million in the company’s 2018 IPO. As the two giants have expanded their presences into Southeast Asia, Alibaba’s biggest splash was through a takeover of e-commerce firm Lazada, while Tencent has taken minority stakes of Singaporean gaming and e-commerce company Sea, as well as super-app Go-Jek.

According to Matthew Brennan, founder of research consultancy China Channel and co-host of Technode’s China Tech Talk podcast, Tencent’s relatively hands-off approach can be attributed to the experience and personalities of two of the company’s top decision-makers: Executive Director and President Martin Lau, and Chief Strategy Officer James Mitchell. “Both Martin and James think more like investment bankers than operations-focused managers,” explains Brennan. “Much of Tencent’s profit generation still lies in gaming, a sector in which they are known to take more controlling and larger stakes. Yet for the rest of their investments, they seem comfortable trusting existing management and taking a much less active role.”

As of the end of Q2 2019, Tencent reported an investment portfolio amounting to over RMB 417 billion (about $59 billion), including China and overseas.

The two sides of the silo

This has certainly not been without its downsides. In some cases, the firm’s tendency to invest capital liberally, often without taking controlling stakes, has meant that it has fostered its own competition. Domestically, Meituan now challenges Tencent’s own WeChat as China’s most versatile super-app. Internationally, Tencent has a habit of buying into firms that compete with its allies—such as Sea, whose Shopee competes with Tencent-linked JD as it tries to push into Southeast Asia. Sea is also part of Tencent’s vast portfolio of gaming companies, many of whom are rivals not only with each other, but in some cases, even Tencent itself. 

Even for parts of the business fully owned by Tencent Holdings, lack of cohesion has proved to be a challenge. In late 2018, the company’s top executives announced dramatic organizational restructuring in an attempt to reform the firm’s “silo culture,” in which small teams competed fiercely internally, while collaboration was notoriously poor. Management believed that this culture, which fostered the development of wildly successful consumer-facing apps like WeChat and QQ, would be less conducive to Tencent’s future goals, centered around cloud services, AI, and enterprise solutions.  

Yet when it comes to doing business outside of the PRC, it is precisely those “downsides” which offer an advantage in the current geopolitical climate. Huawei’s top-down control, poor localization, and organizational opacity have led to trust issues, as even their overseas offices are notorious for a lack of local management or control. As India looks to develop national tech champions to compete with those of China and the US, Tencent’s approach of acquiring minority stakes can be seen as a helping hand in achieving that goal, while Alibaba’s strategy of outright takeover will likely see pushback from authorities and the public. As the US government worries about the personal data of American Tiktok users being stored and exploited in China, Bytedance now ponders how it can best de-couple the video app from its China-based organization. 

While silo culture may be a downside domestically, the reality of today’s multipolar world is that for global tech giants, creating effective silos is a strategic competency. And that is something at which Tencent has proven to be quite effective.

Read more

Where does Tencent make its overseas plays? TechNode digs into the data to find out in a companion article to this story.

I am suffering from a serious case of chronic, excessive Huawei news. I’m sick of writing about them, I’m tired of reading about them. I’m irked by journalists who can’t speak any Chinese calling them “Wah-way,” as if “Hua” is somehow difficult to pronounce. I’m over “my way or the Hua-wei” puns. And sweet Lord, I never want to hear the phrase “smoking gun” again in my life.

There’s too much talk, and not enough information. The topic of 5G technology and security is highly complex and technical. The question of who owns and controls the company has been the subject of much debate, as have Huawei’s connections with the Chinese military. In each case, it’s hard to say if the picture has become much clearer. The company is massive and opaque, as is China and the Communist Party, and the degree to which those three entities are both different and the same. Add to that the chaos of Washington in the Trump era.

What we get from that cocktail is pretty much what we’ve seen for the past eight months or so: intriguing headlines, drama, arrests, speculation, controversy, diplomatic kerfuffles, and don’t forget tweets. Lots and lots of tweets. After a May 15 White House executive order effectively banning US firms from using Huawei equipment and a Commerce Department decision to place the firm and 70 of its subsidiaries on its “Entity List,” barring them from buying parts and components from US companies without the government’s prior approval, some predicted the death of the company. Then President Trump mentioned the possibility of lifting the ban altogether. Then Commerce Secretary Wilbur Ross made a statement which was about as devoid of substance as a slice of white bread.

There has now also been news of leaked documents showing that Huawei had secretly planned to build North Korea’s wireless network, information that at one point probably would have been big news, but is now just another headline of many that we are all now becoming desensitized to.

This entire situation is one big swirly-eye emoji, followed by a facepalm.

So what is actually changing on a business level? How and when will users and suppliers begin to directly feel the heat? Here are a few bullet points which will hopefully provide a bit more clarity:

Mark August 19 on your calendar: Despite all the orders and proclamations, it’s safe to say that at least thus far, there has been more thunder than lightning about the impact on Huawei’s day-to-day operations. This is in large part due to the 90-day suspension of the ban by the US Department of Commerce, put in place on May 21. As things currently stand, Huawei will lose access to US-made products and components on August 19.

“The deadline on August 19 is definitely an action-forcing event for the US government, requiring them to come to the table with a clear decision on whether they will make a deal on Huawei,” said Samm Sacks, Cybersecurity Policy and China Digital Economy Fellow at New America. “After that the big question for Huawei will be how many components they’ve stockpiled, which is in large part a mystery at this point.”

Reports on the size of Huawei’s stockpile of imported components have differed, ranging from three months’ worth to a year. What will likely have an immediate impact is that from August 19 Google will stop sending Android software updates to newly-purchased Huawei handsets, forcing the company’s hand in launching its much-anticipated Hongmeng OS. Company founder Ren Zhengfei has said (paywalled, in French) is not even designed for use on smartphones, likely making Huawei handsets a tough sell to overseas users.

International smartphones sales are already hurting: In June, Ren confirmed a 40% drop-off in the firm’s overseas smartphone shipments. Huawei expects a drop of 40 to 60 million international handset sales this year, roughly half of the previous year’s figure.

Ren added that pressure from the US could account for as much as $30 billion in lost sales growth; estimated revenue for the year has been revised down from $130 billion to $100 billion.

One particularly acute pain point to watch will be Huawei’s standing in Europe’s smartphone market. The company had been steadily increasing market share in the region, where the relatively affluent consumer base had been warming up to their higher-margin premium handsets.

Congress doesn’t trust Trump to be tough enough on Huawei: While Trump has demonstrated willingness to bargain on Huawei to accomplish a trade deal, legislators seem to be moving to limit his ability to do so. On July 16, bipartisan-sponsored bills in the House and Senate were introduced which would, among other things, bar the removal of Huawei from the Entity List without House and Senate approval. The bills also let Congress disallow waivers granted to US companies doing business with the company.

The introduction of the “Defending America’s 5G Future Act” suggests that other leaders in Washington are unwilling to soften their stance on Huawei, even if the President is.

A long waiting game: As is often the case with such high-profile legal and political battles, one thing is fairly certain: we can expect to see a whole lot of cans kicked down a whole lot of roads. Trump’s “trade war” with China, like most American wars over the past few decades, now seems to be just continuing in perpetuity. Detained Huawei CFO Meng Wanzhou’s extradition proceedings will not begin until January of next year, with hearings likely to continue into October, which is not good news for the two detained Canadians who are being held in far less pleasant conditions than Meng.

US chipmakers have been lobbying Washington to ease the ban, as has Google, and it would be surprising if such powerful interests were unable to have any sway on the matter. And of course, if Trump is defeated in November of 2020, we could potentially see a re-examining of US policy towards China and its tech firms. Yet regardless of how exactly everything plays out, we can all probably assume that assume that US hostility to Huawei, and efforts to restrict its business, are here to stay.

For all the talk of the US government delivering “lethal blows” to Huawei, it’s hard to imagine the situation playing out with such a sense of tidy resolution. What we can expect to see over the coming months and years with Huawei is something akin to a military siege of a city: sitting and waiting, while they slowly run out of resources and options until they are weakened to the point of irrelevance.

In the meantime, we’ll just all have to keep reading, writing, and talking about the situation, complete with mispronunciation, bad puns, and all.

Note: This visit, the questions asked, and the answers given, took place prior to the White House executive order allowing the US government to block US firms from doing business with Huawei.

On Monday, May 13, I spent a day visiting Huawei’s offices outside of Shenzhen, China.

I’m hardly the first visitor that the company has had in recent months. As Huawei has experienced ramped-up pressure from the US government, it has embarked on a PR offensive, most notably in an open letter inviting members of the overseas media to “come and see” Huawei for themselves.

Much to my disappointment, I did not receive a personal invitation for an all-expenses-paid junket like super-hawkish Washington Post columnist Josh Rogin (who then proceeded to blast it all over Twitter). After contacting the email address in the Huawei open letter, I had a brief exchange with a Huawei PR representative in the US, who told me on March 6 he would get back to me as soon as he could—and then, well, never got back to me.

I ended up getting an invitation from Joe Kelly, Huawei’s Global VP of Public Affairs, after sitting on a panel with him.

As I understand, my visit was fairly standard for foreign media visitors to Huawei. I visited their AI lab, known as “Noah’s Ark” because its central function is to predict and manage the “floods” of data that course through its networks. I also spent time visiting and speaking with Huawei staff in the firm’s cybersecurity center, its smartphone factory floor, and of course its R&D campus, which is famously modeled after historic European towns and castles.

For the record, I paid my own way. A very nice lunch (featuring multiple courses, including lobster), beverages, transportation between different stops on the tour, a few books on Huawei’s culture and history, a pen, and a notepad were just about the extent of what Huawei offered. I did not request that any expense be covered by the company.

Neither did I request that TechNode cover any expenses for the Huawei visit, although I will likely be paid for this article. I went mostly for my own curiosity.

Crowdsourcing the questions

As statements from Huawei, interviews with executives, and company talking points have been so abundant in the media in recent months, many of the most pressing questions have already been asked and answered. For other questions, it was evident that I would receive an insufficient answer, considering that the only people with the knowledge and authority to answer such questions (i.e., Huawei founder Ren Zhengfei or Chinese president Xi Jinping) would not be available to speak with me.

I had taken the opportunity to outsource the question-asking to members of the TechNode Squared subscription program, as well as my followers on Twitter and listeners of my podcast (The China Tech Investor Podcast). The questions ranged from the company’s products and business strategy, to its people-management practices, to its ownership structure, to how it is responding to US pressure and allegations of IP theft and questionable ethics.

Many questions were answered by the company representatives I spoke with at the various locations visited on the tour. However, the bulk of them, and often the most thorough, were given by public affairs VP Joe Kelly, who, along with another Huawei representative, accompanied me throughout the day.

Side note: A former postal worker from Ireland who dropped out of school at 15 years old and now finds himself at the center of a global technological and political conflict, Kelly himself is perhaps as interesting as the company he represents. The Beijing Bookworm’s Peter Goff wrote a profile on him in The Irish Times that is very worth reading.

What does Huawei consider to be their core business? Do they view themselves as an infrastructure business, a consumer electronics business, or something else?

—Vincent Bergsma, TechNode Squared member

In Huawei’s early days, we were a hardware company, and the software was created to manage and control the hardware. Today, in 2019, the hardware is becoming commoditized, and the intelligence is embedded in the software. Huawei’s activities range from the chip sets, through to the device (e.g., smartphone, laptop, wearable, or connectivity device installed in a car), through to the base station, to the core transmission network. Huawei’s range of activity is broader than any of our competitors. Ericsson and Nokia, for example, are in the network space, not so much in the device space. Apple is in the device space, not so much in the network space.

—Joe Kelly

The fact that Huawei is engaged in all four areas on this value chain explains much of their path to success. The nature of the telecoms industry is one that heavily favors scale, and dominance in one area allows firms like Huawei to invest or subsidize other areas of business, which can create a snowball effect.

What is often a point of dispute between Huawei and its critics is the degree to which the Chinese state, through subsidies and other forms of assistance, helped Huawei in getting up to scale in its earlier days, effectively giving the “snowball” its initial push down the hill.

From a US perspective, Huawei’s potential to dominate all four areas of the telecoms value chain is understandably a source of concern, as it would give them the leverage to establish many of the rules and standards of that value chain, and the ecosystems built on top of it.

How have Huawei’s priorities changed since receiving increased pressure from the US government? Are they taking more assertive actions to speed up development of their own chips? What about an alternative to Android? What is the strategy to succeed without the US?

—Several individuals asked similar questions along these lines

Although this visit took place before the May 15 executive order that threatens to cut off Huawei from US semiconductors and the Android operating system, the company’s official response on such matters is consistent—yet consistently vague.

When I visited Huawei’s AI lab to discuss the company’s capabilities which would enable it to develop an OS and accompanying app suite, Xu Chunjing, the director of Huawei’s computer vision lab, told me that while the company could potentially launch its own OS, it was content with its relationship with Android.

With regard to whether Huawei has accelerated the development of its own core components in preparation for a US ban, Joe Kelly emphasized that the company had been working on its own core tech long before things soured with the US, having founded chipmaking subsidiary HiSilicon in 2004. According to Kelly, this came from a desire to have greater control over the functionality of the chips, and therefore the design of their products.

“All of the strategic direction of the company was established long before there was a China-US trade war … None of this is changing,” said Kelly.

Throughout the day, Kelly seemed intent on portraying the firm as a sort of immovable fixture, an institution that is, has been, and will continue to last into perpetuity.

This is a central theme not only of the firm’s messaging, but also its physical environment. Huawei’s “Ox Horn” R&D campus, known for its massive replicas of European castles, projects a similar solidity. I expected something like Disneyland, or the large villas in the suburbs outside of Beijing, which look impressive from a distance, but up close reveal cheapness behind a facade. Yet Huawei’s Ox Horn campus boasted a quality of material, construction, and maintenance that was frankly jaw-dropping, leaving an impression befitting the RMB 10 billion (about $1.4 billion) that it reportedly cost to build. To walk around that campus is to receive the impression that it was intended to last a very long time.

I’ve been to other places in China that inspire such a feeling. However, they rarely have anything to do with technology or business. More often than not, the headquarters of China’s other top technology firms occupy standard, even unattractive, office buildings, with far more attention paid to the work they are doing than the physical space in which they are doing it.

However, Ox Horn reminded me of China’s great national institutions, such as the National Museum, the Great Hall of the People, or Peking or Tsinghua Universities. Indeed, there was a sense of the permanent, the pseudo-sacred, a sense normally reserved for a consecrated site intended to remain above and apart from the profane business world.

Even though being cut off from US components and services would appear to be like a death sentence for Huawei, it is hard for me to imagine such a collapse playing out. While experts differ on how much US technology Huawei can replace with its own or by finding alternative sources, it’s clear that many of the most necessary components have no non-US substitute. Ren Zhengfei has been quoted as saying that his firm will “always need US chips.”

And yet, the firm’s demise just doesn’t feel likely, or even possible. Huawei feels less like a business than like an institution. And institutions like that don’t just go away.

Is it true that Huawei staff are required to travel for work during their non-working time?

—Frankie Huang, writer and researcher

Kelly told me that roughly 20,000 Huawei employees travel via air on average each day. The company has a strict economy-class policy, which even fairly high-ranking executives like Kelly are apparently required to adhere to. When booking air travel, Huawei employees must purchase the lowest-price ticket available that day, which at times can be during off-work hours.

Stories of Huawei’s famously intense “wolf culture” are numerous. Some are true, others are not, and still others are a bit more complicated. What is evident when looking at Huawei’s internal culture is that, like many companies (perhaps especially in China’s hyper-competitive tech space), there are the rules that are written down, and then there are cultural norms which employees follow. For Huawei, the expectations set by the culture can often far exceed requirements on paper.

Huawei is known for being faster and more responsive than their competitors, with a willingness to do whatever it takes to meet their goals. Therefore, when Huawei is criticized for pushing the limits of what can be expected from an employee, it is often the case that regardless of what the official policies say, the company’s culture of “striving” rewards those who dedicate more of their life, time, and energy to their work, and is less likely to be a place where those looking for “work-life balance” move ahead.

Would Huawei ever consider changing its ownership structure to be more transparent and similar to global norms?

–Anonymous

As Huawei’s representatives tell it, in the company’s early days at the beginning of China’s reform and opening up, the very notion of private enterprise was still a novel concept to many, and the role which private companies would play in the Chinese economy was still uncertain. As Chinese law allowed for no more than 200 private shareholders for a single company, Huawei’s approach of using the labor union as a holding structure was their way of effectively establishing employee ownership in accordance with Chinese law.

According to Kelly and other Huawei representatives, the company is ultimately controlled by Huawei’s Representatives’ Commission, which is formed to exercise shareholder rights on behalf of employee shareholders on a vote-per-share basis.

According to Joe Kelly, while non-Chinese employees are enrolled in a Time-based Unit Plan (TUP)—a profit-sharing and bonus scheme that does not involve ownership—Chinese employees are enrolled in an Employee Stock Ownership Plan (ESOP). Although it is on paper managed through the structure of the labor union, which pays dues to the local government’s labor union, it is in practice owned by its employees.

The area which perhaps remains most murky regarding Huawei is its ownership structure, or more importantly, the question of who controls what at Huawei. In April, US academics Donald Clarke and Christopher Balding argued that what the company claims to be an ESOP is actually a profit-sharing scheme operating through a labor union, which is in fact the legal owner of the 99% of the “employee-owned” company. As labor unions are by law ultimately accountable to the Chinese Communist Party’s All-China Federation of Trade Unions, the academics concluded that Huawei was ultimately owned and controlled by the Chinese Communist Party.

What Huawei seems to take issue with in Balding and Clarke’s paper is less the facts that are presented, and more with the conclusions which the academics draw. The confusion and mystery seem to lie in the blurry lines between what is the case on paper versus how things play out in practice, and in the nuances regarding the nature of ownership of a company versus actual control over it. Joe Kelly takes issue with Balding and Clarke’s conclusion that Huawei’s ownership structure makes the company effectively government-owned. According to Kelly, this is jumping to a conclusion without sufficient evidence, and inconsistent with how the company operates in practice.

Yet, from my own perspective, the claims that the company makes about where power and authority rest at the firm don’t quite pass the sniff test. Officially, the company’s employee shareholders elect a commission of 115 representatives on a vote-per-share basis. With just over 1 percent of shares, Ren Zhengfei is the company’s largest individual shareholder, and the company’s articles of governance also give him limited veto authority. Ren therefore has more power over the company than any other one employee shareholder, but his power is supposedly dwarfed by that of the commission of 115 shareholder representatives.

But what we know about the way Huawei makes decisions just doesn’t match the employee-ownership story. While most large corporations tend to operate in one form or another as dictatorships, or as governed by a small elite that make up a board of directors, organizations with highly dispersed ESOP programs tend to function more like democracies, with greater internal transparency and employee buy-in and engagement, but also with slower, messier decision-making processes and conflicts over power and company direction.

Look at Huawei through this prism. Its structure certainly operates as an incentivizing mechanism that can increase employee engagement, but that seems to be where the typical ESOP characteristics end. Huawei, by all accounts, is heavily centralized and top-down in its decision-making. Its strengths are consistency in its strategic direction and its ability to act quickly and decisively, even at times at the expense of employee well-being. A common complaint among former Huawei staff is the firm’s siloed internal structure, with a lack of transparency for employees. There also seems to be no doubt among Huawei staff as to who is in charge: Ren, and the handful of people who he trusts most.

Looking at how power and decision-making play out in and around the organization, Huawei’s explanation seems to be incomplete at best. The company doesn’t function like an employee-governed representative democracy. It functions like a dictatorship.

Huawei has never had an IPO, yet has expanded so rapidly. Why not go public, and access the capital of public markets like most other similarly-sized companies?

—Chris Edwards, web editor and publicist, Shenzhen University of Science and Technology

The answer consistently given both by Joe Kelly and other Huawei executives when speaking with the media is that Huawei has chosen not to go public because it would weaken the firm in the areas which it considers to be its greatest strengths. The lack of pressure from public shareholders, the thinking goes, allows Huawei to think with a long-term perspective and invest more in areas like research and development. If Huawei were a public firm, shareholder demands for quarterly profits would place pressure on the firm to make compromises that it does not want to make.

While this certainly seems to be at least partially the case, I personally doubt that it is the entire story. Dual-class shareholding structures—such as that in Facebook’s case—now allow founders to raise capital through public listings without giving up control. Hypothetically, a Huawei IPO using a dual-class structure could give Ren and others in power at Huawei even greater control than they currently have.

Regardless of what one might conclude about Huawei’s ownership, or relationship with the Chinese government, the company’s ownership is at the very least messy and complicated. I suspect that an IPO would likely reveal some of those complications, and would be quite difficult to manage.

Another reason why Huawei has not undergone a public listing is that they simply do not need to: They can access all the capital that they need through the cash flow generated from their business, or through bond issuances. Kelly and others at Huawei frequently point to the snowball effect caused by the firm’s massive scale, but they also received approximately RMB 11 billion (about $1.6 billion) in grants from the Chinese government over the past ten years. While the role of government assistance in Huawei’s growth story can be debated, it’s indisputable that the strength of such a firm is an invaluable and necessary component to China’s long-term geopolitical and economic goals. China is also known to give a helping hand to firms whose development is in the national interest, and the strength and variety of how they help such firms is often, though not always, greater than in countries with more free-market economic systems.

Would Huawei ever consider having a more internationally representative board or C-suite management?

—James Hull, Hullx Capital

Despite doing business in 170 countries around the world, Huawei’s executive team appears to be remarkably uniform in their backgrounds. All are Chinese, and have been with the company for at least 20 years, but none have a degree from a foreign university listed in their bio. Many of Huawei’s top leaders struggle to communicate in English, or at least choose not to in a public setting. Huawei possesses a level of insularity that is remarkable, even in comparison with other Chinese tech giants, many of whom are listed overseas or in Hong Kong, have prominent foreign investors, and have senior leadership teams with the international backgrounds, educations, and professional networks that are more similar to the corporate elite in “the West.”

The downsides of having a management team with such a similar set of backgrounds and perspectives are numerous. There is an abundance of research showing connections between boardroom diversity and business performance across a range of metrics. Even beyond that, as Huawei struggles to gain the trust of local governments in their overseas markets, a more diverse set of top leaders could add credibility to the firm’s claims that they are independent of the Chinese state and military.

From Huawei’s perspective, they tend to emphasize different priorities. They highlight the fact that the firm consistently employs the services of foreign consulting firms and has established an International Advisory Council to inform and advise Huawei’s leadership on international issues. The people chosen to lead the company were selected because they were judged to be the people most capable and suitable for their roles, according to Huawei’s priorities of growing their business and satisfying their customers. As is reflected in the growth of the company’s business over the past decade, they have certainly succeeded at that.

Joe Kelly chooses to look at the relative lack of international experience of Huawei’s top brass as a sign of just how impressive their accomplishments are. “The Board of Directors of Huawei today joined the company as fresh graduates. It was their first employer. Over time, they’ve learned how to run a $100 billion/year-plus business by building it,” said Kelly over lunch during my visit. “That is pretty unique in the world of business and technology, and they should be given credit for that remarkable achievement.”

It’s that sentiment which is echoed among many of Huawei’s Chinese employees, and which can be seen in the way that the company is discussed in Chinese media and among many Chinese people. Huawei may have adopted certain foreign management methods and may utilize some foreign technology or expertise—but at their cultural core they are Chinese, and they have gotten to where they are by doing things in a Chinese way. For a country and people well aware of how their technological advancements have lagged behind those of more developed nations in recent centuries, to have a world-leading technology firm that is also thoroughly Chinese is a source of deep national and civilizational pride.

Huawei founder and figurehead Ren Zhengfei was born five years before the founding of the People’s Republic of China in Guizhou, one of the poorest provinces in the country. He lived through the Great Leap Forward and the Cultural Revolution. He served in Mao Zedong’s military. He moved to Shenzhen in the 1980s, when it was still little more than a small fishing village. He belonged to the first wave of entrepreneurs in post-Mao China, founding a company and leading it as it became one of the world’s largest technology firms.

He is also twice-divorced, and has expressed on a number of occasions in recent months that his commitment to his work caused him to be an all-too-absent father. While I do not know the details of his lifestyle choices over the course of his nearly 75 years on this earth, his worn, wrinkled face and raspy voice are reminiscent of other Chinese men I’ve met of a similar age group, who have spent their lives working, smoking, and drinking a bit harder than a responsible doctor would recommend.

In Ren, I see echoes of a lot of people in China who I’ve met before. In him, many Chinese people no doubt see their fathers, their uncles, their grandfathers. They see the imperfect people who made sacrifices during the country’s most difficult years to help build what it has become today. It is understandable why so many people in China view Huawei’s success as their success, and attacks on Huawei as attacks on their nation.

Conclusion

Towards the beginning of my visit, Joe Kelly said to me bluntly: “Look, we know you’re not one of our biggest fans. That’s OK.”

That is, for the most part, true. I would probably never want to work for Huawei, and do not strongly identify with their brand. The characteristics of the firm that inspire so many in China to feel such a strong connection are the ones that cause me, as an American and someone not of Chinese heritage, to struggle to trust or identify with the company.

My visit did not change this. Nor did it sway my opinion in any direction as to whether Huawei is an arm of the Chinese military, is a threat to US national security, systematically steals intellectual property, or mistreats its employees. Most of the questions I asked during my visit could have just as easily been answered through a few phone calls, text messages, or even Google searches.

However, I’m still very glad I went.

I’m glad because in such situations as our countries are currently in, and as this “tech cold war” intensifies, it is all too easy to forget the humanity of the people involved. In visiting Huawei, I was better able to see the people, the stories, the personalities, and the effort behind such a massive and controversial entity. And while my opinions on the company were not particularly altered, I do feel as though I can better empathize with those in and around this firm. And that, I believe, was worth the visit.

The controversy surrounding China’s most prominent and embattled technology firm seems to be growing ever-more intense. Discerning the reality of the situation is growing progressively more difficult.

China’s telecoms and technology giant Huawei was accused by two American academics of misrepresenting the company’s ownership structure. Days later, the CIA released a report alleging that the firm has been funded by Chinese security agencies.

Both allegations, as well as Huawei’s responses, seem to pose more questions than answers.

Who owns Huawei?

The first was published on April 17 in a paper by professors Christopher Balding and Donald Clarke, of Fulbright University Vietnam and George Washington University respectively. The independently published paper examines Huawei’s claim to be an “employee-owned” company, asserting that it may misrepresent who controls the firm.

Drawing on publicly available sources such as media reports, corporate databases and court cases, the article notes that Huawei’s operating company is 100% owned by a holding company, which is in turn approximately 1% owned by Huawei founder Ren Zhengfei and 99% owned by an entity called a “trade union committee” for the holding company. As trade union members in China have no rights to assets held by trade unions, Balding and Clarke deduce that what are referred to as “employee shares” are “in fact at most contractual interests in a profit-sharing scheme.” Since trade unions in China answer to the state, the professors suggest that Huawei may be effectively owned by the Chinese state.

The indirect nature of Huawei’s employee shares has been a topic of frequent discussion in Chinese media, in some cases referenced as a model for cryptocurrency and tokenomics. But who maintains ultimate power and decision-making authority over the trade union remains murky.

Huawei responded to the paper with the following statement:

This report, released by Professor Christopher Balding and Professor Donald Clarke, was based on unreliable sources and speculations, without an understanding of all the facts. They have not verified the information in the report with Huawei, and their conclusions are completely unsubstantiated. Huawei is a private company wholly owned by its employees. No government agency or outside organization holds shares in Huawei or has any control over Huawei.

Through the Union of Huawei Investment & Holding Co., Ltd, Huawei implements an Employee Shareholding Scheme that complies with applicable laws and regulations. The Representatives’ Commission is the organization through which the Union fulfills shareholder responsibilities and exercises shareholder rights. As Huawei’s highest decision-making body, the Representatives’ Commission elects members of the Board of Directors and the Supervisory Board.

In addition, the Commission makes decisions on important company matters, like capital increases, issuance of new shares, and profit distribution. Members of the Representatives’ Commission are elected by shareholding employees that have the right to vote. Daily operations of the Representatives’ Commission, Board of Directors, and Supervisory Board, including the selection of their members, comply with Huawei’s Articles of Governance.

They do not report to any government agency or political party, nor are they required to do so. We welcome experts and researchers who have an interest in this topic to visit Huawei’s exhibition hall of shares and exchange their thoughts and ideas.

In a text-message exchange on the evening of April 21, a representative from Huawei stated that he anticipates that the company will bring further clarity to the firm’s ownership later this week, and expressed disappointment that the authors did not attempt to contact the company, or arrange a visit to their headquarters.

In a written rebuttal, Clarke challenged the assertions made by Huawei representatives, pointing out that the company’s statement did not specify which parts of the paper they took issue with, saying:

Like some of the other critical responses, the Huawei statement fails to identify any facts we got wrong. It does not identify any of the sources it believes are unreliable or wrong, or from which we drew the wrong conclusions. It complains that we did not verify the information with Huawei, but it doesn’t identify any specific thing we got wrong as a result. If Huawei is unwilling to tell me, it is not for me to guess which sources Huawei finds unreliable and then to defend their reliability, but I wonder whether they include State Administration of Industry and Commerce records, compiled with information supplied by Huawei, within that anathema.

While Huawei representatives have in recent months invited journalists to view what they claim to be their shareholder registry at their headquarters in Shenzhen, Clarke posits that the existence of such a registry is not sufficient to refute his paper’s claims, saying:

We don’t deny that there are paper books with records of something. Nor do we claim that the records are simply made up from nothing. But the question is, records of what? A name with some numbers beside it is not proof that the named person is an actual shareholder, especially given the fact that corporate records show who the actual shareholders are. Very possibly the paper books record the holdings of virtual shares under Huawei’s profit-sharing scheme.

When asked about their decision not to contact the firm itself for comment in their research, Balding responded, “the on-record facts speak for themselves, and we felt that a comment from Huawei would not enhance our research.”

CIA questions Huawei’s funding

Days after the publication of Balding and Clarke’s paper, The Times of London reported that the US Central Intelligence Agency informed its “Five Eyes” intelligence partners (Australia, Canada, New Zealand and the UK) that Huawei has received funding from the Central National Security Commission of the Communist Party of China, the People’s Liberation Army and a “third branch of the Chinese state intelligence network.”

The report, which, according to an anonymous source, was shared with “only the most senior UK officials,” is said to have provided a “strong but not cast-iron classification of certainty.”

Huawei dismissed the allegations as “unfounded,” saying that the company “does not comment on unsubstantiated allegations backed up by zero evidence from anonymous sources.”

Nastier by the day

As a business, Huawei has continued to perform impressively, despite its confrontation with the US government. It reported that its Q1 revenue jumped 39% vs the previous year, a staggering number considering that the firm already did over $100 billion in 2018 sales. This is the first time Huawei has reported quarterly earnings, perhaps to show their strength to the US, and to project transparency to the public.

Yet it is the issue of transparency that has made the Huawei story so painfully frustrating to follow. US intelligence agencies, Huawei and the Chinese Communist Party are all very large, very powerful and very secretive. Trying to understand the issue can feel like wandering in the dark, in an unfamiliar house, with a blindfold on.

The US government has provided evidence for its concerns about Huawei, if at all, in classified documents like that reported by The Times, telling the public: “trust us, Huawei is bad.” For intelligence services that have been notably wrong on numerous occasions, including when justifying an invasion of a sovereign state, “trust us” is insufficient.

Yet Huawei hardly inspires trust either. The charm offensive that they have embarked on this year seems to be far more offensive than charming—more the attitude of a street fighter than an innocent firm with nothing to hide. They’ve chosen military and warlike narratives, including comparing to 5G to a “nuclear bomb.” China’s Ministry of Foreign Affairs and state media organizations have lined up in complete support of the company, undermining Huawei’s claim to independence from the Chinese state.

For westerners concerned that democratic values are under threat from China’s political and technological rise, the response from both Huawei and Chinese media has only exacerbated fears. As their response to the Balding and Clarke paper indicates, Huawei seems to be more intent on hitting back at their critics than actually informing and engaging with the public. This is an understandable response when one feels attacked, but it’s counterproductive.

We don’t know the truth about last week’s allegation, but we do know that in the Chinese system, the party-state plays a different role than in most other countries in the world. Huawei’s claims of “independence” from its government, while probably at least partly true, are a vast oversimplification in China’s state-led system. The firm’s unique corporate structure, whatever the specifics may be, calls for a skeptical eye, as does its track record of opacity and inconsistent overseas legal compliance.

What is perhaps most discouraging in this entire saga is that a complex issue has in many cases been reduced to mudslinging. I have never written about an issue that brings out so much vitriol, and displays the ugliest sides of so many otherwise decent folks (at times, myself included).

If, as many say, the US and Huawei are at war, one of the first casualties is the honest and respectful pursuit of the truth.

Clarification: An earlier version of this article stated that Huawei’s 2019 Q1 earnings report was its first time reporting earnings. In fact, it was the first time the company has reported quarterly earnings. The article has been revised to reflect this.

Renewed rape allegations against Richard Liu, the founder and CEO of JD.com, China’s largest retailer and second-largest e-commerce operator, represent only the tip of the iceberg when it comes to the Chinese tech behemoth’s problems.

In 2018, Liu was arrested in Minneapolis, Minnesota, on suspicion of rape. He was not criminally charged, but the fallout of the highly publicized case contributed to a downward slide in the company’s share price.

On Tuesday, Liu faced renewed allegations as the alleged victim decided to pursue a lawsuit seeking damages of more than $50,000. The suit names JD as a defendant.

Reports of massive layoffs, steep pay cuts, and constant comings and goings in JD’s C-suite have Alibaba’s nearest competitor in an uneasy position, prompting many to ask what’s next for JD and to question whether Liu is fit to stay on as leader.

The company has an excellent track record in terms of providing high-quality e-commerce services and logistics. However, the recent unwanted attention has brought closer scrutiny to JD’s business in general, including the company’s efforts to move into new areas such as cloud computing, finance, and new retail.

JD declined to comment for this story.

The turmoil has been reflected in the company’s stock price performance, which hit a historic low in November 2018 at $19.27, less than five months after notching a high of around $43. The company’s shares have more or less bounced back. At market close on April 16, the stock price was $29.91.

JD is at a turning point. The question is whether the company can develop existing lines of business in logistics, its core strength, while succeeding in new ones, such as cloud computing. Many recent announcements indicate that the company is restructuring, shedding staff, and trying to adapt quickly to new business models and opportunities.

E-commerce wars

JD’s reported year-on-year growth of net revenue in 2018 was 27.5%, though exact gross revenue figures are undisclosed. By contrast, Alibaba witnessed a 40% year-on-year growth for its core e-commerce business. In 2014, JD went public on Nasdaq, raising $1.78 billion. Four months later, Alibaba made history with the largest IPO on the NYSE at $25 billion.

JD might come in second from a numbers perspective, but it has amassed valuable assets in supply chain and logistics. As far back as 2007, JD began to build out its own logistics network. Dissatisfied with China’s existing delivery infrastructure, it established delivery hubs of its own, starting in Beijing, Shanghai, and Guangzhou.

While its competitors mainly relied on third-party couriers to deliver their goods, JD’s in-house logistics arm allowed it to control the quality of its service. In 2010, it became one of the first e-commerce companies to launch same-day and next-day delivery service.

However, building logistics infrastructure across a country as expansive as China is not cheap. It is believed that more than 70% of the $1.78 billion proceeds JD raised in the 2014 IPO was spent on logistics construction, according to a paper from a Shanghai-based consultancy that was reviewed by TechNode.

In 2017, JD founded a separate logistics business group, raising $2.5 billion during its first financing round in 2018. After the deal, Jingdong Group, as JD is also known, still held an 81.4% stake in JD Logistics, which is currently valued at over $10 billion. The remainder was held by a consortium that includes Hillhouse Capital, Sequoia China, and Tencent.

But JD’s asset-heavy approach to logistics is gradually losing traction in a massive market where rivals like Alibaba’s Cainiao Logistics are also raising the bar in terms of service quality, while enjoying greater nimbleness by creating a network with courier companies outside of the Alibaba group.

Despite its physical assets, JD Logistics recorded a $343 million loss in 2018. In a leaked internal memo, Liu said that if the trend continues, the subsidiary’s funding would last only two years.

What is more, efficient delivery has proved insufficient to boost growth in the current landscape of e-commerce. “JD has not kept up with the new trends in the Chinese market: drawing online traffic and entertaining younger users. Its e-marketplace simply looks like an online shopping mall, which makes people feel bored,” said a longtime observer of JD who goes by the name Youkaku and who claims to have insider knowledge.

Top-down turmoil

As one of the rare tech companies in China without an official co-founding team, JD has been characterized by Liu’s absolute rule. Unlike companies like Alibaba, JD’s operations are not safeguarded by partnerships or succession planning.

Fang Hao, former editor-in-chief of Chinese media Cyzone, wrote that JD’s management team is considered “barely nothing” compared to Tencent, known for its president Martin Lau and WeChat head Allen Zhang, or Alibaba, where Jack Ma has laid out a succession plan featuring Alibaba CEO Daniel Zhang.

For a decade, Liu almost singlehandedly led JD’s employees in the charge for market share. This situation did not change even after 2011, when, in preparation for their IPO, the company welcomed a long line of executives for the first time.

Leading the charge once again, Liu vowed in a Tencent Tech report in February 2017 that JD’s strategy over the next 12 years would be highly driven by technology. He hoped that people would recognize JD as “a successful technology company.”

This year, within the course of a month, three top JD executives have stepped down, including CTO Zhang Chen. The former Yahoo vice president had been expected to lead a fundamental technology revolution in the company.

General counsel Rain Long Yu and chief public affairs officer Lan Ye also recently quit JD. Experiencing this many high-profile exits in such a tight timeframe is considered highly unusual for China’s tech industry.

Youkaku told TechNode Zhang’s leaving reflected that JD’s long-entrenched political culture complete with “fiefdoms and cliques,” which was criticized by Liu himself recently in an internal meeting, according to Chinese media. This makes the integration of new hires difficult. Youkaku believes the executives’ departures will not have a large impact on the organization, since “only one person is the leader.”

According to a JD employee who asked to remain anonymous because of company policy, the organization is overly centralized with inefficient layers of accounting, reporting, and resource allocation.

“Goals and purposes are barely conveyed to each staff member in an accurate and effective way,” this employee told TechNode. JD is run more like a traditional Chinese state-owned enterprise than an agile tech company, she said.

To be sure, JD has made attempts to boost the vitality of certain parts of the organization. In January, the company upgraded its main segments—retail, logistics, and digital technology—into three independent units, with Xu Lei, Wang Zhenhui, and Chen Shengqiang named as chief executives, respectively.

The restructuring was later highlighted by Richard Liu as part of a decentralization push. In an internal New Year’s memo obtained by Tencent Tech, Liu announced that the company headquarters would relinquish some management control and give greater autonomy to the units. “Each business group will fight battles with its own will,” the memo stated.

Old brothers, new markets

Liu was raised in a family that worked in the coal shipping business. He refers to the nearly 100,000 (predominantly male) delivery personnel as his “brothers” and has often expressed pride in their employment conditions, which gives them higher compensation and better treatment than JD’s competitors.

Those employed at the company for five years or more enjoy unemployment insurance, medical insurance, accommodation, and full medical expenses. Such benefits are unusual for the industry.

“JD will never fire any one of our brothers,” Liu said in a trade conference in May 2018, as cited by Leiphone.

Yet less than a year later, the layoffs began. In February 2019, the e-commerce giant unveiled plans to cut the 10% lowest-performing executives. It later claimed to be eliminating three types of employees, including those who “could not work hard” for any reason, be it health or family.

Last Friday, a report revealed that Liu took a tough tone in his WeChat Moments, saying, “Those who mess around without achieving anything are not my brothers any more.”

“Mass layoffs are happening right now, and everyone is anxious,” said the JD employee. She told TechNode that many of her colleagues are planning to jump ship for other jobs.

For its part, JD disputes the job cut claims, preferring to point towards its plan to create 15,000 new positions this year as part of its organizational overhaul.

One relatively new business area for the company is cloud computing. In April 2016, JD entered China’s fast-growing cloud market by establishing a dedicated subsidiary, JD Cloud.

IDC Consulting expects China’s cloud market to become the largest in the world by 2023, accounting for a quarter of global spending on cloud infrastructure.

In 2015, Alibaba invested $1 billion in its cloud computing arm Aliyun, which it had launched in 2009. The investment proved wise. Since then, Aliyun’s revenue has boasted double—and often triple—digit growth, carrying Alibaba’s growth despite a slowing economy.

“In e-commerce, everybody knows the cloud is important. If you don’t offer it, your clients will look at your competitors,” said Chris Dong, research director at IDC China. “They want to retain their relevance.”

Much like Amazon internationally, Alibaba’s early mover advantage crowned it the king of the Chinese cloud services, holding 43% of the market, according to IDC figures for the first quarter of 2018. The same report indicates that it is followed by Tencent at 11%, China Unicom at 8%, and Amazon at 6%.

“Everyone is looking at powerhouses,” Dong said, referring to companies which dominate the market, like Alibaba and Amazon. However, he added, with plenty of potential customers who are not serviced by their cloud offerings, there’s still room for new arrivals. Still, Dong does not foresee JD Cloud aggressively competing with Alibaba, as that would require major investment.

Tough road ahead

For a long time, people have compared JD with Alibaba, but it appears that comparison is no longer apt. While Alibaba has found success and profit expanding to new areas such as the cloud, finance, and entertainment, JD is still essentially an e-commerce company. The company has been slow to adapt to emerging trends in its core business.

Its unyielding organizational structure, alongside its “macho” and rigid company culture, have also slowed its response to market needs. Meanwhile, Alibaba’s Taobao launched a live-streaming tool in April 2016. Pinduoduo has established a market presence by offering social tools for group-buying models to consumers seeking lower prices.

One possible option for JD to catch up with the e-commerce trends driven by China’s rising millennials could be a merger with Pinduoduo. JD’s presence is strong in higher-tier cities where Pinduoduo is weak, and vice versa. They are also both Tencent-backed and individually outmatched by Alibaba. But this scenario seems far-fetched, given that they are similar-sized entities that appear to lack the financial muscle to make the deal work.

JD’s plan to seek growth in the cloud market, however, takes advantage of its superior logistics network to deliver digital services to areas not yet saturated by the top cloud providers.

JD holds the strongest logistics chain in the countryside, so it is well-positioned to deliver digital services in these areas. “This is where JD Cloud could step in—to build a cloud foundation to help rural governments establish e-commerce capabilities for locally produced goods, so that they can be sold more broadly and effectively on the JD platform,” Dong said.

If it can develop an inclusive and agile corporate culture, and attract a more dynamic team of executives who can implement necessary changes, JD could do a better job of keeping up with or even anticipating technological and internet trends.

A key factor is whether Richard Liu—assuming he holds on to the leadership role—can navigate the changes essential for the company’s long-term survival. Because he has been JD’s indisputable leader, much depends on his standing within the company, as well as his public image.

In March, Liu requested leave from the Two Sessions, China’s biggest annual political event, for unspecified reasons. In contrast, senior executives from China’s other tech giants—Baidu, Tencent, Huawei, and Xiaomi—were all present.

Additional reporting by Jill Shen and Eliza Gkritsi. With contributions from Elliott Zaagman. 

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One of the more engaging stories to emerge from the China tech scene in recent weeks is the “996.ICU” movement. Workers in Chinese tech companies have begun expressing their displeasure with a company culture that demands 9 a.m. to 9 p.m. workdays, six days per week. The “ICU” tag comes from an oft-repeated joke that the grueling work schedule has landed some workers in the intensive care unit.

Frustration with a working style that many view as unsustainable has been a theme in China’s tech community for years. However, with slowing economic growth and venture capital increasingly difficult to access, many firms have been forced to lay off staff or reduce positive incentives for employees. Worse rewards and less security seems to have pushed some tech workers to the tipping point, inspiring the viral campaign.

996.ICU took off as a repository on Github, the collaborative software development platform that helps developers store, manage, track and control changes to their code.

Some Github users are using the platform for viral activism, and the bulk of these user-activists seem to be Chinese. As of mid-day April 11, 996.ICU was the top trending repository on the platform, with more than double the amount of stars as the one in second place (which also happens to be a Chinese discussion forum).

Double-edged sword

In the past, platforms for activism have been blocked in China, or pressured to moderate content in line with the country’s strict guidelines for online discourse. Yet the importance of Github for China’s growing tech industry means that blocking it would be counterproductive for China’s broader aims.

“It’s hard to overstate how critical Github is for developers,” explains Christian Grewell, assistant professor of interactive media arts and business at New York University’s Shanghai campus. “Many, if not most, developer teams around the world are collaborating over Github, and the open-source code on the platform allow teams to develop products in days that would otherwise take months… life as a developer without Github is like life in a Chinese city without Wechat.”

Github’s indispensable role for developers, combined with Beijing’s inability to control it, has proven to be a dilemma for China’s cybersecurity apparatus. Github was briefly blocked in China in 2013, until public outcry from China’s tech community—led by Kai-Fu Lee—led to a reversal of the block two days later.

In 2015, the site was the victim of a distributed denial of service (DDOS) attack attributed to Chinese hackers. The attack was conducted using malicious Baidu JavaScript and traced back to state telecom giant China Unicom’s infrastructure, thought to be due to projects on the Github platform that could undermine China’s domestic cybersecurity efforts.

More recently, Beijing seems to be taking a less forceful approach to influence Github, sending official requests for the removal of content which it considers sensitive. In some cases, Github has complied with the requests. China-based browsers from companies like Xiaomi and Tencent have restricted access to the red-hot repository.

While past clashes between Github and Chinese authorities have centered around code and projects under development, it appears that speech on the platform may be emerging as an equally sensitive issue.

Hub of free speech

A May 2018 Quartz article pointed out that of the top 25 Github projects, four were written in Chinese, and six contained no code. While its community of users is relatively small compared to the world’s major online social networks, the developers on the site hold coveted skill sets, which China must attract in order to achieve its technological ambitions.

Movements such as 996.ICU do not make working for a Chinese company sound very appealing, and when it’s the hottest trending repository on Github, it drives away some of the world’s most coveted talent.

“China wants to promote its tech sector as world-leading, but what the complaints over the 996 culture reveal is how poorly some of these teams are managed,” says NYU’s Grewell. “If a group of developers is managed well, 996 should not be necessary in the majority of cases.”

There is also speculation that Chinese authorities may place additional pressure on Microsoft, who acquired Github last year, and has significant business interests within China. However, censorship concerns were voiced loudly by Github users at the time of the acquisition, and nearly religious fervor for open sharing of information underpins the open-source developer community. Any seemingly Beijing-influenced attempt to manage the platform would be a very hard sell for Microsoft to make to its user base.

For now, Github seems to be the rare space that offers free speech on the Chinese internet. We’ll see how long it lasts.

In mid-March, I participated on a panel discussion on the future of Huawei at the annual Bookworm Literary Festival in Beijing.

With me on the panel were Huawei’s Global VP of Public Affairs Joe Kelly and the Wall Street Journal’s Josh Chin. The talk was moderated by Irishman Ian Lahiffe, a China hand who works in agtech.

While it was entertaining for the audience, we were largely unable to make progress in answering the central question of the panel, that being: “Which Way for Huawei?”

Ever since the news of Huawei CFO Meng Wanzhou’s arrest and the US government’s aggressive attempts to go after the firm on a number of fronts, discussing and writing about Huawei has been a bit awkward for me.

I’m not a US national security or cybersecurity expert. I am also not someone actively trying to take sides in what is looking increasingly like—as the Eurasia Group has coined it—a “US-China tech cold war.” I have no opinion or insight as to whether the myriad accusations from the US government towards Huawei are true or not.

When I began writing about Huawei in 2017, my interest in the company had very little to do with politics. Instead, it had to do with Huawei’s people, its culture, and the worldview that seemed to guide it. I had noticed a fairly common disconnect between how positively the company was thought of within China, and its reputation abroad for poor human resources practices, clueless public relations, and shaky legal compliance.

One of the first areas I looked was the employer-review platform Glassdoor, where Huawei had thousands of reviews. While the company’s overall score was generally average or only slightly below (between 3.0 and 3.5 stars out of 5 stars), filtering the results for specific countries displayed a much different picture. For more developed nations in particular, Huawei’s reviews from its employees ranged from mediocre to abysmal.

When sifting through the reviews from foreign countries, some very clear patterns began to emerge. While many mentioned that attractive compensation packages made the company appealing to join, the praise was often overshadowed by complaints which tended to fall along similar lines: A number of them complained of a two-tier system for staff, in which power was held almost exclusively in the hands of Chinese nationals. Many of these Chinese people, according to reviewers, lacked knowledge of or respect for local cultures or laws. Other reviews mentioned violations by Chinese management of local labor laws, racial and gender discrimination, and lack of transparency.

When speaking with over a dozen current and former Huawei employees in preparation for an article, I noticed similar themes. While Huawei’s pay, intensity, and energy was praised, the two-tier system for staff, poor localization practices, and disregard for local laws—particularly employment laws—were often mentioned.

A number of Chinese nationals sent to overseas Huawei offices spoke of a process in which issues would be discussed and decided upon among Chinese expatriate staff, and then a plan would be drafted for what to say to the local staff. “Often the message we would give the local staff was very different from the reality of the situation,” said one.

Another industry expert said bluntly about Huawei, “I cannot think of another company in the world that has such a global presence, but pays so little attention to localization and integration.”

Disregard for the public

Since first writing about Huawei’s culture and overseas operations, I have been regularly contacted by current or former (mostly non-Chinese) Huawei employees who would share their stories of similar complaints.

To be clear, I’m sure that those who chose to speak with me are unlikely to be Huawei’s happiest employees. However, when I discussed such issues with Huawei staff more supportive of the company’s practices, the feedback I received was not denial of the allegations, but more often than not defending such behavior as necessary in order to sustain the company’s success.

As one American entrepreneur who had frequently worked with Huawei teams on cross-cultural training explained to me: “Huawei has preferred to take an approach like a steamroller to the culture issue … They don’t really believe in adjusting to overseas cultures, but just overwhelming projects with resources until they get it done,” he said. “To Huawei, cultural issues are distractions from urgent short-term goals, rather than a long-term challenge to handle.”

In China, localization and integration are famously demanded of foreign companies and individuals who would like to do business there—often rightfully so. It is then therefore troubling to see China’s most globally expansive firms actively disregard those principles when the shoe is on the other foot.

This apparent disregard for the public of the overseas markets in which they operate has been seen in their PR practices in relating to overseas media, from vaguely threatening advertising campaigns and (until recently) notoriously media-shy senior executives, to a 2015 tour of their Shanghai campus in which media members reportedly had their phones and cameras confiscated. According to Angus Grigg of the Australian Financial Review, when reporters on the tour asked about the company’s connections with the Chinese government, they were told that they could not mention the Huawei tour in their articles and that the group of roughly 30 members of the media should leave immediately.

It also seems as though it may be a policy of Huawei’s to say different things to domestic audiences and international audiences, even if they seem contradictory.

As the company’s former US PR chief William Plummer wrote in his book Huidu: Inside Huawei, founder Ren Zhengfei advised Huawei executives in 2014: “In China, state that Huawei strongly supports the Communist Party of China. Outside China, stress that Huawei always follows key international trends.”

If Plummer’s recollection is correct, what he is describing sounds dishonest, or at least disingenuous.

At the Bookworm panel on which I participated, Huawei’s Joe Kelly understandably defended the tendency of his company’s top leaders to avoid communicating with the overseas public because Ren simply did not see it as a top priority or responsibility of his.

In my eyes, I view this to be indicative of disrespect and disregard for the values and interests of the billions of people in the 170 countries where Huawei does business.

Kelly mentioned that “Huawei deals with the Chinese government in the same way that it deals with the German government, the British government, or any other government.” While such a statement may be true in many logistical and administrative respects, such as with permits, licenses, and even in many cases, bidding for contracts, it does not address the fact that single-party states, by their very nature, have a different dynamic between businesses and the party-state than elsewhere.

Even since their more recent PR charm offensive, the company’s statements, while perhaps technically true, fail to authentically build trust.

Statements from Huawei’s leaders that they would reject Chinese government requests for data seem absurd, not simply because they are claiming to be willing to break Chinese law, but also because there are a multitude of ways in which governments can access data without even speaking to executives.

Who is Huawei?

In recent interviews, Huawei executives have spoken about the need for the company to honestly communicate “who they are” to the world.

I think “who Huawei is,” and what the world does or doesn’t know about that, is exactly the core problem here.

As Huawei has strong and growing footholds in future-oriented fields of technology such as 5G, IoT, and smart cities, they and other major tech firms have an increasing say in determining the future of how human societies function. We have already seen, with Facebook and Google, the extent to which those who provide our technologies can impact our lives, for both better and worse. But we also have a fairly clear picture about the cultures that they are built upon and the financial and ideological interests which motivate them. We know fairly well who they are and what they stand for, and we either trust them or don’t trust them because of it.

Both Facebook and Google seem to be acutely aware of the growing pressures to either prove themselves worthy of public trust, or to face existential challenges in the future.

That is less clear with Huawei.

Huawei has long asked the world to rely on them. But increasingly, they are asking the world to trust them. And those are two different things. Whether or not someone is reliable is based on the consistency of their behavior. But trust is about feeling confident that you can understand someone’s heart, someone’s reason for existing, someone’s core values and principles. To have trust for someone or something comes from whether or not you genuinely feel that they believe what you believe, or at the very least respect and understand what you hold most dear.

It seems as though establishing trust with the overseas public has not been a priority in recent years for Huawei. As its importance becomes more urgent, the question is if—or how—Huawei can effectively do this.

Right now, they seem more interested in fighting with the US government than honestly trying to win the overseas public’s trust.

As initially reported last week on Feb. 11, Reddit confirmed a Series D funding round led by $150 million from Tencent, placing the company at a $3 billion post-money valuation.

The influx of cash will likely allow the online discussion platform, long billed as the “front page of the internet,” to further scale up and compete for ad dollars with the likes of Facebook and Twitter.

What would be, under other circumstances, a fairly standard deal has quickly become a hot-button issue. Fears of Chinese-style censorship are overblown—but business needs may push Reddit away from its legacy “anything goes” content model nonetheless.

Tencent’s investment empire

Tencent has morphed from one of China’s top gaming and social media companies to one of the most powerful investors in the country’s thriving startup ecosystem. The Shenzhen-based tech titan has set its sights on a piece of the internet pie outside of China as well.

By most accounts, Tencent has built a good name for itself in how it has managed its VC investments. In contrast to rival Alibaba’s more heavy-handed approach of acquiring firms outright and taking direct control, Tencent is known for a hands-off style that often leaves control in the hands of the firms’ founding teams.

By investing in Reddit, Tencent broadens its exposure in the social media and online advertising space outside of China. Chinese players have begun to enter spaces dominated by Facebook, Google, and Twitter—the most successful of these is Beijing-based Bytedance, which has attempted to replicate its domestic success with internationally focused apps like short-video platform Tiktok, news aggregators such as TopBuzz, and Indian local-language app Helo.

Reddit will be the second major US-based social media platform in Tencent’s portfolio. In late 2017, it became the single largest shareholder in Snap—a move that has thus far not turned out well, with Snap losing approximately 40% of its value in the past year.

The big question is whether these investments will draw the attention of the US Committee on Foreign Investment. CFIUS has been far stricter with regards to Chinese investment in recent years, blocking not only deals that would put sensitive technology in the hands of Chinese companies, but also those involving personal user data. An early-2018 attempt by Alibaba-affiliated Ant Financial to acquire MoneyGram was rejected over these concerns.

‘Wrath of the Redditors’

While the Reddit investment may make good business sense for Tencent, it’s hard to imagine how two brands could be any more different. Reddit, one of the most loosely moderated forums on the mainstream internet, covers the spectrum from cutting-edge reporting and in-depth discussions to trolling, profanity, and conspiracy theory rabbit holes. Tencent, in contrast, is the firm behind WeChat, the uber-popular Chinese platform that is a central hub in the Chinese Communist Party’s heavy-handed censorship and surveillance regime. Unsurprisingly, Reddit is blocked in mainland China.

This contrast was not lost on Reddit’s user base. While many “Redditors” expressed concern and outrage, warning that Tencent could threaten the platform’s ideal of free speech, the overwhelming response came in the form most characteristic of the Reddit community: snarky memes.

Redditors jokingly began producing and sharing memes that they speculated would soon be banned on the Tencent-backed iteration of the platform. The bulk of the most upvoted posts featured comparisons of Chinese President Xi Jinping to Winnie the Pooh, famously censored on the Chinese internet.

However, it is highly unlikely that Tencent’s investment will lead to greater censorship of the Reddit platform, as TechCrunch’s Jon Russell explained in a recent piece. Tencent’s investment equals just 5% of Reddit’s total valuation, making them hardly the only voices in the room.

A relic of an older internet

If Reddit is going to change, it will be for financial, not political, reasons. The world of social media is changing, and the typical Redditor is no longer the typical internet user. Redditors are mostly young (roughly 60 percent are under 34), predominantly male (as high as 75%), and largely hail from Western, English-speaking countries.

In other words, the Reddit community looks a lot like the internet of the early 2000s. Its message board-style layout reminds me of the online communities I hung out in during my high school years 15 years ago. The norms of behavior on the platform are typical of the internet subculture of that time, filled with inside jokes and memes, as well as language that ranges from edgy and “politically incorrect” to bigoted, offensive harassment.

While the demographics and norms of Reddit’s community may not have changed much over the years, the internet as a whole has broadened to include a wider range of age groups, nationalities, languages, education levels, and worldviews. The average internet user now looks much more like the average human being.

Many of the internet’s newer users do not agree with the norms established by the more culturally homogenous cohort of the web’s early years. The content of today’s internet also has more destructive potential than it did in the past. Adherents to conspiracy theories or radical religious ideologies were once relegated to small message boards with a few hundred members, but on today’s internet, those people have the tools to reach millions of people and to do serious damage to society, both online and offline. A global consensus has emerged that online platforms and the content they contain need to be managed in one way or another. Reddit is more likely to be changed by regulation in its core Western markets than in China.

Change from shareholders, not China

Not only does Reddit have the user demographics, norms, and look and feel of yesteryear’s internet platforms, but it retains their business model as well.

Even as the internet, including social media, has become big business, Reddit has in large part chosen not to cash in. While Twitter and Facebook boast annual revenues per user (ARPU) of $9.48 and $7.37 respectively, Reddit’s annual revenue of roughly $100 million and 330 million monthly active users (MAU) make the platform’s ARPU a relatively miniscule $0.30.

Tencent is an investor. We can assume that they would like to make a return on that investment. This will probably mean a stronger emphasis on user monetization, and that will almost surely mean some changes to the user experience.

The response to Tencent’s investment is a reminder for Chinese companies to be sensitive to areas of political and cultural sensitivity in their overseas investments. Tencent will likely change Reddit, but those changes will have less to do with Winnie the Pooh—and more to do with money.

After weeks of uncertainty, the US Department of Justice has finally filed charges against Huawei and its chief financial officer Meng Wanzhou.

The indictments concern two separate cases.

The first alleges that Huawei and Meng actively misled US authorities and an unnamed financial institution regarding the relationship between two subsidiaries—Huawei Device USA and Skycom Tech—in an effort to evade US sanctions and conduct business with Iran. The indictment comes with an official request from the US to Canada for the extradition of Meng, who is currently under house arrest at her Vancouver home after being apprehended while transiting there on Dec. 1.

The second set of charges alleges that Huawei stole technology from US phone carrier T-Mobile, and accuses the Chinese firm of obstructing justice and committing wire fraud. The technology in question, known as “Tappy,” was a robotics system developed by T-Mobile and used in testing the durability of smartphone screens. The indictment cites evidence, including a series of internal Huawei emails, in accusing the company of conspiring and agreeing to obtain the Tappy technology without authorization over a period spanning from 2012 to 2014.

The Tappy case, which has received considerably less public attention than the high-profile arrest and diplomatic drama around Meng, paints a picture of a company engaging in a coordinated attempt to steal the technology and cover up its wrongdoing. The indictment also includes details of a formal bonus system within Huawei China, regularly encouraging and rewarding staff for stealing confidential information from its competitors.

In a statement, Huawei expressed disappointment in hearing of the charges. It noted that the intellectual property (IP) theft was already the subject of a civil suit between the two parties, settled in 2014, and denied any of the indictment’s asserted violations of US law on the part of the company, its subsidiary, or affiliate. The statement went on to say that it was not aware of any wrongdoing by Meng and that the company believes the same conclusion will be reached by US courts.

A legal and political tangle

This is about far more than merely IP theft and wire fraud. Indeed, these are two components of a far broader more complex set of legal and geopolitical tensions.

While there is every reason to believe that the US federal courts processing each case will be fair and impartial in their proceedings, it is safe to assume that the context around the case is rife with political interests. This is certainly the case for the increased attention that Huawei has received from the US government.

In a statement made regarding the indictments, Federal Bureau of Investigation director Christopher Wray was explicit in his language as to the broader context of the case, accusing Huawei of “brazen and persistent actions to exploit American companies and financial institutions, and to threaten the free and fair global marketplace.”

He went on to directly connect Huawei to the Chinese government, and frame both as a threat to fundamental American norms, institutions, and national security, saying: “In pursuit of their commercial ambitions, Huawei relied on dishonest business practices that contradict the economic principles that have allowed American companies and the United States to thrive.” Adding that, with the Chinese government’s influence over companies like Huawei, the telecoms giant poses a threat to US national and economic security.

This is not the first time that Wray has spoken of China, its tech firms, and its people in these terms. In a February 2018 Senate Intelligence Committee hearing, Wray warned of a “whole-of-society threat” from China, citing the areas of academia and cybersecurity in particular.

There appears to be a broad consensus across the US national security apparatus that taking a harder line on China is in the country’s best interests. A national security strategy plan issued in 2017 framed China as a “strategic competitor,” along with Russia, both of which were characterized as “revisionist powers.” There now appears to be widespread agreement in Washington that China is seeking to, and acting in ways which challenge key US global interests.

Huawei: ‘Queen’ on global tech chessboard

As Washington’s posture towards Beijing becomes less friendly, Huawei has been placed in its sights. A symbol for many of the underlying commercial, cybersecurity, and cultural issues that lie at the heart of US-China tensions, Huawei is also perhaps China’s single most important technology firm. As 5G network infrastructure and cybersecurity become critical battlegrounds in the two countries’ battle for global influence, China, in many ways, goes as Huawei goes.

With this in mind, it is no surprise that the US and its security allies have been pressuring Huawei, and raising concerns—whether valid or invalid—about the cybersecurity risk posed by the company’s equipment, and placing the company under greater scrutiny for its practices.

On the geopolitical tech chessboard, Huawei is China’s queen and the US is doing its best to box her in.

Last Friday, DJI, the world’s largest drone maker, announced the uncovering of an internal corruption scandal, leading the Shenzhen-based company to place 45 of its employees under investigation.

According to a statement from the company, DJI could see a loss of as much as RMB 1 billion (roughly $150 million) as a result of its corruption issues.

DJI’s investigation reportedly found that procurement officials had received kickbacks in exchange for accepting substandard components, or for paying above-market prices. As a result of such practices, the company’s component costs were supposedly inflated by over 20% in 2018.

“DJI condemns any form of corruption strongly and has set up a high-level anti-corruption task force to investigate further and strengthen anti-corruption measures,” the statement read.

The announcement of a corruption crackdown at such a company is not particularly unusual. What’s significant, however, is the scale of the corruption, and that it occurred at DJI, which for long has been a poster child for Chinese tech’s internationalization. In fact, corruption-related cleanouts have been a defining theme throughout China over the past five to six years, and have been particularly notable in the country’s tech community lately.

Ride-hailing giant Didi Chuxing recently dismissed a total of 83 people, after finding over 60 cases of corruption within the last year. Bytedance, the world’s most valuable startup, saw a second executive detained last month over charges of receiving bribes of luxury cars and several million RMB from a business partner.

Also in December, Alibaba Group announced that Yang Weidong, the president of video-streaming platform Youku and the head of its wider digital media and entertainment, was being investigated by police for “alleged acceptance of improper payments.”

Paying the toll

In China, issues of bribery and corruption have long been par for the course. Earlier on in my career, I saw this firsthand while working on a business-to-business sales team in Beijing. As a subsidiary of an established multinational corporation, controls over corrupt practices were quite tight. This put the team at an obvious disadvantage in competition with other players who could apply internal rules more loosely in pursuit of business.

For many of our salespeople, a core component to winning business hinged on finding “creative” ways to circumvent the company’s anti-corruption policy—to bend the rules without technically breaking them.

The norms of vendor corruption and kickbacks were once described to me by a former colleague as we were driving on a toll road expressway to meet a client. “In Chinese companies, everyone you work with is like a gatekeeper at a toll booth. They won’t let you pass until you pay them,” she explained. “What makes it difficult is they all want different things, and no one will say what they want directly. Some want money, some want women, and some want a favor or two. It’s our job to find out what that is.”

Relationship building and reciprocity are components of most business dealings around the world. But when the business relationship is defined almost entirely by what you can provide a decision maker on a personal level, rather than the product or service you can offer the company, it begins to feel that the incentive system is not working quite right.

This culture of gatekeeping and corruption was a trademark of many of the most robust years of China’s economic boom. For many multinationals doing business in China at that time, when local offices and teams would request greater “autonomy” and “localization,” a key subtext of the request was a desire for a more “liberal interpretation” of the firm’s anti-bribery and corruption protocol, or to establish some form of mechanism where global-level management had some form of plausible deniability, or could simply “look the other way.”

However, the argument could be made that at that stage of China’s development, corruption was a benign, perhaps even beneficial phenomenon. Economist and senior fellow for the Carnegie Asia Program Yukon Huang has argued that, in many cases, corruption has been a boon to China’s growth, rather than a hindrance.

After all, if every time a local government official approved a construction project, or a factory manager contracted a vendor, they would get an opportunity to line their pockets, then self-interest would lead them to get as many deals done as possible, right? In other words, the prevalence of corruption created an incentive for economic activity.

New era, new priorities

Attitudes towards the acceptability of such practices have shifted dramatically in recent years. Chinese President Xi Jinping’s anti-corruption drive, launched in 2013, has only intensified, proving to be not simply a temporary crackdown, but an assumed status quo in today’s China.

While the campaign began by targeting party officials, it has spread throughout Chinese society and its economy. In the recent spate of arrests and crackdowns, we are seeing that it has spread to China’s tech sector as well.

The full effect of the anti-corruption campaign in China tech has yet to be seen. While corruption may have served a purpose for China’s earlier development goals, it is unlikely to help much in achieving China’s current ambitions, as corruption may help in getting deals done, but incentivizes actors to prioritize self-enrichment in each deal, de-emphasizing quality, or the adherence to strict process. These incentives may aid in getting things done, but are less likely to help them get done well.

This is abundantly clear in the case of DJI, which has become the world’s leading drone-maker in part because of its reputation for quality, a symbol of China’s transformation from low-end manufacturer to high-end technological superpower. If DJI becomes known for employees who purchase substandard products in exchange for kickbacks, the company’s brand will begin to look substandard as well.

Still, with every coin, there are two sides. Corruption controls may maintain higher quality standards, but if not done well, they may strangle the very industries they are seeking to improve.

Life is full of diverse, and sometimes contradictory, roles and obligations. For just about all of us, we must balance between family, profession, individual wants and needs, perhaps religion, and even our country.

The struggle to reconcile these values, interests, and loyalties is difficult, and at times impossible. It is also a challenge that is universally human.

At this moment in time, Huawei founder Ren Zhengfei must be feeling the pressure of these conflicting elements of his identity with pronounced intensity.

He is the founder and figurehead of one of the world’s largest technology and telecommunications firms, embroiled in a series of security and credibility scandals that threaten to bar the company from many of its most lucrative international markets.

He is also a patriotic Chinese citizen, and member of the Chinese Communist Party, as tensions between his country and the US and its allies seem to be rapidly deteriorating.

Finally, he is a father, whose daughter and heir apparent to his business empire, Huawei CFO Meng Wanzhou, is under house arrest in Vancouver, Canada, awaiting a potential extradition to the US. If granted, she would stand trial on charges which could put her in prison for what would possibly be the rest of the 74-year-old Ren’s life.

It was within this context that the famously private executive made a rare appearance before journalists in Shenzhen on Tuesday. In his remarks he spoke of his relationship with Meng and his other two children, hinting at regret for a life spent devoted to his work, first in the military and later at Huawei.

Ren’s prioritization of work over family was evident in the culture of the organization he created, and the expectations to which he has held its employees. Huawei is known to intentionally place employees in separate cities, or even countries, from their families, in an attempt to limit distractions from their work. The company also reportedly encourages many of its new recruits to sign a “striver pledge,” in which they voluntarily forego their rights to paid leave, so as to devote themselves and their time entirely to the company. It’s even rumored that Ren ordered a senior executive to get divorced. Ren himself has been divorced twice, and is currently on his third marriage.

Customer over country, Party

In his remarks, Ren also addressed speculation and accusations that his company and its equipment pose risks to the national security of some of the countries where it does business, and that Huawei could be used to spy on behalf of the Chinese government and military.

“When it comes to cybersecurity and privacy protection we are committed to be sided with our customers,” said Ren, speaking through a translator. “We will never harm any nation or any individual.”

Ren attempted to clarify in no uncertain terms that for Huawei, it is accountable first and foremost to its customers, over even its home country, or Ren’s Communist Party affiliation.

“The values of a business entity is customer first, is customer centricity,” he said. “We are a business organization so we must follow business rules.”

“And in that context I don’t see close connection between my personal political beliefs and our business actions we are going to take as a business entity. And I think I already made myself very clear right now, we will definitely say no to such a request,” he added.

While his declaration regarding the priorities of his company was explicit, many observers wonder if he has made commitments to disobey Chinese law.

Article 14 of the country’s National Intelligence Law, passed in 2017, grants intelligence agencies authority to insist on the support of Chinese businesses, stating that “state intelligence work organs, when legally carrying forth intelligence work, may demand that concerned organs, organizations, or citizens provide needed support, assistance, and cooperation.”

The law also requires that organizations and citizens also protect the secrecy of “any state intelligence work secrets of which they are aware.” This law has been cited by numerous foreign governments in explaining decisions to ban Huawei 5G equipment.

Ren’s statement declaring Huawei’s prioritization of its users also, and perhaps most importantly, seems to put him at odds with core doctrinal tenets of the Chinese Communist Party.

The Party famously demands that its members prioritize its wellbeing above all else. The intensity of this mandate, however, has fluctuated throughout the Party’s history.

In the days following the devastating Tangshan earthquake of 1976, Party newspaper the People’s Daily told the story of Che Zhengming, a senior cadre whose son and daughter were buried as their house collapsed. The girl cried out for her father to save her, but the newspaper pointed out that Che knew his priority was to retrieve the local Party chairman from the ruins of a nearby apartment. While he was digging him out, his own children died. The article praised his political commitment.

At 74 years old, this ethic of intense political loyalty is one that came to define China during some of Ren Zhengfei’s most formative years.

However, today’s China is a very different place. The Reform and Opening Up period saw the Party dial down both its ideological intensity as well as its prominence in Chinese nonpolitical life. It began admitting private businesspeople as well, seen by many as an acknowledgment of the various priorities and interests that influence the lives of the Chinese people, and an acceptance of some of the contradictions that define so many human lives and societies.

In 2019, the questions of loyalties, obligations, and identity are once again at the heart of the discourse regarding China. Ideology has begun to play a greater role in the Party, and the Party is playing a greater role in China’s tech sector as well.

As geopolitics intensify, China’s global tech champions are facing a dilemma between competing interests that offers no easy solution.

Looking at China tech headlines of recent months, one trend becomes evident: a whole lot of companies are not laying off workers. At least, officially.

In reality, it’s becoming clear that headcount control is occurring across China’s tech sector, and jobs are becoming scarce.

At the end of November, embattled e-commerce giant JD.com refuted rumors circulating that the company would be cutting 10% to 15% of its workers.

Online services company Meituan-Dianping, which recently had its IPO, said in December that reports of large-scale job losses were untrue, and that staff changes were part of “normal operational restructuring.”

Tencent claimed in late September that it had “no plans for layoffs,” as it announced a “strategic upgrade” amid gaming regulations that have threatened to kill one of the Shenzhen-headquartered company’s main cash cows.

Knowledge-sharing platform Zhihu also recently denied slashing its workforce.

It’s difficult to prove or disprove such rumors or refutations specifically. In China, few companies admit to laying off staff, even when downsizing is obvious. Part of this is often attributed to culture, but to be sure, no company would like to bring attention to fact that they are putting some of their employees out of a job.

Yet another reason why few companies in China publicize job cuts is that in many cases, they are technically not laying workers off.

“To officially conduct sizable layoffs, a company shall file with its local labor bureau after consultation with all employees or labor union,” explains Alex Luo, an attorney and partner at Anli Partners, a law firm that works with many of China’s top technology and internet companies. “However, this is rarely done, as it reflects poorly on the company, is a tedious process, and the labor bureau will often challenge it.”

Instead, it is far more common for companies to negotiate with workers individually, hoping to come to amicable terms of separation. “In the best cases, a company will offer an employee a few months’ salary, the specific number usually depending on their total number of years spent working at the company, and the employee agrees to leave of their own volition,” says Luo.

In less pleasant circumstances, a company could threaten to dismiss the employee based on poor performance, potentially damaging their future career prospects, Luo adds. “In this case, the company usually will agree to give the employee a positive reference, on the condition that they accept the severance terms.”

Time to let go

Once-hot startups like bike-sharer Ofo and phonemaker-turned-messaging-app-investor Smartisan now face overwhelming financial challenges, prompting speculation of potential bankruptcy.

Ride-hailing firm Didi Chuxing is reportedly cutting staff bonuses in half after a scandal-plagued year that saw the company lose money at an accelerating rate.

Fintech platform Qudian is also reportedly letting go of hundreds of workers, as the company struggles. Its NYSE-listed stock price is down more than 80% from its October 2017 IPO price.

Meanwhile, Xiamen-based selfie app Meitu was rumored to have been cutting staff throughout 2018, after a failed overseas expansion and disappointing foray into e-commerce.

Two stars of the once-hot cryptocurrency arena, Bitmain and Huobi, have confirmed layoffs. Bitmain has denied rumors that they will be cutting its workforce in half.

Looking at the difficult conditions facing Chinese tech firms, it is unsurprising that many are evaluating again their staffing needs. While the top headlines have focused on Chinese trade tensions with the US and the overseas legal and political troubles faced by Huawei and ZTE, there are a number of other factors at play.

“It seems to me that there are two big problems facing many Chinese technology companies,” explains Luo, the attorney. “The first is that it is very hard for startups to raise funds. For more mature companies, the slowdown of the Chinese economy is hurting sales.”

Indeed, the funding tap, which was flowing freely in early 2018, has since dried up. As tech valuations have come back down to earth from their highs a year ago, investors are wary of getting burned, as has been the case for several the late-stage investors in Xiaomi and Meituan-Dianping, whose stocks have performed poorly after their high-profile IPOs.

Indeed, many of the hottest destinations for capital in China’s tech world just a few years ago have since proven to be bottomless money pits. Bike-sharing, once labeled as one of China’s “four new great inventions,” has failed to develop a business model to match the ambitions of startups and investors.

The P2P collapse revealed a number of “fintech” startups to be little more than Ponzi schemes. The smartphone market is saturated and slowing in growth, offering companies few options with which to differentiate themselves and their products.

For larger firms that have risen to prominence by capitalizing on China’s growing economy and consumer class, times are getting tough as well. The trade war with the US has weakened Chinese consumer confidence. The wallets of Chinese spenders are also being impacted by the government’s deleveraging campaign, meant to control the country’s unsustainable surge in corporate debt, which has been fueled by loose lending from state banks over the past decade.

As the country attempts to ween its firms off their borrowing addictions, the trickle down of that austerity effect that is likely hitting consumers. For retailers like Alibaba and JD.com, this may cause them to adjust their sales expectations.

Mounting challenges

To further complicate an already-fraught situation, regulation has also hampered some of the most promising areas of China’s tech sector. A nearly year-long freeze in gaming approvals, along with a regulatory clampdown, has placed strain on a field in which Chinese companies had been excelling.

Restrictions on development and application of blockchain technology have caused many Chinese startups to at least partially relocate overseas. A series of crackdowns in online content has limited growth options for social media platforms, and required many to spend heavily on managing and censoring content.

To be clear, job cuts are rarely a pleasant ordeal in any part of the world. Yet in China tech, there are some unique factors at play. The bulk of the individuals losing their jobs were born in the 1980’s or 1990’s, forming part of the country’s one-child per family generation.

Many of these people are saddled with the burden of being the only caretaker for their aging parents, while also either personally desiring or socially pressured to have a family and children of their own. For this cohort, losing a job is disappointing not only for themselves, but their entire families, too.

China’s tech firms are also known to place high demands on their employees’ time and attention. The “9-9-6” work schedule—9 a.m. to 9 p.m., six days a week—leaves little time for family, relationships, or hobbies. In these instances, being laid off can feel like losing more than just a paycheck.

“To be honest, I feel betrayed [by the company’s CEO],” explained one recently laid-off tech worker in Shenzhen, who asked to remain anonymous citing privacy concerns.

“I did so much for him, for the company. They demanded that every employee love the company, to give them everything we had. They didn’t just want our minds or our skills, they wanted our hearts. That’s what we gave. And yet, when the time came to let us go, what to us was personal, to them, became ‘just business.’”

The year began full of promise for Chinese telecommunications giant Huawei.

Just 12 months ago, the Shenzhen-based giant looked poised to sell its smartphones in every major market on the globe, and to be a, if not the, leading equipment provider for development of what appears to be a once-in-a-generation revolution in infrastructure—5G.

At this time last year, Huawei had its sights set on entering the US smartphone market. The company reportedly planned to do so through a deal with major US carrier AT&T.

Now, as 2018 comes to a close, it finds itself in unexpectedly difficult terrain, caught between a rock and a hard place, wedged between trade and national security tensions, legal troubles, and a slowing domestic economy.

Then, of course, there’s the arrest of Huawei CFO Meng Wanzhou in Canada.

Let’s take a look at what Huawei’s gone through in what seems to be one of its rockiest years:

January

By early January, Huawei’s hopes for the US phone market were dashed, as AT&T pulled out of the deal. While reasons were not made clear, a group in the US Congress had written a letter to the US Federal Communications Commission the previous month, citing security concerns.

April

In April, the US Department of Commerce banned US companies from selling components to another Chinese telecoms titan, ZTE, based on accusations that the company had violated sanctions against Iran.

This was seen by many as a signal that similar actions could be taken against Huawei, as in 2016, the Commerce Department made documents public that showed ZTE’s misconduct and also revealed how a second company, identified only as F7, had successfully evaded U.S. export controls.

In a 2016 letter to the Commerce Department, 10 US lawmakers said F7 was believed to be Huawei, citing media reports. In April 2017, lawmakers sent another letter to Commerce Secretary Wilbur Ross asking for F7 to be publicly identified and fully investigated.

July

In July, Huawei overtook Apple as the world’s Number 2 smartphone maker, driven by growth in the Chinese phone market, and rising brand recognition for Huawei in Asia and Europe.

Also in July, the intelligence chiefs of the “Five Eyes” nations (Australia, Canada, New Zealand, UK, US) met secretly in Canada to discuss the threat of Chinese cyber attacks, including on the US Office of Personnel Management, Australian National University, and countless companies.

Having identified the Chinese Communist Party as the “greatest emerging threat,” the Five Eyes nations began taking actions to counter its influence in the tech and cyber arenas. This included restricting Huawei, China’s top telecoms and tech firm.

August

After it had become clear earlier in the year that the company would be unable to substantially enter the US smartphone market, Huawei let go of its long-time vice president of external affairs, William Plummer.

In August, he published a 351-page tell-all about his time at the company: “Huidu—Inside Huawei.”

Plummer maintains that Huawei and its equipment are not a national security threat. However, his book paints a picture of an exclusive, jingoistic, dysfunctional and paranoid corporate culture, struggling to adjust to the company’s growing global prominence.

Also in August, the Australian government banned Huawei and ZTE equipment from the country’s 5G projects, citing a Chinese national intelligence law requiring Chinese companies and individuals to aid in national intelligence-gathering operations.

September

Reports circulated among the Chinese internet that Huawei was being acquired by a Chinese state-owned firm. Huawei rebuffed the rumors. However, since Huawei is not a publicly listed firm, and is instead owned by its employees, it is very difficult to verify either claim.

SK, South Korea’s largest telecoms operator, announced that Samsung, Nokia, and Ericsson would be preferred bidders, a list that excluded Huawei.

Also in September, Huawei and ZTE were excluded from 5G trials in India. (Huawei was later invited to Indian G5 trials in December.)

October

Senator Marco Rubio and Senator Mark Warner of the US Senate Intelligence Committee wrote to Canadian Prime Minister Justin Trudeau, urging the country to bar Huawei from its 5G network, citing national security concerns.

November

New Zealand announced it would join Australia in banning Huawei 5G equipment.

December

On Dec. 1, Huawei CFO Meng Wanzhou, the daughter of the company’s founder Ren Zhengfei, was arrested in Canada. She faces extradition to the US on charges of wire fraud, allegedly assisting her company in evading Iran sanctions. The move has heightened tensions between the US and China, and Chinese authorities have detained two Canadian citizens in what appears to be retaliation for Meng’s arrest.

The same week that Meng’s arrest was made public, the UK’s BT Group said it was removing Huawei Technologies’ equipment from the core of its existing 3G and 4G mobile operations and would not use the Chinese company in central parts of the next network.

A week later, after Huawei pledged to address the British government’s security concerns with a $2 billion overhaul, a meeting with prominent UK officials ended with one British official walking out in dissatisfaction.

December has also seen an effective ban on Huawei products by Japan’s government.

EU tech commissioner Andrus Ansip told a group of journalists in Brussels on Dec. 7 that the bloc should be “worried” about the risk to industry and security that Huawei and other Chinese technology companies pose. Huawei expressed surprise and disappointment in response to Ansip’s statement.

Huawei now faces the possibility of bans in France and Germany, and Czech officials have also issued security warnings about Huawei and ZTE equipment. However, German officials have expressed skepticism with regards to the claims that Huawei equipment poses a security risk.

It’s worth noting that the year isn’t quite over, and there might even be more twists in store for the company in the coming weeks.

One thing that is clear is that with intensifying international tensions, Chinese telecommunications firms like Huawei seem to be casualties in the conflict. For them—and indeed for both foreign firms working in China and Chinese firms doing business overseas—there is not much cause for optimism for 2019.

In what is becoming an unfortunately common occurrence, yet another Bytedance app is receiving criticism for its problematic content overseas.

The platform is Helo, the Beijing-based super-unicorn’s news app for Indian regional languages. A recent investigation by the Hindustan Times revealed that Helo, as well as its Xiaomi-backed, India-based competitor ShareChat, are “rife with misinformation and political propaganda.”

The article cited a number of Helo posts, including one saying that the BBC had declared the prominent Indian National Congress the “fourth most corrupt political party in the world.” (It hadn’t.) Another falsely claimed a well-known politician in the state of Rajasthan had suggested that India should help neighboring rival Pakistan clear its debt rather than invest in the country’s newly-constructed Statue of Unity monument. (He didn’t.) At the time of writing, neither had been removed from the Helo platform.

According to the Hindustan Times, fake news on both Helo and ShareChat tended to involve false quotes or graphic images designed to provoke outrage along religious lines, manipulating the country’s longstanding tensions between its Hindu and Muslim populations. Many either referenced or involved images of violent acts.

Updated: Toutiao’s overseas platform is delivering fake news, but its problems run much deeper than that

I am unable to read Indian languages, so I enlisted the assistance of some acquaintances who can. While incendiary content could be found in many different languages on the platform, the bulk of the fake news was in Hindi, the language of much of India’s Hindu majority, and spoken by Prime Minister Narendra Modi. Modi has used a brand of populist Hindu nationalism to fuel his rise to power.

In just a few minutes of browsing the Helo app, several problematic posts were found. Examples of fake and harmful Hindi content include this, which falsely claims that US President Donald Trump had advocated for Modi to become “prime minister for life”:

Or this one, which accuses the country’s Muslim minority of being the culprits behind the bulk of the country’s rapes, and claims that members of Modi’s rival politicians place blame on Hindus:

The photo (below), which was trending under the hashtag ‘Temple-Mosque debate’ falsely quotes an opposition leader promising to reverse a court decision allowing the construction of a Hindu ‘Ram Temple.’ This is a hot-button issue in India, as Hindu-Muslim tensions are fanned by local politicians promising to build a temple over an existing mosque:

Many of these posts become even more dangerous when they become shared over messaging apps like WhatsApp, the one that is most popular in India. Helo encourages the sharing of its content via WhatsApp, by featuring an option to do so through a WhatsApp logo button in the lower left-hand corner of the post.

Earlier this year, 20 people were killed in religious and ethnically motivated mob violence, based on erroneous assumptions drawn from fake news stories, shared via WhatsApp. As a well-known Silicon Valley-based messenger app, WhatsApp has drawn much of the blame from international media for spreading misinformation and fueling the violence.

WhatsApp is a relatively bare-bones messaging app. It does not employ algorithms which are biased toward one form of content over another. This is not the case for Helo and Bytedance’s other content recommendation apps.

A lit match in a tinderbox 

The fake news frenzy comes as India’s political environment intensifies in the run-up to elections in the first half of next year. While fake news shared on social media platforms famously disrupted the 2016 US elections, its impact could perhaps be even more pronounced in the world’s second-most-populous country, and largest democracy.

With approximately 10 million Indians getting online for the first time each month, the internet is rapidly transforming political and social life in the country. This, however, carries with it very real threats to stability. Many of India’s new netizens live in rural towns or small cities and have a limited educational background. These people may lack the experience or knowledge necessary to discern fake news from genuine reporting.

What is also worth noting about these new Indian netizens is that unlike the wealthier, more educated earlier generation, nine out of 10 of those getting online in India now consume content not in English, but primarily in their local languages, according to a Google report. For platforms, this makes content moderation a far more difficult and complicated task.

This online environment is also now becoming a battleground for China’s internet companies’ proxy war. Having launched Helo in June of this year, Bytedance has poured an estimated $20 million into the Indian market, already attracting over 5 million users. It has aggressively taken on ShareChat, (locally owned, but Xiaomi-invested) for the clickbait crown, even mimicking ShareChat’s user interface to such an extent that it led to a lawsuit from the Bangalore-based startup.

While it is difficult to identify proof of direct causation, it is worth noting that these platforms have risen to popularity as India has seen a wave of violence that is being blamed on fake news. It is also worth noting that the issues behind the acts of violence are the same that can be seen across these platforms.

However, when comparing platforms like Helo and ShareChat to others such as Twitter, Facebook, WeChat, or Weibo, one distinction should be made. Facebook and WeChat for example, can at times, spread misinformation and stoke outrage. In fact, it has been well-documented that Facebook’s algorithms were making this worse (although they have since reorganized their algorithms to focus on “meaningful social connections.”)

Yet, these platforms were not designed with the purpose of doing that, and they provide several other benefits. They connect family members, facilitate financial transactions, offer a platform for innovation, and generally make life and communication easier.

Whatever fake news they promote or division they foment, the argument can be made convincingly that they serve a useful and productive purpose in society, that the world is better with them than it is without. However, while these problems may be bugs in the systems of Twitter or Weibo, it seems as though for these others, they are in fact features.

This is particularly true for Helo, and other Bytedance news apps. While there are any number of popular news platforms available, what makes Bytedance’s different? One way is that it recognizes the types of headlines that get the most clicks, and applies them to the news stories they publish. This often leads to headlines that are more provocative or divisive than the actual content of the article. This can cause users to be misinformed simply by scanning through the headlines.

It also curates and targets content for users, creating feedback loops of information. Since most readers are not considering how their clicks may affect future recommendations, they end up creating a bubble for themselves without even realizing it. For the less-educated, new internet-users, which Bytedance’s news apps often target, they often have no understanding of how the app is influencing them.

Par for the course

This isn’t the first time that Bytedance’s news apps have been accused of spreading fake news. Its wildly popular Chinese app Jinri Toutiao has faced a series of disciplinary action from regulators for inappropriate content. English-language Topbuzz has struggled with a fake news problem as well and has recently taken steps to remove the patently false content that once filled the platform, although it is clear that the app aims far more to titillate and provoke outrage than it does to inform.

“At Helo, we take issues such as misinformation and fake news very seriously. This is why we work very closely with our local content review and moderation team in harnessing our algorithms to review and take down inappropriate content according to our Community Guidelines,” said a company representative told me in an email. They also claimed to be partnering with a local, non-partisan fact-checking authority to ensure that their platform’s content is safe and viable. However, even the months-old fake news posts cited earlier in the article have yet to be removed. Helo representatives also declined to mention how many people were assigned to their content moderation team.

After Chinese regulators severely cracked down on the company in April, Bytedance founder and CEO Zhang Yiming promised that the company would employ as many as 10,000 Chinese content moderators. In its international markets, the company has yet to receive the same degree of scrutiny from authorities.

When looking at the content Bytedance’s news platforms throughout the world and in various languages, the algorithms tend to promote the same type of articles: Those that foment anger and divisiveness, running along fault lines such as racial and religious issues, often involving controversial and famous celebrities and political leaders. Its algorithms are designed to get clicks, and it has learned that few things attract eyeballs like outrage. What the algorithm seems unable to determine is whether the content is accurate.

While Bytedance’s algorithms have found that fake news-fueled outrage is the trick to drive user engagement on their news apps, for their video app TikTok (formerly Musical.ly in some markets), underage sexuality seems to be the magic ingredient, as I wrote about in detail last month.

What is perhaps most disappointing is how Bytedance, which is the world’s most valuable internet startup, has chosen to respond to the much-deserved criticism that it receives. While publicly releasing such boilerplate statements as the one given to Hindustan Times above, the company’s representatives behave far more questionable behind the scenes.

Bitter experience

When a YouTube video went viral for drawing attention to the underage sexuality and safety risks posed by TikTok, Bytedance filed a complaint with YouTube (a platform on which Bytedance advertises heavily), claiming falsely that the uploader of the viral video was guilty of copyright infringement. Although initially removed by YouTube, the company has since put the video back up.

Bytedance’s teen protection problem

Indeed, Bytedance is known for such bullying tactics. In the famously cut-throat world of the Chinese internet ecosystem, Bytedance has stood out as willing to go even further than most to silence their critics, using unfounded accusations of defamation or copyright infringement to bully small, independent outlets to remove stories.

In other situations, they will pressure publishers’ investors, hoping that keeping the negative stories online just won’t be worth the trouble. These tactics are frequently discussed and complained about in China tech circles, even leading Tencent’s low-key chairman Pony Ma to complain publicly about “black PR.”

Bytedance is fully aware of the social problems that their platforms are causing. And they seem willing to go further than most to make sure the public doesn’t know about them.

To look at the profile of Bytedance founder and CEO Zhang Yiming is to see what seems to be a contradiction. A 35-year-old self-proclaimed “geek,” Zhang has famously said that his greatest strength is his ability to delay gratification in pursuit of a longer-term goal. This has certainly helped him as an entrepreneur build his startup into the most valuable in the world.

However, there is an irony here as well, that the man who is so disciplined has created a product designed to take advantage of those who do not have the same personal strength and to exploit the psychological vulnerabilities of those who know no better.

Or maybe he is simply a good student of Chinese history and has learned that selling an addictive and harmful product to foreign markets, and then attacking those who sound the alarm about its negative effects, can be quite a profitable business.

TechNode does not necessarily endorse the statements made in this article.

Mayor pulls the plug on electric bus deal – Albuquerque Journal

What happened: Albuquerque, New Mexico Mayor Tim Keller has announced the city’s plans to reject and return all 15 of the electric buses manufactured by the US subsidiary of Shenzhen-based automaker BYD, also known as Build Your Dreams.

Although the city cited a number of quality and safety concerns ranging from electrical issues to brake failure, the chief issue seemed to be with the vehicles’ batteries. The contract with BYD calls for buses to operate for 275 miles, yet according to city officials, the buses are unable to go more than 177 miles before they need recharging. Mayor Keller also referenced problems with the batteries overheating and having inadequate fire protection.

Why it’s important: This isn’t the first time that BYD’s buses have run into quality issues. An investigation by The Los Angeles Times in May of this year revealed similar problems with the automaker’s buses, causing headaches for the mass transit system of the second-largest American city. The Times investigation also revealed evidence of official corruption and mistreatment of employees at BYD’s Southern California plant. In August of this year, reports out of Cape Town claimed that the city’s newly-purchased buses would stall when going uphill.

Fake news and hate speech thrive on regional language social media– Hindustan Times

What happened: A Hindustan Times investigation has revealed that Bytedance’s Indian regional-language news platform Helo, with at least 5 million estimated registered users, is rife with misinformation and political propaganda.

Why it’s important: This isn’t the first time that the world’s most valuable startup’s news apps have been accused of spreading fake news. Its wildly popular Chinese app Jinri Toutiaohas faced a series of disciplinary action from regulators for inappropriate content. English-language Topbuzz has struggled with a fake news problem as well and has recently taken steps to clean the platform up. As social media gains popularity in less-developed areas of the world, platforms are increasingly being accused of exacerbating ethnic and religious tensions. In Sri Lanka and Myanmar, regional-language misinformation and propaganda that was spread through Facebook are blamed for fomenting violence against Muslim minority groups.

This Singles’ Day, China’s JD is hoping to make its mark in The Land of Smiles.

Also known as Double 11, the shopping festival originally popularized in China by Alibaba, is the world’s biggest in terms of sales. For JD’s joint venture in Thailand, this year’s shopping holiday is an opportunity to establish itself in Southeast Asia’s second-largest economy.

The Chinese e-commerce company has a 50:50 partnership with Central Group, Thailand’s largest retail conglomerate. That group is controlled by the powerful Chirathivat family, one of the wealthiest and most influential in the country.

According to Forbes, the Chirathivats have an estimated net worth of over $21 billion, and rank as the 10^th richest family in Asia and the second in Thailand, a kingdom where economic and political power is concentrated among a small elite, often connected through familial ties.

The official launch of the Sino-Thai platform, called JD Central, took place in late September, although it opened to consumers in June. The shopping festival, which kicked off earlier this month, represents an important chance to stake a foothold in Thailand’s fast growing e-commerce landscape.

In China, Singles’ Day is famous for flash sales where products are sold at steep discounts, and top e-commerce firms such as Alibaba and JD clock up billions of dollars in sales.

Although not immediately profitable, these shopping holidays are a method by which e-retailers attract users to their platform, who they hope to retain as loyal customers even after the deals die down.

JD Central has rolled out a 14-day campaign, titled “11.11 Crazy Hot Sale.” This involves several user-enticing specials and deals including “Super Deals Day,” with up to 90% discount of prices in every category, discounts to Central Group-owned restaurants, an in-app game in which users can accumulate points, which they can redeem for discounts on purchases. There’s even a lucky draw to win a trip for two to Beijing.

JD Central is the second joint venture that the Beijing-based giant has established in Southeast Asia, having set up one in Indonesia with Provident Capital, which began as early as 2015.

JD’s joint venture approach in Southeast Asia is different from its Chinese rival Alibaba, who has steadily expanded their presence in the region through a series of investments in Singapore-based Lazada Group.

Alibaba took a controlling stake of Lazada in 2016 with a $1 billion investment, followed by another billion the following year, and $2 billion earlier this year. As the Hangzhou-based e-commerce giant increased its financial control over the company, it has put its own people in place as well, replacing a number of senior executives, including installing Alibaba co-founder Lucy Peng as the company’s CEO this past March.

E-commerce is not the only area in which Chinese internet companies who are seeing their fierce battles spill over to this part of the world. Ride-hailing giant Didi, as well as Alibaba and their long-time investment partner Softbank have invested heavily in Grab, the Singapore-based platform that has made impressive moves not only into ride-hailing, but mobile payments and food delivery as well.

Not to be outdone, Google, Tencent, JD, and Meituan-Dianping have all backed Go-Jek, the Indonesian mobility super-app, quickly expanding across the region, setting the stage for what looks to be a showdown pitting the alliances of Alibaba and Softbank vs Tencent and Google, in a fight for dominance in some of the world’s fastest-growing markets.

There is good reason for these companies’ aggressive land-grabs as well. According to a joint research report by Google and Temasek Holdings, Southeast Asia’s internet economy—travel, media, ride-hailing and e-commerce—surpassed $50 billion in 2017, placing it on a trajectory to grow to roughly $200 billion by 2025.

With a population of approximately 600 million people, the region has around 330 million internet users, gaining 70 million since 2015.

Still, as JD tries to leverage its strong brand in China and its reputable Thai joint-venture partner to build a name for itself in Thailand, it faces an environment that could be even more vicious than the notoriously knock-down-drag-out e-commerce space from where it came.

As it attempts to attract users through its first 11.11 campaign, it must compete with both Lazada and Shopee, two well-established brands that have long been recognizable brands in the country, including introducing the first “Singles Day” promotions a few years back.

JD is entering unfamiliar territory and may struggle against the native players who considerate Southeast Asia to be their home turf. To further complicate matters, Amazon is making a push into the region as well.

As it has in China, JD hopes to set itself apart through its quality and reliability, guaranteeing the authenticity of high-end electronics and luxury goods in a part of the world where the prevalence of counterfeit goods still gives some consumers pause when making purchases online.

Over the next few years, industry observers are likely to see a battle royale of the world’s biggest names in e-commerce, fighting over Asia’s most attractive emerging markets. It may be a question of who can spend the most cash, attract the most users, and outlast the rest.

In the years to come, expect to see companies taking heavy losses in a grab for market share acquisition in the region. That’s sure to make CFOs uncomfortable and shoppers in Southeast Asia quite happy.

Popular knowledge-sharing platform Zhihu has introduced a user credit system in a bid to incentivize good behavior.

Similar to Alibaba’s Sesame Credit system, Zhihu Credit is part of a “credit craze” sweeping through China’s internet and technology companies, as they get on board with the government’s plan to introduce a broad “social credit system” by 2020.

Blacklists and redlists: How China’s Social Credit System actually works

Seven-year-old startup Zhihu is unknown in most parts of the world. In China, it’s an indispensable component of the country’s growing internet and information ecosystem. Founded and led by former journalist Victor Zhou, the knowledge-sharing platform is best known for its Quora-like Q-and-A function.

Yet to describe Zhihu as a “Quora clone” would be to overlook both its unique role in China’s digital society, as well as the steps it has taken to expand its services and establish itself as the central node for credible knowledge on the Chinese internet.

Investors seem to recognize this as well. Earlier this year the Beijing-based company secured $270 million in a Series E funding round that, according to the company, valued it at roughly $2.5 billion.

Despite lacking Quora’s robust international user base and functionality in a number of languages, Zhihu seems to be out doing its most often-cited Silicon Valley analog, which raised a modest-by-comparison $85 million on a $1.7 billion valuation in a funding round of its own last year.

Zhihu’s offerings now include electronic books and paid live streaming. The company also launched “Zhihu University,” which offers paid online courses in business, science, and humanities and career coaching. According to the company’s representatives, the online university has more than 6 million paid users.

In managing its platform, Zhihu is faced with several complex challenges. While initially targeting China’s highly-educated elite, its user base has grown to include a much broader demographic mix. This is of course a good sign for a business whose monetization model is based largely on advertising. But it also has a downside.

Zhihu has struggled to ensure that all the knowledge shared on it is reliable. Sensational and opinionated answers and entries that can often engage users may not always be fact-based. Outside actors such as scammers and businesses can also use to platform to promote their own financial interests. Trolling and rude behavior can cause constructive discussions to collapse into name calling.

But while these troubles are typical for most major social media platforms, Zhihu has other challenges as well, with uniquely “Chinese characteristics.” In Spring of this year, Beijing cyberspace authorities ordered it and other platforms to delist from all app stores for a week, as they had not adequately curbed “illicit information.”

Zhihu walks a precarious tightrope. It needs to encourage user engagement while keeping information credible, attract a large user base while maintaining those with the most relevant expertise, and stay in regulators’ good graces. The platform needs to do all of this without sterilizing the dynamic community that keeps it vibrant.

How does it work?

Following a soft launch in July, Zhihu Credit became a standard feature for all users the week of October 15. Its Chinese name literally translates to “salt value” (盐值).

“We use the term ‘salt,’ because to us, all the users, with their professional knowledge, experience and unique understanding of world, are like the salt to the sea,” explained Dayun Sun, community management director for Zhihu. “By establishing Zhihu Credit, we want to help our users live, grow, and build their influence with their professional expertise and insight.”

Zhihu’s system is made up of ratings in five categories, each evaluating a separate aspect of Zhihu user behavior, based on the application of different algorithms to the full set of Zhihu user data.

1. Basic Credit (基础信用): This dimension relates to the basic profile of the Zhihu user, essentially their resume. This includes educational degrees, work experience, and any other qualifications that the user may have. For many users, this score can be improved by simply filling out a more detailed user profile to fully include all areas of professional and academic expertise, to indicate areas where each user may have higher credibility.
2. Content Creation (内容创作 ): A Zhihu user’s score in this dimension is determined by the quantity and quality of the content they create on the platform. According to representatives from Zhihu, this primarily consists of four activities: Asking questions, answering questions, publishing articles, and posting on Zhihu’s xiangfa (“想法”) channel, a function similar to a Twitter feed, or WeChat moments.
3. Friendly Interaction (友善互动): This dimension refers to the level of civility with which a Zhihu user interacts with other members of the community. This does not necessarily refer to rules, or terms of service infractions, but one’s reputation for interacting with others in a respectful and polite way. In other words, a user may still be complying with the platform’s rules, but if they are seen by other users to be rude or mean-spirited, their score in this dimension may still suffer.
4. Community Behavior (遵守公约): While the “friendly interaction” dimension applies more to informal courtesy, “community behavior” refers more to compliance with official terms of service. Infractions that can damage a user’s score in this dimension range from libel, to plagiarism, to threatening and harassing other users, to posting inappropriate or illegal content. There is certainly some overlap between the two dimensions (for example, both dimensions can be used to discourage cyberbullying, which has been a problem on the Zhihu platform), but although the two dimensions promote some of the same desired behavioral outcomes, different mechanisms and standards of evaluation are used.
5. Community-Building (社区建设): This dimension refers to the degree to which a user contributes to the monitoring and curation of the content on the platform. Users can increase their score in this dimension by productively up-voting and down-voting answers to questions, editing content, and reporting on other Zhihu users in a way that is accurate. By measuring this dimension, Zhihu is able to incentivize its community members to provide a self-governing function.

As is evident in my own Zhihu Credit score (above), this is something I personally do very little of as a Zhihu user. My score of 564 is slightly above average, with my highest scores coming from the dimensions of “friendly interaction” and “community behavior.”

User reaction

Zhihu’s users tend to be young adults, in general more educated and upwardly mobile than those of most popular Chinese social media platforms. When asked about their thoughts regarding the Zhihu Credit score system, many expressed optimism, hoping it would encourage the positive elements of the platform, while limiting the negative.

“I understand the developers’ desire to get rid of negative energy, and hope it goes well,” expressed a Chinese graduate student who goes by the English name Jamie, and who is currently studying overseas. “In the past, when I commented with opinions different from Zhihu’s mainstream, tons of weird attacks would flood in. If the (Zhihu Credit) system works well, it can get rid of the trolls.”

“Zhihu is a really good platform when its answers are good,” explained one financial researcher based in Inner Mongolia and who has been a Zhihu user since 2015. “There are some people and companies on Zhihu who use the platform to promote fake news, or just to sell their products, though. If the Zhihu Credit score can get rid of those users, that will be a good thing.”

Yet, other users are more skeptical, worried that the Zhihu Credit system is another step to limit users’ freedom of speech. One dedicated user, a Chinese-born man living in Australia, complained that the platform, in response to tighter regulations, was censoring content deemed to be politically sensitive. “The parts about friendly interaction and community behavior, they restrict how users express themselves. For political content, there is no room for anything anymore.”

Indeed, Zhihu keeps a tight lid on political speech. I personally have had politically themed jokes that I posted removed from the platform, followed by a message, explaining why the post was removed. Despite such censorship measures, posting such content does not seem to negatively impact a user’s Zhihu Credit score. My “friendly interaction” and “community behavior” scores were the strongest aspects of my profile. For the dedicated user who expressed concern over his freedom of speech, his Zhihu Credit score is still nearly perfect.

Why the ‘Zhihu experiment’ matters

As a platform, Zhihu carries with it a great deal of significance for the future of the Chinese internet, social, professional, and academic discourse, freedom of information, and entrepreneurship. Its founder Zhou has achieved tech-titan status. He speaks frequently about his passion for entrepreneurship, and his desire to build a meritocratic platform where the best ideas, and the most knowledgeable users, succeed. He sees one of Zhihu’s major roles as being a facilitator for opportunity, helping aspiring entrepreneurs connect with the knowledge and network that they need in order to succeed.

Zhihu has a difficult balancing act to perform, staying engaging and informative, limiting trolls and fake news, and remaining in the good graces of regulators—all while making a profit as well. Whether or not it succeeds will determine not just the fate of this company, but may also in some ways serve as barometer for the health of the Chinese internet as well.

The author, who is a corporate trainer, executive coach, and writer based in Bangkok and Beijing, has worked with Zhihu as a client in the past. 

China has already produced some of the world’s most successful blockchain-oriented startups. But many blockchain enthusiasts are concerned that new proposed regulations could stifle the development of the potentially-transformational field.

“Premature supervision will certainly hamper innovation,” explained one blockchain entrepreneur from northeastern China who didn’t want to be named. “But blockchain now is very mixed, some activities that were previously gray areas have become outright illegal.”

New draft regulations will tighten control over blockchain technology and platforms. If enacted, they would require that blockchain users go through real-name registration, and that service providers take responsibility for censoring content as well as saving user data for potential government inspection. The laws would apply to all “blockchain service providers,” whether organizations or individuals that operate in China.

The legislation, proposed by the Cyberspace Administration of China, is already being compared to the country’s cybersecurity law, enacted last year, and which operates under similar principles.

New proposed rules could rock China’s blockchain industry. Here’s what they mean

Such regulations seem to be contradictory to the technology’s very nature. Since blockchain has established a near-religious following due to its anonymous, transparent, and decentralized nature, the proposed rules would eliminate or hinder many of the attributes which make it so appealing in the first place.

The blockchain entrepreneur referenced a number of gambling dapps which have become popular among many cryptocurrency-holders in China, allowing users to bet on online games of chance, and skirt local laws.

However, the threats to social stability in China posed by an unregulated blockchain go much further. Fraudsters have capitalized on the blockchain craze to take advantage of unsuspecting investors, and cryptocurrencies have become a popular means by which corrupt business people and government officials can launder ill-gotten gains into assets overseas.

Blockchain networks have also been fertile ground for social activists, as Ethereum transactions have been used to publish documents and data which have been censored by Chinese authorities. In a domestic cyber landscape over which Beijing is determined to have total control, this poses a threat.

As blockchain technology has moved closer to the mainstream in recent years, Chinese entrepreneurs seemed to take an early lead. Chinese firms saw impressive levels of investment, and the Chinese business community produced some of the world’s first blockchain billionaires.

However, as China’s regulators have cracked down on the space, starting with ICO and cryptocurrency bans even before this current draft legislation, many of China’s blockchain entrepreneurs have taken their ventures overseas. Silicon Valley and Singapore, with comparatively lax rules, now seem to be more appealing locations for Chinese entrepreneurs to set up shop. For Binance, the Chinese-founded international cryptocurrency exchange, Uganda is the country they now call home.

Need for control

Regulatory stifling of its burgeoning technology industries seems to be a pattern of behavior this year from Beijing. In the gaming sector, where Chinese firms have begun to establish themselves as global leaders, regulators have hit the brakes on the industry’s rapid growth.

No new games have been approved since March, and none are expected to be approved until next year. Even if approvals resume, it is safe to say that gaming companies and investors alike will now be factoring this into the risks involved in doing business in the China market.

When it comes to blockchain technology, China faces a dilemma. For the technology to function best, regulatory authorities have to give up some degree of control. Blockchain systems, by and large, are designed to operate in decentralized ways, that is where their greatest benefits lie.

For China’s highly-centralized system of authority, there is not much of a playbook for integrating such systems. After all, for a bureaucracy that prioritizes stability above all else, any form of decentralization will be seen as a potential threat, at least in the short term, to such stability.

This is not a new problem in China—and it may be the single greatest problem plaguing the Chinese system. Throughout the past decades, not to mention centuries and millennia, there have been many efforts to foster semi-independent institutions of law, business, and society. In each case, the threat that they pose to stability in the short-term, often leads to crack-downs, preventing such institutions from fully maturing, and creating broader, more resilient, and sustainable systems in the long-term.

This has long been China’s Achilles’ heel. It has held China back in the past and will likely do the same to its aspirations in technology and innovation as well.

Equity markets around the world have had a rough week, but Chinese tech stocks seem to be having a particularly painful time.

As of 12:30 on October 12^th, Hong Kong’s Hang Seng Index had tumbled 4.3 percent for the week, the Shanghai Composite Index was down 6.8 percent, while Shenzhen had fallen 8.8 percent.

Alibaba’s shares hit their lowest point in a year, Xiaomi’s plunged to less than 60 percent of their post-IPO peak.

Cautious of the choppy waters, Tencent Music has chosen to postpone its US IPO until November, according to media reports.

So how to make sense of it all?

Not just the trade war

Blaming the markets’ troubles on Trump and the trade war sure make for good headlines, but the bigger culprit may be something far less eye-catching: interest rates.

For much of the past decade, the US Federal Reserve has kept interest rates rather low, making bonds unappealing options for investors, and driving them to stocks, which offered a potential for higher returns. This helped create what has now become the longest bull market in history.

This benefited no one more than the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google), whose growth, market dominance, and potential for even more success going forward made them the default option for investors. Amazon, for example, has seen its market cap more than quintuple over the past five years.

This has also benefited China’s tech giants, as Alibaba and Tencent, listed in the US and Hong Kong respectively, saw their market capitalizations rival that of their Silicon Valley counterparts. This was based somewhat on their strong performance in China, but also on the wave of exuberance fueling good times for internet companies across the board.

As bond yields rise and investors now have a wider variety of options to choose from, stocks are seeing a dip, including the frothy FAANGs, and their Chinese counterparts.

Rising interest rates in the US also tend to make emerging markets comparatively less attractive, and can lead to capital flight, as investors ditch their high-risk/high-reward environments for safer harbors in the US bond market.

This has caused currency disruptions across emerging markets, from India to Turkey to Brazil. For the Alibaba’s, Tencent, and Xiaomi’s of the world (tech stocks from emerging markets), the environment is not exactly favorable.

Strained relations

While this week’s troubles are not entirely from the trade war, China’s tensions with the US certainly have coincided with trouble for the country’s stocks. While for much of the past year the Hang Seng generally tended to mirror America’s S&P 500, the two have been on divergent paths since June, as tariffs have gone into effect and the two economies seem to be actively decoupling from one another.

See the chart below, with the Hang Seng Index in dark blue, and the S&P 500 Index in light blue:

The dips in the S&P could mean that, despite its apparent earlier insulation, the trade war is starting to impact US markets as well. However, it’s too early to tell.

Among the Chinese tech stocks who have been taking blows during the past week and recent months, few seem to be feeling the pain as much as Tencent.

After hitting a high of HK$476.6 (around US$61) per share earlier this year and earning the title of Asia’s most valuable company, the Hong Kong-listed shares of the Shenzhen-based social media and gaming company have seen their value plummet, losing nearly 43 percent of their value since March of this year as of Thursday, before gaining back a few percentage points Friday.

Tencent has encountered several difficult conditions in 2018. In addition to the headwinds facing other Chinese internet companies mentioned above, Tencent has seen regulatory changes threaten to kill its gaming business in China, which has proven to be a cash cow.

As Chinese authorities now seem to have soured on the gaming industry, the Shenzhen-based behemoth now must change course, announcing a “strategic upgrade” late last month, shifting its focus to areas such as enterprise services and med-tech.

While Tencent still owns one of the world’s most valuable and most-used social media platforms and the company looks as poised as anyone to capitalize on China’s future digital marketplace, such a massive shift in a such a large company’s core business would make any investor nervous.

Worse times ahead?

This year, Chinese technology startups have been racing to list, mostly on stock exchanges in the US or Hong Kong. However, with a souring market, the results have been mixed at best. Many have been forced to lower their funding targets, and a number of high-profile companies have seen their share prices dip to even further below their already-disappointing IPO prices.

Despite less-than-ideal circumstances, Chinese startups continue to list, often out of necessity—private funding, for many of them, is drying up, leaving few other options.

Additionally, a popular sentiment among the Chinese tech and financial communities seems to be that as difficult as the current environment is, the future may be even more so.

“Everyone wants to cash in while they can,” explained one Chinese investment analyst. “Winter is coming.”

The author, who is a corporate trainer, executive coach, and writer based in Bangkok and Beijing, has stock investments in some of the companies mentioned in this article.

For China’s most valuable start-up, this year has been a case study in just how difficult it can be to manage social media platforms with international user bases. Things seem to only be getting more complex as well.

Bytedance is the content-aggregation super-unicorn behind China’s most popular news app Jinri Toutiao, as well as a short-video app known as Douyin, TikTok, or Musical.ly, depending on the country or region in which the user resides (as of August 2nd, 2018, all versions outside of China have been branded under the TikTok name, doing away with the Musical.ly brand).

As Bytedance’s users have grown both in China and abroad, so has their valuation. Bytedance does not release valuation figures publicly, but Forbes estimated the company to be worth $11 billion in 2017. They reportedly were seeking funding at $75 billion just 16 months later.

The secret to their success lies in their ability to target content to its users. Often this content is in the form of click-bait news headlines. For its short-video apps, Bytedance targets mostly teen and pre-teen children, who make brief videos, usually while lip-syncing to pop songs.

However, as is often the cases when large numbers of 13 and 14-year-olds congregate without adult supervision, the Beijing-based company’s short-video apps have raised concerns regarding both the safety of the young people involved, as well as the decency standards by which such platforms ought to be governed. While the problems and dangers plaguing Bytedance’s platforms are becoming evident, what is less clear is what, exactly, the company should be required to do about them.

Bytedance representatives were contacted for this piece but did not directly provide a statement.

These problems were the focus of a July viral video by YouTuber PayMoneyWubby, exposing a number of the most-viewed videos on the platform Musical.ly featured sexually-suggestive clips of underage teens and pre-teens.

“I’m pretty sure Musical.ly is a pedophile’s dream… Most of these girls are 14, and they’re doing weird sexual shit,” explained the video blogger, sarcastically joking that “if I were a pedophile, Musical.ly would be a beautiful thing.”

Later in the video, while watching a series of Musical.ly clips, he exclaimed in disgust, “How is this allowed? If [the police] pulled this up on my computer, I’d be going to jail!”

Throughout the YouTube video, scantily-clad young people, seeming to range in age from 12 or 13 to 19 or 20, are shown simulating sex acts, dancing suggestively, and lip-syncing to songs with sexually explicit lyrics. While those in the featured short videos remained at least partially clothed, and at least in most Western cultures would not be considered technically pornographic, it is the age of the children in the videos which is so unsettling.

As PayMoneyWubby put it: “It’s so sexualized, but it’s almost exclusively kids.”

After posting the video, the previously little-known YouTube vlogger saw views soar to over 1 million, by far his most successful video, which previously regularly received under 10,000 views.

On August 29th, PayMoneyWubby (who prefers not to disclose his real name) received an email from YouTube itself, informing him that the video had been removed from the platform, and that his channel had been given a “copyright strike,” given often to copyright violators who are removed from the platform after 3 strikes.

YouTube took this action after a copyright complaint was filed by none other than Bytedance itself, claiming that PayMoneyWubby had unlawfully used the Musical.ly logo, and reviewed Musical.ly content in his viral video. In a second video that also went viral with hundreds of thousands of views, the vlogger looked into the “selective” nature of Bytedance’s copyright complaints, using them to remove videos which portray the company’s platform in a negative light, while hundreds of videos remain on YouTube that are straight uploads from Bytedance’s platforms.

After complaints started trending on the social news site Reddit, YouTube removed the copyright strike and put the video back up. YouTube then sent PayMoneyWubby an email, notifying him of the situation with a copy of Bytedance’s initial complaint. The complaint was written in Chinese and cited “an unlawful use” of a Bytedance trademark. In other words, they officially requested that the video be taken down because it had a Musical.ly logo in it, despite the fact that hundreds, if not thousands of videos featuring Bytedance platforms’ logos remain on YouTube. It is also YouTube’s policy that using logos in review videos, as it was in the video in question, does not violate the platform’s terms of service.

It seems plausible that Bytedance was attempting to use YouTube’s copyright protection system to prevent news from coming out about the very real issues with their platform, issues which appear to be an increasingly urgent threat to the company’s international success.

Bytedance’s child “pornography” and “pedophilia” problem

The PayMoneyWubby video is hardly the only one bringing up the issue of child safety on Bytedance’s short video platforms. Although more modest in viewership numbers, other videos on the YouTube platform show a series of creepy middle-aged men making sexually suggestive videos with clearly underage girls.

The tendency for Bytedance’s platforms to become a hotbed of predatory activity was also highlighted by a number of investigative local news reports in the US, raising concerns among parents. Some more conservative societies have banned TikTok altogether, as Indonesia’s Ministry of Communication and Information Technology did temporarily in July of this year, accusing the platform of promoting “pornography, inappropriate content and blasphemy” and that it “contains negative videos that are deemed to be a bad influence on the youth” of the world’s most populous majority-Muslim nation.

It’s not just a Bytedance problem

The business model for Bytedance, or at least their TikTok platform, is quite clear. They use sophisticated algorithms to target children, exploiting the most fundamental of human desires. By targeting young people, they reach a demographic that is too young to be fully aware of the way the algorithms works, or how they are being exploited, or possibly even put in harm’s way. Their product is designed to be addictive but offers very little in the way of helping their young users develop into healthy, happy, and productive adults.

In other words, Bytedance is McDonald’s. On the internet. But before we pile on this peddler of digital Happy Meals as the target-de-jour of our rage for all that is wrong with the world, let’s take a step back.

After all, many of us love McDonald’s and enjoy a Big Mac every now and then as part of an otherwise healthy lifestyle. McDonald’s provides something that people want to eat, is well-managed, and has consistently provided value to their shareholders. Is it their responsibility if some people choose to scarf down McNuggets and fries so excessively that they put their own health in danger? Is the onus not on parents to ensure that their children stick to a healthy diet? If McDonald’s poses a threat to public health, why do governments not establish and enforce nutritional standards for restaurants, or ban unhealthy fast food altogether?

Thankfully for McDonald’s, most cultures in the world tend to generally agree that dietary choices are to be left to individuals, and in the areas where they differ, McDonald’s is able to localize or adjust their menu, such as by removing beef products in heavily-Hindu India, or by offering apple slices as a substitute for French fries in Happy Meals to appease health-conscious parents.

However, as internet platforms grow increasingly ubiquitous and global, meeting the demands of all stakeholders is proving to be almost impossibly complex. It is this that is quickly becoming the greatest threat to Bytedance’s global success.

Philosophies regarding corporate responsibility, standards of decency, and the role of individuals and the government differ greatly from culture to culture, and internet platforms now face the arduous task of meeting the demands of their global user bases while maintaining the international connectivity that allows them to succeed as businesses.

In many ways, this has been the story of 2018 thus far for Bytedance. After seeing their Chinese user numbers skyrocket and their portfolio of hit apps expand, the company was slapped with a series of disciplinary actions from government regulators. These culminated in a forced shutdown of the company’s popular “Neihan Duanzi” joke app, and the 4 am release of a “self-criticism” written by founder and CEO Zhang Yiming, a document which seemed by many to be more fitting of the China of 1968 than that of 2018.

Within China, Bytedance has played by the rules that govern competition among most internet companies in the Middle Kingdom: Do whatever it takes to secure users, funding, and higher valuations. Do this with extreme intensity, until the government cracks down, at which point apologies will be made and business will continue in a slightly altered form, provided that Beijing allows the company to stay in business.

However, outside of China, governments most often either hold a more hands-off philosophy to internet governance or lack the control capability of the Cyberspace Administration of China to ensure that online activity is to their liking. In these cases, stakeholders, standards, and societal impact can vary greatly. While the Indonesian government may choose to block the app outright, they may face pushback and damage to their brand from concerned parents (or YouTube personalities, for that matter) in the US, or struggle to deal with tightening data regulations in the EU and elsewhere, which could limit the effectiveness of recommendation engines like that of Bytedance.

Learning from Facebook

The challenges of managing this unprecedented complexity are what have brought Facebook to what is possibly the most tempestuous year in the company’s history. From concerns over their platform being exploited to influence elections, to data breaches, to serving as a catalyst for civil unrest and violence, it seems clear that Mark Zuckerberg and co. are struggling to reckon with the complex, global web of social externalities created by their very powerful platform.

However, as Facebook struggles to control the Frankenstein’s monster of their own creation, Bytedance seems to be attempting to build something that shares Facebook’s strengths, while avoiding its downfalls. Sources close to the company have mentioned how adapting to changing regulatory and social environments, both at home and abroad, has become a primary focus of the company’s top management over the past year.

In June, the company announced enhanced privacy and safety features, including allowing users to set accounts to “private,” so that only approved users could view their content, providing the option for users to delete their accounts if they choose so, and restricting private messaging to only between those who are friends on the platform. Parental control functions were also introduced, including a “time lock” feature, which allows parents to set a limit on how much time their children spend on the app. However, it should be noted that many of these features have long been standard on Facebook, Twitter, and other popular platforms.

However, while they can take steps to curb their platforms’ most harmful excesses, the truth is that Bytedance is ultimately beholden to the desires of its users, and the instincts, emotions, and faults which make them human. When asked at an investor meeting about why so much of the content on the company’s platforms seemed to involve “low-quality” content rather than that which is more educational and informative, Bytedance’s Zhang answered frankly: “Every time we run internal tests the results show that viewership drops off precipitously when alternative content like international current affairs, science and technology is served up.”

In other words, Bytedance just gives the people what they want. After all, McDonald’s is successful for their cheeseburgers and fries, not their apple slices.

TechNode does not necessarily endorse the statements made in this article.

Update, 09 October 2018: This piece has been corrected after publication to reflect the fact that Indonesia’s ban was temporary and that Bytedance’s valuation has not been confirmed by the company.

China has become addicted to debt. Now, its tech industry is hooked too.

It started innocently enough. Back in 2008, when the fallout of America’s own debt binge was giving the whole world a hangover, China engaged in a decisive and robust economic stimulus, injecting RMB 4 trillion into key sectors of its economy. Banks, mostly state-owned in China, were directed to lend more, particularly to other state-owned firms. As a result, China recovered quickly from the global financial crisis, even as the US and Europe struggled to get back on their feet.

However, even as the Chinese economy recovered, the banks continued to lend, and Chinese companies continued to invest, most notably in infrastructure projects. Not only did they invest, they invested A LOT.

China’s lending firehose has injected more cash into the economy than the quantitative easing measures of the US Federal Reserve, European Central Bank, and Bank of Japan combined. While this lending has kept the economy growing, it has had detrimental side effects as well. Here are just a few of the most notable:

Low-productivity investments 

As often happens when credit is too readily available, borrowers have tended to be less prudent about the feasibility of their investment projects. The necessary, practical roads and bridges may get built, but so do inefficient and wasteful projects like 100-story skyscrapers and the hundreds of “ghost cities” across the country, massive residential districts where houses are purchased, but few actually live.

Corruption and waste

When money flows freely, it becomes easier for business or political leaders to cut a few pieces off for themselves. This is not necessarily a bad thing. Corruption becomes more of a problem, however, when it incentivizes unproductive investment. After all, the companies must pay back the loans that they took out for the project in the first place. The corrupt executives and government officials keep their money, but the company is left with the bill.

A vicious cycle of corporate debt

As high-productivity projects have become scarcer and the heyday of China’s infrastructure boom is in its past, more and more companies have found themselves with far more capacity than they can reasonably use, so they borrow money to stay in business, or to complete unproductive projects. When those projects do not yield the returns they were hoping for, they borrow more money, to embark on another project, or simply to keep the lights on, or service the interest of their existing debt. Once that money is spent, they have to borrow more, and the cycle continues.

The level of total debt in China is now officially approaching 300% of GDP, with the bulk of that coming from ballooning corporate debt, although household debt is rising sharply as well. Considering the cost at which these loans are being taken out, servicing the debt alone takes up roughly 18% of GDP. That’s almost three times the country’s official GDP growth rate.

With all that lending to unproductive companies (usually state-owned enterprises), the banks need to find other sources of returns.

Shadow banking surge

With the state-owned companies underperforming, but with monetary expansion placing inflationary pressure on the economy, both investors and banks demand higher returns on their investments. So the banks sponsor “trusts,” off-balance-sheet entities which make higher-risk/higher-reward loans, securitize them, and then sell them to investors as wealth-management products (WMPs).

These shadow banking institutions include hedge funds, VCs, private equity, and other entities that are not required to comply with the same strict regulations as China’s traditional banks. Chinese shadow banking has expanded rapidly over the last decade into a massive, $10 trillion ecosystem that connects financial institutions with companies, local governments and hundreds of millions of households.

With all that money sloshing around the Chinese economy, looking for high returns, the result has been a surge in asset bubbles. Most notable is housing, where apartments sit empty, held as investments, while—as a ratio of the average wage to average apartment price—China’s major cities have some of the least affordable housing in the world. We’ve also seen asset bubbles in liquor,  Tasmanian lavender bears, and even illicitly-traded animal products like ivory and rhino horn.

Shadow banking in China has created an economic environment where not much genuine value is created, although GDP keeps going up. Wages and living standards do not particularly increase, but prices for assets do. Most people and companies are unable to build wealth in the traditional way, so many do so by bringing on debt, and investing it in speculative ventures, usually based around asset bubbles. In this environment, “working” is something that suckers do, because no matter how much a worker saves, they will struggle to make as much money as those playing financial games. As long as these bubbles keep inflating, the irresponsible gamblers get rich, while prudent, hard-working people see others pass them by.

Tech’s debt addiction

China’s speculative bubble-riders, like those from anywhere in the world, move in stampede-like herds. “Hot money” rushes into assets on one day, and then out again just as quickly the next, most evident in the financial roller-coaster rides that are China’s stock exchanges.

This phenomenon becomes even more extreme when the government gets directly involved. By investing aggressively in the technology sector and strongly emphasizing innovation, the Chinese government has been injecting cash both directly and indirectly into tech ventures.

“Much of the VC money in China is government money, from state-owned companies or institutions,” explains Christopher Balding, Bloomberg contributor and former associate professor of business and economics at the HSBC Business School in Shenzhen.  “The government is pumping money into the tech sector. They are directing the herd, but also part of the herd as well.”

The result has been a historic surge in venture funding. In Q2 2018, China accounted for up 47% of global venture capital, surpassing even North America. However, it is unclear how the reality on the ground can support this level of investment. China certainly has strong engineering and technical talent but is unlikely to be currently on par with that of North America. The same goes for managerial talent, venture investment expertise, corporate governance, or access to global consumer markets.

An economy full of asset bubbles seems to have created quite a large one in its tech sector, to both the benefit and detriment of its tech firms. But as with just about any major bubble, there are some common characteristics which stand out.

Ponzi schemes

China’s tech industry is seeing more than its fair share of Ponzi schemes, although branded in different ways. This has become evident through the recent collapse of China’s P2P (peer-to-peer) lending industry.

The rise and fall of China’s online P2P lending

As Martin Chorzempa thoroughly explained, peer-to-peer lending should theoretically be very difficult to suffer a run and collapse. After all, if the lending is truly peer-to-peer, a P2P lending platform simply serves as an intermediary between a borrower and a lender. That, however, is not what these platforms actually were. As Chorzempa put it:

True P2P lending means lenders are only paid if and when borrowers repay the loans. For example, investments in a 12-month loan cannot be withdrawn after three months if the investor panics, because it is not yet due, and the lender cannot ask the platform for reimbursement if the borrower stops making payments. A “run” on P2P platforms that precipitates its failure should therefore not be possible. These attributes are critical in distinguishing a P2P platform from a bank. The credit risk and maturity mismatch of bank loans means they tend to be more strictly regulated.

Sadly, a “run” on P2P platforms is happening anyway. In practice, P2P platforms in China provide guarantees, meaning that investors get no hint that risk is piling up until suddenly the platform cannot meet its obligations and goes offline. These platforms also issue wealth management–type products that have maturity mismatches, putting them at the risk of a run if spooked investors pull out their investments. The China Banking Regulatory Commission (CBRC) issued rules in August 2016 making these practices illegal, but the turmoil over the last two months indicates that numerous platforms have ignored them.

P2P platforms, unfortunately, are not the only Ponzi startups out there. As excitement has risen over the potential of blockchain technology, fraudsters have taken advantage. In May, police in Jinan, Shandong province arrested a gang of more than ten suspects involved in a $47 million scam under the guise of a “blockchain” project.

Cases of blockchain or cryptocurrency-related fraud have skyrocketed, according to a government report released in July, and although Chinese authorities have taken decisive action to limit such fraud (they banned ICOs, and have even cracked down on cryptocurrency discussion forums). However, it is a tricky balancing act, since they would also like to encourage the development of blockchain technology, and many legitimate projects need to fund themselves through ICOs. The problem is, therefore, how to discourage the fraudsters without alienating the legitimate actors.

2VC Business models: “Ponzi-lite”

While there are some con artists out there, scheming to defraud investors out of their money, there is a far more frequent, and possibly more harmful phenomenon. In this scenario, entrepreneurs often begin with a legitimate idea for a startup. However, with funding so readily available, and valuations soaring based more on speculation than tangible results, entrepreneurs are perversely incentivized to spend their time, effort, and funds building hype rather than focusing on the core of their business.

The result is an epidemic of cash-burning and “2VC” business models, in which a startup’s operations are oriented towards the pursuit of funding, rather than delivering value to its users. In these situations, a startup may ostensibly hold on to an original mission or purpose, while in essence, the financial model is very Ponzi-esque. We can call these startups “Ponzi-lite.”

Chinese tech giants burn cash and users are paying for it

One of the clearest examples of this is what has occurred in the bike-sharing industry. With an appealing concept and strong support from the Chinese government (branding them as one of China’s “four new great innovations”), bike sharing exploded, and funding poured in. The flood of cash prompted a race for market share, with millions of bikes hitting the streets of China’s cities in an attempt to acquire users, as more users would mean higher valuations, and garner more investment.

The combination of access to capital as well as the urgency and competition to get more market share and funding created a perverse incentive structure, in which those in charge of the companies developed unrealistic expectations for what was possible, and made decisions which placed their firms and stakeholders in unsustainable situations.

ofo’s young founder and CEO, Dai Wei, was known to have been particularly detached from reality. He stated an ambition to turn the company into the “next Google,” and feuded with investor-appointed managers at the company. A long-time acquaintance of his, in the summer of 2017, observed a disturbing loss of humility in the young entrepreneur, saying “his ego is out of control.” A former ofo employee recalled being astonished by the flippancy of his decision-making, saying “there seemed to be no rhyme or reason to the company’s strategy, it was just doing everything at once, based on his whims.”

As bike rentals cool, ofo chooses to stand alone

As access to capital allowed bike-rental firms to expand, their costs ballooned as well, requiring even more investment. One method of attracting investment was through highly-publicized global expansions, which in many instances seemed to be more of a form of marketing to VC funds, as opposed to actually serving overseas users. One manager appointed to run a Chinese bike-sharing expansion in the US shared a case in which they were pressured to deploy bikes on a prestigious university campus, despite not receiving approval from campus authorities. “[The managers in China] didn’t seem to care if all the bikes were removed the following day. They just wanted to get a photo of the bikes at [the university] and publish some PR to promote that they were there. They didn’t care about building a business, just scamming some investors out of more funding.”

As the flood of cash in bike-sharing has dried up, and the firms have returned to reality, some have faced harder landings than others. Bluegogo’s bankruptcy left investors angry and users unable to get their deposits back. Rumors have also been swirling that ofo is on the verge of bankruptcy, as they pull out of international markets, place bikes for sale, are unable to pay vendors, and are laying off workers. While the future is still not entirely certain for Mobike, they have attempted to stabilize their business, after being acquired by Meituan-Dianping, eliminating the requirement for user deposits, and emphasizing a renewed focus on “responsible growth.”

As the bike-share frenzy dies down, many are now expressing concern over the expansion practices of long-term housing rental platforms like Ziroom and Danke. These platforms take advantage of collateral-free loans offered by state banks to renters, which can be as high as RMB 1 million (approximately $150,000), which renters can pay back over a maximum of ten years. The platforms act as an intermediary between homeowners and renters, providing some management services as well, and take the entirety of the loan amount from the renter, and take a percentage for themselves before paying the homeowner.

One way that Ziroom and others have raised funds for expansion is through selling asset-backed securities, based on rental income.  As they expand and compete for market share, they aggressively offer homeowners attractive terms to lease their homes, which many have claimed is driving up rental prices in some of China’s largest cities. What’s of greater concern, however, are the risks that these companies pose to renters and state banks.

Like the bike-rental companies, they are rapidly expanding, and dependent on external funding. If they cease to be able to raise money from the sale of securities or are unable to make good on paying back investors, they could experience the same fate as Bluegogo and ofo. However, the results, in this case, could be far more severe for the users. While users of a failed bike-rental company may lose a deposit of few hundred yuan, the users of a failed long-term rental platform would be forced to find new homes, but still be on the hook to repay the entirety loan they’ve taken out, which could be years’ worth of salary. In many cases, the banks would have to write off those loans and add them to an already-massive stack of bad debt.

As genuine value growth in China’s economy has slowed and consumers are squeezed, financial games are seen by many startups as the only way to ensure that they stay in business. Even for China’s most established names in e-commerce, much of their growth seems to be coming from financial services, rather than core business.

“When looking at the growth from the e-commerce world [Alibaba, JD, VIPshop], my brief point of view is that actually, it’s banking, it’s not the sale of goods. . . [I]t’s investment-driven, but the key motivation of these companies is to aggregate capital using these payment systems that they control, and the ability to move that capital into investment vehicles,” explained Anne Stevenson-Yang, Co-founder of J Capital Research, at a 2015 event for the Center for Strategic and International Studies.

This trend seems to have largely continued since then, as the crown jewel of the Alibaba ecosystem over recent years has been Ant Financial, which reached a valuation of $150 billion in an April funding round. For many of these companies, the bright spots are coming through financial services based on asset valuations, while their core businesses struggle. Once asset values slump, these firms are likely to struggle as well.

Non-tech businesses, turning into VCs

With weak consumption, government restrictions of real estate investment and outbound capital flows, and promotion of its tech industries, China’s traditional firms are finding themselves with few other options than to get into the tech venture investment business. Real estate conglomerates like Wanda and Evergrande have sizeable VC funds, and it seems just about every other real estate giant in China has as well. However, one must wonder as to the productivity of the investments that they are making, as the highly-tangible business of real estate development operates by very different principles than that of tech entrepreneurship. Real estate developers in China are often known to be synonymous with corruption and waste as well, but when there is corruption and waste in the real estate business, apartment buildings and malls still get built. When there is corruption and waste in the tech sector, there is often nothing but vaporware and broken promises in the end.

Good firms become overvalued and overfunded

To be sure, there are many legitimate tech firms in China that produce valuable products and services. However, in a cash-bloated environment full of investors looking for safe places to park their money, these companies often are valued at higher levels than is justified. Take Xiaomi, for example. The smart-device maker, known as “China’s Apple,” was expected to be this year’s star Chinese tech IPO. The company, as well as some bullish analysts, expected them to go public with a $100 billion valuation. At the time of IPO, however, Xiaomi shares hit the markets with a total capitalization of only $50 billion. At the end of last month, the shares were trading below the IPO price.

This gap between inflated private valuations and weak performance on public markets, according to many analysts, stems from the gap between what Xiaomi bills itself as vs what it is. Its bulls invested in it with images of a Chinese version of Apple, with excellent hardware margins, an addicted and wealthy user base, and robust revenues from internet services. However, at this current point in time, Xiaomi’s hardware is mostly low-margin, its “Mi fans” are minuscule in size, loyalty, and spending power compared to the “cult of Mac,” and it has failed as of yet to achieve strong monetization from its internet services. It claims that it will one day become Apple, but at the current moment, it bears a stronger resemblance to Lenovo.

Xiaomi is not the only overhyped tech firm to experience a rough return to reality when going public. After hitting the market with a share price of over $26 in late July, social e-commerce start-up Pinduoduo has spent most of its time trading under $20 after reports surfaced of ubiquitous counterfeit products on its platform. EV-maker NIO, after announcing an IPO earlier this summer, has seen Japan’s SoftBank, who had earlier planned to buy 200 million USD worth of its shares, back out. News aggregator Qu Toutiao, who plans to IPO in the US this month, recently announced that it was cutting its financing volume by nearly 50%. All three of those companies are backed by Tencent.

Tighter credit means tougher times ahead

As debt levels in China approach a crisis point, its central bank has been attempting to curtail lending, walking the precarious tightrope of tightening credit while avoiding a major economic collapse. However, as the cash is getting increasingly difficult to come by, tech firms are starting to feel the pain.

Other vulnerabilities are also showing. After accounting for 60% of the world’s AI investment since 2013, many once-promising start-ups in the field may soon find that their days are numbered, with one of China’s top venture investors predicting that 90% of Chinese AI start-ups will encounter “great difficulty” over the coming two years, as the tightening of funding becomes “especially obvious this year”.

The growth of China’s tech industry over the past few years has truly been impressive. As liquidity begins to dry up, it can serve as a corrective mechanism, allowing the underperforming and irresponsible firms to fail while the strong, well-managed ones can thrive. However, given the vulnerabilities in the rest of the Chinese economy, it may not work out so neatly or fairly.

In the financial crisis of 2008, imprudent homebuying and real estate investment decisions of families and firms, coupled with highly-leveraged financial institutions, were the guilty parties. While some irresponsible homebuyers lost homes that they never should have had in the first place, and investment banks like Bear Sterns and Lehman Brothers collapsed as a result of poor management, there were many for whom justice was not served. Many of the banks who caused the crisis were bailed out, while countless hard-working people lost their savings or their jobs for no fault of their own. As China’s tech bubble bursts, there are likely to be many good companies—and good people—who suffer as well.

For one well-known Chinese electric vehicle maker, two recent PR crises reflect a deeper dilemma playing out all over the world. After a string of high-profile, highly-leveraged overseas corporate expansions in recent years, many investors, consumers, and employees both in China and overseas have been left with only broken promises and unpaid bills. Even for those who seem credible, the specter of recently failed expansions now haunts all globalizing Chinese firms, regardless of whether or not they have done anything to deserve it.

The company in the middle of these crises is BYD, the Chinese automaker backed famously by Warren Buffet’s Berkshire Hathaway.

Fraud, football, and a lot of questions

The most recent case has raised eyebrows among many observers and involves accusations from the Shenzhen-based company that an individual had fraudulently conducted business on their behalf.

The alleged fraud involves complications around a marketing deal with London football club Arsenal.

The would-be partnership between Arsenal and BYD was announced in April of this year, with the club publicly celebrating the deal to cooperate with “the world’s best-selling electric vehicle manufacturer”.

In an announcement on the club’s official site, the deal would have provided BYD with a broad range of marketing rights including pitch-side LED signage and branding on dugout seats at Emirates Stadium. BYD would have also had access to Arsenal legends for promotional events in China.

BYD announced in a statement last week, however, that a woman by name of Li Juan, also known as Liki Li, posing as an employee at its Shanghai branch, had signed multiple contracts with advertising agencies to promote the company, using a forged company seal.

“BYD has informed Arsenal that they believe they have been the victim of a fraud in relation to various advertising agreements,” said Arsenal in a brief statement on their Chinese company web site. Neither side has released any additional information as to the future of the partnership, aside from that they are “investigating the situation.”

Details of the case had many observers publicly expressing skepticism of BYD’s claims, as BYD executives were clearly involved with the deal early on, but now seem to be claiming that they did not in fact officially authorize certain aspects of it. Reports suggest that the alleged fraudster and her firm had worked for years as a known representative and vendor for BYD, and had conducted transactions on their behalf, although BYD fervently denies any relationship.

Some are speculating that this is an attempt for BYD to back out of the deal.

“With senior officials from BYD clearly involved in the partnership with Arsenal, including being present at the signing ceremony and launch event, it would be disingenuous for them to claim that the entire deal was fraudulent,” says Mark Dreyer, a China sports media veteran and founder of China Sports Insider. “In addition, how has it taken them two or three months to say anything about it? It is far more likely that they are having second thoughts about the deal, and are looking for a way out.”

As both Arsenal and BYD have offered limited information, it is difficult to come to any conclusion at this current time as to BYD’s intent, or as to their relationship with the accused.

What is worth taking note of, however, is that this is just one case among a broader trend of odd instances that, at the very least, merit a closer look. Some are directly related to BYD’s business dealings. For others, BYD may be an innocent casualty, simply by association, of a string of highly-publicized failed global expansions in recent years by Chinese firms.

BYD’s LA electric bus deal: Overpromising, underdelivering, and a little corruption

Meanwhile, an ocean away, BYD has been dealing with another PR mess.

BYD, in English, stands for “Build Your Dreams,” which is fitting, as the company certainly had lofty dreams of its own. It aims to be a global leader in electric vehicles, and in recent years, the firm has been in the midst of an aggressive global expansion. One early step in their globalization journey was the success of a 2008 bid to provide electric public buses for the Los Angeles metropolitan area. With the prospect of local job creation and cleaner air, local politicians were quick to get on board with the proposal.

A decade into the deal, however, the results have been less-than-stellar.

An investigation by the Los Angeles Times, published in May of this year, found that the fleet of BYD buses was contending with a record of poor performance and mechanical problems. Buses were known to stall on hills and required service much more frequently than older buses. They also reportedly had unpredictable driving ranges which were less than the advertised distances and were impaired by the heat, the cold, or the way drivers braked.

Despite claims from BYD executives that they have received overwhelmingly positive feedback on the vehicles, Times reporters found that government emails and bus inspection records showed multiple agencies had confronted the company regarding their quality and range issues. In response, BYD executives directed blame to outside forces, including drivers braking too hard, and a negative publicity campaign by labor activists pushing to unionize BYD’s workforce. They also cast blame on some transit authority officials for being “insufficiently committed” to transitioning to electric vehicles.

A response that seemed particularly tone-deaf from BYD was a claim that, despite receiving hundreds of millions of taxpayer dollars with insufficient results, they should be “lauded for providing an important public service.”

“If you want to find the problem for the new technology, you always can try to,” said Stella Li, president of BYD Motors Inc, BYD’s US-based subsidiary responsible for the buses. “If you want success,” she said, “everything is positive.”

But…. There are many ways to look at this case

Reading the detailed, well-researched takedown from the LA Times, one may be alarmed by the case. It would be very easy, perhaps natural, to adopt this narrative:

This Chinese company uses corrupt, backdoor channels to ensure lucrative deals from dirty politicians at the cost of the local taxpayer.  They consistently lied about the capabilities of their buses and how many workers they could employ. They violated local laws, underpaying their workers while treating them poorly, all while their executives got rich. When confronted with their misdeeds, they refused to accept responsibility and pointed fingers at others, expressing self-righteousness and disdain for the good, hardworking local people.

While the words used in that description may be a bit sensational, many, if not all of them do seem to be factually true, at least to my knowledge. However, someone could also adopt this narrative:

BYD is a forward-thinking company that is bringing environmentally-friendly transportation to the Los Angeles metropolitan area, and jobs to the town of Lancaster. Their buses are competitively-priced and comparable in quality to their competitors. Electric vehicles are different than diesel-powered ones, and in a relatively new industry. Therefore, it can be expected that there may be some problems along the way. Sure, they may have overestimated the distance that the batteries could last and the people they would employ, but at the time of the proposal, they chose a number at the high end of their estimated range. After all, they wanted to win the bid, and it is not unheard of to slightly exaggerating one’s capabilities a little in those circumstances.

That narrative seems plausible. But which story will most people choose to accept, and why? That could be determined by whether an individual tends to be more trusting or more skeptical, or by prejudices based on racism or nationalism. It could also be influenced by someone’s experiences with local government, corporations, or labor unions in general.

Ultimately, though, an individual’s decision to offer the benefit of the doubt comes from whether or not they have trust in priorities and intent, whether or not they feel as though they understand what is in someone else’s heart. It is this issue which, I believe, is a question being increasingly asked regarding Chinese firms. Recent events also indicate that it is for good reason.

China’s global corporate spending spree, and its many ripple effects

BYD is not the only Chinese company to be caught in awkward financial entanglements with a European football club.  After a surprise acquisition of AC Milan in 2017 by mysterious Chinese billionaire Li Yonghong, the club now seems to be getting taken over by infamous US “vulture capital” fund Elliott, after Li has been unable to provide them with the funds he had promised.

While he is undeniably entertaining, Aston Villa’s eccentric owner Tony Xia now seems to be driving the club into financial ruin after two years of mismanagement, failing to qualify for the Premier League, and what seems to be an inability on Xia’s part to supply the necessary funds from China.

These cases are littered throughout professional football but are hardly limited to sports. Anbang, HNA, and Wanda are just a few of the most recognizable names on a long list of Chinese firms that in the past few years have frantically purchased overseas company after overseas company, only to suffer from a cash crunch, unable to come up with the funds to follow through on their commitments.

Many of these have resulted in dramatic stories of a number of larger-than-life business tycoons, rapidly ascending to glorious heights, followed by dramatic, tragic downfalls. But in all of the focus on the money and the power and the drama, the people most affected usually get overlooked.

For over a year in total in 2016 and 2017, I worked in some capacity or another for a firm that went through one of these “global expansion supernovas.” The company was a well-known local internet and entertainment firm in China, with an ambitious and intelligent CEO, who had plans to build a global technology empire the scale of which the world had never seen. They opened sizable offices in high-profile locations in major global hubs of technology, entertainment, and finance. They put on elaborate events and aggressively recruited top talent with lucrative compensation packages.

Being at the same time excited and taken aback by what seemed to me as an effort to defy the fundamental “laws of physics” that govern business and finance, I consulted with knowledgeable experts on the topic to try to get the full picture before joining the company. I ended up taking the job, but hedged my bets, hoping for the best, but knowing that I would be fine if the worst were to happen as well. I admired the CEO and what he was attempting to do, but I know that I could not really count on any promise I was given, and so I positioned my life situation with an understanding of that knowledge.

I still hear stories here and there, of employees still owed significant amounts of money by the company, or whose long-term romantic relationships were unable to withstand the pressure brought home every day from the office. Some have suffered far worse fates.

For each of these people who I know to have suffered the most, both in China and overseas, there was a theme: They believed what the company, what their managers, what the CEO told them. Things were fine for me and others largely because we didn’t. In other words, they suffered because they were better employees. Skepticism reaped benefits, while trust brought about pain.

How much can we assume?

When asking around about these Chinese corporate tragedies, different reasons are offered by different people, in different circumstances. Some blame the ambition and ego of the leaders of these companies, aiming too high and becoming detached from reality. Others point to China’s financial and economic situation, in which getting money out of the country is growing increasingly difficult, credit is tightening, and the regulatory environment is uncertain. And yet others claim that corruption is the culprit, that these expansions, no matter how reckless, offer a way for ill-gotten gains to be transferred out of the country.

To be clear, I have no evidence or knowledge that would justify making any claim as to BYD’s finances. What I do know is that they are a Chinese company that has been undergoing a global expansion. I also know that for those both Chinese and foreign who I have seen take globalizing Chinese firms at their word, they seem to have paid a price for it.

There is also no shortage of poor behavior from the large companies of other countries as well. For any of the misdeeds a Chinese firm may make, a foreign company has probably done a similar act already, at least in one way or another. However, Chinese firms are relatively new to the global stage. Compared with other major international firms, they also tend to have far less transparent corporate governance structures. The Chinese financial system is also quite opaque, as is its legal system. I study, work in, and write about this country’s business world for a living, and every day, I feel like I understand it less.

How then, should any overseas investor, government official, consumer, or employee know what to expect when a Chinese firm sets up shop in their town?

BYD, by all accounts, seems to be imperfect. However, they seem to be a serious, legitimate business, making a product that is useful and beneficial. There is a reason that a conservative investor like Warren Buffet is willing to support them. But the stories and attention directed at globalizing Chinese firms over the last few years have not gone to the imperfect, modest successes, but to the loud, brash, messy failures that leave in their wake nothing but unpaid debts and unanswered questions.

Foreigners’ concerns about the transparency of Chinese systems and organizations is nothing new. It is a theme that has existed for centuries. After all, if there were one topic most frequently discussed China’s economic and diplomatic relations with the rest of the world, it would likely be “opening up.”

It is certainly possible to be trusted without being transparent. After all, Japanese corporate cultures are notoriously impossible to understand but represent some of the world’s most trusted products and brands. But the world generally knows how Japanese manufacturing methods work. After all, Toyota’s model has been adopted as standard practice throughout the automotive industry. Japanese corporate culture tends to adhere strictly to detailed processes, and their companies are less likely to try new or risky things.

But most importantly, the world has used their products for decades, and have come to know that they can be relied on. They may not be open to the world, but they are consistent. Their mysterious global misadventures in recent years seem to indicate that for many Chinese organizations, neither is true.

I would like to believe that a company like BYD is worth trusting, but the harsh reality for any Chinese firm going global at this moment is that they now must dig themselves out of a hole of skepticism, even if they deserve better. Can BYD and others earn the benefit of the doubt of a skeptical world? Possibly, but only if they are seriously committed to honesty and transparency. I personally am not convinced that they are, but would welcome the opportunity to be persuaded otherwise.

Last week, roughly 1400 Google employees had signed an internal letter demanding that more information be shared with employees about the products the company was developing in its recent China push. Although the Silicon Valley juggernaut seems to be working on a series of China-focused projects, the one to have gained the most attention was “Project Dragonfly,” which reportedly involves a version of Google Search which would comply with China’s famously-tight internet regulations.

“We urgently need more transparency, a seat at the table, and a commitment to clear and open processes: Google employees need to know what we’re building,” the letter said.

Additionally, the letter called on Google to allow employees to participate in ethical reviews of the company’s products, to appoint external representatives to ensure transparency and to publish an ethical assessment of controversial projects.

Google’s return to China has been a contentious topic in many circles. The firm’s top leaders have drawn criticism from the political, tech, and journalism communities in the US, while regulators have kept online discussion of the topic in China to a minimum. It has been a subject of heated debate in several chat groups I am in.

I suspect the reason that this issue has become such a lightning rod stems from much deeper differences between the values, cultures, and socio-political systems of which internet companies play an ever-increasing role in governance.

This is evident simply in the language used in the Google letter, and the request employees made, which is not exactly new in working with China. The employees of Google requested transparency. After all, Google is known for its commitment to internal transparency, quite remarkable for a company of its size. “Default to open,” a phrase often used for opensource developers, is also famously a principle for information-sharing at Google. In other words: unless confidentiality is absolutely necessary, information should be shared.

Indeed, at least from the outside, the opacity with which Google has approached its China re-entry seems to be far more a trait of the market it is entering than of its own corporate culture. While Google’s creed is to default to transparent, Chinese organizations tend to default to more closed and opaque methods of decision-making and information-sharing. For foreign firms and individuals working in China, transparent practices often must be shed in order to do business, simply because local partners, regulators, and other stakeholders require it.

Comparatively high opacity is simply a necessity for survival in Chinese business. It is a feature, or a bug, of the Chinese system, depending on how you look at it. I’ve personally been both frustrated and fascinated by China’s opacity, and have spent the past year or so trying to find out why exactly it is this way. In conversations with scholars, business leaders, and others, here is what I can conclude, to the best of my understanding.

“Catching fish” with Schrodinger’s cat

There’s a saying in China that “it’s easier to catch fish in muddy waters” (渾水摸魚). This is often quoted by foreign investors who are skeptical of the claims made by Chinese firms, saying that opacity is a tool used to defraud investors or to engage in corruption. Indeed, between 2008 and 2012 alone, fraudulent Chinese firms listed on US stock markets lost approximately $14 billion of shareholder value, enabled by complicit financial institutions in the US. It not uncommon for Chinese startups to use opacity to cover up bogus claims made in order to secure funding, and many Chinese people disregard the country’s own stock market as being rigged by corruption and insider trading.

While it is tempting to assert that opacity in Chinese business is born purely out of insidious schemes to get rich quick at the expense of others, it is also simply a necessary method of survival within its system.

Over the course of China’s Reform and Opening Up, both the country’s leadership and its companies have maintained a pragmatic approach, relying less on an ideology or a strict code of principles, but applying elements from a variety of systems, according to what was most suitable for maintaining prosperity and stability. This approach is frequently associated with Deng Xiaoping’s statement that “it doesn’t matter whether a cat is black or white, as long as it catches mice.”

The emphasis on pragmatism, however, has also been associated with a moral vacuum in China, and a well-documented corruption problem. After all, if the goal is to catch mice, inflexible ethical frameworks can prevent the cat from successfully procuring its dinner. As the winds of China are known to change suddenly, savvy businesspeople in the country must also be prepared to quickly adjust. If adjustment is both necessary, frequent, and unpredictable, keeping cards close to the vest can minimize the complications associated with such changes in direction or creed.

In a 1935 attempt to explain the phenomenon of quantum entanglement, Austrian physicist Erwin Schrodinger used the metaphor of a cat. The scenario presents a cat that may be simultaneously both alive and dead, a state known as a quantum superposition, as a result of being linked to a random subatomic event that may or may not occur.  This state of being two seemingly contradictory things at once has since been associated with the term “Schrodinger’s cat.”

The way that Chinese law works, oddly enough, puts each business and individual into its own state of “quantum superimposition.” Laws tend to be written in ways that are quite broad, open to interpretation and may be in direct conflict with others. They are also selectively enforced, depending on who is doing the enforcing and which aspects of the law are being emphasized at that current time.

Tim Murray, co-founder of J Capital Research, once explained the situation by saying, “In China, complying with one law will often put you in breach of another, so that at any given time, anyone can be found in breach of anything.”

Like Schrodinger’s cat, which is both alive and dead at the same time, most people and businesses in China, in relation to the law, can be considered something like “Schrodinger’s criminal:” simultaneously being guilty of a series of crimes, while at the same time, being innocent. It all depends on the perspective, focus, and intention of those enforcing the law.

How then, should businesses looking to protect themselves go about operating in China? Well, opacity helps in most cases. If an act is permissible at one moment and punishable the next, it behooves businesses, individuals, and officials to keep quiet about many of the dealings, just to stay safe.

Can “default to open” work in a “default to closed” world?

It is clear that even in this relatively early and tentative stage of Google’s China re-entry, we are already seeing a culture clash. Something has got to give: either Google abandons some of its core principles, forgets its China plans or China accepts Google’s way of doing things. The last of these possibilities seems the least likely.

However, it is acknowledged, even by the highest levels of authority in China, that opacity is a problem, and one from which no one suffers more greatly than Chinese people themselves. As the country’s businesses and regulators experiment with systems of social credit, blockchain, and digitization in general, it is clear that one of the primary purposes is to increase transparency and to reduce issues like fraud and corruption, which are fostered by opacity.

As Google feels the heat for its opacity in China, it may help bring about the transparency which the Chinese business environment has long needed.

It seems every single news outlet has published a line similar to this over the last week: “The tech world has been abuzz with talk of Google’s rumored secret plan to return to China.” 

Rumors, however, are just another form of gossip. They’re unconfirmed, without much evidence to support them.

Google has been very active in China since the beginning of the year, setting up offices, making major investments, launching a WeChat Mini Program, and announcing deal after deal with Tencent, with whom they very clearly seem to be teaming up, at least when it comes to the China market. From what I’ve been hearing in China’s tech HR circles, they’ve been recruiting aggressively in the Middle Kingdom since 2017, if not earlier.

When The Intercept reported last week that Google had secretly been working on a China-friendly search app, it was surely significant news. But this is 2018, folks. Search is only one part of the wide array of functions performed company at the heart of the world’s internet.  No, Google is not planning a return to China. Google has been returning to China.

That being said, nothing in China is ever a 100-percent certainty. The political and regulatory winds are always changing. However, it seems that a general direction has been agreed upon: When looking at the foreseeable future of the Chinese internet, Google will be playing a role.

But what does that mean for everyone else in a competitive environment that is already notoriously fierce? Well, here are some likely winners, probable losers, and some questions that have yet to be answered:

Winners:

Users of the Chinese internet

Baidu and Sogou, China’s two top search engines, are each formidable in their own right. In fact, when Google largely left the China market in 2010, Baidu was already a noteworthy competitor, if not the search engine of choice for the Chinese internet.

However, there is a reasonable case to be made that the lack of competitive pressure has altogether weakened the quality of the internet available to those within the PRC. Baidu has drawn the ire of Chinese netizens numerous times for ethically questionable behavior. When founder and CEO Robin Li remarked earlier this year that Chinese internet users were “not interested in privacy,” well, that didn’t do much to improve the public’s already-fragile trust with his company.

Baidu has also simply not performed very well as a business. While the acronym BAT is often used to refer to China’s three most dominant internet giants (Baidu, Alibaba, Tencent), the “A” and “T” have left the “B” in their dust. Tencent and Alibaba have grown in value to rival their Silicon Valley counterparts, but Baidu is trading at roughly 78 billion USD as of August 8^th, 2018. Compare that with Tencent’s 430 billion, Alibaba’s 458 billion, or Google’s 877 billion. Baidu has been dwarfed by its rivals.

At the very least, Google’s presence in China pressures its Chinese competitors to compete more aggressively and deliver a better service, but there is another benefit that Google offers as well. Google Search opens an improved window to the world. Try searching for anything in English on Baidu. It’s terrible. Even when complying with stricter Chinese internet regulations, Google will likely provide improved options for searching the web outside of China.

Tencent

With WeChat, Tencent is already in possession of the crown jewel of the Chinese internet. With key investments in JD and Meituan Dianping, it added two key sidekicks. However, it could be their partnership with Google that catapults them into the next level.

With a series of key agreements, it is becoming abundantly clear that Google is pairing up with Tencent for their China push, and strategically, this makes a lot of sense for Pony Ma and co.

The most obvious benefits are for dealing with their domestic competitors. In search, they can now give Baidu a run for their money, but that is just the beginning. Google is also reportedly developing a news aggregation app for the Chinese market. This is particularly significant because China’s current top news platform is Jinri Toutiao, owned and operated by super-unicorn Bytedance, with which Tencent has been very publicly feuding. Bytedance’s core strength is its AI-driven content recommendation engine, which Tencent has struggled to match. However, if Google’s AI were available, that would likely no longer be a problem.

And then there is what Google could bring to WeChat. The Tencent-owned super-app already takes up roughly one-third of China’s mobile data usage, and they’ve been expanding their functionality. WeChat Pay already handles a significant amount of the country’s financial transactions, its mini programs are a formidable challenge to conventional mobile apps, and a few months ago it began featuring a shopping function, in which users could browse and order from JD.com with just a few clicks. If Google Search were embedded into WeChat as well, it would be entirely conceivable for many in China to go through their whole digital day without ever leaving the WeChat app, making it effectively its own mobile operating system, overlaid on top of Android or iOS.

Finally, working with Google benefits with Tencent as they look outward. For whatever their global ambitions may be, there is no better partner to have than the home page of the global internet and the organizer of much of its data.

Google’s stock price

The stock of Google and its fellow top Silicon Valley superstars has been skyrocketing in recent years, and their shareholders have become accustomed to such growth. However, with the low-hanging fruit of profitability becoming scarcer, and regulators around now looking at them with a more skeptical eye, Google needs to find a new growth engine. China’s still-urbanizing population of 1.4 billion may provide just that.

China’s reputation among foreign companies

As trade tensions have heightened, China has come under criticism, with many questioning whether it is still a welcoming place for foreign businesses to set up shop. The US business community in particular, once China’s strongest ally in Washington, seem to have lost enthusiasm for the Middle Kingdom. The American Chamber of Commerce in China’s annual Business Climate Survey has shown US businesses growing steadily less optimistic about the country’s growth potential, and grumbling about the regulatory environment there. This has not been eased by the PRC’s tightening internet regulations.

By welcoming Google back, China is sending a clear message to the global business community that they are indeed still open for business. Whether that is, in fact, true remains to be seen, but the PR of such a high-profile re-entry is likely to have a positive effect for them.

Facebook

It’s no secret that Facebook greatly covets the China market. Mark Zuckerberg has gone to lengths that few other major global CEOs have in currying favor with Beijing’s top leaders. Thus far, his efforts seem to be of little avail, but that may be changing in the near future. If Beijing opens a door to Google, it provides a playbook for Facebook to get in as well. Last month, they opened a short-lived subsidiary in Hangzhou, before being pulled by one of the country’s central internet regulators. While not quite successful yet, it seems they are making headway.

Losers:

Bytedance

With Google’s proficiency in content aggregation and recommendation in tandem with the stickiness of the WeChat ecosystem, Team Tencent may finally have a news app that could give Jinri Toutiao a run for its money. As Bytedance has also struggled to remain on the good side of China’s internet regulators, the presence of a strong alternative to Toutiao allows the government to tighten the screws on Zhang Yiming and co. if they feel the need to do so. Google is also a competitor for top AI engineering talent in China, and surely has their sights set on some of Bytedance’s top people. They may currently hold the title of the world’s most valuable unicorn, but with Google in China, things are about to get more difficult.

Sogou

China’s second-largest search engine has had strong backing from Tencent. Before they went public last year, Tencent owned 44 percent of Sogou, and it was the default search engine of their popular QQ messaging app. However, Sogou is no Google. Pardon the obvious pun, but Pony Ma loves a horserace. Tencent has been known to use internal competition to drive product development, and they may be doing something similar with Sogou and Google. It does seem hard, though, to see how Sogou can compete. To somewhat mix metaphors, Sogou is at the starting line with a Volkswagon Golf. Google is rolling up in a Ferrari.

Alibaba

In their competition over China’s internet, Alibaba and Tencent have been matching each other tit for tat. Alibaba has TMall and Taobao, Tencent has JD. Tencent has Meituan-Dianping, Alibaba has Ele.me. While Alibaba has struggled to dominate the social media space the way that Tencent’s WeChat has, Alibaba’s cloud platform seems to be leaving Tencent’s in its dust.

However, a partnership between Google and Tencent on cloud services, which seems to be in the works, could quickly erase the lead that Alibaba Cloud has built.

The most obvious counter-move for Ali would be to partner with Facebook, and there is some evidence to suggest that they are thinking along those lines. If Tencent can work with Google to knock Alibaba back from their lead in cloud, an Alibaba-Facebook alliance would be a strong countermove to attack Tencent’s home turf of social media.

Google’s brand

When Google pulled out of China in 2010, it salvaged moral high ground from its rapidly deteriorating position in the Middle Kingdom by saying that it was standing firmly by its famous “don’t do evil” principle. As they re-enter China, they are receiving a torrent of criticism from journalists, rights advocates, US lawmakers, and even their own employees.

To be clear, the whole “don’t be evil” thing is a bit overly simplistic. Silicon Valley is not “good,” and the Chinese internet is far from “evil,” and just about anyone who has worked in the tech industry in either China or the US knows that there is plenty of good and quite a bit of evil in both. Google is not shedding a white hat for a black one. Their hat has always been some shade of gray.

But it is evident that Google has chosen to distance itself somewhat from its do-gooder image, and that has caused a bit of a backlash among employees and users who would like to feel as though they are working for and supporting the “good guys.” Earlier this year, Google removed “don’t be evil” from its code of conduct, drawing public consternation. It also pulled out of a lucrative contract to work on AI-enabled weaponry for the US military after objection from employees made the drawbacks of the project not worth the benefit.

The way some see it, Google is simply now honestly recognizing the moral complexity in which they’ve always dealt. The way others see it, they are abandoning their core principles. Either way, it is hard to see how their brand does not end up taking a hit.

Questions:

Alibaba and Facebook: Will they or won’t they?

This is really starting to look like Ross and Rachel in the first few seasons of Friends. We know they’re right for each other, we know they both want it, we just don’t know if, when, or how the stars will align to finally make it happen.

Facebook seemed to be making their intentions quite clear when they registered their short-lived subsidiary last month in Hangzhou, home of Alibaba’s headquarters. For now, however, we are left to speculate with amusement…

Will Tencent and Google be teaming up outside of China as well?

It’s clear that Tencent has global ambitions, and they seem to be building a series of alliances with major international firms. In addition to the well-documented Google deals, they’ve been getting closer to Walmart as well, who just recently announced a major investment in Tencent-backed grocery delivery service Dada-JD Daojia.

While these alliances seem to be currently focused on the China market, they may prove valuable outside of China as well. As Amazon and Alibaba continue their aggressive global growth, a Google-Walmart-Tencent/JD “big three” could potentially be very formidable.

Will it even work? If it does, how far can Google go?

Google in China makes a lot of sense for Google, Tencent, and for many reasons, for China as a whole. But of course, it is far more complicated than that. There are regulatory and political hurdles in both China and the US, and this is not a period where the two governments are getting along particularly well. There are many ways in which Google China could foreseeably become a casualty of US-China tensions.

And then there are the simple questions of if and how Google can actually succeed in competing with Chinese competitors and cooperating with its Chinese partners. It is unlikely that Google will be able to understand the Chinese consumer in the way that its domestic rivals do, and they are likely to find that the landscape is unfamiliar terrain. The corporate cultures of Tencent and Google are very different, and they may not mesh in practice as well as they do in theory.

Whatever happens, it is likely to provide an overall benefit to China’s internet users and to be an entertaining story to follow for China’s internet-industry-watchers.

I, for one, have my popcorn ready.

It is safe to assume at this point that both Google and Facebook are prioritizing re-entry into the China market. There is also a growing amount of evidence to suggest that they are doing so with the assistance of Tencent, and possibly even Alibaba.

On August 1^st, The Intercept reported that Google has been planning to launch a version of its search engine in China that would comply with Chinese cybersecurity regulations.

According to The Intercept, leaked internal documents from the Silicon Valley search giant revealed that the project – code-named Dragonfly – has been underway since spring of last year, and accelerated following a December 2017 meeting between Google’s CEO Sundar Pichai and a top Chinese government official.

Earlier today, China Securities Daily reported that relevant Chinese government departments denied that Google was making such attempts. However, it is not uncommon for Chinese organizations and government spokespeople to deny factual reports. In fact, it is a common joke among journalists in China that there are few things more reliable in the Middle Kingdom than an explicitly denied rumor.

The Tencent connection

This is not the first time Google has attempted a China foray. Less than ten years ago, they were fairly dominant in China, but a series of disputes with government regulators over information regulation issues, along with a nasty cyberattack, led Google to largely abandon its ambitions within the PRC. Since then it has only maintained a minimal presence in the country but has made a number of attempts to re-establish itself there.

In its most recent push, there is reason to believe that they are doing so with the help of Chinese internet behemoth Tencent. While this is still speculative, the evidence is mounting quickly that suggests the two are growing closer:

• In January of this year, Google’s parent company Alphabet and Tencent announced a patent agreement that they stated would “pave the way for collaboration on technology in the future,” signaling a vision for a longer-term partnership looking forward.
• Google opened an office in Shenzhen in January as well. Shenzhen is home to Tencent’s headquarters.
• In June, Google announced a $550 million investment in JD.com, the Chinese e-commerce firm in which Tencent has invested, and with whom they have frequently partnered. It is assumed by many in the Chinese tech community that JD is one of the strongest and most loyal arms of “Team Tencent,” along with rising mobility star Meituan Dianping. When the JD investment was announced, Quartz’s Josh Horwitz also began to speculate as to Google joining the JD/Tencent alliance.
• In July, Google launched a WeChat Mini Program. Since WeChat is a Tencent platform, it marks another collaboration between Google and a Tencent-related entity.
• Just today, The Information reported that Google was also developing a news app for China. This is significant as well because China’s current most popular news app is Jinri Toutiao, owned by Bytedance, the Chinese super-unicorn who has feuded quite publicly with Tencent. Bytedance’s core strength is its content recommendation engine, an area where Google also excels. By teaming up with Google, Tencent could potentially be able to beat Bytedance at its own game.
• Finally, there is simply the fact that the two tech giants make very good strategic fits for each other. Google has long struggled with building social platforms, and Tencent is great at it. Tencent has struggled in search (they’ve invested in domestic engine Sogou, which is decent, but nothing near Google). As Tencent looks outward to craft its globalization strategy, they are likely to find no better partner than the company that singlehandedly manages much of the global internet.

What about Facebook and Alibaba?

Facebook—also blocked in China and like Google long looking for a way back in as well—may be aiming to pair up with a Chinese tech giant too. In July, the social media colossus registered a fully-funded subsidiary, only to have the registration taken down due to issues with China’s national-level regulators. What was interesting about the short-lived subsidiary was its location: Hangzhou, home to Tencent rival Alibaba.

While there is less of a history of partnership between the two firms, it does make sense. It would counter the moves of each of their biggest rivals, and meet the unique needs of each. Facebook needs an established partner in China that has earned the trust of the Chinese authorities. Alibaba, for all of its strengths, has had trouble making forays into social media, where Tencent has been strong. As Alibaba expands globally, partnering with a company that boasts billions of users around the world could certainly help their e-commerce and cloud service businesses.

We’ll have to wait and see

It is still far too early to know for sure if and how these alliances will work out, but there is no question that there is some flirtation going on here, and if Google and Facebook are serious about getting into China, it definitely makes sense. After all, as long as foreign companies have been operating in the People’s Republic of China, Chinese authorities have been most comfortable with their presence occurring in the form of joint ventures with local firms. We may be seeing the formation of a new model of such partnerships, but for the digital age.

What remains to be seen is if the DNA of these two very different cultures can co-exist. The operating principles of Google and Facebook have long been in stark contrast with those managing the Chinese internet. There will have to be some serious compromises of those principles from one side or the other. They may find a way to blend, or it may simply be a case of oil and water. Only time will tell.

When thinking of Chinese phone brands, what names come to mind? If you’re like most people I speak to, you’re probably thinking about Huawei, Xiaomi, or possibly Vivo or Oppo. But what about TECNO?

Even in China, where the phone maker’s parent company, TRANSSION Holdings, is based, TECNO is hardly a household name. It has never even cracked the top ten in China’s smartphone market, and has not focused heavily on developed markets. However, if you live in Africa, the brand is just about unavoidable. In fact, TECNO, its sister brand itel and other TRANSSION devices make up nearly half phones that are sold on the continent, according to company representatives.

TRANSSION is just one of many Chinese technology firms who have made inroads into Africa in recent years, and with the increasing focus that China is devoting to the region, the firms there now may simply be the first wave of Chinese tech pioneers on a continent that may be poised for same kind of dynamic economic growth that China itself experienced in the 1990’s and 2000’s.

Founded in 2006, the themes of TRANSSION’s origin story are similar to those of many hardware firms in their hometown of Shenzhen who have gone on to have global success. Rather than attempting to fight their way into the overcrowded consumer markets of the developed world, they saw opportunity in the less-glamourous markets of the “global south.” By 2010, TECNO ranked among the top three brands in the African mobile phone market. In September 2011, they opened a manufacturing facility in Ethiopia. They have remained a dominant force in Africa’s mobile phone market since.

Getting there first and localizing

When speaking with those in and around the company about their recipe for success in Africa, the terms “hard-working” and “street smart” were frequently mentioned.

“First, I’d say we got into the market at the right time,” explained one TRANSSION employee who has worked for the company in three different African countries. “We also focused on building up brand equity in these markets over the long-term, not just make money quickly. And finally, we localize to meet the needs of our African users.”

It is worth noting that TRANSSION’s localization contrasts with the commonly-held stereotype of Chinese companies in Africa. In a November 2017 an op-ed in Chinese newspaper The Global Times by Huang Hongxiang and Huang Ye of the Nairobi-based firm China House wrote a scathing critique of how their home country’s firms often fail to adequately build goodwill with local populations on the ground in Africa.

“The Chinese always say China-Africa is win-win cooperation and we are brothers. I don’t know whether it is win-win, and who are the ‘brothers’ they talk about, maybe our government officials?” asked one African reporter who was interviewed for the piece.

This failure to engage and benefit the general public, whether real or perceived, can undermine the message of shared development that China and its companies are attempting to send in Africa.

“Joint Ventures and localization were crucial for China’s growth. That’s the model African countries are looking to get from Chinese companies too – where they can get maximum knowledge transfer, local jobs and tax from the foreign investment,” illustrated Hannah Ryder, CEO of Development Reimagined, a Beijing-based consultancy focused on China-Africa development issues.

It is the fact that their approach contrasts so dramatically with the stereotype of Chinese firms in Africa that makes TRANSSION’s success in Africa so remarkable. Their approach to localization has been quite holistic.

“In our case, acting locally entails creating products that are fully localized and based on in-depth market insights;” explained Group VP Arif Chowdhury in an email for this piece, “It also means actively building strong relationships with local distribution partners, with whom we then build and grow brands together; it also means hiring a great number of local employees to drive local employment. In other words, we get fully involved in local mobile business as well as economic and community development. In addition, we are also running numerous CSR programs, which contribute to our good reputation as a responsible business actor in the communities we operate in.”

One strategy they used was to build strong long-term relationships with local vendors who could offer a greater depth of understanding regarding the local cultures and market demands.

“We are also sharing experiences with partners such as local suppliers, to drive more development,” said Chowdhury. “In our early days, TRANSSION worked closely with Mwale, a Nairobi local advertiser. As TRANSSION took off, so did Mwale’s advertising business, quickly becoming one of Kenya’s top 10 advertising companies and later expanding to other African countries.”

TRANSSION has applied their localization focus to product design as well. They’ve tailored their devices for Africans’ needs by focusing on internet connectivity, allowing for dual sims, and by featuring louder speakers for phone calls and music. As African markets can suffer from inconsistent power supplies, they focused on longer battery life. They’ve also designed a camera specifically for African facial features and skin tones.

Their low price-points (TECNO phones can run from 50-100USD) and ubiquity on the continent meant that for many Africans, TRANSSION was the company that made smartphone ownership a reality.

Managing instability

Despite their success on the continent, the sustainability of their good fortune is hardly a given in African markets, where political and economic uncertainty can often be par for the course. The company’s plans for a 280,000-square-foot factory in Ethiopia were put on hold recently after the surprise resignation of Prime Minister Hailemariam Desalegn destabilized the country’s ruling regime and prompted its government to declare a state of emergency. Ethiopia’s tumultuous political environment could put the company’s future at risk.

However, for TRANSSION, managing such risk seems to be a chance they’re willing to take to maintain a foothold in the continent’s high-potential markets. When asked about the risk that such instability poses, Chowdhury emphasized a long-term outlook, saying:

“Africa has been a focus market for us for the past 10 years. As we look towards the future, Africa will certainly remain our priority market. We hope that in this case, through our efforts, the new factory will not only provide local consumers with high-quality products but also contribute to the development of the local community. We will let you know as soon as we have further updates.”

For the many Chinese companies using TRANSSION’s case as a model for African localization, they will certainly be watching closely.

On April 13th, the BBC published an article and video by reporter Karishma Vaswani entitled China’s Uber has plans to take on the rest of the world. The brief piece centered around Vaswani’s interview with Cheng Wei—founder and CEO of Chinese ride-hailing giant Didi Chuxing—and his global ambitions for the company he built. In keeping with the quiet profile that Cheng has become known for, he shared little information that even casual followers of Didi’s rise would find surprising.

There was, however, a small piece that I found significant, and whether he intended it or not, the remarks made by Cheng profoundly highlighted some of the central conflicts behind the thorniest issue in tech today, and one of the greatest threats to global business and trade.

That issue, of course, is data privacy and security, and the complicated intersection between tech companies, their users, and the national and political systems and power structures in which they operate. Below is an excerpt from the piece:

“Some [US businesses and politicians] say that Chinese companies that deal in data, as Didi does, hand that data back to the Chinese government,” a perception Cheng Wei is quick to correct.

“When American companies first entered China, there were also these concerns,” he says.

“Whether you’re Chinese or American, data is the lifeline of any business. If you can’t guarantee data security, that’s going to be totally destructive for the business.”

Somewhat ironically, Cheng’s own answer to the data question may in itself hint at the roadblocks that Didi and other Chinese firms are likely to continue to face in their global expansions. Cheng is right when he says that when American companies first entered China, there were concerns over data and national security. In fact, those concerns were and are so great, that most major American internet companies are blocked in China. Those who attempt to enter often face enormous barriers, both formal and informal, as well as the constant uncertainty. Regardless of how much they invest in their Chinese expansion, the axe could come whenever, for whatever reason, and without warning. Hell, even Pokemon Go was deemed “too dangerous” back in its 2016 heyday.

Even Apple, who has maintained a loyal (if decreasingly enthusiastic) Chinese user base, has been conducting quite the contortion act in an attempt to maintain its foothold in one of the world’s most coveted consumer markets. In July of 2017, it announced it would be building a $1 billion data center in Guizhou province, in order to comply with new Chinese cybersecurity laws.

In January of this year, Apple announced that a Chinese firm would be operating their iCloud service. And of course, they are a regular punching bag of state-run media. Indeed, it is peculiar that Cheng Wei would bring up American firms in China because if foreign markets were to manage Chinese internet firms the way the Chinese manage foreign ones, their globalization efforts would surely be frustrating.

Destined for (techno) war?

Those who are interested in the politics of US-China relations are likely familiar with the concept of the “Thucydides Trap:” a deadly trend first identified by the Greek historian it is named after. The ambitions and confidence of a rising power, coupled with the fears and misunderstandings which it inspires in an existing power, create a cocktail of conditions in which war is inevitable. In an argument most famously laid out in Graham Allison’s 2017 book Destined for War, it seems to some that the future for China and the US holds the same fate.

While an all-out war between these two great powers seems ludicrous to many of us, the tech world is quickly devolving into such a state. US regulators are growing increasingly concerned about Chinese tech giants’ ties with their government back home, complicating the globalization strategies for many of China’s most well-known tech firms. In January, US lawmakers urged mega-carrier AT&T to “cut all ties” with Huawei, after reportedly nixing a deal that would put Huawei phones in AT&T stores.

Alibaba-backed Ant Financial was blocked in their attempt to acquire US money transfer company Moneygram as well, ditto for a Chinese state-backed fund’s try for Massachusetts semiconductor-testing firm Xcerra. All of these deals were reportedly nixed on “national security” grounds.

Concerns over Chinese tech firms extend to US allies as well. Both India and Australia have banned the use of Wechat and other Chinese apps, even on personal devices, for employees of the countries’ defense ministries. In the case of India, the ministry’s official order read:  “As per reliable inputs, a number of Android/iOS apps developed by Chinese developers or having Chinese links are reportedly either spyware or other malicious ware. Use of these apps by our force personnel can be detrimental to data security having implications on the force and national security.”

In what seems to be a near-daily occurrence, US and Chinese political entities seem to be making jabs at the other’s tech companies. For those who rely on both countries’ talent and markets, this brings about numerous complications. Didi, for example, has labs in Silicon Valley and has identified Mexico as one of its most important frontiers for international expansion. With key investments in both the US and one of its closest allies, Didi has a lot to lose if tensions continue to escalate.

And then there is what tech tensions do to threaten actual peace. The ability for countries to put aside political differences for the sake of mutual economic benefit has been a foundational component to the period of general peace and prosperity through which most of this article’s readers have come to know the world. The “Golden Arches Theory,” made famous by Thomas Friedman in his 1999 book The Lexus and the Olive Tree, was formed from an observation that almost no major conflicts had ever been fought between two countries which both had McDonalds restaurants. There are many holes to this theory, but the general gist of it rings true: when the world benefits from economic interconnectivity, it makes far more sense to work together than it does to fight.

But the current situation makes maintaining this very tricky. After all, in this day and age, just about every major company, in one way or another, is a tech firm. If tech continues to be something that is nationalized and militarized, we risk finding ourselves in a second cold war.  If we have learned anything from the previous cold war, it is that when two world powers isolate themselves from the influence of the other, they tend to become vulnerable to their own worst excesses.

Trapped by a story most of us don’t even believe

As tensions rise between the powerful forces that govern China and its Western trading partners, what this relationship really needs is a long-overdue, cathartic, couples-therapy-style coming-to-terms between the very concepts of “China” and “The West.” But of course, this can’t ever really actually happen. After all, the ideas of “China” and “The West” don’t exist in the physical world. As famed Israeli historian, Yuval Noah Harari, would put it, they are “inter-subjective myths through which we have spun webs of meaning.” They are figments of our collective imagination.

Ironically, it has always seemed to me that the people who are actually working in the tech sector tend to be the people who buy into these narratives least. At least through my experience, the American and Chinese tech professionals I know seem to think on much more global terms. Many have traveled and lived outside of their home countries, and have colleagues, friends, and for some, even family members, spouses, and children for whom national identity is a blurry overlap. For numerous tech professionals I have met, “us” vs “them” cannot be how they think, because it would undermine their very identity.

Many of these people are optimistic problem-solvers, who genuinely believe in what they are doing, not because they believe it will benefit their country, but because it will benefit the world. It would truly be a tragedy if we were to deny ourselves a shared future due to the narratives of the past.

Last month, I wrote an op-ed taking a critical eye to the globalization strategy of Bytedance, the Beijing-based parent company of ultra-popular Chinese news aggregation platform Jinri Toutiao. Riding a soaring valuation, Bytedance has stated its ambitions to apply their sophisticated AI-based recommendation engine to platforms aimed at overseas markets. In an ideal situation, this technology produces a win-win-win-win scenario in which readers get tailored content, creators reach the right audiences, advertisers efficiently reach their target market, and Bytedance cashes in as well.

While the platform and those in charge of it were certainly not intentionally creating a place for fake news, the issues with the platform come at a time when sensitivity around news content, and its relationship with the online platforms that distribute it, is particularly high. Western democracies are growing increasingly concerned over foreign governments’ attempts to influence voters through online media. For a Chinese news aggregator to succeed in entering those markets at this time, careful navigation will be required.

That being said, there are areas of the overseas internet in which Bytedance’s aggregation and recommendation competencies are sorely needed, and are not particularly sensitive. They just need to pick their spots. 

Bytedance’s global acquisitions

In their globally-focused acquisitions, they have made thus far, Bytedance has targeted China-connected firms with overseas popularity. In 2017, they acquired France-based news app News Republic from Chinese company Cheetah Mobile, who had acquired them the previous year. The crown jewel of their shopping spree, however, was undoubtedly Musical.ly, the Shanghai-based video app that took off with Western teenagers in 2016 and 2017, and for which Bytedance reportedly spent anywhere from $800 million to $1 billion. The acquisition makes sense. The videos on the app are mostly short, fun, and light, and since there is little political sensitivity around their subject matter, it is feasible that they could be a rare app to achieve a large userbase both inside and outside of China.

That being said, teens are fickle, and business models that focus on them can struggle in achieving sustainable success. Take Snap for example, who after IPO-ing at 25 dollars per share a year ago, has been trading mostly in the teens since June of 2017. Its stock plummeted again in late February after reality TV star Kylie Jenner declared it “dead” on Twitter.

Bytedance needs audio, and audio needs Bytedance

But where Bytedance may be most needed, and where their greatest overseas opportunity may be, is in audio. In fact, they are possibly better suited than anyone else to entirely revolutionize the podcast industry.

For those of you who don’t know what a podcast is…

Podcasts are downloadable audio files, most of which listeners enjoy on their smartphones. Most last anywhere from 20 minutes to 3 hours. Some focus on story-telling, others on news, but most popular ones involve in-depth interviews with experts or public figures.

Since podcasts are quite cheap to produce, it means just about anyone can start a podcast, on just about any topic. I recently was a guest on marketer Lauren Hallanan’s “China Influencer Marketing Podcast,” an English-language podcast which focuses on influencer marketing on Chinese social media platforms. A niche within a niche within a niche. But for the group of people for whom that topic is important, the information shared on Lauren’s podcast is pure gold.

Podcasts also hold tremendous influence and advertising potential. “From an advertising perspective, you have the listener trapped,” explained Bill Simmons, founder of The Ringer, a Los Angeles-based media platform which, according to Simmons, is achieving profitability primarily from the ad revenue of their robust network of sports and culture podcasts. “If someone is listening to your podcast while they’re exercising or doing dishes, they’re not going to stop what they’re doing in order to fast-forward while you talk about a sponsor for 30 seconds.”

Podcasts have become a central component to just about every major media company in the English-speaking world. From CNN to Vox to The Wall Street Journal, if a media company isn’t producing podcasts, they’re falling behind. For many of these companies, there are fewer rights restrictions on their audio content. For example, while the New York Times website limits me to ten articles per month before asking me to pay for a subscription, I can listen to their daily podcast, aptly named The Daily, for free, without limits. The same principle applies to aggregation platforms. While many media outlets seem to be getting stingier about allowing their articles to be accessed through other platforms, this doesn’t seem to be the case with podcast aggregation platforms.

However, despite the wealth of content that has become accessible through podcasts, there seems to be a consensus that both as a media format and business model as a whole, podcasts are far underperforming their potential. This is due to a number of issues, all of which Bytedance is uniquely suited to solve-and profit from.

The podcast industry is chaotically fragmented. It is in desperate need of centralization, and the efficiencies and monetization that can come from that.  What Google did for the internet as a whole, what Youtube has done for video, and what Jinri Toutiao has done for digital content in China, someone needs to do for podcasts.

Apple’s lazy pace, and missed opportunities

Apple’s iTunes is by far the worlds’ most popular podcast player—as well as being the first—offering directories, a rating system, and features which are now standard on most podcast apps. However, since their initial centralization, they have done little to continue to capitalize on the opportunities that present themselves in the podcasting space.

In June of last year, they did announce some slight advancements, offering in-episode analytics, allowing podcast producers (and likely advertisers as well) to view what parts of each episode are listened to, including whether or not listeners skip over the ads.

This is certainly an improvement, but really only a drop in the bucket. Apple seems reluctant to fully commit to being the centralized aggregator that the podcasting industry needs, an aggregator that Ben Thompson envisions would look like this:

• The centralized aggregator would likely offer hosting to podcast creators, not only to secure the user experience and get better analytics (including on downloads through other apps) but also to dynamically insert advertisements. Those advertisements would also be available to smaller podcasts that are currently not worth the effort to advertisers.
• Advertisers would get their own dashboard for those analytics and, more importantly, the opportunity to buy ads at far greater scale across a large enough audience to make it worth their while. Ideally, at least from their perspective, they would actually be able to target their advertising buys as well.
• Users would, at least in theory, benefit from a far broader array of content made possible by the growth in revenue for the industry broadly.

Why hasn’t Apple capitalized on this opportunity? It’s hard to say for sure, but most convincing arguments center around the company’s identity and priorities. After all, Apple is a phone company. They specialize in making user-friendly and stylish hardware and operating systems. A hard shift into end-to-end audio content aggregation and an advertising-based business model would require a fairly dramatic overhaul of their business model, organization, and brand. When they have dipped their toe in the advertising waters, it hasn’t turned out that well, so diving in seems unlikely.

And then there’s Midroll, the podcast advertising network which acquired Stitcher in 2016. They have a few pieces of the puzzle already put together, but likely lack the financial resources or tech capabilities to become an aggregation giant. However, they would make an interesting acquisition target for a company that did…

Bytedance, on the other hand…

There are a few key areas in which centralization can have a dramatic effect. The first is through search and recommendation. Since podcasts are in audio form, searching for appropriate podcasts has long been challenging. Most search functions only search through titles of keywords, which makes search results easy for savvy podcasters to manipulate. They also tend to not search specific episodes of podcasts, just the names of the podcast series’ in general. If you’re looking for specific information, or an interview with a particular guest, finding that has long been tricky.

This is beginning to change with the advent of Natural Speech Processing (NLP) algorithms which can automatically transcribe audio into text, allowing for far more precise data on the content of each audio file.

There is one podcast app that has begun integrating audio-to-text technology into their search: an app called Castbox. Founded in 2016, Castbox is already one of the most highly-recommended podcast apps on the Apple App and Google Play stores. The brainchild of a former Google engineer, Castbox allows users to search by podcasts series title, episode title, and in-audio text. In October, they secured $12.8 million in A-round investment. I wrote a piece on them in January.

But Castbox is still a small startup, with limited resources. While it may be the best podcast app out there, it is far from reaching its potential. If Bytedance were to acquire or invest in Castbox and apply their resources and recommendation engine, it could revolutionize how the world consumes audio content.

Consider these scenarios:

Jason likes listening to the news every morning but feels as though the negativity of many news podcasts cause him to start his day in a bad mood. A sophisticated recommendation engine, coupled with the data provided by the speech-to-text algorithm, would be able to comb through the words used in each podcast and identify each’s ratio of positive words to negative words, recommending a news podcast that is a bit more upbeat.

Lucy speaks English, but it is not her first language. She also has never lived in an English-speaking country and is frustrated when cultural references are used that she doesn’t understand. The recommendation engine evaluates the level of vocabulary and complexity of language used in each podcast, as well as the speed of the speech in it, recommending one that she can easily understand and enjoy.

Janice has an 11-year-old son who enjoys listening to podcasts, but Janice is concerned about they are appropriate for children. A powerful AI could detect the subject matter and language used in each podcast, and set different levels of parental controls, so Janice can be confident, knowing that her son is only listening to content suitable for children.

Improvements in recommendation could be a world-changer for podcast producers as well, who often have to rely on their own networks, or SEO manipulation tricks to bring attention to their content. “I rely largely on my own networks on social media to get the message out about my podcast,” explains Lauren Hallanan. “An accurate recommendation engine would be very helpful.”

One more thing about Castbox: They’re a Chinese company, based in Beijing. So here is Castbox’s profile: Chinese company, popular overseas, with standout tech that could be exponentially improved, with a top-notch recommendation engine. Certainly sounds like Bytedance’s “type,” right? Methinks…

A match made in podcast distribution heaven.

But this is just the start of how Bytedance-orchestrated centralization could revolutionize the podcasting universe. Currently, despite their success as a content medium and potential for advertisers, podcasts currently suffer from crippling fragmentation across their value chain.  The media companies who produce them (The Ringer, CNN, etc) are separate from the platforms who host them (Soundcloud, Podbean, etc), which are usually separate from the apps that curate and play them (Castbox, iTunes), which are separate from the centralized ad sellers (Midroll). Each player has a piece of the data picture, but without being able to centralize and organize the data, it doesn’t mean much. Without useful data, its difficult to build a reliable and targeted ad model, and without a convincing value proposition to advertisers, it’s difficult to monetize content.

To make matters more difficult, since podcasts are downloaded by users all over the world, with relatively small numbers of listeners for each podcast, they are both nearly impossible to survey, and not worth a large-scale ad buy. In the words of tech industry analyst and blogger Ben Thompson, “podcasts suffer from being both too small and too big at the same time.”

As a result, podcast advertising is nearly entirely limited to transaction-initiated subscription-based services, which Thompson explains this way:

The “transaction-initiated” bit means that there is a discrete point at which the customer can indicate where they heard about the product, usually through a special URL, while the “subscription-based” part means these products are evaluating their marketing spend relative to expected lifetime value. In other words, the only products that find podcast advertising worthwhile are those that expect to convert a listener in a measurable way and make a significant amount of money off of them, justifying the hassle.

Regular podcast listeners will likely be very familiar with brands like Harry’s Razors, Blue Apron, and Squarespace, all subscription-based services that offer a discount if the listeners use a special URL. This is because, under the current podcasting system, they are the only products for whom podcast ads offer a tangible ROI.

Bytedance, more than perhaps any other tech company in the world, has content centralization, aggregation, recommendation, and targeted advertising in its very DNA. Take a second, scroll back up, and read Ben Thompson’s description of what an ideal podcast aggregator would look like.

….

Am I mistaken, or is that not precisely what Jinri Toutiao has done with written content in China? It is hard to imagine a company in the world more suited to revolutionize the audio content industry.

So why not?

It’s hard to know for sure, but here are some possible theories:

• Podcasts aren’t popular in China. In fact, they seem to be mostly confined to the anglophone world. Even for my tech-savvy millennial friends in Beijing, they seem confused when I mention podcasts. It’s highly possible that given a lack of familiarity with the medium, Bytedance decision-makers may not feel comfortable in such territory.
• The monetization paradox. As explained above, podcasts aren’t exactly printing money these days, and therefore attract less investment from those looking to centralize the medium… and because podcasts aren’t centralized, they’re difficult to monetize… and around and around we go…
• My own bubble. The demographic for whom podcasts are most popular is middle-class white American men in their 20s and 30s. I am a 31-year-old middle-class white American man. I also listen to a ton of podcasts. My proximity to the medium may not provide the necessary perspective.
• Unknown factors. I don’t pretend to know what’s going on in Bytedance’s leadership meetings, so there could be any number of reasons miles away from my radar or that of those I know.

Regardless, podcasting is poised to be disrupted, and no company has the capability to do it more than Bytedance. As they make their global expansion, it may be at least worth a try. After all, there’s far less fake news in audio form…

Editor’s note: This op-ed was contributed by Elliott Zaagman, a trainer, coach, and change management consultant who specializes in aiding Chinese companies as they globalize. To contact him, check him out on LinkedIn, or add ezaagman on WeChat. 

Updated on 07 Feb 2018 to include information about Elliot’s previous relationship with the TopBuzz platform as well as his attempts to get official statements from the company.

Over the last year, few Chinese tech firms have made a bigger splash than news aggregator Jinri Toutiao (今日头条). Leaping from relative obscurity just a few short years ago, the app has become a magnet for Chinese eyeballs, with over 120 million daily active users, who spend an average of 74 minutes per day on the platform.

What my Chinese friends (and Toutiao’s investors) seem to like so much about it is the use of machine learning to recommend content to its users based on their preferences and habits. Since the majority of the media I consume is in English, I hadn’t had much of an opportunity to see how its algorithms work. That changed recently when I downloaded TopBuzz, the English-language app of Jinri Toutiao’s parent company, Bytedance. While TopBuzz’s user interface is a bit different, it relies on the same core back-end architecture as its Chinese sibling to deliver a tailored content stream to its users.

This past autumn, I gave Topbuzz a try. I opened an account as a content creator, and re-ran some of my content which I had previously published on other outlets. After posting a couple articles, I became turned off to publishing on the platform, mostly because I found much of the content on it to be click-bait, without much thought involved or substantive value. I did not think it was the right platform for me.

However, the platform began to draw my attention a few months later, beginning with a push notification on December 13th, when Democrat Doug Jones defeated Republican Roy Moore in a special election for a Senate seat in Alabama. On December 12th, in a tightly-contested special election for an Alabama Senate seat, Democrat Doug Jones defeated Republican Roy Moore. A few hours after the major news networks declared that Jones had won, I received this article in a push notification from TopBuzz:

While every credible news outlet in the world was reporting Jones’ victory, TopBuzz was sending me updates from little-known far-right-wing news site One America News Network.

I also get conspiracy-theory-style news from Topbuzz.

A couple weeks ago, I received this headline in a push notification, saying that former Beatle John Lennon’s wife Yoko Ono was claiming to have had a lesbian affair with Hillary Clinton in the 1970s:

This headline is also objectively false. According to fact-checking website Snopes.com, the story originated in 2015 on a site which produces fabricated hoax stories for the purpose of generating click traffic. There is no evidence to support any claim that such an affair occurred, nor that Ono ever claimed that it did.

The fake news seems to be bipartisan as well, as I received a headline earlier this month reporting a scandal involving Republican Arizona Senator John McCain:

For this one, it seemed as though the source of the article was not even a news organization or a hoax site, but just a user named “haitim738653.” I searched online and could not find any reference to what scandal he was referring to. Nevertheless, TopBuzz put it at the top of my feed.

I even received another one just today, claiming that actress Julia Roberts made a crude remark in comparing former first lady Michelle Obama and the current one, Melania Trump:

This claim is also false. Julia Roberts never made such a comment, according to both fact-checking websites Politifact.com and Snopes.com. In fact, Roberts has been a vocal supporter of the Obamas in the past, publicly fundraising for Barack Obama’s 2012 presidential campaign.

Stories like this seem to appear on my TopBuzz feed every day. Even when the story is factually true, the sensational click-bait nature of the headlines tends to be misleading, and the content itself is usually from far-right or far-left-wing fringe websites.

Bytedance’s global ambitions

TopBuzz is one of a series of apps in Bytedance’s portfolio that it hopes to use to power its global expansion. In November, it announced the acquisition of video app Musical.ly for an estimated $800 million, which has a strong user base in North America and Europe. They also acquired global news aggregator New Republic that month. In Japan, Korea, and southeast Asia, they have experienced some success in their music-sharing app TikTok, which they launched in September. TopBuzz seems to be primarily focused on the North American and European markets.

While Bytedance is using different apps for different media and markets, they all operate with the same China-based back-end architecture. “We have different products that cover different regions, but the back-end recommendation engine is the same,” explained Bytedance Senior VP Liu Zhen on the 996 Podcast. “All the engineers and product people are based in China.”

Bytedance aims to do two different things that have proven challenging for Chinese tech firms: Succeed by delivering content to overseas, non-Chinese users, and to develop and manage apps that catch on with high and middle-income foreign markets.

Silicon Valley sea change

As Bytedance has laid plans for global domination, one must wonder how their product and ambition will mesh with the shifts that have taken place in the West and Silicon Valley, in particular, over the past year.

America’s tech giants, who have gained the trust of users in small part due to their ability to project themselves as friendly, democratic, “forces for good,” have recently received greater public scrutiny. Most notable among them has been Facebook, who came under fire in late 2016 after it revealed that it received approximately $100,000 during the US election to publish Russia-linked ads aimed at “amplifying divisive social and political messages across the ideological spectrum.”

While there does not seem to be an expert consensus on the extent to which Russian Facebook content influenced the election, one thing is clear: Politics in the US, and many other democracies around the world, are more divided than they have been in decades. This is in no small part due to the algorithms that social media platforms use, which create information “echo chambers.”

This effect was chronicled in a June 2015 study published in the journal Science entitled “Exposure to ideologically diverse news and opinion on Facebook.” Let’s say person A and person B both live in the US. Person A tends to vote Democrat more often, while person B tends to vote Republican. Person A starts to click on stories from Democrat-leaning news outlets, while person B clicks on more Republican-leaning stories. Recognizing their clicking tendencies, Facebook’s algorithm tries to curate content that is aligned with their habits and begins to suggest more and more stories that confirm, rather than challenge, their existing worldviews.

Eventually, the recursive effect of the algorithm’s interactions with the individuals creates online universes where people not only receive different opinions in their news but different facts altogether. The effect of this has been a further polarization of the populace, as this Pew Research graph indicates:

In democratic societies where governance is based on the ability to have a rational debate and reach a compromise, this effect is downright dangerous.

Last December, when speaking to an audience at the Stanford Graduate School of Business, former Facebook VP of user growth Chamath Palihapitiya used no uncertain terms when expressing “tremendous guilt” for the company he helped create, saying “I think we have created tools that are ripping apart the social fabric of how society works.”

“The short-term, dopamine-driven feedback loops we’ve created are destroying how society works,” he continued, referring to the system of “clicks, likes and thumbs-up” on which the platforms of Facebook and Toutiao are based. “No civil discourse, no cooperation; misinformation, mistruth. And it’s not an American problem — this is not about Russians ads. This is a global problem.” He also described an incident in India where hoax messages about kidnappings shared on WhatsApp led to the lynching of seven innocent people.

Palihapitiya is just one of many tech pioneers who are beginning to re-examine just what impact their products have made on society. In November, Napster founder and early Facebook investor Sean Parker spoke publicly about becoming a “conscientious objector” to social media, saying that Facebook and other social media platforms were succeeding by “exploiting a vulnerability in human psychology.”

This has prompted some serious soul-searching at Facebook. In February 2017, Mark Zuckerberg published a nearly 6,000-word manifesto, in which he spoke in detail about his vision for the platform as a force for social good around the world and the changes that need to be made in order to ensure that is the case. In January 2017, Facebook launched the Facebook Journalism Project, a comprehensive program designed to filter out fake and hoax stories, train and educate journalists and publishers, and improve news literacy among readers. In October, they announced new media guidelines designed to stop fake news and introduced a “more information” button that would allow readers to check the credibility of the publisher before opening a link. Earlier this year, Facebook stock dropped 4 percent after Zuckerberg announced that the platform would be moving away from its content and ad-based model to emphasize more interaction between friends and family members.

But what is Bytedance doing?

As Silicon Valley and Facebook regroup from the current backlash to the social problems they have helped create, it is difficult to see how Bytedance envisions the impact they would like to make. When asking recently about their policy for managing fake news or stance on the societal impact of social media, Bytedance PR declined to comment on the record.

I reported the fake news problem to the Topbuzz team and let them know that, while I did not immediately plan on writing an article on it, I was researching a piece on Bytedance’s globalization process and was paying close attention to the Topbuzz platform, including the fake news issue, and that if it were a consistent theme, it would be worth writing about.

To be fair, Bytedance does seem to acknowledge that social responsibility is something that they at least should reference publicly, but it is difficult to see exactly where it falls in the company’s hierarchy of priorities.

In December, they hosted their first “Global Festival for AI Ideas”, at which founder and CEO Zhang Yiming made the following statement:

“As AI becomes an increasingly integral part of our society, Bytedance believes that we – and our industry peers – have a duty to ensure that we understand and can anticipate the social impact of these new technologies, and manage this impact responsibly. We are delighted to provide this platform where some of the greatest minds and most influential people in our industry can come together to exchange ideas about the future of AI in our society, and drive the best ideas forward.”

The challenge of managing fake news is something they at least seem to recognize, and they have publicized how they are using their technology to help find missing children in China. Their AI and methods for content monetization have also proven useful in helping small creators find audiences and convert their followings into income. They have also partnered with Tsinghua University School of Public Administration to establish the Innovation and Governance Center, which focuses on researching the social impact of, and response to, new technologies, and have formed something called the Bytedance Strategic Technology Committee to provide a sustained platform for cross-industry discussion of critical challenges at the intersection of AI and society.

At the same December event at which Zhang spoke, the head of Bytedance’s AI lab Dr. Ma Wei-Ying addressed foreign journalists and spoke of how the company is developing techniques to train its AI to recognize and remove fake news. According to Ma, the platform also lets users report what they believe to be fake news and analyzes comments to detect whether they suggest the content might be fake. When the system identifies any fake content that has been posted on its platform, it will notify all who have read it that they had read something fake.

Despite Ma’s claims, this is far from my experience with TopBuzz. Although I receive news that is verifiably fake on a near-daily basis, often in the form of push notifications, I have never once received a notification from the app informing me that Roy Moore is in fact not the new junior senator from Alabama, or that Hillary Clinton was actually not Yoko Ono’s sidepiece when she was married to John Lennon.

Actually, on the very morning of this piece’s publication, I learned from TopBuzz’s “Politics” and “Science” channels that Barack Obama travels with a demon in his entourage and that NASA is hiding a secret alien base on the dark side of the moon:

But what is perhaps more concerning is the very nature of the platform, its algorithm, and its incentive structure. Bytedance’s core competency is its AI-based system for content creation, curation, and dissemination, which incentivizes content creators through financial rewards often based on clicks, and curates the content according to the preferences of each individual reader.

In other words, it seems as though Bytedance is basing its entire business model and global expansion on a turbo-charged version of the tools that Chamath Palihapitiya says are “ripping apart how society works.” What Facebook is moving away from, Bytedance is diving into head-first.

In China, Bytedance censors their platform in response to pressure from authorities. In December 2017, the Beijing bureau of China’s top regulator accused Toutiao of “spreading pornographic and vulgar information” and “causing a negative impact on public opinion online,” and ordered the temporary suspension of some popular sections of the app. In response, Bytedance took down or suspended the accounts of more than 1,100 bloggers that is said had been publishing “low-quality content” on the app. It also replaced its “Society” section with one called “New Era,” which primarily pushes state media coverage of government decisions.

Outside of China, in Bytedance’s target overseas markets like North America and Europe, there is far less pressure from government regulators, but the consequences of the media the public consumes is arguably of greater impact. After all, these people are voters. The information they receive has a direct impact on how their societies govern themselves, and social media has played a critical role in hampering the effectiveness of their democratic systems. The world does not need more “curated” information, it needs accurate information.

The globalization push of many Chinese firms is inspiring: What they offer can potentially meet genuine global needs. Mobike and Ofo are helping to ease traffic congestion, lessen pollution, and provide affordable transportation. Alibaba and JD are introducing pathways for foreign businesses to access Chinese consumers. Many of the state-owned firms are developing infrastructure which can spur economic development in underdeveloped regions of the world. But what exactly does Bytedance offer?

Democracy and civil discourse are in rough shape these days. It is suffering from an unhealthy diet of inaccurate, misleading, and heavily biased information that has been fed to its citizens through their social media platforms. As Bytedance expands globally, its answer to this global “information health crisis” seems to be a bigger, greasier cheeseburger.

TechNode does not necessarily endorse the statements made in this article.

Editor’s note: This was contributed by Elliott Zaagman a trainer, coach, and change management consultant who specializes in aiding Chinese companies as they globalize. To contact him, check him out on LinkedIn, or add ezaagman on WeChat.

I am a podcast addict. I’ve never been much of a reader, and tend to spend lots of time on trains, streets, and planes, so the revolution in downloadable audio content has opened up a whole new world of information for me.

As I’ve developed somewhat of a pseudo-career as a writer and blogger, I’ve relied on podcasts as sources of both inspiration and information for the topics I’m researching. However, I’ve come to find this method incredibly annoying and time-consuming on most podcast apps. The specificity of the search results is often woefully inadequate.

Take, for example, the popular app Stitcher. Here’s what happened when I tried to search the topic of “blockchain,” the decentralized, anonymous ledger system used by most crypto-currencies:

173 results, all for blockchain-themed podcasts. In order to find the information that I’m looking for, I will have to go through each podcast, episode-by-episode. Some episodes are filled with great info, others aren’t, and the only way to sort the good from the bad is to listen to them, or maybe try to judge by episode title.

This process has gotten a lot easier, however, since I’ve discovered Castbox, the project of former Googler, Peking University alumnus, and Hebei native Renee Wang (王小雨). Castbox aims to improve the search quality of audio files. Take a look at what happens when I conduct the same search, just on Castbox instead of Stitcher.

They offer similar results when categorized under “channel:”

When you search under the “episode” tab, it gets a little more specific, organizing by specific episodes. This is great when looking to access to-the-point summaries from top experts on a topic:

But where this app really stands out is in their “in-audio search,” which combs podcasts for references to certain terms, and then allows the user to, in just one click, go directly to the point in the episode when that keyword is discussed:

How it works

Castbox does this a Natural Language Processing (NLP) algorithm which transcribes the audio of a podcast into speech. They also use a machine-learning process to customize the search results based on the user’s listening habits.

This provides a user experience that I personally find preferable to the one provided by apps like Stitcher. “Traditionally, audio search results crawl channel tags or keywords of an episode and title descriptions,” explains Tina Kuan, Castbox’s Chief Marketing Office. “This age-old approach becomes ripe for manipulation by a keyword savvy podcaster – much like the issues plaguing SEO.”

Chinese roots, but focusing on the overseas market

While Castbox has a presence in the Bay Area, its HQ and the majority of its development team is based in Beijing. “Beijing has a large number of internet talents, but with relatively low cost, so it makes sense to operate from there,” says Renee Wang.

In basing itself in China but targeting an overseas user base, Castbox is hoping to follow somewhat in the footsteps of Musical.ly, the China-based video platform rarely used in the middle kingdom, but which is a hit with Western teenagers. In November, Chinese super-unicorn Bytedance (parent company of news aggregator Jinri Toutiao) acquired Musical.ly for what is reported to be between 800 million and 1 billion USD.

Despite its China roots, Wang emphasizes the desire and need to have a diverse team that is representative of the app’s user base. “Reaching global resources is very important to us, and that includes a push to hire talent from other countries,” explains Wang.

Room to improve

I’m certainly not the only one who sees the value in what Castbox offers. In October, they announced a US$12.8 million series A investment, from some of the same investors who were Musical.ly’s early backers.

However, I must say that their in-audio search function still is far from perfect. For example, I recently searched for content from the wildly popular and well-respected China tech news blog Technode, the total search results were definitely better than Stitcher, giving me both more channel options, as well as episodes of other podcasts where Technode reporters were guests.

Stitcher:

Castbox:

However, the in-audio search was a bit more disappointing:

Keep trying, Castbox. You’re already my new favorite app, but you’ve still got a bit of a way to go.

Editor’s note: This was contributed by Elliott Zaagman a trainer, coach, and change management consultant who specializes in aiding Chinese companies as they globalize. To contact him, check him out on LinkedIn, or add ezaagman on WeChat.

I worked at LeEco from March 2016 to May 2017 at their Beijing office. Beginning as an external consultant hired to coach leaders in the company’s rapid overseas expansion. I was later hired as a full-time employee, where I headed up their Culture Globalization program, an HR initiative designed to bridge the cultures of the China and overseas offices. This program was also designed to develop the language, cultural, and leadership skills of the staff at the Beijing headquarters.

In some of those areas, LeEco has made incomplete progress. In others, we missed the mark by a long shot. What follows is my understanding of why we were not able to achieve our goals in this area as well as key takeaways that other Chinese companies can use in their globalization process.

My motives here are not to tear down YT Jia or LeEco. Actually, I really admire YT as a leader. We can all learn a lot from his emphasis on learning by doing, being unafraid to fail, and taking the time to self-reflect.

What I hope to do is provide an analysis framework so that LeEco, and companies like LeEco, can improve their globalization strategies. One consistent theme is evident:  while technical and surface-level changes can take place rapidly (companies can be acquired, talent can be hired, and strategies can be laid out), the necessary cultural changes in people’s hearts, minds, and habits are complex processes that require time and patience. The speed and scale of LeEco’s development did not allow for that.

In analyzing the culture globalization process, I believe a comprehensive understanding can be gained by looking at four dimensions: language, the resonance of organizational values, leadership and management skills of those in power, and localization. By looking at LeEco through these lenses, we can come to a better understanding of how companies can better globalize.

1. Language:  Are internal documents and key information bilingual? What is the level of English competency of key staff?

As LeEco began its globalization journey, they recognized this need and took steps to address it. They hired a highly-qualified team of translators and interpreters, who would provide simultaneous interpretation in all relevant meetings. For executives with poor English skills, coaches were hired to help them improve quickly. Most internal systems and communication were made bilingual.

“The translation that was provided to us was the best I’ve ever experienced,” said one US employee, who worked for other Chinese companies prior to LeEco.

However, despite their best intentions to integrate English into the company, the reality was far more complicated. When selecting people for key overseas and global positions, English competency was considered much less important than the implicit trust YT had in them. While many of them were provided English coaches, the high-pressure demands of their jobs meant they had little time to study and develop their English skills.

One case was in that of an executive who was responsible for driving the go-to-market process in the US. He only had a very basic level of English, and this had a demoralizing effect on some of the US staff.

“People were shocked by how poor his English was, and I think it made a lot of US staff just feel like the leadership in Beijing didn’t respect us,” said one US employee.

By putting that executive in that position without the necessary language skills to succeed, the leadership of LeEco put both the US team and that Chinese executive in a very difficult position.

The degree to which the US office was staffed by transplants from China also took a toll on their ability to recruit and retain local talent.

“The working language here is more Chinese than it is English,” one senior leader mentioned. “This makes it very hard to recruit and keep non-Chinese staff, and therefore severely limits the talent pool that we can recruit from, meaning that the skills of our people just won’t be of the same caliber as those of our competitors.”

Key takeaway: Language matters. It is the foundational building block, not just to direct work-related communication, but to the building of trust, a key ingredient to any effective team. Without a shared language, the team will be severely disadvantaged.

2. Corporate Culture: Are your company’s story and values globally resonant?

The key to the sustainable success of any global organization is creating a vision, mission, and value set that are resonant beyond simply the culture of the country in which the headquarters is based.

I joined LeEco because they had the beginnings of this: a set of values focused on providing more benefits to its end-users through an entirely reconstructed value chain, and a teamwork-based working style founded on proactive trust and collaboration across teams, functions, and its seven sub-ecosystems.

While I am genuinely convinced that this was what the leaders of the company truly believed in, they were unable to communicate this in a way that was resonant to overseas staff, journalists, and consumers. This was made evident in the October 19 “Big Bang” event, in which LeEco and its products were officially unveiled to the US market. In an event that lasted almost two hours, the entire business model of the company was laid out, with executives taking the stage to introduce the company’s wide array of products and services. When YT Jia came to the stage to speak, he was preceded by a video that displayed his own face, projected 15 meters high on a screen behind the stage. When the video montage ended, YT took the stage amidst a cloud of smoke. While a very impressive event from the perspective of many, it did not have the desired impact among the US media, with the most-read articles using words like “bizarre,” “confusing,” and “over-the-top.”

I, too, was confused. I asked one director-level employee at the Beijing headquarters. He responded: “Apple did this with Steve Jobs, didn’t they? We want to show that YT is that kind of genius.”

This way of thinking, held by many in the company, failed to take into consideration that the case of Steve Jobs was the exception, not the rule. Furthermore, by the time Steve Jobs was lifted to demigod status by the cult of Mac, he had already built a legacy for himself through decades of technological innovation with real impact on millions of people. YT, on the other hand, was relatively unknown in the US, and by presenting himself in the way he did, he gave the impression that he was just a proud billionaire, rather than the founder and developer of a quickly-expanding tech company. Not a good first impression.

This attitude towards YT Jia went beyond just the event, but reportedly to the workplace as well. Many of the US staff spoken to for this article expressed discomfort with the Chinese approach to power distance and status symbols. In my research for this piece, multiple people mentioned that YT had a nicer, more expensive chair which was used only by him, kept in a closet when he was not at the office. While a chair in itself is a small thing, it demonstrated a lack of awareness and understanding in the approach to brand-building used by the company, both internally and externally.

This same approach, while not uncommon in China, was entirely tone deaf to the values that govern Silicon Valley, where billion-dollar CEOs famously drive Toyotas to work, leaders refuse to sit at the head of the conference room table, and HR VPs boast about how democratic and transparent their company’s systems are. “In China, leaders show their power and wealth through status symbols, and people respect that. In Silicon Valley, those same displays of status make people think that you are weak, lack confidence, and have a fragile ego,” said one Chinese national who has spent years working in the Bay Area. By using very normal Chinese cultural messaging, LeEco alienated their US key stakeholders in the US: staff, media, and consumers.

Key takeaway: Before entering a market, learn the cultural values of the talent you hope to recruit and the consumers you hope to attract. If you share those values, emphasize them and act according to them. If you do not share their values, rethink your values, or rethink the talent and consumers that you are pursuing.

3. Leadership and Management: Are your leaders and management systems globally effective?

“When Japanese automakers entered the US market, they had proven systems with higher-quality results, and that gave them credibility with US employees. One of our problems is that we didn’t have a proven system, so we had to work much harder to get buy-in from US staff,” a senior LeEco leader told me.

“The lack of a clear, coherent system of management led to poor productivity and a disorganized workplace,” said another employee.

This became increasingly evident as the company began to suffer from cash flow issues in November 2016 and it became clear the company had a full-blown crisis on their hands.

“We had no clear company-wide plan from headquarters for crisis management in communications,” said one PR professional. “For a company of that size to have no plan is absolutely unheard of.”

This lack of a clear management system had become a big challenge throughout the entire company. An underdeveloped management system, combined with the company’s hard-driving culture caused frustration among many US employees.

“We would work overtime for two straight days on a task, only to be told that the strategy was changed based on some opaque reasoning from the Beijing office. After that happens, it is very hard to stay motivated,” said a US employee.

The conflict over a willingness to work long hours was a point of conflict between US and Chinese staff.

“A lot of the Chinese employees who went to the US would work separately from their US colleagues, because (Chinese staff) would work late into the evening, but US employees wanted to get home to their families,” said a Chinese employee who worked in the US office of Faraday Future, YT Jia’s electric vehicle startup.

“Balancing the demands of the Chinese leaders while showing respect for US colleagues was challenging,” said another.

When it comes to leadership, it was quite clear that YT Jia was able to deliver a compelling vision. I myself was drawn to this, as were many others.

However, a compelling vision cannot be the only ingredient in successful leadership. In the case of LeEco, the leaders’ inability to accept counsel and feedback from those under was a key weakness. In the dozens of conversations and interviews that I have conducted in preparation for writing this piece, one refrain was unanimously consistent: the leaders simply were not open to critical feedback, and because of this, they were unable to gather the necessary information about the company’s severe financial issues until it was simply too late.

“By the time the leaders saw the iceberg, the Titanic was already sinking,” said a director-level employee.

The company’s financial problems created a cycle of secrecy and perceived dishonesty from leadership, followed by mistrust and frustration from staff, proceeded by further entrenchment and secrecy from leadership.

“We were promised town hall meetings every month, but they had been canceled for the past three months,” a US office employee told me in early March.

“When they finally did have a town hall meeting, the only person who spoke was a lawyer, not anyone in charge. I believe the only reason why they even had that meeting was because employees persistently demanded it,” said another US employee.

Key takeaway: Recognize that expectations for leader behavior are different from culture to culture. Make sure that those in leadership positions of overseas teams have flexible leadership styles that can be adapted to the demands of the situation.  When recruiting talent, clarify expectations regarding working style. If your company’s working style does not fit the local culture, be flexible in finding a solution. Never mislead talent about your company’s expectations.

4. Localization: Are you meeting the needs of the local market?

The localization process is another case of good intentions falling apart. To facilitate this process, the company created a translation and localization team, made up of multicultural professionals. They were amazing and I cannot praise them enough.

However, while the team was very useful, it became clear that LeEco leaders were not utilizing them to their fullest extent. In many cases, while key language and localization oversights were made early, localization experts would not be brought in until the later stages of product development, making their job very hard. In other cases, the team was not involved in the process at all, and content, products, and promotional material designed for North American audiences were released containing obvious mistakes.

The most prominent missteps in localization occurred in LeEco’s North American go-to-market push in the fall of 2016.

“They tried to just copy and paste their model from China and use it in the US, but that’s not going to work,” said one former LeEco employee.

That model relied heavily on online “flash sales,” short periods of time in which products were heavily discounted, designed to drive enthusiasm and attention to the company.

“The problem is, flash sales don’t work in the US, especially when no one knows who you are,” said another US employee involved in the marketing process.

In the end, this strategy was unable to produce the desired results. Reportedly, although North America sales targets were originally quite ambitious, the final sales numbers were only a fraction of the goal they had set.

Key takeaway: Hire qualified and knowledgeable local staff, and then trust and empower them to make decisions that are well-suited to the local markets. If you do not trust them, either take the time and effort to build a trusting relationship or hire another local whom you do trust. Only trusting people from your own country or culture to run the show is certain to create big difficulties.

Final thoughts

No company can simply buy or hire their way from local company to global organization. It is a process that requires a fundamental shift in the language that the company uses, the story that it tells, the way that key people manage and lead, and who is trusted and empowered.

These are lessons that multinationals have been trying to learn for a long time. Over the past few decades, Western companies have failed or succeeded in the Chinese market based on how effectively they were able to deal with these sometimes painful lessons. Now, as Chinese companies globalize at an increasing rate, they must now learn and adapt as well.

I am very grateful for my time at LeEco and very glad that I joined. I cannot even count the number of friends I made and professionals who I was able to learn from. I wish them all the best.

I hope that my writing can be a valuable learning tool for not only LeEco but all companies at any stage of their globalization process.

TechNode does not necessarily endorse the commentary made in this article.